UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
|
þ
|
ANNUAL REPORT PURSUANT
TO SECTION 13 OR 15(
d
) OF THE SECURITIES
EXCHANGE ACT OF 1934
|
For the fiscal year ended September 30,
2017
OR
|
¨
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(
d
) OF
THE SECURITIES EXCHANGE ACT OF 1934
|
For the transition period from to
Commission file
number: 001-37619
Stellar
Biotechnologies, Inc.
(Exact name of registrant as specified
in its charter)
British Columbia, Canada
|
N/A
|
(State or other jurisdiction of
incorporation or organization)
|
(I.R.S. Employer
Identification No.)
|
|
|
332 E. Scott Street
Port Hueneme, California
|
93041
|
(Address of principal executive offices)
|
(Zip Code)
|
Registrant’s telephone number,
including area code: (805) 488-2800
Securities registered pursuant to Section
12(b) of the Act:
|
Name of each exchange on which
|
Title of each class
|
registered
|
Common Shares, without par value
|
The Nasdaq Stock Market LLC
|
Securities registered pursuant to Section 12(g)
of the Act:
None
Indicate by check
mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
¨
No
x
Indicate by check
mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes
¨
No
x
Indicate by check
mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days. Yes
x
No
¨
Indicate by check
mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant was required to submit and post such files). Yes
x
No
¨
Indicate by check
mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated
by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
¨
Indicate by
check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller
reporting company, or an emerging growth company. See the definitions of “large accelerated filer,”
“accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule
12b-2 of the Exchange Act.
Large
accelerated filer
¨
|
Accelerated
filer
¨
|
Non-accelerated
filer
x
(Do not check if a
smaller reporting company)
|
Smaller
reporting company
¨
|
|
Emerging
growth company
x
|
If an emerging growth company, indicate by check mark if the
registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards
provided pursuant to Section 13(a) of the Exchange Act.
x
Indicate by check mark whether the registrant
is a shell company (as defined in Rule 12b-2 of the Act). Yes
¨
No
x
As of March 31,
2017, the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market
value of the registrant’s outstanding common shares held by non-affiliates was approximately $16,119,024, which was
calculated based on 10,136,258 common shares outstanding as of that date, of which 9,888,972 common shares were held by
non-affiliates at the closing price of the registrant’s common shares
on The Nasdaq Capital Market on such date.
As of November 30,
2017, the registrant had 10,520,096 common shares issued and outstanding.
Documents
incorporated by reference:
NONE
Stellar
Biotechnologies, Inc.
Annual
Report ON FORM 10-K
Fiscal Year Ended September 30, 2017
Table of Contents
SPECIAL NOTE REGARDING FORWARD-LOOKING
STATEMENTS
This Annual Report
on Form 10-K contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended
(the Securities Act) and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act)
and, as such, may involve known and unknown risks, uncertainties and assumptions. Forward-looking statements are based upon our
current expectations, speak only as of the date hereof, and are subject to change. Forward-looking statements are those that predict
or describe future events or trends and that do not relate solely to historical matters. You can generally identify forward-looking
statements as those statements containing the words
“anticipate,” “believe,”
“plan,” “estimate,” “expect,” “intend,” “may,” “will,”
“would,” “could,” “should,” “might,” “potential,” “continue”
or other similar expressions. You should not rely on our forward-looking statements as they are not a guarantee of future
performance. There can be no assurance that forward-looking statements will prove to be accurate because the matters they describe
are subject to assumptions, known and unknown risks, uncertainties and other unpredictable factors, many of which are beyond our
control. Our actual results could differ materially and adversely from those expressed in any forward-looking statements as a result
of various factors, some of which are listed under the “Risk Factors” section of this Annual Report. Risks and uncertainties
include, among others, the availability of funds and resources to pursue our research and development projects, the successful
and timely completion of preclinical or clinical studies by third parties in which our products are utilized, our ability to meet
the goals of our joint ventures and strategic partnerships, the degree of market acceptance for our products or for other companies’
products in which our products are components, our ability to take advantage of business opportunities in the pharmaceutical industry,
changes in our strategy or development plans, our ability to protect our intellectual property, uncertainties related to governmental
regulations and regulatory processes, the volatility of our common share price, the effect of competition, the effect of technological
changes, reliance on key personnel, and general changes in economic or business conditions. Except as required by law, we undertake
no obligation to update forward-looking statements.
As used in this Annual
Report on Form 10-K, “Stellar,” “the Company,” “we,” “us,” and “our”
refer to Stellar Biotechnologies, Inc. and our consolidated subsidiaries, except where the context otherwise requires.
Our
logo, Stellar KLH and other trademarks or service marks of Stellar Biotechnologies, Inc. appearing in this Annual Report on Form
10-K are the property of Stellar Biotechnologies, Inc. This Annual Report on Form 10-K contains additional trade names, trademarks
and service marks of other companies. We do not intend our use or display of other companies’ trade names, trademarks or
service marks to imply relationships with, or endorsement or sponsorship of us by, these other companies.
PART I
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.
Immunotherapies (also
known as therapeutic vaccines) are an emerging class of treatments that involve using the body’s own immune system to target
and treat disease. Today, multiple companies and institutions are developing drugs that combine disease-targeting agents with
KLH. These disease-targeting agents do not evoke a robust immune response by themselves and thus require a carrier molecule like
KLH.
The versatility of the KLH molecule
and its use in multiple drug development pipelines provide numerous commercial opportunities for us. KLH is currently
utilized in immunotherapies in clinical or pre-clinical development for Alzheimer’s disease, metastatic breast cancer, type
1 diabetes, dermatomyositis, systemic lupus erythematous, ovarian cancer and various other cancers and diseases. The successful
commercialization of one or more of these drug development pipelines, especially in a major indication, could have a significant
impact on the industry’s ability to produce sufficient quantities of KLH. The protein is derived only from the Giant Keyhole
Limpet, a scarce ocean mollusk that is native to a limited stretch of Pacific Ocean coastline. Due in part to the inherent limitations
of utilizing of wild sources of KLH, we believe that aquaculture production methods, like the methods we practice, will be required
to provide scalable, fully traceable supplies of KLH.
Based upon our specialized knowledge
of aquaculture science and KLH, we have built unique land-based aquaculture, laboratory and production facilities in Port Hueneme,
California, and developed production and manufacturing processes to produce medical-grade KLH using Current Good Manufacturing
Practices (GMP). Using our proprietary aquaculture technology, we can support the marine mollusk from embryo to protein-producing
adult, and we now support multiple generations of limpets grown entirely within our land-based aquaculture facility. Other KLH
suppliers do not have this capability and thus are reliant on scarce, wild populations of limpets.
We market and sell our KLH products
under the brand Stellar KLH. Our customers and partners include multinational biotechnology and pharmaceutical companies, academic
institutions, clinical research organizations and research centers. We have multiple agreements to license and supply Stellar KLH
and other technology in exchange for fees, revenues or royalties. Our customers manage and fund all product development and regulatory
submissions for their respective drug products that utilize our KLH protein.
Competitive Strengths
We believe that we possess a
number of competitive strengths that position us to become the world leader in the sustainable manufacture of GMP grade KLH and
KLH-conjugated vaccines, including:
|
•
|
Fully permitted, land-based aquaculture facility produces a barrier to market entry.
Our
proprietary methods, infrastructure
and aquaculture facility give us the capability to support the source animal in aquaculture. Due to the time needed to raise the
source animal to maturity, and the time needed to build and validate facilities and manufacturing processes, including water discharge
permits, we believe that we have a five to seven year lead over any new market entrants attempting to produce KLH in a similar
manner. Due to its exceptional size and complexity, KLH has not been reproduced synthetically.
|
|
•
|
Fully traceable, GMP grade product offerings benefit commercialization programs.
Using our proprietary production and
manufacturing methods, we are able to produce a high quality, GMP grade KLH product that is fully traceable and controlled from
native source to finished product, which we believe are important considerations for our pharmaceutical partners as they pursue
later-stage trials and commercial introductions subject to more rigorous regulatory standards than early-stage research. Due to
the known origin of material and continuity of data, we believe we are able to create a more consistent, high quality, immunogenic
product than other KLH proteins in the market. In contrast, commercial supplies of KLH from other sources have historically differed
widely in their source, traceability, purity, form and preparation, as well as their immunogenicity (their ability to stimulate
an immune response). We believe that we are the only company that offers GMP grade KLH supported by fully traceable manufacturing
methods.
|
|
•
|
Multiple supply and collaboration agreements reduce single-customer dependence.
We believe that our supply and collaboration agreements with drug developers, which include binding orders,
allow us to better manage our working capital as well as build long- term relationships. Our manufacturing and quality experts
work closely with our collaboration partners and customers to deliver KLH products according to their specifications. We believe
that our long-term relationships and collaborative approach have helped build customer trust and loyalty.
|
|
•
|
Business model leverages growth potential.
We believe we have an attractive business model due to the unique nature
of our product offerings, embedded growth opportunities within our existing customer base and operating leverage. As we increase
production volumes and sales, we expect our operating expenses to decrease as a percentage of revenue, providing for greater operating
leverage. In addition, we have established a model via our joint venture, Neostell, S.A.S., to participate in the manufacturing
of KLH-conjugated vaccines, which provides additional revenue and growth opportunities.
|
|
•
|
Intellectual property portfolio includes protection for specialized systems and technologies.
We have intellectual property
related to KLH development and manufacturing and to the environmental protection of the Giant Keyhole Limpet, including patents,
trade secrets and know-how related to specialized aquaculture systems and technologies; spawning, selection and maintenance of
the species; non- lethal KLH protein extraction methods; and the processing, purification and production of KLH formulations.
|
|
•
|
Safety profile and extensive citations in scientific literature contribute to the appeal
of KLH as a carrier platform for immunotherapies.
KLH has been used for decades in immune system testing, it has an
extensive safety record, and continues to be selected for new immunotherapies preparing to enter clinical testing. According
to a search on PubMed, a service of the U.S. National Library of Medicine, there are more than 3,600 publications referencing
Keyhole Limpet Hemocyanin in biomedical literature.
|
|
•
|
Sustainability practices protect marine source and promote scalability
Our KLH protein is produced using environmentally
sound, sustainable practices intended to protect and renew the live marine source. We believe this is a critical component of ensuring
long-term, scalable supplies, since rapid growth in demand has had severe consequences to other related species. In California,
for example, failure to manage wild populations of abalone resulted in dramatic declines and eventually led to closure of commercial
abalone harvests.
|
|
•
|
Leadership team provides extensive aquaculture production and related industry expertise.
Our leadership team includes
industry experts who have extensive experience in the field of aquaculture and Giant Keyhole Limpet production, and possess a deep
understanding of a variety of biotechnology businesses. Our President and CEO has more than 40 years of experience leading commercial
aquaculture businesses and projects focused on mollusk domestication and production.
|
Our Strategy
We intend to develop and expand
the market for KLH and KLH-conjugated vaccines. Our near-term focus is to support the further development of third party drug candidates
utilizing Stellar KLH and to expand our customer base. This strategy seeks to preserve the opportunity for Stellar to share in
the successful development and commercialization of product candidates utilizing our licensed KLH products. In addition to fees,
revenues or royalties we may receive, we believe that the successful development of third party drug candidates will further validate
our technologies, increase awareness and promote broader adoption of our products by additional third parties. Key elements of
our business strategy include:
|
•
|
Expand
infrastructure and capacity while prudently managing our working capital
. We currently
have multiple customers with KLH-based drug candidates in Phase 2 studies. While the
outcome of these clinical studies cannot be predicted, we are preparing for the possible
impact that favorable clinical results could have on the KLH market and the company’s
supply capabilities. We plan to incrementally increase our infrastructure, manufacturing
capabilities and KLH production capacity based on our customers’ forecasts and
the anticipated future requirements of commercial-scale vaccine manufacturing, which
we estimate could require multiple kilograms of GMP grade KLH per year. In order to produce
such volumes and to provide our customers with greater certainty of future supply, we
intend to have the capacity to support commercial drug launches in a variety of indications,
with planned redundancy at multiple locations. We also plan to increase efficiency and
throughput capacity by optimizing our manufacturing and purification processes.
|
|
•
|
Pursue additional supply and collaboration agreements.
We plan to continue pursuing opportunities for commercial growth
that build on our strengths and core competencies in KLH development and manufacturing, including additional supply and collaboration
agreements. We regularly engage in discussions with various entities involved in immunotherapies, in connection with opportunities
for licensing, supply and collaborative research.
|
|
•
|
Support continuing development of our Neostell Growth Initiative.
In July 2016, we formed Neostell S.A.S., a joint venture
with Neovacs S.A, to produce Neovacs’ Kinoid immunotherapy product candidates which utilize Stellar KLH as a carrier molecule.
In addition to expanding our market opportunities related to manufacturing of Neovacs’ KLH-conjugated vaccines, this joint
venture provides the opportunity to manufacture and sell KLH-based immunotherapies for third party customers.
|
|
•
|
Continue innovation and new product development.
We plan to expand our KLH technology portfolio through ongoing research
and development. Our research and development activities are focused primarily on the aquaculture of the Giant Keyhole Limpet;
improvements in KLH protein characterization and manufacturing; the development of functional assays; and new uses for KLH in immunotherapy
and immunodiagnostic applications. We believe that these activities provide long-term strategic, revenue and clinical opportunities
by extending the commercial use of Stellar KLH and furthering our understanding of the KLH molecule.
|
|
•
|
Pursue additional markets for our technology and products.
We intend to evaluate additional markets for our current
products and technologies. Due to the immune-stimulating characteristics of KLH, we believe the protein could have broader applications
in the medical field or other markets.
|
Keyhole Limpet Hemocyanin (KLH)
KLH is a safe, potent, immune-stimulating
protein. Specifically, it is a very large, high molecular weight, oxygen-carrying glycoprotein. In addition to the native molecule,
KLH can be chemically dissociated into a subunit formulation commonly used in the production of immunotherapies. Both the native,
high molecular weight molecule and subunit forms of KLH are excellent immune stimulants. The KLH molecular structure offers numerous
sites for conjugation, and can generate multiple product configurations. Because of its large size, immune-stimulating properties,
numerous sites for conjugation, and safety profile, KLH is used by researchers and product developers as a vaccine carrier protein.
However, due to its exceptional size and complexity, KLH has not been reproduced synthetically.
KLH can be used as a carrier
molecule, or it can be used as a finished, injectable product in the immunodiagnostic market.
As a carrier molecule, KLH is
combined, or conjugated, to vaccine antigens that are used to promote the generation of antibody and cell-mediated immune responses
against targeted diseases. By themselves, the small haptens (partial antigens) and vaccine antigens used to target these diseases
are not usually immunogenic enough to awaken the immune system and therefore, require a carrier molecule or adjuvant, like KLH,
in order to be effective. The combination of an antigen against specific pathogenic targets, such as tumors, and over-expressed
proteins, conjugated to the immunogenic KLH molecule, is the basis for a promising new class of drugs in development known as active
immunotherapies or therapeutic vaccines. Unlike preventative vaccines, active immunotherapies are designed to stimulate the body’s
own immune system to generate an immune response to target and attack an existing disease or condition. We believe immunotherapies
are, and will continue to be, one of the fastest-growing sectors of pharmaceutical research and development. KLH is an important
component for drugs used in clinical development, including major indications such as Alzheimer’s disease, metastatic breast
cancer, systemic lupus erythematous, dermatomyositis, ovarian cancer and various other cancers and diseases. New indications expected
to enter clinical trials, such as type 1 diabetes, point to expanding clinical potential for KLH.
As a finished injectable product,
KLH has been used extensively by pharmaceutical companies and researchers as a safe, immune-stimulating antigen in drug-screening,
drug immunotoxicology, and assessment of immune status. KLH is a standard immunogen in T-Cell Dependent Antibody Response (TDAR),
a functional assay which is widely recognized as a standard test for monitoring the effects of drugs on the immune system.
KLH protein is derived only
from the hemolymph of the Giant Keyhole Limpet (
Megathura crenulata
), a mollusk native only to a limited stretch of the
Pacific Ocean coastline along Southern California and Baja California, Mexico. Historically, suppliers other than us have obtained
KLH protein directly from wild and sensitive populations of Giant Keyhole Limpet, or have utilized lethal production processes.
Based on publicly available information and reports, commercial supplies of KLH differ widely in their source, traceability, purity,
form, and preparation, as well as in immunogenicity (their ability to stimulate an immune response). We believe that highly-specialized
aquaculture manufacturing methods, like the methods we practice, protect the KLH molecule’s source species and provide sustainable,
scalable supplies of quality KLH protein. The concept of sustainability involves sound, responsible management of environmental
resources and, especially where biological systems are concerned, includes protecting native species so that the species thrive
and remain diverse and productive over time. Further, we believe that environmentally sound methods associated with professional
and specialized aquaculture can minimize variability in KLH products and assure full traceability to their biological source.
Our Technology
We have spent more than 15 years
developing and optimizing sustainable KLH production methods, specifically focused on protection of the Giant Keyhole Limpet and
a patented, non-lethal method to extract KLH protein. We believe our proprietary methods will provide a scalable supply of GMP
grade KLH and meet pharmaceutical industry standards for immune response, consistency, purity, and traceability while protecting
the natural source species.
Our proprietary aquaculture technology
involves methods we developed and optimized to control the reproduction and growth of the Giant Keyhole Limpet including, but not
limited to, culture systems, nutritional requirements and the recirculation of seawater. We achieved a significant milestone in
aquaculture science by developing the capability to sustain the complete life cycle of the Giant Keyhole Limpet. Using our proprietary
methods, we can support the marine mollusk from embryo to protein-producing adult, and we now support multiple generations of limpets
grown entirely within our land-based aquaculture facility. We believe that other KLH suppliers do not have this capability and thus are reliant
on scarce, wild populations of limpets.
The aquaculture cycle to raise Giant Keyhole Limpets from fertilized
eggs to maturity for KLH production is approximately five years, with multiple complex larval and juvenile stages. The hemolymph
circulatory fluid, which contains KLH, is extracted in a non-lethal manner utilizing our patented methods. Once extracted, the
hemolymph is processed and purified through our proprietary methods, which are protected as trade secrets. KLH can be extracted
from mature limpets multiple times per year.
We currently maintain a production
inventory of limpets sufficient for an annual capacity of up to 1,500 grams/year of KLH pharmaceutical intermediate, which can
be further processed and purified to produce various final product grades and formulations. We believe we can continue to scale
up capacity to meet anticipated customer demand in the near term. Given sufficient funding to continue scale- up, our projected
production capacity is up to 20,000 grams (20 kg) of KLH pharmaceutical intermediate in five to seven years. We plan to incrementally
increase hatchery production of limpets and expand aquaculture infrastructure, which will thereby increase our KLH production capacity,
in order to meet the anticipated future multi-kilogram KLH requirements of immunotherapy commercialization.
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. This initiative 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.
We rely on contract manufacturing
organizations and contract testing organizations for certain steps of cGMP processing and quality control testing. The services
performed by these contract vendors have included sterile fill/finish and product release testing.
As a result of these operational
capabilities, we believe we will be able to supply GMP grade KLH in commercial quantities to meet the anticipated long-term demand
within the pharmaceutical industry, while protecting the natural source species. We base these beliefs on our intellectual property,
achievements in aquaculture science, KLH production capacity, KLH sustainable manufacturing know-how, and survey data used to estimate
populations of Giant Keyhole Limpets in the wild.
Our Aquaculture and KLH Production Facilities
We maintain
research and manufacturing facilities directly along the Pacific Ocean with dedicated, land-based aquaculture operations in Port
Hueneme, California. We have approximately 37,000 square feet of leased aquaculture, manufacturing and laboratory space. We believe
our waterfront location is a proprietary asset that allows our marine scientists to work in close proximity to naturally resident
Giant Keyhole Limpet colonies, and to be at the forefront in developing protective measures and environmentally sound practices
for KLH production. At this location, our seawater supply and discharge system is fully permitted, which we believe is a competitive
strength due in part to the time required and uncertainties related to obtaining new water discharge permits in the State of California.
Our aquaculture operations include,
among other specialized infrastructure, systems for spawning, larval development, and maturation of limpets, recirculating seawater
supply systems and environmental controls. Our facility currently includes multiple production tanks and numerous individual limpet
production modules in two independent aquaculture production systems. Each closed recirculating system is equipped with temperature
controlled seawater distribution, filtration and treatment equipment. The facility also contains a fabrication shop for production
of equipment and culture apparatus.
Additional Aquaculture and KLH Production Locations
In January 2017, we established
a wholly owned Mexican subsidiary under the name BioEstelar, S.A. de C.V. to support our plan to establish additional aquaculture
capabilities in Baja California, including the development of regional marine resources, aquaculture and raw material processing
for Stellar’s KLH products. Since 2015, we have leased undeveloped land in Baja California as part of multi-year site suitability
studies. We have a related, exclusive collaboration agreement with the lessor to collaborate on the design, expansion and development of marine aquaculture
resources for hatchery and maturation of Giant Keyhole Limpets on the leased property. The collaboration agreement expires in June
2018, unless terminated earlier. We believe this expansion in Mexico will support our goal to meet the anticipated long-term industry
demand for KLH protein.
Research and Development
Our research and development
is focused primarily on the aquaculture of the Giant Keyhole Limpet; improvements in KLH protein characterization and manufacturing;
the development of functional assays; and new uses for KLH in immunotherapy and immunodiagnostic applications. These activities
involve both internal programs and external collaborations with other biopharmaceutical companies or research organizations.
Our internal research has included,
among other activities, improvement of methods for the culture and growth of Giant Keyhole Limpet, developing proprietary formulated
limpet diets, 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, and new KLH formulations and
KLH-related technologies.
Our external collaborations
have historically involved both development and evaluation projects, with multiple biopharmaceutical companies and research institutions,
for the use of Stellar KLH in their programs. We believe that these collaborations provide for strategic, revenue and clinical
opportunities for our future business by extending the commercial use of Stellar KLH and furthering our understanding of the KLH
molecule.
For the years ended September
30, 2017, 2016 and 2015, our research and development expense were $1.97 million, $1.73 million and $1.03 million, respectively.
These amounts related mainly to research and development in aquaculture, improvements in analytical, manufacturing, and purification
processes, stability studies and formulation development.
Our Stellar KLH Products
We offer Stellar KLH protein
in various grades, formulations, custom configurations and fill finishes for both drug development and research applications. Our
portfolio includes GMP and research grade products intended for: conjugation as a carrier molecule in therapeutic vaccines; assessing
immune function; and, in immunotoxicology studies, for monitoring the immunomodulatory effects of drug candidates. We also offer
KLH-based in vitro diagnostic kits for research and preclinical use.
We currently have limited revenue
from sales of our Stellar KLH products. The list price for bulk Stellar KLH protein ranges from approximately $15,000 to $50,000
per gram, depending on the purity, grade, preparation, packaging configuration and volume ordered. While our customer base has
not changed significantly from year to year, product sales volumes have been highly dependent and subject to variability associated
with the rate of development and progression of clinical studies of third-party immunotherapies and other technologies that utilize
our products. The rate of progression towards later stage studies is expected to continue to affect the timing and volume of future
product sales. The advancement and commercial success of third-party products utilizing Stellar KLH is dependent upon many factors,
including available capital, trial recruitment and progress, and regulatory review.
Revenues from the sale of products
and contract services revenues in fiscal years 2017, 2016 and 2015 are as follows:
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
Product sales
|
|
$
|
178,287
|
|
|
$
|
1,239,689
|
|
|
$
|
563,689
|
|
Contract services revenue
|
|
|
50,000
|
|
|
|
32,000
|
|
|
|
195,000
|
|
The geographic breakdown of revenues in fiscal years
2017, 2016 and 2015 are as follows:
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
Europe
|
|
|
64
|
%
|
|
|
43
|
%
|
|
|
53
|
%
|
North America
|
|
|
33
|
%
|
|
|
12
|
%
|
|
|
9
|
%
|
Asia
|
|
|
3
|
%
|
|
|
45
|
%
|
|
|
38
|
%
|
Drug Master Files for Stellar KLH
We have submitted Type II Master
Files for our high molecular weight and subunit KLH product formulations to the FDA Center for Biologics Evaluation and Research
(CBER) and Type II Drug Master Files to the FDA Center for Drug Evaluation and Research (CDER). A Master File is a confidential,
detailed dossier kept on file at the FDA that contains the proprietary information on the manufacture and safety of a drug component.
These files can be used to support the regulatory approval process for customers’ immunotherapy products that use our Stellar
KLH, while allowing us to control access to our manufacturing data.
Customers
We primarily market and distribute
our products directly to biotechnology and pharmaceutical companies, academic institutions, clinical research organizations and
research centers. Products are shipped to our customers from our facilities in Port Hueneme, California using a common carrier
chosen by the customer. The geographic markets of our customers are principally Europe, North America and Asia.
The customers that represent 10% or more of our total
consolidated revenue in fiscal years 2017, 2016 and 2015 are as follows:
Customer
|
|
Percentage
|
|
2017
|
Araclon Biotech, SL
|
|
|
57
|
%
|
Matrivax R&D Corporation
|
|
|
22
|
%
|
|
|
|
|
|
2016
|
OBI Pharma, Inc.
|
|
|
41
|
%
|
Eurogentec
|
|
|
25
|
%
|
Neovacs SA
|
|
|
10
|
%
|
|
|
|
|
|
2015
|
Araclon Biotech, SL
|
|
|
19
|
%
|
Amaran Biotechnology, Inc.
|
|
|
19
|
%
|
OBI Pharma, Inc.
|
|
|
17
|
%
|
AXON Neuroscience SE
|
|
|
16
|
%
|
Neovacs SA
|
|
|
15
|
%
|
Supply Agreements, Collaboration Agreements and
Contracts
We have entered into, and intend
to continue to enter into, agreements with third parties that will allow us to supply Stellar KLH in exchange for fees, revenues
or royalties. Supply agreements generally involve a customer’s commitment to purchase our Stellar KLH for use as a carrier
molecule in the customer’s own immunotherapy products or as a finished product in their development programs. In return,
we license and provide exclusive or priority supply in a given field and territory, and provide technical and regulatory support.
When applicable, we also agree to maintain a master file with the U.S. Food and Drug Administration (FDA) for the KLH product.
Our current supply agreements are limited to clinical trials and typically have an initial multi-year term, which may be renewed
by customers for additional one-year periods. Our supply agreements also typically provide us with first negotiation rights for
the supply of KLH in connection with potential future commercialization of a customer’s products.
To date, our Stellar KLH protein
has been used in research and development, preclinical and clinical phases of development but has not yet been used in any commercialized
and marketed drug products. Quantities required for clinical trials depend on, among other variables, the nature of the trial,
the clinical indication, the number of patients enrolled, dosing regimens and vaccine manufacturing processes.
We have supply agreements
with Araclon Biotech SL, a privately-held biotechnology company headquartered in Spain and majority-owned by global healthcare
company Grifols, who is developing beta amyloid-targeting active immunotherapies for neurodegenerative diseases with a primary
focus on Alzheimer's disease; Amaran Biotechnology, Inc., a biopharmaceuticals manufacturer based in Taiwan that manufactures
a KLH conjugate vaccine for OBI Pharma, Inc., a publicly-listed Taiwan biotech company; and French biotechnology company Neovacs
S.A, for the use of Stellar KLH in the development and manufacture of Neovacs’ active immunotherapies. As previously disclosed,
our agreement with Neovacs provides for Neovacs to purchase Stellar KLH for use in its proprietary KLH-based Kinoid immunotherapies
in the European Union, Latin America, Asia, the U.S. and Canada. Our customers manage and fund all product development and regulatory
submissions for their respective drug products that utilize Stellar KLH.
Neostell Joint Venture Agreement
In May 2016, we entered into
a joint venture agreement with Neovacs S.A., a publicly-held biotechnology company in Paris, France for the formation of a joint
venture company to manufacture and sell conjugated therapeutic vaccines. In July 2016, Neostell S.A.S., a French simplified stock
corporation (Neostell), was formed to carry out the business of the joint venture. Neostell is expected to produce Neovacs’
Kinoid immunotherapy product candidates which utilize Stellar KLH as a carrier molecule. Neostell may also manufacture and sell
other KLH-based immunotherapy products for third-party customers worldwide.
We hold 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 in June 2016 with the balance due upon the occurrence of certain defined future events. We will
also provide additional financing to Neostell, as may be required, on a pro rata basis in line with our equity interest. If Neostell
does not achieve certain milestones by December 31, 2017, it will be dissolved, unless the parties mutually agree to pursue the
joint venture arrangement, or either party decides to purchase the equity interests of the other party. As of the date of this
Annual Report, these milestones have not been achieved, and the parties have discussed their mutual desire to extend the deadline.
Each of the parties is entitled, upon the occurrence of certain defined events, to acquire the interest of the other party. Except
as otherwise described herein, 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
its participation in the joint venture, the other party will have a right to acquire all of such terminating party’s equity
interests in Neostell.
In connection with
the formation of Neostell 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 Neostell, a supply agreement designating Neostell as the exclusive manufacturer
and supplier of the Neovacs’ vaccines, and services agreements for the provision of various knowledge and expertise by each
of the parties. Neovacs will also license certain of its intellectual property to Neostell.
Intellectual Property and License Agreements
We hold important proprietary
intellectual property related to KLH development and manufacture and to the environmental protection of the Giant Keyhole Limpet
including, but not limited to, patents and trade secrets related to specialized aquaculture systems and technologies; spawning,
selection and maintenance of the Giant Keyhole Limpet; non-lethal KLH protein extraction methods; and the processing, purification
and production of KLH formulations. Our proprietary methods also include methods for the control of larval development, metamorphosis
and maturation of the Giant Keyhole Limpets, which we protect as trade secrets.
Our success depends in part
on our ability to obtain and maintain proprietary protection for our product technology and know-how, to operate without infringing
proprietary rights of others, and to prevent others from infringing our proprietary rights. We seek to protect our proprietary
position by, among other methods, filing, when possible, U.S. and foreign patent applications relating to our technology, inventions
and improvements that are important to our business. We also rely on trade secrets, know-how, continuing technological innovation,
and in-licensing opportunities to develop and maintain our proprietary position. We require our employees, consultants and advisors
to execute confidentiality agreements in connection with their employment, consulting or advisory relationship with us. We also
require our employees, and to the extent practicable, our consultants and advisors with whom we expect to work on our products
to agree to disclose and assign to us all inventions made in the course of our working relationship with them, while using our
intellectual property or which relate to our business.
We hold patent protection for
our non-lethal extraction methods of hemocyanin in the United States and other countries, including one issued patent in the United
States, U.S. Patent No. 6,852,338, which currently expires in 2023, and covers a two-step method for obtaining hemolymph from a
live gastropod mollusk. This U.S. patent was originally granted to our Chief Executive Officer, Frank Oakes, who assigned the patent
to the Company in August 2002. Foreign patent counterparts were granted in Canada, France and Germany. In August 2011 we acquired
an exclusive, worldwide sub-licensable and royalty-free license to the technology we developed under collaboration with Bayer Innovation
GmbH (Bayer) for the improved production method and process yields for Stellar KLH. The license included a carve-out by Bayer to
use the technology in certain non-Hodgkin Lymphoma active immunotherapies, but we may exclusively commercialize the technology
in other fields.
The scope of any patent protection
may not exclude competitors or provide competitive advantages to us, and any of our patents may not be held valid if subsequently
challenged, and others may claim rights in or ownership of our patents and proprietary rights. Furthermore, others may develop
products similar to our products and may duplicate any of our products or design around our patents.
Our trademarks include, but
are not limited to, “Powering and Improving Immunotherapy™”, “Stellar KLH™” and “KLH
Site™”. In addition to patents and trademarks, we rely on trade secrets and other intellectual property laws, nondisclosure
agreements and other measures to protect our intellectual property rights.
Competition
The immunotherapy industry is
rapidly evolving and new competitors with competing technologies and products are regularly entering clinical development and the
market. We compete on the basis of: the advantages and disadvantages of Stellar KLH as compared to other KLH proteins manufactured
by our competitors; our ability to educate the industry about the high quality, and sustainable and traceable features, of Stellar
KLH; our ability to supply scalable quantities of GMP grade KLH; product efficacy; customer service; and the price and demonstrated
cost-effectiveness of Stellar KLH as compared to our competitors. We believe that our products and services currently compete favorably
with respect to such factors. However, we may not be able to maintain our competitive position against current and potential competitors.
We compete directly with Biosyn Corporation, a pharmaceutical and biotechnology company which manufactures KLH starting material
and offers clinical and research grade KLH products. We also compete directly with SAFC, a division of Sigma-Aldrich, which offers
clinical and research grade KLH products. In addition to competition from current suppliers of KLH, we also face indirect competition
from developers of other carrier proteins, adjuvants or therapeutic vaccine platforms. We are unable to predict what effect evolution
of the KLH and immunotherapy industries and potential new entrants may have on price, selling strategies, intellectual property
or our competitive position.
Government Regulation
Our operations, including our
aquaculture and harvesting activities, as well as production operations, manufacturing site development, and drug research, development
and sales, are subject to complex regulation at the local, state and federal levels in the United States by a number of regulatory
agencies including, but not limited to, the U.S. Food and Drug Administration, the U.S. Environmental Protection Agency, the U.S.
Fish and Wildlife Service, the U.S. Secretary of the Navy, the Regional Water Quality Control Board Los Angeles Region, the California
Department of Fish and Wildlife, the California Coastal Commission, the California Air Pollution Control Board, the County of Ventura,
and the City of Port Hueneme.
We are subject to laws and regulations
covering clean water and waste discharge, and are required to hold licenses for the aquaculture production and wild harvesting
of the Giant Keyhole Limpet. Our aquaculture facility is subject to regulation by the California Department of Fish and Wildlife
and the Regional Water Quality Control Board, Los Angeles Region. These agencies impose regulations that restrict any activity
that could pose a potential risk to the California marine environment including, but not limited to, seawater waste discharge limitations
specified in our National Pollution Discharge Elimination Systems (NPDES) permit. We regularly monitor our KLH production and manufacturing
processes for compliance with applicable regulations.
In addition to regulations in
the United States, we may be subject to a variety of foreign regulations related to research, manufacturing, and the commercial
sale and distribution of our products, to the extent we choose to manufacture, sell or distribute any products outside of the United
States. The requirements governing our activities in jurisdictions outside the United States vary greatly from country to country.
In Mexico, our current research
and development activities and collaborations, and potential future operations, are subject to regulation, permitting and oversight
by the Secretariat of Agriculture, Livestock, Rural Development, Fisheries and Food (SAGARPA), including the National Service of
Health, Food Safety and Quality (SENASICA), the National Commission of Fisheries and Aquaculture (CONAPESCA), and the National
Institute of Fisheries and Aquaculture (INAPESCA), all of which are administrative bodies of SAGARPA. We are also subject to regulation,
permitting and oversight by the Secretariat of the Environment and Natural Resources (SEMARNAT), the Secretariat of Health’s
Federal Commission for the Protection Against Sanitary Risks (COFEPRIS), and by and other state and local agencies.
Good Manufacturing Practices
The FDA and other regulatory
agencies regulate and inspect equipment, facilities and processes used in the manufacture of pharmaceutical and biologic products
prior to approving a product. If, after receiving approval from regulatory agencies, a company makes a material change in manufacturing
equipment, location or process, additional regulatory review and approval may be required. All facilities and manufacturing techniques
used for the manufacture of our products must comply with applicable regulations governing the production of pharmaceutical products
known as Current Good Manufacturing Practices. These requirements include, among other things, quality control, quality assurance
and the maintenance of records and documentation. We are responsible for regularly assessing compliance with GMP requirements through
record reviews and periodic audits and for ensuring that we take corrective action for any identified deficiencies.
The FDA and other regulatory
agencies also conduct regular, periodic visits to re-inspect equipment, facilities and processes following initial approval of
a product. If, as a result of these inspections, it is determined that our equipment, facilities or processes do not comply with
applicable regulations and conditions of product approval, regulatory agencies may issue warning or similar letters or may seek
civil, criminal, or administrative sanctions against us. To date, we have not been subject to inspection by the FDA or other drug
regulatory agency because none of our customers or partners has filed an application in any country for marketing approval of a
product encompassing our Stellar KLH protein.
New Drug Development
None of our KLH products have been subject to approval as a drug by any regulatory authority. However,
a number of our customers and strategic partners are utilizing Stellar KLH in the development of pharmaceuticals and immunotherapies
that are subject to the regulatory approval process in various jurisdictions. The regulatory approval process for new drugs under
development by our customers is typically long and expensive. Clinical trials that they conduct may not be successful and such
products may not receive regulatory approval. Delays by our customers in obtaining, or the inability to obtain, regulatory approvals
for their products which use Stellar KLH will have a direct effect on the demand for our products.
Employees
As of November 30,
2017, we had 28 employees. We consider our employee relations to be good. None of our employees are represented by a labor union
or collective bargaining agreement.
Corporate Information
We operate through our wholly-owned
subsidiary, Stellar Biotechnologies, Inc., a California corporation which was organized September 9, 1999. We acquired the subsidiary
on April 12, 2010 through a reverse merger and began trading on the TSX Venture Exchange (TSX-V) under the symbol “KLH”
on April 19, 2010. We were originally incorporated in Canada on June 12, 2007 under the name China Growth Capital, Inc. and subsequently
changed our name to CAG Capital, Inc. on April 15, 2008. We began trading on the TSX Venture Exchange as a Canadian capital pool
company on August 29, 2008, and became a British Columbia corporation on November 25, 2009. Our reverse merger in April 2010 constituted
our “qualifying transaction” under Canadian law, at which time we changed our name to Stellar Biotechnologies, Inc.
In January 2013, we began trading on the U.S. OTCQB Marketplace Exchange under the symbol “SBOTF” and, on November
5, 2015, our common shares began trading on The Nasdaq Capital Market (Nasdaq) under the symbol “SBOT.” On March 29,
2016, at our request, our common shares were voluntarily delisted from the TSX-V in Canada and ceased trading on the TSX-V as of
the close of business on April 8, 2016.
Our executive offices are located at 332 East Scott Street, Port Hueneme, California 93041. Our phone
number is (805) 488-2800. Our website address is www.stellarbiotechnologies.com. The contents of our website are not part of this
Annual Report on Form 10-K for any purpose or otherwise incorporated by reference. Our website address is included for information
only.
Available Information
We file or furnish periodic
reports, including our annual reports on Form 10-K, our quarterly reports on Form 10-Q and current reports on Form 8-K, proxy statements
and other information with the SEC, and amendments to such reports filed or furnished pursuant to Section 13(a) or 15(d) of the
Securities Exchange of 1934, as amended, as soon as reasonably practicable after we electronically file or furnish such materials
to the SEC. Such reports and filings may be obtained by visiting the Public Reference Room of the SEC at 100 F Street, NE, Washington,
D.C. 20549, by calling the SEC at (800) SEC-0330 or by sending an email to the SEC at publicinfo@sec.gov. In addition, the SEC
maintains a website (www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers
that file electronically with the SEC. Our reports, proxy statements and other information are also made available, free of charge,
on our investor relations website at ir.stellarbiotechnologies.com as soon as reasonably practicable after we electronically file
such information with the SEC. References to our corporate website address (www.stellarbiotechnologies.com) in this Annual Report
on Form 10-K are intended to be inactive textual references only, and none of the information contained on our website is part
of this report or incorporated in this report by reference.
Certain factors may have
a material adverse effect on our business, financial conditions and results of operations. You should carefully consider the risks
and uncertainties described below together with all of the other information contained in this Annual Report on Form 10-K, including
our financial statements and the related notes, before deciding to invest in our common shares. The risks and uncertainties described
below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently believe
to be immaterial may also adversely affect our business. If any of the following risks actually occurs, our business, financial
condition, results of operations and future prospects could be materially and adversely affected.
Risks Related to Our Business
We have a history of net losses and limited cash flow
to sustain our operations.
We currently have limited revenue
from product sales of Stellar KLH, and anticipate our planned total operating expenses will be greater than our revenues for the
foreseeable future. We incurred net losses of $5.03 million in fiscal 2017, $5.03 million in fiscal 2016, and $2.84 million in
fiscal 2015. As of September 30, 2017, we have an accumulated deficit of $45.4 million since inception. To date, we have not paid
dividends on our common shares and do not anticipate doing so in the foreseeable future. We have historically relied upon the sale
of common shares to help fund our operations and meet our obligations. Any future additional equity financing would cause dilution
to current shareholders. If we do not have sufficient capital for our operations, management would be forced to reduce or discontinue
our activities, which would have a negative effect on our operations and financial condition.
We depend heavily on the success
and market acceptance of Stellar KLH and we may never recoup our investment into its research and development.
We have invested a significant
portion of our time and financial resources into the development of Stellar KLH. We anticipate that in the near term our ability
to generate revenues will depend solely on the commercial success of Stellar KLH, which depends upon its market acceptance by purchasers
in the pharmaceutical market and the future market demand and medical need for products and research utilizing KLH. The degree
of market acceptance of Stellar KLH depends on a number of factors including: the advantages and disadvantages of Stellar KLH as
compared to other KLH proteins; our ability to educate the industry about the high quality, sustainable and traceable qualities
of Stellar KLH; product efficacy; customer service; and the price and demonstrated cost-effectiveness of Stellar KLH as compared
to our competitors.
Our customers face uncertainties related
to regulatory approval, which could reduce the market for our products.
A primary market for our Stellar
KLH products is its use as a component of active immunotherapies under development. The pharmaceutical industry is subject to significant
government regulation, which varies from country to country. Many of the products being developed by our customers that utilize
our Stellar KLH are not yet approved for commercial sale. Before regulatory approvals for the commercial sale of any drug is granted,
it must be demonstrated through preclinical research and clinical trials to be safe and effective for its intended use in humans.
The process to determine safety and efficacy, including clinical trials, is expensive, prolonged and uncertain. The time necessary
to complete these processes and clinical trials, and to submit applications for regulatory approvals, is difficult to predict and
is subject to numerous factors outside of our control. Such clinical trials may not be successful. Larger or later stage clinical
trials may not produce the same results as earlier trials. Successful results in clinical trials may not result in regulatory approval,
due to certain factors including unacceptable side effects or safety issues. If regulatory approval is granted for any drug or
product that utilizes Stellar KLH, it will be subject to ongoing regulatory requirements, which include registration, manufacturing,
labeling, advertising and promotion, packaging, distribution, record keeping and reporting, and storage. Manufacturing facilities,
both those operated by us and by our contractors, would be subject to continual review and inspection, and failure to meet these
regulatory requirements can interrupt, delay, or shut down these facilities. Previously unknown problems may result in regulatory
restrictions on such products, including withdrawal from the marketplace. Delays in obtaining regulatory approvals for products
developed by our customers that use Stellar KLH, or failure to obtain or maintain regulatory approvals altogether, would have a
negative effect on market demand for our Stellar KLH products, and have a negative effect on our operations and financial condition.
Our business is geographically concentrated and if
a catastrophic event, such as a hurricane, an earthquake or coastal flooding, were to impact our facilities, our business may be
disrupted which could result in serious harm to our business, results of operations and financial condition.
Our aquaculture operations,
research and manufacturing facilities, laboratory space, and executive offices are all located in Port Hueneme, California, a coastal
city located along the Pacific Ocean. To date, we have conducted all of our aquaculture operations, research and manufacturing
at these facilities and we currently have no active backup facilities or second sites. In January 2017, we established a wholly
owned Mexican subsidiary to support our plan to establish additional aquaculture capabilities in Baja California, including the
development of regional marine resources, aquaculture and raw material processing for Stellar’s KLH products. However, we
do not anticipate the site to be available for manufacture and production until 2019 at the earliest. There can be no assurance
that these expansion plans will result in successful development of additional sites of research and manufacturing and KLH production
outside of our Port Hueneme location. If a hurricane, an earthquake or other natural disaster, including coastal flooding, or a
virus affecting our limpet colony, were to impact our facilities, we may be unable to manufacture our KLH products, which would
have a serious disruptive impact on our business and a material adverse effect on our results of operations and financial condition.
While we carry personal property insurance, such insurance may not be adequate to compensate us for losses from any damage or interruption
of our business operations resulting from a hurricane, an earthquake, coastal flooding or other catastrophic event.
Government and geopolitical changes may impede the
implementation of our strategy outside the United States.
Changes in geopolitical policies of the United States, such as changes in U.S. support for existing treaty
and trade relationships with other countries, may adversely impact (i) the ability or willingness of non-U.S. companies to transact
business in the United States, including with Stellar (ii) regulation and trade agreements affecting U.S. companies, (iii) global
stock markets (including The Nasdaq Capital Market on which our common shares are traded), and (iv) general global economic conditions.
These factors are outside of our control, but may nonetheless cause us to adjust our strategy in order to compete effectively in
global markets.
Our
joint venture with Neovacs involves numerous risks that could adversely impact our financial results
.
In May 2016, we entered into
a strategic relationship with Neovacs S.A. to manufacture and sell conjugated therapeutic vaccines through a newly-formed joint
venture entity in France called Neostell S.A.S. This relationship is subject to various risks that could adversely affect the value
of our investments and our results of operations. These risks include the following:
|
•
|
our interests could diverge from those of Neovacs or we may not be able to agree on ongoing manufacturing and operational activities,
or on the amount, timing, or nature of further investments in Neostell;
|
|
•
|
we may experience difficulties in transferring technology to Neostell;
|
|
•
|
we may experience difficulties and delays in manufacturing and production at Neostell;
|
|
•
|
as a minority partner, our control over the operations of Neostell is limited;
|
|
•
|
Neovacs may be unable to meet its commitments to us or to Neostell, which may pose credit risks for our transactions with them;
|
|
•
|
due to differing business models or long-term business goals, we and Neovacs may not participate to the same extent on funding
capital investments in Neostell;
|
|
•
|
our working capital or cash flows may be inadequate to fund increased capital requirements in Neostell;
|
|
•
|
we may experience difficulties or delays in collecting amounts due to us from Neostell and/or Neovacs due to multinational
financial regulations or geopolitical forces beyond our control; and
|
|
•
|
shifts in the geopolitical landscape may result in tax, legal, or regulatory changes in the United States, France and/or the
European Union, thereby necessitating amendments to the agreements with Neovacs and/or the structure of the joint venture.
|
If our joint venture with Neovacs
is unsuccessful, our business, results of operations, or financial condition may be materially adversely affected.
Our expansion plans include the design and development
of aquaculture infrastructure and KLH production in Mexico which presents substantial risks to our business and personnel. We
may never recoup our investment into this location.
We plan to establish additional
aquaculture capabilities in Baja California, including the development of regional marine resources, aquaculture and raw material
processing for Stellar’s KLH products. There are certain administrative, legal, governmental and societal risks to operating
in Mexico that could adversely impact our ability to expand our operations there. Any one or more of the risks that could adversely
affect our ability to successfully implement our expansion and therefore ultimately have a material adverse effect on our business,
financial condition and results of operations include, without limitation:
|
•
|
geopolitical factors could adversely impact the ongoing relationship between the United States and Mexico and/or the continuity
of the North American Free Trade Agreement, or NAFTA, in its present form;
|
|
•
|
regional political and economic instability;
|
|
•
|
ability to hire and maintain a significant work force;
|
|
•
|
burdensome and evolving government regulations;
|
|
•
|
cooperation of various departments of the Mexican government in issuing permits, and inspecting our operations on a timely
basis;
|
|
•
|
providing adequate security for our employees; and
|
|
•
|
change in the value of the Mexican peso.
|
In addition, our international
operations are governed by the U.S. Foreign Corrupt Practices Act and similar anti-corruption laws outside the U.S. Global enforcement
of anti-corruption laws has increased substantially in recent years, with more enforcement proceedings by U.S. and foreign governmental
agencies and the imposition of significant fines and penalties. While we have implemented policies and procedures to enhance compliance
with these laws, our international operations create the risk that there may be unauthorized payments or offers of payments made
by employees, consultants, sales agents or distributors. Any alleged or actual violations of these laws may subject us to government
investigations, significant criminal or civil sanctions and other liabilities, and negatively affect our reputation.
Our sales in international markets subject us to foreign
currency exchange and other risks and costs, which could harm our business.
Substantial portions of our
revenues are derived from outside the United States; primarily from Europe and Asia. We anticipate that revenues from international
customers will continue to represent a substantial portion of our revenues for the foreseeable future. All our revenues are generated
in U.S. dollars. However, if the effective price of our products were to increase as a result of fluctuations in foreign currency
exchange rates, demand for our products could decline and adversely affect our results of operations and financial condition.
We compete with other companies in KLH production
and manufacturing that may have greater resources than we do.
The immunotherapy industry is
rapidly evolving and new competitors with competing technologies and products are regularly entering the market. Our Stellar KLH
products are similar to KLH-based products produced by other companies. While we believe we are the only company that offers GMP
grade KLH supported by fully traceable manufacturing methods, we may not be able to maintain our competitive position against current
and potential competitors. We compete directly with Biosyn Corporation, a pharmaceutical and biotechnology company which manufactures
KLH starting material and offers clinical and research grade KLH products. We also compete directly with SAFC, a division of Sigma-Aldrich,
which offers clinical and research grade KLH products. Some of our competitors, both public and private, have greater financial
and personnel resources than us, and have greater sales and marketing experience in the industry than us. If they are able to produce
and sell comparable KLH products for less than us, it will have a negative effect on our operations and financial position. In
addition to competition from current suppliers of KLH, we also face indirect competition from developers of other carrier proteins,
adjuvants or therapeutic vaccine platforms. We are unable to predict what effect evolution of the KLH and immunotherapy industries
and potential new entrants may have on price, selling strategies, intellectual property or our competitive position.
We may not be able to meet demand for KLH from either
internally raised or ocean harvest sources.
We are dependent upon a supply
of Giant Keyhole Limpets (
Megathura crenulata
) for KLH production. The range of the Giant Keyhole Limpet in the wild is
limited, and due to the lack of a regulated harvest, the wild stocks of Giant Keyhole Limpets are believed to be declining. If
the wild stocks are depleted, and our hatchery and aquaculture operations are unable to produce sufficient supplies of captive
Giant Keyhole Limpets to meet demand, it would have a negative effect on our operations and financial condition.
We may not be able to manufacture our products in
commercial quantities and currently depend on third parties for certain steps in our manufacturing operations, which could prevent
us from marketing our products.
The manufacture
of pharmaceutical starting materials like KLH requires significant expertise, including the development of advanced manufacturing
techniques and process controls. We may encounter difficulties in production, particularly in scaling up production. These problems
include difficulties with production costs and yields, quality control, including stability of the product and quality assurance
testing, shortages of qualified personnel, as well as compliance with federal, state and foreign regulations.
In addition, we contract with
third party vendors, including contract manufacturing organizations and contract testing organizations, for certain steps in the
manufacture and testing of our products, and may be unable to establish and maintain relationships with qualified vendors in order
to produce sufficient supplies of our finished products.
We are currently dependent upon
a small number of contractors and locations for certain steps in our manufacturing operations, namely product release testing.
We do not currently have backup manufacturing capacity for some of our key products. If we are unable to retain our current contractors,
or are unable to obtain new contractors to provide manufacturing services in a timely manner and on similar terms, it will have
a negative effect on our operations. Further, these contract manufacturers and testing organizations provide services to many biotechnology
and research companies, and such third party contractors may not provide acceptable quality, quantity or costs required by us.
In addition, they may not be able to provide the services required on a schedule acceptable to us. These issues may result in us
being unable to manufacture our products in the required quantities or at an acceptable cost, which would have a negative effect
on our operations and financial condition.
We have been, and expect to continue to be in the
future, significantly dependent on collaboration and supply agreements for the development and sales of Stellar KLH.
In conducting our research and
development and commercialization activities, we currently rely, and expect to continue to rely, on collaboration and supply agreements
with third parties, such as contract research organizations, commercial partners, universities, governmental agencies and not-for-profit
organizations, for strategic, technological, and financial resources. The inability to secure agreements on acceptable terms, the
termination of these relationships, changes in our strategy or development plans or those of third parties, or failure to perform
by us or third parties who are subject to regulatory, competitive and other risks, under their respective agreements or arrangements
with us, would substantially disrupt or delay our research and development and commercialization activities, including anticipated
commercial sales. Any such loss would likely increase our expenses and materially harm our business, financial condition and results
of operation.
We have limited marketing, sales and distribution
experience and capabilities. We will need to establish sales and marketing capabilities or enter into agreements with third parties
to market and sell our products.
We currently have limited experience
in the marketing, sales and distribution of KLH-based therapeutic or diagnostic products. Depending on market acceptance of our
Stellar KLH products, we may need to expand our capabilities. We may not be able to establish such additional capabilities in-house,
and then will need to enter into agreements with third parties to successfully perform these tasks. If we contract or make arrangements
with third parties for the sales and marketing of our products, our revenues will be dependent on the efforts of these third parties,
whose efforts may not be successful. If we market any of our products directly, we must either internally develop or acquire a
marketing and sales force, which would require substantial resources and management attention.
We rely on the significant experience and specialized
expertise of our Chief Executive Officer and other members of our senior management team, and we will need to hire and retain other
highly skilled personnel to maintain and grow our business.
Our ability to be successful
in the highly competitive biotechnology and pharmaceutical industries depends in large part upon our ability to attract and retain
highly qualified managerial, scientific, medical, sales and other personnel. Our performance is substantially dependent on the
research and development and business development expertise of Frank Oakes, our President and Chief Executive Officer, and other
executive officers. We do not have employment agreements currently in effect with Mr. Oakes and other executive officers, and they
are free to leave their employment with us at any time.
There is little possibility that
this dependence will decrease in the near term. The loss of the services of Mr. Oakes, or the increased demands placed on our key
executives and personnel by our continued growth, could adversely affect our financial performance and our ability to execute our
strategies. Our continued success also depends on our ability to attract and retain qualified team members to meet our future growth
needs. We may not be able to attract and retain necessary team members to operate our business.
In addition, our future success
depends on our ability to identify, attract, hire, train, retain and motivate highly skilled technical, managerial and research
personnel in all areas within our organization. We plan to continue to grow our business and will need to hire additional personnel
to support this growth. We believe that there are only a limited number of individuals with the requisite skills to serve in many
of our key positions, and we compete for key personnel with other biotechnology companies, as well as universities and research
institutions. It is often difficult to hire and retain these persons, and we may be unable to timely replace key persons if they
leave or be unable to fill new positions, as they become available, requiring key persons with appropriate experience. If we fail
to attract, integrate and retain the necessary personnel, our ability to maintain and grow our business could suffer significantly.
We are subject to the risk of product liability claims,
for which we may not have, or be able to obtain, adequate insurance coverage.
The pharmaceutical industry
is subject to product liability claims in the event of adverse effects, even in respect to products that have received regulatory
approval for commercial sale. Such claims might be made directly by consumers, healthcare providers or by pharmaceutical companies,
or others selling or utilizing our Stellar KLH products. Although we currently maintain liability insurance for our products, we
may not be able to obtain or maintain sufficient and affordable insurance coverage for all claims that may occur. The cost of any
product liability litigation or other proceeding, even if resolved in our favor, could be substantial. In addition, our inability
to obtain or maintain sufficient insurance coverage at an acceptable cost or to otherwise protect against potential product liability
claims could prevent or inhibit the development and commercial production and sale of our products, which could adversely affect
our business, financial condition and results of operations.
Our activities are subject to regulation in the United
States and in the foreign jurisdictions in which we operate. Failure to comply with applicable laws and regulations could adversely
impact our operations.
Our operations, including our
aquaculture and harvesting activities, and our production activities, are subject to regulation at the local, state and federal
levels in the United States by a number of regulatory agencies including, but not limited to, the U.S. Food and Drug Administration,
the U.S. Environmental Protection Agency, the U.S. Fish and Wildlife Service, the U.S. Secretary of the Navy, The Regional Water
Quality Control Board, the California Department of Fish and Wildlife, and similar foreign agencies. In addition to regulations
in the United States, we may be subject to a variety of foreign regulations related to research, manufacturing, and the commercial
sales and distribution of our products, to the extent we choose to manufacture, sell or distribute any products outside of the
United States. If we are unable to comply with laws and regulations in the United States and elsewhere, our operations could be
restricted, or sanctions could be imposed on us, if we are found to not be in compliance with any such regulation.
We may face environmental risks related to handling
regulated substances and hazardous materials.
Our research and clinical development
activities, as well as the manufacture of materials and products, are subject to federal, state and local laws, rules, regulations
and policies governing the use, generation, manufacture, storage, air emission, effluent discharge, handling and disposal of certain
materials, biological specimens and wastes. We may be required to incur significant costs to comply with environmental and health
and safety regulations in the future. Our research and clinical development, both now and in the future, may involve the controlled
use of hazardous materials, including but not limited to certain hazardous chemicals. We cannot completely eliminate the risk of
accidental contamination or injury from these materials. In the event of such an occurrence, we could be held liable for any damages
that result and any such liability could exceed our resources.
We deal with hazardous materials and must comply with
environmental, health and safety laws and regulations, which can be expensive and restrict how we do business and/or give rise
to significant liabilities.
As we operate a manufacturing
facility, we are subject to various environmental, health and safety laws and regulations, including those governing air emissions,
water and wastewater discharges, noise emissions, the use, management and disposal of hazardous materials and wastes, and the cleanup
of contaminated sites. The cost of compliance with these laws and regulations could be significant. In the event of a violation
of these requirements, including from accidental contamination or injury, we could be held liable for damages exceeding our available
financial resources. We could be subject to monetary fines, penalties or third party damage claims as a result of violations of
such laws and regulations or noncompliance with environmental permits required at our facility. As an operator of real property
and a generator of hazardous materials and wastes, we also could be subject to environmental cleanup liability, in some cases without
regard to fault or whether we were aware of the conditions giving rise to such liability. In addition, we may be subject to liability
and may be required to comply with new or existing environmental laws regulating pharmaceuticals in the environment. Environmental
laws or regulations (or their interpretation) may become more stringent in the future. If any such future revisions require significant
changes in our operations, or if we engage in the development and manufacturing of new products or otherwise expand our operations
requiring new or different environmental controls, we will have to dedicate additional management resources and incur additional
expenses to comply with such laws and regulations.
In the event of an accident,
applicable authorities may curtail our use of hazardous materials and interrupt our business operations. In addition, with respect
to our manufacturing facility, we may incur substantial costs to comply with environmental regulations and may become subject to
the risk of accidental contamination or injury from the use of hazardous materials in our manufacturing process.
Risks Related to Intellectual Property
The inability to protect our intellectual property
rights could result in competitive harm to our Company.
Our success and ability to maintain
our competitive position depends on our ability to protect our intellectual property, including by obtaining patent protection
in the United States and other countries, or through protection of our trade secrets, including unpatented know-how, technology
and other proprietary information. When appropriate, we seek to protect our proprietary position by filing patent applications
in the United States and other countries. If we are unable to protect our intellectual property, whether by obtaining patents or
through trade secret protection, our competitors could develop and commercialize products similar or identical to ours.
We may not have adequate remedies
for any infringement or funds to take action against those infringing any of our intellectual property rights, or if our trade
secrets otherwise become known or independently developed by competitors. There can be no assurance that any current or future
patents held, licensed by or applied for by us will be upheld, if challenged, or that the protections afforded will not be circumvented
by others. The patent positions of biotechnology and pharmaceutical companies, which often involve licensing agreements, are frequently
uncertain and involve complex legal and factual questions. In addition, the coverage claimed in a patent application can be significantly
reduced before the patent is issued. Consequently, our patents, patent applications and licensed rights may not provide protection
against competitive technologies or may be held invalid if challenged or could be circumvented. If we enter litigation in regards
to our business or to protect or enforce our patents, it may involve substantial expenditures and require significant management
attention, even if we ultimately prevail.
The patent position of biotechnology
companies is generally highly uncertain. The degree of patent protection we require may be unavailable or severely limited in some
cases and may not adequately protect our rights, provide sufficient exclusivity, or preserve our competitive advantage. For example:
|
•
|
we might not have been the first to invent or the first to file patent applications on the inventions covered by each of our
pending patent applications;
|
|
•
|
others may independently develop similar or alternative technologies or duplicate any of our technologies;
|
|
•
|
the patents of others may have an adverse effect on our business;
|
|
•
|
any patents we obtain or license from others in the future may not encompass commercially viable products, may not provide
us with any competitive advantages or may be challenged by third parties;
|
|
•
|
any patents we have obtained, will obtain or license from others in the future may not be valid or enforceable; and
|
|
•
|
we may not develop additional proprietary technologies that are patentable.
|
Patents have a limited lifespan.
In the United States, the natural expiration of a utility patent typically is generally 20 years after it is filed. Various extensions
may be available; however, the life of a patent, and the protection it affords, is limited.
In addition, some of our technologies
are not covered by any patent application and we rely instead on confidentiality agreements and trade secret law to protect such
intellectual property rights. We require all of our employees and consultants to sign confidentiality agreements. The agreements
also oblige our employees, and to the extent practicable, our consultants, and advisors, to assign to us ideas, developments, discoveries
and inventions made by such persons in connection with their work with us. We cannot be sure that these agreements will maintain
confidentiality, will prevent disclosure, or will protect our proprietary information or intellectual property, or that others
will not independently develop substantially equivalent proprietary information or intellectual property.
The failure of our patents,
patent applications, applicable intellectual property law or our confidentiality agreements to protect our intellectual property
and other proprietary information, including our trade secrets, could have a material adverse effect on our competitive advantages
and on our operations and financial position.
Changes in patent law could diminish the value of patents in
general, thereby impairing our ability to protect our products and our technologies. There are numerous recent changes to the U.S.
patent laws and proposed changes to the rules of the United States Patent and Trademark Office (USPTO) that may have a significant
impact on our ability to obtain and enforce intellectual property rights. In particular, the Leahy-Smith America Invents Act (Leahy-Smith
Act) was adopted in September 2011. The Leahy-Smith Act includes a number of significant changes to U.S. patent law, including
provisions that affect the way patent applications will be prosecuted and may also affect patent litigation. Under the Leahy-Smith
Act, the United States transitioned from a “first-to-invent” system to a “first-inventor-to-file” system
for patent applications filed on or after March 16, 2013. With respect to patent applications filed on or after March 16, 2013,
if we are the first to invent but not the first to file a patent application, we may not be able to fully protect our intellectual
property rights and may be found to have violated the intellectual property rights of others if we continue to operate in the absence
of a patent issued to us. Many of the substantive changes to patent law associated with the Leahy-Smith Act have recently become
effective. Accordingly, it is not clear what, if any, impact the Leahy-Smith Act will have on the operation of our business. However,
the Leahy-Smith Act and its implementation could increase the uncertainties and costs surrounding the prosecution of our patent
applications and the enforcement or defense of any patents that issue, all of which could have a material adverse effect on our
business and financial condition.
In addition, patent reform legislation may pass in the future
that could lead to additional uncertainties and increased costs surrounding the prosecution, enforcement, and defense of patent
applications and any patents we may obtain. Furthermore, the U.S. Supreme Court and the U.S. Court of Appeals for the Federal Circuit
have made, and will likely continue to make, changes in how the patent laws of the United States are interpreted. Similarly, foreign
courts have made, and will likely continue to make, changes in how the patent laws in their respective jurisdictions are interpreted.
We cannot predict future changes in the interpretation of patent laws or changes to patent laws that might be enacted into law
by United States and foreign legislative bodies. Those changes may materially affect our patents and patent applications or any
patents we may obtain and our ability to obtain and enforce or defend additional patent protection in the future.
We may not be able to adequately protect
our intellectual property rights throughout the world.
Filing, prosecuting and defending
patents on our products and technologies in all countries throughout the world would be prohibitively expensive. The requirements
for patentability may differ in certain countries, particularly developing countries, and the breadth of patent claims allowed
can be inconsistent. In addition, the laws of some foreign countries may not protect our intellectual property rights to the same
extent as laws in the United States. Consequently, we may not be able to prevent third parties from practicing our inventions in
all countries outside the United States. Competitors may use our technologies in jurisdictions where we have not obtained patent
protection to develop their own products and, further, may export otherwise infringing products to territories where we have patent
protection, but enforcement on infringing activities is inadequate.
We seek to protect our proprietary
position by, among other methods, filing, when possible, U.S. and foreign patent applications relating to our technology, inventions
and improvements that are important to our business. We have obtained patent protection for our non-lethal extraction methods of
hemocyanin in the United States and other countries. We also rely on trade secrets, know-how, continuing technological innovation,
and in-licensing opportunities to develop and maintain our proprietary position.
We plan to file other international
patent applications directed to patentable features of our products and technologies from time to time. If patent rights are obtained
in foreign jurisdictions, proceedings to enforce such rights could result in substantial costs and divert our efforts and attention
from other aspects of our business, could put our patents at risk of being invalidated or interpreted narrowly, could put our pending
patent applications at risk of not issuing, and could provoke third parties to assert claims against us. We may not prevail in
any lawsuits that we initiate and the damages or other remedies awarded, if any, may not be commercially meaningful. Thus, we may
not be able to stop a competitor from marketing and selling in foreign countries products that are the same as or similar to our
product.
We may become involved in lawsuits to protect or enforce
our patents and patent applications, any patents that may be issued to us or other intellectual property, which could be expensive,
time consuming and unsuccessful.
Competitors may infringe our
patents or patent applications, or other of our intellectual property. To counter infringement or unauthorized use, we may be required
to file infringement or misappropriation claims, which can be expensive and time consuming. Any claims we assert against perceived
infringers could provoke these parties to assert counterclaims against us alleging that we infringe their patents or claiming that
our patents are invalid or unenforceable. Grounds for a validity challenge could be an alleged failure to meet any of several statutory
requirements, including lack of novelty, obviousness, non-enablement or lack of statutory subject matter. Grounds for an unenforceability
assertion could be an allegation that someone connected with prosecution of the patent withheld relevant material information from
the USPTO, or made a materially misleading statement, during prosecution. Third parties may also raise similar validity claims
before the USPTO in post-grant proceedings such as
ex parte
reexaminations,
inter partes
review, or post-grant review,
or oppositions or similar proceedings outside the United States, in parallel with litigation or even outside the context of litigation.
The outcome following legal assertions of invalidity and unenforceability is unpredictable. We cannot be certain that there is
no invalidating prior art, of which we and the patent examiner were unaware during prosecution. For any patents and patent applications
we may license, we may have limited or no right to participate in the defense of any such patents against challenge by a third
party. If a defendant were to prevail on a legal assertion of invalidity or unenforceability, we would lose at least part, and
perhaps all, of any future patent protection on our products. Such a loss of patent protection could harm our business. In addition,
in a patent infringement proceeding, a court may decide that our patent applications or patents, if issued, are invalid or unenforceable,
in whole or in part, construe the patent’s claims narrowly, or refuse to stop the other party from using the technology at
issue on the grounds that our patent applications do not cover the technology. An adverse result in any litigation proceeding could
put one or more of our patents at risk of being invalidated or interpreted narrowly.
Our trade secrets are difficult to protect and misappropriation
could reduce the market for our products.
We may not be able to obtain
adequate remedies for the unauthorized use or disclosure of our proprietary information, including our trade secrets. Enforcing
a claim that a party illegally disclosed or misappropriated a trade secret is difficult, expensive and time consuming, and the
outcome is unpredictable. If any of our trade secrets were to be lawfully obtained or independently developed by a competitor,
we would have no right to prevent them, or those to whom they communicate it, from using that technology or information to compete
with us. If any of our trade secrets were to be disclosed to or independently developed by a competitor, our competitive position
could be harmed.
Third parties may
initiate legal proceedings alleging that we are infringing their intellectual property rights, the outcome of which would be uncertain
and could have a material adverse effect on the success of our business.
Our success depends, in part,
on our ability to operate without infringing the patents and other proprietary intellectual property rights of third parties. This
is generally referred to as having the “freedom to operate.” The biotechnology and pharmaceutical industries are characterized
by extensive litigation regarding patents and other intellectual property rights. The defense and prosecution of intellectual property
claims, interference proceedings and related legal and administrative proceedings, both in the United States and internationally,
involve complex legal and factual questions. As a result, such proceedings are lengthy, costly and time-consuming, and their outcome
is highly uncertain. We may become involved in protracted and expensive litigation in order to determine the enforceability, scope
and validity of the proprietary rights of others, or to determine whether we have the freedom to operate with respect to the intellectual
property rights of others.
Patent applications in the United
States are, in most cases, maintained in secrecy until approximately 18 months after the patent application is filed. The publication
of discoveries in the scientific or patent literature frequently occurs substantially later than the date on which the underlying
discoveries were made. Therefore, patent applications relating to a product or method similar to ours may have already been filed
by others without our knowledge. In the event that a third party has also filed a patent application covering our products, methods
or other claims, we may have to participate in an adversarial proceeding, such as an interference or derivation proceeding in the
USPTO or similar proceedings in other countries, to determine the priority of invention. In the event an infringement claim is
brought against us, we may be required to pay substantial legal fees and other expenses to defend such a claim and, if we are unsuccessful
in defending the claim, we may be subject to injunctions or damage awards.
In the future, the USPTO or a foreign patent office may grant patent rights to our claims to third parties.
Subject to the issuance of these future patents, the claims of which will be unknown until issued, we may need to obtain a license
or sublicense to these rights in order to have the appropriate freedom to further use, develop or commercialize such products or
methods. Any required licenses may not be available to us on acceptable terms, if at all. If it is determined that we have infringed
an issued patent and do not have the freedom to operate, we could be subject to injunctions, and compelled to pay significant damages,
including punitive damages, which could harm our business.
We may become involved in lawsuits
to protect or enforce our patents and patent applications, any patents that may be issued to us or other intellectual property,
which could be expensive, time consuming and unsuccessful.
If we become involved in any
patent litigation or other legal proceedings, we could incur substantial expense, and the efforts of our technical and management
personnel could be significantly diverted. A negative outcome of such litigation or proceedings may expose us to the loss of our
proprietary position or to significant liabilities, or require us to seek licenses that may not be available from third parties
on commercially acceptable terms, if at all. We may be restricted or prevented from using or developing methods, or manufacturing
and selling our products in the event of an adverse determination in a judicial or an administrative proceeding, or if we fail
to obtain necessary licenses. Further, even if we are successful in defending against claims of infringement, such litigation could
be burdensome and costly, and divert management’s attention away from executing our business plan.
We may be subject to claims
that our employees, consultants or independent contractors have wrongfully used or disclosed confidential information of third
parties.
Certain of our employees were
previously employed at other biotechnology or pharmaceutical companies. We may be subject to claims that we or our employees, consultants
or independent contractors have inadvertently or otherwise improperly used or disclosed confidential information of these third
parties or our employees’ former employers. We may also be subject to claims that former employees, consultants, independent
contractors or other third parties have an ownership interest in our patents or other intellectual property. Litigation may be
necessary to defend against these and other claims challenging our right to and use of confidential and proprietary information.
If we fail in defending any such claims, we may lose our rights to such information, in addition to paying monetary damages. Such
an outcome could have a material adverse effect on our business. Even if we are successful in defending against these claims, litigation
could result in substantial cost and be a distraction to our management and employees.
Risks Related to Ownership of Our Securities
The price of our common shares may be subject to substantial
volatility.
Although our common shares are
listed on The Nasdaq Capital Market in the United States, there can be no assurance that an active public market will be sustained
for our common shares. If there is a thin trading market or “float” for our common shares, the market price for our
common shares may fluctuate significantly more than the stock market as a whole. Without a large float, our common shares would
be less liquid than the stock of companies with broader public ownership and, as a result, the trading price of our common shares
may be more volatile.
Furthermore, the stock market
is subject to significant price and volume fluctuations, and the price of our common shares has been in the past, and may continue
in the future to be subject to wide fluctuations in response to several factors, including:
|
•
|
our quarterly or annual operating results;
|
|
•
|
our cash and cash equivalents position;
|
|
•
|
changes in our earnings estimates;
|
|
•
|
investment recommendations by securities analysts following our business or our industry;
|
|
•
|
additions or departures of key personnel;
|
|
•
|
changes in the business, earnings estimates or market perceptions of our competitors;
|
|
•
|
our failure to achieve operating results consistent with securities analysts’ projections;
|
|
•
|
announcements or the expectation of raising additional financing;
|
|
•
|
sales of our common shares by us, our insiders or other shareholders;
|
|
•
|
the status of our listing on the Nasdaq;
|
|
•
|
changes in industry, general market or economic conditions; and
|
|
•
|
announcements of legislative or regulatory changes in the United States and in other countries where we transact business.
|
The stock markets in general,
and the small-cap biotech market, in particular, have experienced extreme price and volume fluctuations in recent years that have
significantly affected the quoted prices of the securities of many companies, including companies in our industry. The changes
often appear to occur without regard to specific operating performance. The price of our common shares could fluctuate based upon
factors that have little or nothing to do with our company and these fluctuations could materially reduce our share price.
Our common shares are thinly traded and there may not
be an active, liquid trading market for our common shares.
There is no guarantee
that an active trading market for our common shares will be maintained on Nasdaq, or that the volume of trading will be sufficient
to allow for timely trades. Investors may not be able to sell our common shares quickly or at the latest market price if trading
in our shares is not active or if trading volume is limited. In addition, if trading volume in our common shares is limited, trades
of relatively small numbers of shares may have a disproportionate effect on the market price of our common shares.
If we cannot meet Nasdaq’s continuing listing
requirements and Nasdaq rules, Nasdaq may delist our securities, which could negatively affect our company and the price of our
securities.
Although our shares are currently
listed on Nasdaq, in the future, we may not be able to meet the continued listing requirements of Nasdaq, which require, among
other things, a minimum bid price of $1.00 per share for common shares listed on the exchange. If we are unable to satisfy the
Nasdaq criteria for maintaining our listing, our securities could be subject to delisting. Trading of our securities may still
be eligible for an over-the-counter market or electronic bulletin board. As a consequence of any such delisting, our shareholders
would likely find it more difficult to dispose of, or to obtain accurate quotations as to the prices of our securities.
We may require additional financing or financings,
which would result in substantial dilution to existing shareholders.
While the Company
plans to finance company operations for the next twelve months with cash on hand and product sales, management expects to continue
incurring losses for the foreseeable future and will need to raise additional capital to pursue our business plan beyond December
2018. In addition, we may decide to expand operations, undertake strategic acquisitions or determine some other business need.
Financing could include debt and/or equity financings, including transactions with strategic customers and partners that may include
debt and/or equity arrangements. Such sources of financing may not be available on acceptable terms, if at all. Failure to obtain
such financing may cause us to curtail operations and/or result in delay or indefinite postponement of research and development
of our Stellar KLH, expansion initiatives, capital expenditures and other operational priorities. Any transaction involving the
issuance of previously authorized but unissued common shares, or securities convertible into common shares, could result in dilution,
possibly substantial, to present and prospective holders of common shares and may be on terms less favorable to us.
We could be deemed a “passive foreign investment
company” in the future, which could have negative consequences for U.S. investors.
We would be designated as a
“passive foreign investment company”, or a PFIC, under the meaning of Section 1297 of the United States Internal Revenue
Code of 1986, as amended, or the Code, if (a) 75% or more of our gross income is “passive income” (generally, dividends,
interest, rents, royalties and gains from the disposition of assets producing passive income) in any taxable year, or (b) at least
50% of the average value of our assets produce, or are held for the production of, passive income. If we are designated a PFIC
for any taxable year during which a U.S. shareholder holds our common shares, it would likely result in materially adverse U.S.
federal income tax consequences for such U.S. shareholder, including, but not limited to, any gain from the sale of our common
shares would be taxed as ordinary income, as opposed to capital gain, and such gain and certain distributions on our common shares
would be subject to an interest charge, except in certain circumstances. In addition, U.S. shareholders should be aware that there
can be no assurances that we would be able to satisfy the record keeping requirements that apply to a PFIC, or that we would supply
U.S. shareholders with the information that such U.S. shareholders require to make certain elections available under the Code that
are intended to mitigate the adverse tax consequences of the PFIC rules. The PFIC rules are extremely complex. A U.S. shareholder
of our common shares is encouraged to consult a tax advisor regarding the PFIC rules and the U.S. federal income tax consequences
of the acquisition, ownership and disposition of our common shares.
We are governed by
the corporate laws in British Columbia, Canada which in some cases have a different effect on shareholders than the corporate laws
in Delaware.
The
material differences between the British Columbia Business Corporations Act (BCBCA) as compared to the Delaware General
Corporation Law (DGCL) which may be of most interest to shareholders include the following: (i) for material corporate
transactions (such as amalgamations, other extraordinary corporate transactions, amendments to the notice of articles and
amendments to the Articles), the BCBCA generally requires a two-thirds majority vote by shareholders (and, in addition,
especially where the holders of a class of shares are being affected differently from others, approval will be required by
holders of two-thirds of the shares of such class voting in a meeting called for that purpose), whereas the DGCL generally
only requires a majority vote of shareholders for similar material corporate transactions; (ii) quorum for shareholders
meetings is not prescribed under the BCBCA and is 33-1/3% under our Articles (to assure compliance with Nasdaq corporate
governance requirements); whereas, under the DGCL, quorum requires the holders of a majority of the shares entitled to vote
to be present; and (iii) our Articles require a two-thirds majority vote of shareholders to pass a resolution for one or more
directors to be removed, whereas the DGCL requires only the affirmative vote of a majority of the shareholders. Accordingly, certain provisions of our corporate governance under the laws of British Columbia may
be disadvantageous to our shareholders.
Risks Related to an Emerging Growth Company
We are an “emerging growth company” under
the JOBS Act of 2012 and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will
make our common shares less attractive to investors.
We are an “emerging
growth company,” as defined in the Jumpstart Our Business Startups Act of 2012 (JOBS Act), and as a result, we may take advantage
of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging
growth companies.” We may take advantage of these reporting exemptions until we are no longer an “emerging growth company.”
We will remain an “emerging growth company” until the earlier of: (i) the last day of the fiscal year (a) following
the fifth anniversary of the date of our first sale of common equity securities pursuant to an effective registration statement
under the Securities Act of 1933, (b) in which we have more than $1.07 billion in annual revenues ($1.0 billion threshold adjusted
for inflation effective April 2017), or (c) in which we are deemed to be a large accelerated filer, which means the market value
of our common shares that is held by non-affiliates exceeded $700 million as of the prior March 31st and (ii) the date on which
we have issued more than $1.0 billion in non-convertible debt securities during the prior three-year period. While we became a
reporting company following the effectiveness of our Form 20-F, filed with the Securities and Exchange Commission on February 3,
2012, our first sale of common equity securities pursuant to an effective registration statement under the Securities Act of 1933
was July 6, 2016. We may choose to take advantage of some but not all of these reduced reporting burdens.
For so long as we remain an
emerging growth company, we will not be required to:
|
•
|
have an auditor report on our internal control over financial reporting pursuant to Section 404(b) of Sarbanes-Oxley;
|
|
•
|
comply with any requirement that may be adopted by the Public Company Accounting Oversight Board (PCAOB), regarding mandatory
audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial
statements (auditor discussion and analysis);
|
|
•
|
submit certain executive compensation matters to shareholders advisory votes pursuant to the “say on frequency”
and “say on pay” provisions (requiring a non-binding shareholder vote to approve compensation of certain executive
officers) and the “say on golden parachute” provisions (requiring a non-binding shareholder vote to approve golden
parachute arrangements for certain executive officers in connection with mergers and certain other business combinations) of the
Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010; and
|
|
•
|
include detailed compensation discussion and analysis in our filings under the Exchange Act, and, instead, may provide a reduced
level of disclosure concerning executive compensation.
|
In addition, Section 107 of
the JOBS Act also provides that an “emerging growth company” can take advantage of the extended transition period provided
in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an “emerging
growth company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private
companies. We have elected not to take advantage of the extended transition period for complying with new or revised accounting
standards.
If we take advantage
of any of these reduced reporting burdens in future filings, the information that we provide our security holders may be different
than information such security holders might receive from other public companies in which they hold equity interests. We cannot
predict if investors will find our common shares less attractive because we may rely on these exemptions. If some investors find
our common shares less attractive as a result, there may be a less active trading market for our common shares and our share price
may be more volatile.
|
Item 1B.
|
UNRESOLVED STAFF COMMENTS.
|
None.
We currently lease 4,300 square
feet of executive office and laboratory space in Port Hueneme, California under a lease which was renewed in July 2016 for a two-year
term, with options to renew for three successive two-year terms.
Our aquaculture and KLH manufacturing
operations are located on approximately 37,000 square feet of oceanfront land in the Port Hueneme Aquaculture Business Park. Our
facilities here include specialized aquaculture infrastructure, seawater supply and discharge systems, laboratories, manufacturing
and administrative offices. We have two sublease agreements which expire in September and October 2020, respectively, with options
to extend the leases for two additional five-year terms.
We also currently lease undeveloped
land in Baja California, Mexico under a lease agreement which we entered into in June 2015, with a three-year term, which lease
agreement is terminable at will at any time with 30 days prior notice by either party. We are utilizing the undeveloped land to
conduct suitability studies for the potential development of an additional aquaculture locale and future expansion of production.
We also have a short-term lease for office space in a business center located in Ensenada, Baja California. This office serves
as the administrative headquarters of our BioEstelar subsidiary.
|
Item 3.
|
LEGAL PROCEEDINGS.
|
From time to time,
we may be involved in legal proceedings, claims and litigation arising in the ordinary course of business, including contract disputes,
employment matters and intellectual property disputes. We are not currently a party to any material legal proceedings or claims
outside the ordinary course of business. Regardless of outcome, litigation can have an adverse impact on us because of defense
and settlement costs, diversion of management resources and other factors.
|
Item 4.
|
MINE SAFETY DISCLOSURES.
|
Not applicable.
PART II
|
Item 5.
|
MARKET
FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES
OF EQUITY SECURITIES.
|
Market Information
Our common shares trade
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, our common shares were traded in the United States on the U.S. OTCQB Marketplace Exchange under the symbol
“SBOTF.” From April 19, 2010 to April 8, 2016 our common shares traded on the TSX Venture Exchange in Canada under
the symbol “KLH.”
The table below lists
the high and low closing prices for our common shares for each fiscal quarter during 2017 and 2016 as reported by Nasdaq, Inc.
or OTC Markets Group, Inc., as applicable. The OTC quotations reflect inter-dealer prices, without retail mark-up, mark-down or
commission, and may not necessarily represent actual transactions.
Common Shares Trading Activity
Nasdaq Capital Market and OTCQB Marketplace
|
|
US Dollars
|
|
Period
|
|
High
|
|
|
Low
|
|
|
|
|
|
|
|
|
Fiscal Year 2017
|
|
|
|
|
|
|
Fourth Quarter Ended 9/30/17
|
|
$
|
1.44
|
|
|
$
|
1.11
|
|
Third Quarter Ended 6/30/17
|
|
$
|
1.64
|
|
|
$
|
1.12
|
|
Second Quarter Ended 3/31/17
|
|
$
|
2.16
|
|
|
$
|
1.53
|
|
First Quarter Ended 12/31/16
|
|
$
|
2.50
|
|
|
$
|
1.87
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year 2016
|
|
|
|
|
|
|
|
|
Fourth Quarter Ended 9/30/16
|
|
$
|
3.82
|
|
|
$
|
2.13
|
|
Third Quarter Ended 6/30/16
|
|
$
|
4.70
|
|
|
$
|
2.44
|
|
Second Quarter Ended 3/31/16
|
|
$
|
6.85
|
|
|
$
|
4.81
|
|
First Quarter Ended 12/31/15 (after 11/4/15)
|
|
$
|
9.41
|
|
|
$
|
6.49
|
|
First Quarter Ended 12/31/15 (through 11/4/15) *
|
|
$
|
8.56
|
|
|
$
|
6.75
|
|
* OTC quotations
|
|
|
|
|
|
|
|
|
Holders
As of November 30,
2017, we had 10,520,096 common shares outstanding, with 19 shareholders of record. The number of record shareholders was determined
from the records of our stock transfer agent and does not reflect persons or entities that hold their shares in nominee or “street”
name through various brokerage firms.
Securities Authorized for Issuance Under
Equity Compensation Plans
See Item 12 “
Security
Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
” of this report.
Dividends
We have not declared
any dividends on our common shares since our incorporation and do not anticipate that we will do so in the foreseeable future.
Our present policy is to retain future earnings, if any, for use in our operations and the expansion of our business.
Performance Graph
The following performance graph and
related information shall not be deemed to be “soliciting material” or to be “filed” with the SEC, nor
shall such information be incorporated by reference into any future filing under the Securities Act, except to the extent that
we specifically incorporate it by reference into such filing.
The graph set forth
below compares the cumulative total return of our common shares to the Nasdaq Composite Index and the Nasdaq Biotechnology Index
based on the period from August 31, 2012 through the Company’s fiscal year end on September 30, 2017. The graph assumes $100
was invested on August 31, 2012 in our common shares and in each of the comparative indices and assumes reinvestment of dividends,
if any.
The comparisons shown
in the graph below are based on historical data. We caution that the stock price performance showing in the graph below is not
necessarily indicative of, nor is it intended to forecast, the potential future performance of our common shares. Information used
in the graph was obtained from S&P Capital IQ, a source believed to be reliable, but we are not responsible for any errors
or omissions in such information. Please also note that, due to the fact that the graph begins in August and includes a transition
period resulting from a change in fiscal year-end, the horizontal segments of the graph do not represent equal time intervals.
Prepared by S&P Global Market Intelligence
|
|
Base
|
|
|
|
|
|
Years Ending
|
|
|
|
|
|
|
|
|
|
Period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company / Index
|
|
8/31/12
|
|
|
8/31/13
|
|
|
8/31/14
|
|
|
9/30/15
|
|
|
9/30/16
|
|
|
9/30/17
|
|
Stellar Biotechnologies, Inc.
|
|
$
|
100
|
|
|
$
|
417.91
|
|
|
$
|
474.63
|
|
|
$
|
191.04
|
|
|
$
|
71.64
|
|
|
$
|
33.87
|
|
NASDAQ Composite Index
|
|
$
|
100
|
|
|
$
|
118.75
|
|
|
$
|
153.37
|
|
|
$
|
156.60
|
|
|
$
|
182.32
|
|
|
$
|
225.50
|
|
NASDAQ Biotechnology Index
|
|
$
|
100
|
|
|
$
|
142.71
|
|
|
$
|
204.08
|
|
|
$
|
224.20
|
|
|
$
|
215.04
|
|
|
$
|
249.29
|
|
Recent Sales of Unregistered Securities; Use of Proceeds
from Registered Securities
None.
Purchase of Equity Securities by the Issuer and Affiliated
Purchasers
None.
|
Item 6.
|
SELECTED FINANCIAL DATA.
|
Our selected financial
data in the table below is derived from our audited financial statements, which have been prepared in accordance with accounting
principles generally accepted in the United States (US GAAP). Our auditors for the fiscal years ended September 30, 2017, 2016
and 2015 and August 31, 2014, Moss Adams LLP, conducted the audits in accordance with United States generally accepted auditing
standards, and the standards of the Public Company Accounting Oversight Board. Our auditors for the fiscal year ended August 31,
2013, D&H Group LLP, conducted the audit in accordance with Canadian generally accepted auditing standards, and the standards
of the Public Company Accounting Oversight Board. You should read these selected financial data together with “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 and our audited financial statements
and notes thereto that are included in this Annual Report on Form 10-K.
Selected Financial Data
Expressed in U.S. dollars
|
|
Year Ended
September 30,
2017
|
|
|
Year Ended
September 30,
2016
|
|
|
Year Ended
September 30,
2015
|
|
|
Year Ended
August 31,
2014
|
|
|
Year Ended
August 31,
2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
228,287
|
|
|
$
|
1,271,689
|
|
|
$
|
758,689
|
|
|
$
|
372,132
|
|
|
$
|
545,469
|
|
Net loss
|
|
|
(5,030,648
|
)
|
|
|
(5,026,080
|
)
|
|
|
(2,843,029
|
)
|
|
|
(8,439,523
|
)
|
|
|
(14,495,779
|
)
|
Net loss per share
|
|
|
(0.49
|
)
|
|
|
(0.57
|
)
|
|
|
(0.36
|
)
|
|
|
(1.11
|
)
|
|
|
(2.81
|
)
|
Total assets
|
|
|
7,720,005
|
|
|
|
12,937,804
|
|
|
|
10,385,927
|
|
|
|
14,473,962
|
|
|
|
8,513,358
|
|
Long-term obligations
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,352,663
|
|
|
|
6,835,199
|
|
Supplementary Financial Information
Selected Quarterly Financial Data
U.S. dollars are shown in thousands,
except per share data
|
|
For the Year Ended September 30,
|
|
|
For the Year Ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
Q4
|
|
|
Q3
|
|
|
Q2
|
|
|
Q1
|
|
|
Q4
|
|
|
Q3
|
|
|
Q2
|
|
|
Q1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
3
|
|
|
$
|
21
|
|
|
$
|
63
|
|
|
$
|
141
|
|
|
$
|
277
|
|
|
$
|
181
|
|
|
$
|
326
|
|
|
$
|
488
|
|
Net loss for period
|
|
|
(1,221
|
)
|
|
|
(1,220
|
)
|
|
|
(1,104
|
)
|
|
|
(1,486
|
)
|
|
|
(1,349
|
)
|
|
|
(1,194
|
)
|
|
|
(861
|
)
|
|
|
(1,622
|
)
|
Net loss per share - basic and diluted
|
|
|
(0.11
|
)
|
|
|
(0.12
|
)
|
|
|
(0.11
|
)
|
|
|
(0.15
|
)
|
|
|
(0.14
|
)
|
|
|
(0.14
|
)
|
|
|
(0.10
|
)
|
|
|
(0.19
|
)
|
Fluctuations in net
income (loss) between quarters can be mainly attributed to fluctuations in revenue and changes in noncash gains and losses shown
in thousands as follows:
|
|
For the Year Ended September 30,
|
|
|
For the Year Ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
Q4
|
|
|
Q3
|
|
|
Q2
|
|
|
Q1
|
|
|
Q4
|
|
|
Q3
|
|
|
Q2
|
|
|
Q1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss in fair value of warrant liability
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(212
|
)
|
Foreign exchange gain (loss)
|
|
|
140
|
|
|
|
64
|
|
|
|
35
|
|
|
|
(77
|
)
|
|
|
(33
|
)
|
|
|
(8
|
)
|
|
|
227
|
|
|
|
(109
|
)
|
Item 7.
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
.
|
This discussion contains forward-looking
statements that involve risks and uncertainties that could cause actual results or events to differ materially from those expressed
or implied by such forward-looking statements as a result of many important factors, including those set forth in Part I of this
Annual Report on Form 10-K under the caption “Risk Factors.” Please see “Special Note Regarding Forward-Looking
Statements” in Part I above. We do not undertake any obligation to update forward-looking statements to reflect events or
circumstances occurring after the date of this Annual Report.
Operating and Financial Review and Prospects
Overview
Our financial statements
have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) and include
the accounts of the Company and our wholly-owned subsidiaries, Stellar Biotechnologies, Inc. and BioEstelar S.A. de C.V.
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. In July 2016, the Company closed a $6.75 million registered direct offering. Management believes the
Company’s working capital is sufficient to support the Company’s operations for the next 12 months. Management also
seeks to expand the customer base for existing marketed products, and is currently evaluating opportunities to secure additional
financing through debt and/or equity financings, including transactions with strategic customers and partners that may include
debt and/or equity arrangements.
Results of Operations
Fiscal Year Ended September 30, 2017
Our total revenues decreased by $1.04 million to $.23 million for fiscal 2017 compared to $1.27 million
for fiscal 2016 primarily due to a decrease in product sales. While our customer base has not changed significantly, product sales
volumes are subject to variability associated with the rate of development and progression of clinical studies of third-party products
that utilize Stellar KLH. For fiscal 2017, product sales consisted of KLH for clinical and pre-clinical studies and immune
system assays. For fiscal 2016, product sales primarily consisted of higher volume orders for later stage clinical studies. The
rate of progression toward later stage studies is expected to continue to affect the timing and volume of future product sales
Our total expenses decreased by $.73 million
to $5.45 million for fiscal 2017 compared to $6.18 million for fiscal 2016:
|
·
|
Our costs of sales and contract services decreased by $.57 million to $.25 million for fiscal 2017 compared to $.82 million for fiscal 2016 primarily due to decreased product sales.
|
|
|
|
|
·
|
Our research and development expenses increased by $.24 million
to $1.97 million for fiscal 2017 compared to $1.73 million for fiscal 2016. 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 $.38 million to $2.94 million for fiscal 2017 compared to $3.32 million for fiscal 2016
primarily due to management’s actions to reduce corporate expenses, including travel and professional fees, as well as lower legal fees and public company expenses
.
|
Our other income
(loss) increased by $.31 million to an overall gain of $.19 million for fiscal 2017 compared to an overall loss of $.11 million
for fiscal 2016. The increase 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 2017 compared to a loss of $.21 million for fiscal 2016.
Foreign exchange gain (loss) was a gain of $.16 million for the fiscal 2017 compared to a gain of $.08 million for fiscal 2016
due to fluctuations in exchange rates and decreased amounts held in Canadian cash and cash equivalents.
Our net loss for fiscal 2017 was $5.03
million, or $0.49 per basic share, compared to a net loss of $5.03 million, or $0.57 per basic share, for fiscal 2016.
Fiscal Year Ended September 30, 2016
Our total revenues
increased by $.51 million to $1.27 million for fiscal 2016 compared to $.76 million for fiscal 2015. Product sales increased by
$.68 million to $1.24 million for fiscal 2016 compared to $.56 million for fiscal 2015 primarily due to an increase in the number
of customers and greater product sales volume, including sales under supply agreements and custom manufactured products. Contract
services revenue decreased by $.17 million to $.03 million for fiscal 2016 compared to $.20 million for fiscal 2015 as a result
of the successful conclusion of a collaboration agreement in December 2015.
Our total expenses
increased by $1.08 million to $6.18 million for fiscal 2016 compared to $5.10 million for fiscal 2015.
Our costs of sales
and contract services increased by $.24 million to $.82 million for fiscal 2016 compared to $.58 million for fiscal 2015, due to
increased product sales.
Our research and development
expenses increased by $.70 million to $1.73 million fiscal 2016 compared to $1.03 million for fiscal 2015. The increase was a result
of 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 increased by $.09 million to $3.32 million for fiscal 2016 compared to $3.23 million for fiscal 2015. The increase resulted
from increased corporate expenses, including our Nasdaq listing fees; compensation increases; and expanded business development
and investor relations activities; offset by decreases in legal fees due to the Form S-3 shelf registration statement and our
transition to reporting as a U.S. domestic issuer during fiscal 2015.
Other income decreased
by $1.64 million to an overall loss of $.11 million for fiscal 2016 compared to an overall gain of $1.53 million for fiscal 2015
primarily due to a noncash change in fair value of warrant liability, which fluctuated to a loss of $.21 million for fiscal 2016
compared to a gain of $2.13 million in fiscal 2015. All warrants with Canadian dollar exercise prices were exercised or expired
by December 2015 and, consequently, there was no warrant liability and no gain/loss in fair value of warrant liability after that
time. These fair value gains and losses occur in inverse relation to changes in our share price that affect the Black Scholes valuation
model. The loss in fiscal 2016 is a result of the increase in our share price from September 30, 2015 to the exercise dates of
the warrants compared to the gain in fiscal 2015 as a reflection of both the decrease in our share price from September 30, 2014
to the exercise dates of warrants during the year and the decrease in our share price from $11.90 at September 30, 2014 to $6.40
for warrants outstanding at September 30, 2015. Our foreign exchange gain in fiscal 2016 was $.08 million compared to a foreign
exchange loss of $.65 million in fiscal 2015. The change over the prior year was due to improved exchange rates for our Canadian
cash and cash equivalents.
Our net loss for fiscal
2016 was $5.03 million, or $0.57 per basic share, compared to a net loss of $2.84 million, or $0.36 per basic share, for fiscal
2015. The increase in net loss of approximately $2.19 million for fiscal 2016 was primarily due to significant fluctuations in
non-cash gain/loss in fair value of warrant liability and non-cash foreign exchange gain/loss, as well as increased research and
development expenses, which were offset by increased product sales.
Capital Expenditures
Our capital expenditures,
which primarily consist of scientific, manufacturing, and aquaculture equipment, and facility leasehold improvements for the previous
three fiscal years are as follows:
2017
|
|
$
|
302,733
|
|
2016
|
|
|
402,271
|
|
2015
|
|
|
274,589
|
|
Capital expenditures
include $145,318 of construction in progress, primarily for aquaculture site improvements and installation of lab equipment.
Liquidity and Capital Resources
Company operations
have historically been funded by the issuance of common shares, exercise of warrants, grant revenues, contract services revenue
and product sales. For the fiscal years 2017, 2016, and 2015, the Company reported net losses of approximately $5.0 million, $5.0
million, and $2.8 million, respectively. As of September 30, 2017, the Company had an accumulated deficit of approximately $45.4
million and working capital of approximately $6.4 million. While the Company plans to finance company operations for the next
twelve months with cash on hand and product sales, management expects to continue incurring losses for the foreseeable future
and will need to raise additional capital to pursue our business plan beyond December 2018. Management is taking action to ensure
the Company will continue as a going concern for at least one year beyond the date of the issuance of the Company’s financial
statements. First, management has flexibility to adjust planned expenditures based on a number of factors including the size and
timing of capital expenditures, staffing levels, inventory levels, and the status of customer clinical trials. Management also
seeks to expand the customer base for existing marketed products, and is currently evaluating opportunities to secure additional
financing through debt and/or equity financings, including transactions with strategic customers and partners that may include
debt and/or equity arrangements. 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.
In July 2016, we completed 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 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 non-affiliates 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.
Research and Development
Our core business is
developing and commercializing Keyhole Limpet Hemocyanin for use in immunotherapy and immunodiagnostic applications. Our internal
research has included, among other activities, continual improvement of methods for the culture and growth of Giant Keyhole Limpet,
innovations in aquaculture systems and infrastructure, biophysical and biochemical characterization of the KLH molecule, analytical
processes to enhance performance of our products, KLH manufacturing process improvements, new KLH formulations, and early development
of potential new KLH-based immunotherapies.
Research and development
costs, including materials, KLH designated for internal research use only 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 most recent three fiscal years:
2017
|
|
$
|
1,973,400
|
|
2016
|
|
|
1,729,445
|
|
2015
|
|
|
1,029,489
|
|
Off Balance Sheet Arrangements
We do not have any
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.
Disclosure of Contractual Obligations
We currently lease 4,300 square
feet of executive office and laboratory space in Port Hueneme, California under a lease which was renewed in July 2016 for a two-year
term, with options to renew for three successive two-year terms.
Our aquaculture and KLH manufacturing
operations are located on approximately 37,000 square feet of oceanfront land in the Port Hueneme Aquaculture Business Park. Our
facilities here include specialized aquaculture infrastructure, seawater supply and discharge systems, laboratories, manufacturing
and administrative offices. We have two sublease agreements which expire in September and October 2020, respectively, with options
to extend the leases for two additional five-year terms.
We also currently lease
undeveloped land in Baja California, Mexico under a lease agreement which we entered into in June 2015, with a three-year term,
which lease agreement is terminable at will at any time with 30 days prior notice by either party. We are utilizing the undeveloped
land to conduct suitability studies for the potential development of an additional aquaculture locale and future expansion of production.
We also have a short-term lease for office space in a business center located in Ensenada, Baja California. This office serves
as the administrative headquarters of our BioEstelar subsidiary.
We have purchase commitments
for contract research organizations, consultants and construction contractors.
The approximate amounts
of our contractual obligations are as follows:
Contractual Obligations
As of September 30, 2017
|
|
|
|
|
Less than 1
|
|
|
1-3
|
|
|
3-5
|
|
|
More than
|
|
|
|
Total
|
|
|
year
|
|
|
years
|
|
|
years
|
|
|
5 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating lease obligations
|
|
$
|
378,000
|
|
|
$
|
160,000
|
|
|
$
|
212,000
|
|
|
$
|
6,000
|
|
|
$
|
-
|
|
Purchase obligations
|
|
|
252,000
|
|
|
|
186,900
|
|
|
|
65,100
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
630,000
|
|
|
$
|
346,900
|
|
|
$
|
277,100
|
|
|
$
|
6,000
|
|
|
$
|
-
|
|
Significant Accounting Policies
and Estimates
Our consolidated financial statements,
which are indexed under Item 15 of this Annual Report on Form 10-K, have been prepared in accordance with accounting principles
generally accepted in the United States, which require that the management make certain assumptions and estimates and, in connection
therewith, adopt certain accounting policies. Our significant accounting policies are set forth in Note 3 in the Notes to Consolidated
Financial Statements. Of those policies, we believe that the policies discussed below may involve a higher degree of judgment or
may otherwise be more relevant to our financial condition and results of operations.
Investments
Investments at September
30, 2017 and 2016 consisted of U.S. Treasury bills with original maturities between 13 and 52 weeks. They are classified as held-to-maturity
and are reported at amortized cost, which approximates fair value. We regularly review these investments to determine whether any
decline in fair value below the amortized cost basis has occurred that is other than temporary. If a decline in fair value has
occurred that is determined to be other than temporary, the cost basis of the investment is written down to fair value.
Inventory
We record inventory
at the lower of cost or market, with market not in excess of net realizable value. Raw materials are measured using FIFO (first-in
first-out) cost. Work in process and finished goods are measured using average cost. 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 year. Finished goods include products that are complete
and available for sale. The Company recorded work in process and finished goods inventory only for those products with recent sales
levels to evaluate net realizable value.
Warrant Liability
Our equity offerings
in prior years included the issuance of warrants with exercise prices denominated in Canadian dollars. As a result of having exercise
prices denominated in a currency other than our functional currency, our warrants with Canadian dollar exercise prices met the
definition of derivatives and were therefore classified as derivative liabilities measured at fair value with noncash adjustments
to fair value recognized through the consolidated statements of operations. Upon exercise of these warrants, the fair value of
warrants included in derivative liabilities was reclassified to common shares. If these warrants expired, the related decrease
in warrant liability was recognized as gain 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.
All warrants with exercise
prices denominated in Canadian dollars were exercised or expired by December 2015. Therefore, there is no outstanding warrant liability
at September 30, 2017.
Revenue Recognition
Product Sales
The Company recognizes product
sales when KLH product is shipped (for which the risk is typically transferred upon delivery to the shipping carrier) and there
is persuasive evidence of an arrangement, the fee is fixed or determinable, and collectability is reasonably assured. The Company
documents arrangements with customers with purchase orders and sales agreements.
Product sales include sales
made under supply agreements with customers for a fixed price per gram of KLH products based on quantities ordered. Supply agreements
are typically on a non-exclusive basis except within that customer’s field of use.
Contract services revenue
The Company recognizes contract
services revenue when contract services have been performed and reasonable assurance exists regarding measurement and collectability.
An appropriate amount will be recognized as revenue in the period that the Company is assured of fulfilling the contract requirements.
Amounts received in advance of performance of contract services are recorded as deferred revenue.
Contract services include services
performed under collaboration agreements and technology transfer and purchase agreement.
Share-Based Compensation
We grant options to
buy common shares of the Company to our directors, officers, employees and consultants, and grant other equity-based instruments
to non-employees.
The fair value of share-based
compensation is measured on the date of grant, using the Black-Scholes option valuation model and is recognized over the vesting
period net of estimated forfeitures for employees or the service period for non-employees. The Black-Scholes option valuation model
requires the input of subjective assumptions, including price volatility of the underlying shares, risk-free interest rate, dividend
yield, and expected life of the option.
Foreign Exchange
Items included in the
financial statements of our subsidiaries are measured using the currency of the primary economic environment in which the entity
operates (the functional currency). Our functional currency and the functional currency of our subsidiaries is the U.S. dollar.
Transactions in currencies
other than the U.S. dollar are recorded at exchange rates prevailing on the dates of the transactions.
Recent Accounting Pronouncements
Recent accounting pronouncements
are contained in Note 3 to the financial statements, which are indexed under Item 15 of this this Annual Report on Form 10-K.
CERTAIN INCOME TAX CONSIDERATIONS
United States Federal Income Taxation
As used below, a “U.S.
holder” is a beneficial owner of a common share that is, for U.S. federal income tax purposes, (i) a citizen or resident
alien individual of the United States, (ii) a corporation (or an entity treated as a corporation) created or organized under the
law of the United States, any State thereof or the District of Columbia, (iii) an estate the income of which is subject to U.S.
federal income tax without regard to its source or (iv) a trust if (1) a court within the United States is able to exercise primary
supervision over the administration of the trust, and one or more United States persons have the authority to control all substantial
decisions of the trust, or (2) the trust has a valid election in effect under applicable U.S. Treasury Regulations to be treated
as a United States person. For purposes of this discussion, a “non-U.S. holder” is a beneficial owner of a common share
that is (i) a nonresident alien individual, (ii) a corporation (or an entity treated as a corporation) created or organized in
or under the law of a country other than the United States or a political subdivision thereof or (iii) an estate or trust that
is not a U.S. Holder. If a partnership (including for this purpose any entity treated as a partnership for U.S. federal tax purposes)
is a beneficial owner of a common share, the U.S. federal tax treatment of a partner in the partnership generally will depend on
the status of the partner and the activities of the partnership. A holder of a common share that is a partnership and partners
in that partnership should consult their own tax advisers regarding the U.S. federal income tax consequences of holding and disposing
of common shares. We have not sought a ruling from the Internal Revenue Service (IRS) or an opinion of counsel as to any U.S. federal
income tax consequence described herein. The IRS may disagree with the description herein, and its determination may be upheld
by a court. This discussion does not address U.S. federal tax laws other than those pertaining to U.S. federal income taxation
(such as estate or gift tax laws), nor does it address any aspects of U.S. state or local or non-U.S. taxation.
GIVEN THE COMPLEXITY OF THE TAX LAWS AND
BECAUSE THE TAX CONSEQUENCES TO ANY PARTICULAR SHAREHOLDER MAY BE AFFECTED BY MATTERS NOT DISCUSSED HEREIN, SHAREHOLDERS ARE URGED
TO CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THE SPECIFIC TAX CONSEQUENCES OF THE ACQUISITION, OWNERSHIP AND DISPOSITION OF
COMMON SHARES, INCLUDING THE APPLICABILITY AND EFFECT OF STATE, LOCAL AND NON-U.S. TAX LAWS, AS WELL AS U.S. FEDERAL TAX LAWS.
Taxation of Dividends
U.S. Holders
.
In general, subject to the passive foreign investment company rules discussed below, a distribution on a common share will
constitute a dividend for U.S. federal income tax purposes to the extent that it is made from a corporation’s current or
accumulated earnings and profits as determined under U.S. federal income tax principles. If a distribution exceeds the current
and accumulated earnings and profits of the distributing corporation, it will generally be treated as a non-taxable reduction of
basis to the extent of the U.S. holder’s tax basis in the common share on which it is paid, and to the extent it exceeds
that basis it will be treated as capital gain. The Company has not and does not plan to maintain calculations of earnings and profits
under U.S. federal income tax principles. Accordingly, it is unlikely that U.S. holders will be able to establish that a distribution
by the Company is in excess of its current and accumulated earnings and profits (as computed under U.S. federal income tax principles).
Therefore, a U.S. holder should expect that a distribution by the Company will generally be taxable in its entirety as a dividend
to U.S. holders for U.S. federal income tax purposes even though the distribution may be treated in whole or in part as a non-taxable
distribution for Canadian tax purposes.
The gross amount of
any dividend on a common share (which will include the amount of any Canadian taxes withheld with respect to such dividend) generally
will be subject to U.S. federal income tax as foreign source dividend income, and will not be eligible for the corporate dividends
received deduction. The amount of a dividend paid in Canadian dollars will be its value in U.S. dollars based on the prevailing
spot market exchange rate in effect on the day the U.S. holder receives the dividend. A U.S. holder will have a tax basis in any
distributed Canadian dollars equal to their U.S. dollar value on the date of receipt, and any gain or loss realized on a subsequent
conversion or other disposition of such Canadian dollars generally will be treated as U.S. source ordinary income or loss. If dividends
paid in Canadian dollars are converted into U.S. dollars on the date they are received by a U.S. holder, the U.S. holder generally
should not be required to recognize foreign currency gain or loss in respect of the dividend income.
Subject to certain
exceptions for short-term and hedged positions, as well as the passive foreign investment rules, a dividend that a non-corporate
holder receives on a common share will generally be subject to a maximum federal income tax rate of 20% if the dividend is a “qualified
dividend.” A dividend on a common share will be a qualified dividend if (i) either (a) the common shares are readily tradable
on an established market in the United States or (b) we are eligible for the benefits of a comprehensive income tax treaty with
the United States that the Secretary of the Treasury determines is satisfactory for purposes of these rules and that includes an
exchange of information program, and (ii) we were not, in the year prior to the year the dividend was paid, and are not, in the
year the dividend is paid, a passive foreign investment company (PFIC). The common shares are listed on The Nasdaq
Capital Market which should be treated as an established securities market in the United States. In any event, the U.S. Canada
Income Convention (the Treaty) satisfies the requirements of clause (i)(b), the Company is incorporated in and tax
resident of Canada and should be entitled to the benefits of the Treaty. Based on our audited financial statements, income tax
returns and relevant market and shareholder data, we believe that we likely will not be classified as a PFIC in the September 30,
2017 taxable year. There can be no assurance, however, that the Company will not be considered to be a PFIC for any particular
year in the future because PFIC status is factual in nature, depends upon factors not wholly within the Company’s control,
generally cannot be determined until the close of the taxable year in question, and is determined annually. Accordingly, no assurance
can be made that a dividend paid, if any, would be a “qualified dividend.” In addition, as described in the section
below entitled “Passive Foreign Investment Company Rules,” if we were a PFIC in a year while a U.S. holder held a common
share, and if the U.S. holder has not made a qualified electing fund election effective for the first year the U.S. holder held
the common share, the common share remains an interest in a PFIC for all future years or until such an election is made. The IRS
takes the position that such rule will apply for purposes of determining whether a common share is an interest in a PFIC in the
year a dividend is paid or in the prior year, even if we do not satisfy the tests to be a PFIC in either of those years. Even if
dividends on the common shares would otherwise be eligible for qualified dividend treatment, in order to qualify for the reduced
qualified dividend tax rates, a non-corporate holder must hold the common share on which a dividend is paid for more than 60 days
during the 120-day period beginning 60 days before the ex-dividend date, disregarding for this purpose any period during which
the non-corporate holder has an option to sell, is under a contractual obligation to sell or has made (and not closed) a short
sale of substantially identical stock or securities, is the grantor of an option to buy substantially identical stock or securities
or, pursuant to U.S. Treasury regulations, has diminished such holder’s risk of loss by holding one or more other positions
with respect to substantially similar or related property. In addition, to qualify for the reduced qualified dividend tax rates,
the non-corporate holder must not be obligated to make related payments with respect to positions in substantially similar or related
property. Payments in lieu of dividends from short sales or other similar transactions will not qualify for the reduced qualified
dividend tax rates.
A non-corporate holder
that receives an extraordinary dividend (generally, any dividend that is in excess of 10% of the holder's adjusted basis in the
common share on which the dividend is paid) that is eligible for the reduced qualified dividend rates must treat any loss on the
sale of the common share as a long-term capital loss to the extent of the dividend. For purposes of determining the amount of a
non-corporate holder’s deductible investment interest expense, a dividend is treated as investment income only if the non-corporate
holder elects to treat the dividend as not eligible for the reduced qualified dividend tax rates. Special limitations on foreign
tax credits with respect to dividends subject to the reduced qualified dividend tax rates apply to reflect the reduced rates of
tax.
The U.S. Treasury has
announced its intention to promulgate rules pursuant to which non-corporate holders of stock of non-U.S. corporations, and intermediaries
through which the stock is held, will be permitted to rely on certifications from issuers to establish that dividends are treated
as qualified dividends. Because those procedures have not yet been issued, it is not clear whether we will be able to comply with
them.
Non-corporate holders
of common shares are urged to consult their own tax advisers regarding the availability of the reduced qualified dividend tax rates
with respect to dividends, if any, received on the common shares in the light of their own particular circumstances.
Any Canadian withholding
tax imposed on dividends received with respect to the common shares will be treated as a foreign income tax eligible for credit
against a U.S. holder’s U.S. federal income tax liability, subject to generally applicable limitations under U.S. federal
income tax law. For purposes of computing those limitations separately under current law for specific categories of income, a dividend
generally will constitute foreign source “passive category income” or, in the case of certain holders, “general
category income.” A U.S. holder will be denied a foreign tax credit with respect to Canadian income tax withheld from dividends
received with respect to the common shares to the extent the U.S. holder has not held the common shares for at least 16 days of
the 30-day period beginning on the date which is 15 days before the ex-dividend date or to the extent the U.S. holder is under
an obligation to make related payments with respect to substantially similar or related property. Any days during which a U.S.
holder has substantially diminished its risk of loss on the common shares are not counted toward meeting the 16-day holding period
required by the statute. The rules relating to the determination of the foreign tax credit are complex, and U.S. holders are urged
to consult with their own tax advisers to determine whether and to what extent they will be entitled to foreign tax credits as
well as with respect to the determination of the foreign tax credit limitation. Alternatively, any Canadian withholding tax may
be taken as a deduction against taxable income, provided the U.S. holder takes a deduction and not a credit for all foreign income
taxes paid or accrued in the same taxable year. In general, special rules will apply to the calculation of foreign tax credits
in respect of dividend income that is subject to preferential rates of U.S. federal income tax.
Non-U.S. Holders
.
A dividend paid to a non-U.S. holder of a common share will generally not be subject to U.S. federal income tax unless the
dividend is effectively connected with the conduct of trade or business by the non-U.S. holder within the United States (and is
attributable to a permanent establishment or fixed base the non-U.S. holder maintains in the United States if an applicable income
tax treaty so requires as a condition for the non-U.S. holder to be subject to U.S. taxation on a net income basis on income from
the common share). A non-U.S. holder generally will be subject to tax on an effectively connected dividend in the same manner as
a U.S. holder. A corporate non-U.S. holder under certain circumstances may also be subject to an additional “branch profits
tax,” the rate of which may be reduced pursuant to an applicable income tax treaty.
Taxation of Capital Gains
U.S. Holders
.
Subject to the passive foreign investment company rules discussed below, on a sale or other taxable disposition of a common
share, a U.S. holder will recognize capital gain or loss in an amount equal to the difference between the U.S. holder’s adjusted
basis in the common share and the amount realized on the sale or other disposition, each determined in U.S. dollars. Such capital
gain or loss will be long-term capital gain or loss if at the time of the sale or other taxable disposition the common share has
been held for more than one year. In general, any adjusted net capital gain of an individual is subject to a maximum federal income
tax rate of 20%. Capital gains recognized by corporate U.S. holders generally are subject to U.S. federal income tax at the same
rate as ordinary income. The deductibility of capital losses is subject to limitations.
Any gain a U.S. holder
recognizes generally will be U.S. source income for U.S. foreign tax credit purposes, and, subject to certain exceptions, any loss
will generally be a U.S. source loss. If a Canadian tax is paid on a sale or other disposition of a common share, the amount realized
will include the gross amount of the proceeds of that sale or disposition before deduction of the Canadian tax. The generally applicable
limitations under U.S. federal income tax law on crediting foreign income taxes may preclude a U.S. holder from obtaining a foreign
tax credit for any Canadian tax paid on a sale or other disposition of a common share. The rules relating to the determination
of the foreign tax credit are complex, and U.S. holders are urged to consult with their own tax advisers regarding the application
of such rules. Alternatively, any Canadian tax paid on the sale or other disposition of a common share may be taken as a deduction
against taxable income, provided the U.S. holder takes a deduction and not a credit for all foreign income taxes paid or accrued
in the same taxable year.
Non-U.S. Holders
.
A non-U.S. holder will not be subject to U.S. federal income tax on gain recognized on a sale or other disposition of a common
share unless (i) the gain is effectively connected with the conduct of trade or business by the non-U.S. holder within the United
States (and is attributable to a permanent establishment or fixed base the non-U.S. holder maintains in the United States if an
applicable income tax treaty so requires as a condition for the non-U.S. holder to be subject to U.S. taxation on a net income
basis on income from the common share), or (ii) in the case of a non-U.S. holder who is an individual, the holder is present in
the United States for 183 or more days in the taxable year of the sale or other disposition and certain other conditions apply.
Any effectively connected gain of a corporate non-U.S. holder may also be subject under certain circumstances to an additional
“branch profits tax,” the rate of which may be reduced pursuant to an applicable income tax treaty.
Passive Foreign Investment Company Rules
A special set of U.S.
federal income tax rules applies to a foreign corporation that is a PFIC for U.S. federal income tax purposes. As noted above,
based on our audited financial statements, income tax returns, and relevant market and shareholder data, we believe that we likely
will not be classified as a PFIC in the September 30, 2017 taxable year. There can be no assurance, however, that the Company will
not be considered to be a PFIC for any particular year in the future because PFIC status is factual in nature, depends upon factors
not wholly within the Company’s control, generally cannot be determined until the close of the taxable year in question,
and is determined annually.
In general, a non-US
corporation is a PFIC if in any taxable year either (i) at least 75% of its gross income is “passive income” or (ii)
at least 50% of the quarterly average value of its assets is attributable to assets that produce or are held to produce “passive
income.” In applying these tests, the Company generally is treated as holding its proportionate share of the assets and receiving
its proportionate share of the income of any other corporation in which the Company owns at least 25% by value of the shares. Passive
income for this purpose generally includes dividends, interest, royalties, rent and capital gains, but generally does not include
certain royalties derived in an active business. Passive assets are those assets that are held for production of passive income
or do not produce income at all. Thus cash will be a passive asset. Interest, including interest on working capital, is treated
as passive income for purposes of the income test. Without taking into account the value of its goodwill, more than 50% of the
Company’s assets by value would be passive so that the Company would be a PFIC under the asset test. Based upon its current
operations, its goodwill (the value of which should be based upon the Company’s market capitalization) will likely be attributable
to its activities that will generate active income and to such extent, should be treated as an active asset. The determination
of whether a foreign corporation is a PFIC is a factual determination made annually and is therefore subject to change. Subject
to exceptions pursuant to certain elections that generally require the payment of tax, once stock in a foreign corporation is stock
in a PFIC in the hands of a particular shareholder that is a United States person, it remains stock in a PFIC in the hands of that
shareholder.
If we are treated as
a PFIC, contrary to the tax consequences described in “Taxation of Dividends” and “Taxation of Capital Gains”
above, a U.S. holder that does not make an election described in the succeeding two paragraphs would be subject to special rules
with respect to (i) any gain realized on a sale or other disposition of a common share (for purposes of these rules, a disposition
of a common share includes many transactions on which gain or loss is not realized under general U.S. federal income tax rules)
and (ii) any “excess distribution” by the Company to the U.S. holder (generally, any distribution during a taxable
year in which distributions to the U.S. holder on the common share exceed 125% of the average annual taxable distributions (whether
actual or constructive and whether or not out of earnings and profits) the U.S. holder received on the common share during the
preceding three taxable years or, if shorter, the U.S. holder’s holding period for the common share). Under those rules,
(i) the gain or excess distribution would be allocated ratably over the U.S. holder’s holding period for the common share,
(ii) the amount allocated to the taxable year in which the gain or excess distribution is realized would be taxable as ordinary
income in its entirety and not as capital gain, would be ineligible for the reduced qualified dividend rates, and could not be
offset by any deductions or losses, and (iii) the amount allocated to each prior year, with certain exceptions, would be subject
to tax at the highest tax rate in effect for that year, and the interest charge generally applicable to underpayments of tax would
be imposed in respect of the tax attributable to each of those years.
The special PFIC rules
described above will not apply to a U.S. holder if the U.S. holder makes a timely election, which remains in effect, to treat the
Company as a “qualified electing fund” (QEF) in the first taxable year in which the U.S. holder owns
a common share and the Company is a PFIC and if the Company complies with certain requirements. Instead, a shareholder of a QEF
generally is currently taxable on a pro rata share of the Company’s ordinary earnings and net capital gain as ordinary income
and long-term capital gain, respectively. Neither that ordinary income nor any actual dividend from the Company would qualify for
the 20% maximum federal income tax rate on dividends described above if the Company is a PFIC in the taxable year the ordinary
income is realized or the dividend is paid or in the preceding taxable year. A QEF election cannot be made unless the Company provides
U.S. Holders the information and computations needed to report income and gains pursuant to a QEF election. The Company expects
that will not provide this information. It is, therefore, likely that U.S. holders would not be able to make a QEF election in
any year we are a PFIC.
In lieu of a QEF election,
a U.S. holder of stock in a PFIC that is considered marketable stock could elect to mark the stock to market annually, recognizing
as ordinary income or loss each year an amount equal to the difference as of the close of the taxable year between the fair market
value of the stock and the U.S. holder’s adjusted basis in the stock. Losses would be allowed only to the extent of net mark-to-market
gain previously included in income by the U.S. holder under the election for prior taxable years. A U.S. holder’s adjusted
basis in the common shares will be adjusted to reflect the amounts included or deducted with respect to the mark-to-market election.
If the mark-to-market election were made, the rules set forth in the second preceding paragraph would not apply for periods covered
by the election. A mark-to-market election will not apply during any later taxable year in which the Company does not satisfy the
tests to be a PFIC. In general, the common shares will be marketable stock if the common shares are traded, other than in
de
minimis
quantities, on at least 15 days during each calendar quarter on a national securities exchange that is registered with
the SEC or on a designated national market system or on any exchange or market that the Treasury Department determines to have
rules sufficient to ensure that the market price accurately represents the fair market value of the stock
.
Under current
law, the mark-to-market election may be available to U.S. holders of common shares because the common shares are listed on The
Nasdaq Capital Market and the TSX Venture Exchange (at least one of which should constitute a qualified exchange for this purpose),
although there can be no assurance that the common shares will be “regularly traded” for purposes of the mark-to-market
election.
If we are treated as
a PFIC, each U.S. holder generally will be required to file a separate annual information return with the United States Internal
Revenue Service (IRS) with respect to the Company (and any lower-tier PFICs). A failure to file this return will suspend the statute
of limitations with respect to any tax return, event, or period to which such report relates (potentially including with respect
to items that do not relate to a U.S. holder’s investment in the common shares). Given the complexities of the PFIC rules
and their potentially adverse tax consequences, U.S. holders of common shares are urged to consult their tax advisers about the
PFIC rules.
Medicare Surtax on Net Investment Income
Non-corporate U.S.
Holders whose income exceeds certain thresholds generally will be subject to 3.8% surtax on their “net investment income”
(which generally includes, among other things, dividends on, and capital gain from the sale or other taxable disposition of, the
common shares). Absent an election to the contrary, if a QEF election is available and made, QEF inclusions will not be included
in net investment income at the time a U.S. Holder includes such amounts in income, but rather will be included at the time distributions
are received or gains are recognized. Non-corporate U.S. Holders should consult their own tax advisors regarding the possible effect
of such tax on their ownership and disposition of the common shares, in particular the applicability of this surtax with respect
to a non-corporate U.S. Holder that makes a QEF or mark-to-market election in respect of their common shares.
Information Reporting and Backup Withholding
Dividends paid on,
and proceeds from the sale or other disposition of, a common share to a U.S. holder generally may be subject to information reporting
requirements and may be subject to backup withholding unless the U.S. holder provides an accurate taxpayer identification number
or otherwise establishes an exemption. The amount of any backup withholding collected from a payment to a U.S. holder will be allowed
as a credit against the U.S. holder’s U.S. federal income tax liability and may entitle the U.S. holder to a refund, provided
certain required information is furnished to the Internal Revenue Service. A non-U.S. holder generally will be exempt from these
information reporting requirements and backup withholding tax but may be required to comply with certain certification and identification
procedures in order to establish its eligibility for exemption.
Under U.S. federal
income tax law and U.S. Treasury Regulations, certain categories of U.S. holders must file information returns with respect to
their investment in, or involvement in, a foreign corporation. U.S. holders are urged to consult with their own tax advisors concerning
such reporting requirements.
Reporting Obligations of Individual
Owners of Foreign Financial Assets
Section 6038D of the
Code generally requires U.S. individuals (and possibly certain entities that have U.S. individual owners) to file IRS Form 8938
if they hold certain “specified foreign financial assets,” the aggregate value of which exceeds $50,000 on the last
day of the year or $75,000 at any time during the year. The definition of specified foreign financial assets includes not only
financial accounts maintained in foreign financial institutions, but also, unless held in accounts maintained by a financial institution,
any stock or security issued by a non-US. person, any financial instrument or contract held for investment that has an issuer or
counterparty other than a U.S. person and any interest in a foreign entity. Persons who are required to report foreign financial
assets and fail to do so may be subject to substantial penalties.
Canadian Federal Income Tax Consequences
The following summary
of the material Canadian federal income tax consequences is stated in general terms and is not intended to be legal or tax advice
to any particular shareholder. Each shareholder or prospective shareholder is urged to consult his or her own tax advisor regarding
the tax consequences of his or her purchase, ownership and disposition of common shares. The tax consequences to any particular
holder of common shares will vary according to the status of that holder as an individual, trust, corporation or member of a partnership,
the jurisdiction in which that holder is subject to taxation, the place where that holder is resident and, generally, according
to that holder’s particular circumstances.
This summary is applicable
only to holders who are resident in the United States for income tax purposes, have never been resident in Canada for income tax
purposes, deal at arm’s length with the Company, hold their common shares as capital property and who will not use or hold
the common shares in carrying on business in Canada. Special rules, which are not discussed in this summary, may apply to a United
States holder that is an issuer that carries on business in Canada and elsewhere.
This summary is based
upon the provisions of the Income Tax Act (Canada) and the regulations thereunder (collectively, the Tax Act or ITA)
and the Canada-United States Tax Convention (the Tax Convention) at the date of this Annual Report and the current
administrative practices of the Canada Revenue Agency. This summary does not take into account provincial income tax consequences.
The comments in this summary that are based on the Tax Convention are applicable to U.S. holders only if they qualify for benefits
under the Tax Convention. Management urges each holder to consult his own tax advisor with respect to the income tax consequences
applicable to him in his own particular circumstances.
Non-Resident Holders
The summary below is
restricted to the case of a holder (a Holder) of one or more common shares who for the purposes of the Tax Act is
a non-resident of Canada, holds his common shares as capital property and deals at arm’s length with the Company.
Dividends
A Holder will be subject
to Canadian withholding tax (Part XIII Tax) equal to 25%, or such lower rates as may be available under an applicable
tax treaty, of the gross amount of any dividend paid or deemed to be paid on his common shares. The Company will be required to
withhold the applicable amount of Part XIII Tax from each dividend so paid and remit the withheld amount directly to the Receiver
General for Canada for the account of the Holder.
Disposition of Common Shares
A Holder who disposes
of common shares, including by deemed disposition on death, will not be subject to Canadian tax on any capital gain thereby realized
unless the common share constituted “taxable Canadian property” as defined by the Tax Act. Generally, a common share
of a public corporation will not constitute taxable Canadian property of a Holder unless he held the common share as capital property
used by him carrying on a business in Canada, or he, persons with whom he did not deal at arm’s length or partnerships in
which he or persons with whom he did not deal at arm’s length held an interest, alone or together held or held options to
acquire, at any time within the 60 months preceding the disposition, 25% or more of the issued shares of any class of the capital
shares of the Company and at any time during the 60 months preceding the disposition more than 50% of the value of the common
shares is derived from, or from an interest in, Canadian real estate, including Canadian resource or timber resource properties.
Holders Resident in the United States
A Holder who is a
resident of the United States and realizes a capital gain on disposition of common shares that was taxable Canadian property will,
if qualified for benefits under the Tax Convention, generally be exempt from Canadian tax thereon unless (a) more than 50% of
the value of the common shares is derived from, or from an interest in, Canadian real estate, including Canadian natural resource
properties, (b) the common shares formed part of the business property of a permanent establishment that the Holder has or had
in Canada within the 12 months preceding disposition, or (c) the Holder (i) was a resident of Canada at any time within the ten
years immediately preceding the disposition, and for a total of 120 months during any period of 20 consecutive years, preceding
the disposition, (ii) owned the common shares when he ceased to be resident in Canada, and (iii) the common shares were not subject
to a deemed disposition on the Holder’s departure from Canada.
Inclusion in Taxable Income
A Holder who is subject
to Canadian tax in respect of a capital gain realized on disposition of common shares must include one half of the capital gain
(“taxable capital gain”) in computing his taxable income earned in Canada. The Holder may, subject to certain limitations,
deduct one half of any capital loss (“allowable capital loss”) arising on disposition of taxable Canadian property
from taxable capital gains realized in the year of disposition in respect to taxable Canadian property and, to the extent not so
deductible, from such taxable capital gains of any of the three preceding years or any subsequent year.
Subject to certain
exceptions, a non-resident person who disposes of taxable Canadian property must notify the Canada Revenue Agency either before
or after the disposition (within ten days of the disposition).
Item 7A.
|
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
.
|
We are exposed to financial
market risks associated with foreign exchange rates, concentration of credit, and liquidity. In accordance with our policies, we
manage our exposure to various market-based risks and where material, these risks are reviewed and monitored by our Board of Directors.
Foreign Exchange Risk
Our exposure to foreign
exchange risk is primarily related to fluctuations between the Canadian dollar and the U.S. dollar. Funds held in Mexican pesos
are nominal. We incur operating expenses and capital expenditures mostly in U.S. dollars, with some operating expenses incurred
in Canadian dollars which are subject to foreign currency fluctuations. The fluctuation of the U.S. dollar in relation to the Canadian
dollar will have an impact upon our profitability and may also affect the value of our assets and the amount of shareholders’
equity. We have not entered into any agreements or purchased any instruments to hedge possible currency risks. At September 30,
2017, we held approximately CDN$1.5 million in cash and cash equivalents in Canadian dollars and the U.S. dollar was equal to 1.2458
Canadian dollars. Based on the exposure at September 30, 2017, a 10% annual change in the Canadian/U.S. exchange rate over the
prior year would impact our net loss by approximately $122,000.
Concentration of Credit Risk
We are potentially
subject to financial instrument concentration of credit risk through our cash equivalents, US Treasury bills and accounts receivables.
We place our cash and cash equivalents in 4 week US Treasury bills or financial institutions believed to be credit worthy and perform
periodic evaluations of their relative credit standing. We place short-term investments in 13 to 52 week US Treasury bills. Accounts
receivables can be potentially exposed to a concentration of credit risk with our major customers.
The Company had concentrations
of revenues in fiscal 2017, 2016 and 2015 as follows:
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
Product sales and contract services revenue
|
|
|
79% from
2 customers
|
|
|
|
76% from
3 customers
|
|
|
|
82% from
3 customers
|
|
The Company had concentrations
of accounts receivable at fiscal year-end 2016 as follows:
|
|
2016
|
|
|
|
|
|
Accounts receivable
|
|
|
100 % from
1 customer
|
|
There were no customer
accounts receivable at September 30, 2017.
We assess the collectability
of our accounts receivable through a review of our current aging, as well as an analysis of our historical collection rate, general
economic conditions and credit status of our customers. As of September 30, 2017 and 2016, all outstanding accounts receivable
were deemed to be fully collectible, and therefore, no allowance for doubtful accounts was recorded. We determine terms and conditions
for our customers primarily based on the volume purchased by the customer, customer creditworthiness and past transaction history.
Management works to
mitigate our concentration of credit risk with respect to accounts receivable through our credit evaluation policies, reasonably
short payment terms and geographical dispersion of sales. Revenue includes export sales to foreign companies located principally
in Europe and Asia.
Liquidity
Risk
Liquidity risk is
the risk that we will not be able to meet our financial obligations as they fall due. We attempt to manage liquidity risk by maintaining
sufficient cash and cash equivalent and short-term investment balances. Liquidity requirements are managed based on expected cash
flows to ensure that there is sufficient capital in order to meet our short-term obligations. At September 30, 2017 and 2016,
we had cash and cash equivalents and short-term investment balances totaling $6.6 million and $11.4 million, respectively, to
settle current liabilities of $.32 million and $.62 million, respectively.
Item 8.
|
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
.
|
The financial statements
and related financial information required to be filed hereunder are indexed under Item 15 of this Annual Report on Form 10-K
and are incorporated herein by reference.
Item 9.
|
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
.
|
There were no reportable
events under this item during the past two fiscal years.
Item 9A.
|
CONTROLS AND PROCEDURES
.
|
Disclosure Controls and Procedures
Our management is responsible
for establishing and maintaining disclosure controls and procedures to provide reasonable assurance that material information related
to our Company, including our consolidated subsidiaries, is made known to senior management, including our Chief Executive Officer
and the Chief Financial Officer, by others within those entities on a timely basis so that appropriate decisions can be made regarding
public disclosure.
We carried out an evaluation,
under the supervision and with the participation of our management, including our Principal Executive Officer and our Principal
Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e)) under the Securities and Exchange Act of 1934, as amended) as of September 30, 2017. Our Chief Executive
Officer and Chief Financial Officer concluded that the disclosure controls and procedures as of September 30, 2017, were effective.
Management’s Annual Report on Internal Control over
Financial Reporting
Our management is responsible
for designing, establishing and maintaining a system of internal controls over financial reporting (as defined in Exchange Act
Rule 13a-15(f)) to provide reasonable assurance that the financial information prepared by us for external purposes is reliable
and has been recorded, processed and reported in an accurate and timely manner in accordance with accounting principles generally
accepted in the United States. The Board of Directors is responsible for ensuring that management fulfills its responsibilities.
The Audit Committee fulfills its role of ensuring the integrity of the reported information through its review of the interim and
annual financial statements. Management reviewed the results of their assessment with our Audit Committee.
Because of its inherent
limitations, our internal control over financial reporting may not prevent or detect all possible misstatements or frauds. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with policies or procedures may deteriorate.
Management has used
the criteria issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in “Internal
Control — Integrated Framework (2013)” to evaluate the effectiveness of our internal control over financial reporting.
Management has assessed the effectiveness of our internal control over financial reporting and concluded that such internal control
over financial reporting was effective as of September 30, 2017.
Attestation Report of Our Registered
Public Accounting Firm
This Annual Report
does not include an attestation report from our independent registered public accounting firm. We are an “emerging growth
company,” as defined under the JOBS Act, and are subject to reduced public company reporting requirements. The JOBS Act provides
that an emerging growth company is not required to have the effectiveness of such company’s internal control over financial
reporting audited by its external auditors for as long as such company is deemed to be an emerging growth company.
Limitations on the Effectiveness of Controls
Our management, including
the Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls or our internal controls
will prevent all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable,
not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect
the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because
of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within our Company have been detected. These inherent limitations include the realities that judgments
in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can
be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control.
The design of any system of controls is also based, in part, upon certain assumptions about the likelihood of future events, and
there can be no assurance that any design will succeed achieving its stated goals under all potential future conditions; over time,
control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may
deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur
and not be detected.
Changes in Internal Control over Financial Reporting
There were no changes
in our internal control over financial reporting that occurred during the fourth quarter ended September 30, 2017 that have materially
affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B.
|
OTHER INFORMATION.
|
None.
PART III
Item 10.
|
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
|
Directors
Our directors and their
ages as of November 30, 2017 are set forth below.
Name
|
|
Age
|
|
Position(s) Held
|
|
Director Since
|
Tessie M. Che, Ph.D.
|
|
67
|
|
Director
|
|
September 25, 2013
|
Paul Chun (1)(2)(3)
|
|
36
|
|
Director
|
|
December 8, 2016
|
David L. Hill, Ph.D. (1)(2)(3)
|
|
66
|
|
Director
|
|
May 17, 2011
|
Daniel E. Morse, Ph.D.
|
|
76
|
|
Director
|
|
April 9, 2010
|
Frank R. Oakes
|
|
67
|
|
President, Chief Executive Officer and
Chairman of our Board of Directors
|
|
April 9, 2010
|
Charles V. Olson, D.Sc. (2)
|
|
60
|
|
Director
|
|
December 8, 2016
|
Mayank D. Sampat (1)(2)(3)
|
|
62
|
|
Director
|
|
August 15, 2012
|
(1) Member of Audit Committee.
(2) Member of Compensation Committee.
(3) Member of the Nominating and Corporate Governance Committee.
There are no family
relationships between any of our directors or executive officers.
Biographies
and Qualifications.
The biographies of our directors and certain information regarding each director’s experience,
attributes, skills and/or qualifications that led to the conclusion that the director should be serving as a director of our Company
are as follows:
Tessie M. Che, Ph.D.
has been a director of Stellar since September 2013. Dr. Che is currently General Manager
and Chair of the Board of Directors of Amaran Biotechnology Inc., a privately-held biopharmaceuticals manufacturer based in Taiwan,
a position she has held since 2012. She is also a director of OBI Pharma USA, a wholly-owned subsidiary of OBI Pharma, Inc., a
publicly traded biotechnology corporation in Taiwan. From 1998 to 2011 she served as COO and Sr. V.P., Corporate Affairs of Optimer
Pharmaceuticals Inc., a company she co-founded. At Optimer, Dr. Che guided the company’s CMC team to the successful registration
and commercialization of Dificid
TM
in the U.S., Canada and Europe. Prior to Optimer, Dr. Che’s experience includes
20 years in research, operations and management at global companies, including Exxon Mobil Corp., Aventis Pharmaceuticals Inc.,
and EniChem SpA. Dr. Che holds bachelor degrees in chemistry from Illinois State University and Fu-Jen Catholic University (Taiwan)
and a PhD in physical-inorganic chemistry from Brandeis University. She has authored numerous scientific publications and holds
over 20 U.S. patents. Dr. Che has extensive scientific, operational, manufacturing, quality assurance, product development and
senior management experience in the pharmaceutical and biotechnology industries, as well as experience serving on a board of directors
within our industry.
Paul Chun
has
been a director of Stellar since December 2016
and serves as the chair of the Nominating and Governance Committee
.
He is a Managing Partner of Eldred Advisors LLC, a life sciences advisory firm he founded in May 2016. From November 2015
to April 2016, he served as Director of Strategy and Corporate Development at Kiromic, LLC. From May 2011 to October 2015, Mr.
Chun served as a life sciences principal with Westwicke Partners, LLC, a capital markets advisory firm. During his tenure at Westwicke, he
supported the capital markets and investor engagement objectives of private and public biopharma companies, including the support
of multiple initial public offerings and other strategic transactions. Prior to Westwicke, he held various roles in investment
research and corporate finance, including at Amgen, Inc., Tavistock Life Sciences and Goldman, Sachs & Co. He received his
bachelors in biological sciences from Columbia University. Mr. Chun has broad experience in therapeutics development and commercialization,
valuation, corporate development and finance.
David L. Hill,
Ph.D.
has been a director of Stellar since May 2011, and serves as the chair of the Compensation Committee. He served as Scientific
Director for the ART Reproductive Center, Beverly Hills, California, from December 1999 until his retirement in December 2016.
He is also an Assistant Clinical Professor in the Dept. of Obstetrics and Gynecology at the David Geffen School of Medicine, University
of California, Los Angeles, and a Research Assistant IV at Cedars-Sinai Medical Center, Los Angeles, California. Dr. Hill received
his Ph.D. in Biological Sciences from the Department of Pathology, School of Life Sciences, University of Connecticut and completed
a Postdoctoral Fellowship at the Dana Farber Cancer Institute through an appointment by the Department of Physiology and Biophysics,
Harvard Medical School, Boston, Massachusetts. Dr. Hill has extensive scientific and clinical research experience in our industry.
Daniel E. Morse,
Ph.D.
has been a director of Stellar since April 2010. Dr. Morse is the Wilcox Professor Emeritus of Molecular Genetics and
Biochemistry Biotechnology, Biomolecular Science and Engineering, a position he has held since 2008, and Director of the Marine
Biotechnology Center, at the University of California, Santa Barbara, a position he has held since 1986. Previously, he served
as Director of the UCSB-MIT-Caltech Institute of Collaborative Biotechnologies from 2003 to 2010, and also served as Stellar’s
Executive Vice-President, Science & Technology from 2010 until December 2011. Dr. Morse is an expert in the structure and function
of the KLH molecule and internationally recognized expert in protein chemistry, molecular biology, molluscan reproductive biology,
and aquaculture, and has an intimate understanding of our technology.
Frank R. Oakes
was appointed our President and Chief Executive Officer and Chairman of our Board of Directors in April 2010. Prior to that time,
he served as founder and Chief Executive Officer of Stellar’s California subsidiary since 1999. He has more than 40 years
of management experience in aquaculture including a decade as Chief Executive Officer of The Abalone Farm, Inc., during which he
led the company through the R&D, capitalization, and commercialization phases of development to become the largest abalone
producer in the United States. Mr. Oakes is the inventor of our patented method for non-lethal extraction of hemolymph from a live
gastropod mollusk. He was the principal investigator on our Small Business Innovation Research (SBIR) grant from the National Science
Foundation and was principal investigator on our Phase I and II SBIR grants from the NIH’s Center for Research Resources,
and a California Technology Investment Partnership (CalTIP) grant from the Department of Commerce. Mr. Oakes has consulted and
lectured for the aquaculture industry around the world. He received his Bachelor of Science degree from California State Polytechnic
University, San Luis Obispo and is a graduate of the Los Angeles Regional Technology Alliance University’s management-training
program. Mr. Oakes is a valuable member of our Board due to his depth of operating, strategic, and senior management experience
in our industry, specifically as related to aquaculture. Additionally, Mr. Oakes holds an intimate knowledge of Stellar due to
his longevity in the industry and with us.
Charles V. Olson,
D.Sc.
has been a director of Stellar since December 2016 and a member of our scientific advisory board since June 2014.
Since September 2017, he has served at Applied Molecular Transport Inc., as the Vice President of Biologics. He has also been a
Principal Biotechnology Consultant for Compass Biotechnology LLC since 2006. Dr. Olson previously held senior and executive management
positions at Anthera Pharmaceuticals Inc. from April 2010 to August 2017, NGM Bioharmaceuticals Inc, Coherus BioSciences Inc, Nexbio
Inc., Cell Genesys, Inc., Biomarin Pharmaceuticals, Inc, and Onyx Pharmaceuticals, Inc. After graduate school, Dr. Olson was a
Research Scientist at Kaiser Hospitals, followed by Scientist and Senior Scientist positions at Genentech and Bayer, respectively.
He holds a B.A. in biology and chemistry from Westmont College, an M.A. in chemistry from the University of California at Santa
Barbara and a D.Sc. in biochemistry. Dr. Olson has extensive scientific, manufacturing operations, process development, and senior
management experience in the biopharmaceutical industry.
Mayank (Mike) D.
Sampat
has been a director of Stellar since August 2012, and serves as the chair of the Audit Committee. Mr. Sampat is an independent
consultant providing business services to companies seeking expertise in financial planning and analysis, accounting and financial
reporting, M&A transactions support and financial system implementation. He previously held the positions of controller at
Precision Toxicology, LLC, a healthcare focused clinical laboratory specializing in providing quantitative drug testing, from February
2015 to May 2016, Zpower, LLC, an emerging manufacturer in the microbattery industry, from June 2012 to September 2014, and Imaging
Advantage LLC from September 2010 to June 2012, and the position of Chief Financial Officer for Gamma Medica-Ideas, a supplier
of imaging equipment to the medical industry, from September 2007 to June 2010. Mr. Sampat received a BBA in accounting from Bombay
University and his MBA in Finance at Mercer University. Mr. Sampat is a seasoned finance and accounting executive, having worked
with multiple companies ranging from startups to large Fortune 100 companies.
Executive Officers
Set forth below
is certain information with respect to the names, ages, and positions of our executive officers as of November 30, 2017.
Biographical information pertaining to Mr. Oakes, who is a director and an executive officer, may be found in the above
section entitled “Directors.” The executive officers serve at the pleasure of our Board of Directors.
Name
|
|
Age
|
|
Position(s) Held
|
|
Date of Appointment
|
Frank R. Oakes
|
|
67
|
|
President, Chief Executive Officer and Chairman of our Board of Directors
|
|
April 9, 2010
|
Kathi Niffenegger, CPA
|
|
60
|
|
Chief Financial Officer and Corporate Secretary
|
|
November 1, 2013
|
Gregory T. Baxter, Ph.D.
|
|
58
|
|
Executive Vice President of Corporate Development
|
|
December 1, 2016
|
Kathi Niffenegger,
CPA
was appointed Chief Financial Officer in November 2013 and Corporate Secretary in June 2013. She initially joined Stellar
in May 2012 as Controller, after previously serving as the company’s outside Certified Public Accountant for more than 12
years. Ms. Niffenegger has more than 30 years of experience in accounting and finance in a range of industries. She held positions
of increasing responsibility in the audit division of Glenn Burdette CPAs from 1988 to 2012 and served most recently as technical
partner. She obtained CFO experience at Martin Aviation, and began her career at Peat, Marwick, Mitchell & Co. (now KPMG LLP). Ms.
Niffenegger has held leadership roles for audits of manufacturing, aquaculture, pharmaceutical and governmental grant clients,
and developed specific expertise in cost accounting systems and internal controls. Ms. Niffenegger holds a B.S. degree in Business
Administration, Accounting from California State University, Long Beach and is a member of the American Institute of Certified
Public Accountants (AICPA).
Gregory T. Baxter,
Ph.D.
joined Stellar’s executive management team in December 2016 following his service on the company’s Board
of Directors, which he joined in August 2012. Dr. Baxter has served as an executive and scientist for several biotechnology corporations
and foundations. Since 2001, Dr. Baxter has been a Senior Scientist in the Department of Clinical Drug Development for CCS Associates
Inc., a scientific research consulting firm specializing in technical and support services for clinical research, design strategies
for preclinical studies, chemical information sciences and research and development support for translational science. His prior
experience includes serving as Program Director for the National Science Foundation (NSF) Division of Industrial Innovation and
Partnerships, Founder and CSO of Hurel Corporation, Founder and CEO of Aegen Biosciences and Research Scientist for Molecular Device
Corporation. He also serves as Adjunct Associate Professor at Cornell University in the College of Chemical Engineering and on
the Founders Board of Stanford University's StartX Med Program. Dr. Baxter received his B.A. and Ph.D. in Biochemistry/Molecular
Biology from University of California, Santa Barbara.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the
Exchange Act, requires that our directors, executive officers, and greater-than-10% shareholders file reports with the SEC on their
initial beneficial ownership of our common shares and any subsequent changes. To our knowledge, based solely on a review of copies
of such reports furnished to us by our officers and directors, we believe that, during the fiscal year ended September 30, 2017,
no person required to file reports under Section 16(a) of the Exchange Act failed to file such reports on a timely basis during
such fiscal year.
Code of Ethics
We have adopted a Code
of Ethics and Business Conduct that applies to all of our directors, officers, and employees. A copy of our Code of Ethics and
Business Conduct is available on the Investor Relations section of our website at http://ir.stellarbiotechnologies.com. We intend
to satisfy the SEC’s disclosure requirements regarding amendments to, or waivers of, our Code of Ethics and Business Conduct
by posting such information on our website. Copies of our Code of Ethics and Business Conduct may be obtained, free of charge,
by writing to our Corporate Secretary, Stellar Biotechnologies, Inc., 332 East Scott Street, Port Hueneme, California 93041.
Nominations for Board of Directors
The Board of Directors
has approved an advance notice policy, which was subsequently approved by our shareholders, that requires advance notice be given
to us in certain circumstances where nominations of persons for election to the Board are made by our shareholders.
In the case of an annual
meeting of shareholders, notice to the Company must be made not less than 30 days nor more than 65 days prior to the date of the
annual meeting. However, in the event that the annual meeting is to be held on a date that is less than 40 days after the date
on which the first public announcement of the date of the annual meeting was made, notice may be made not later than the close
of business on the tenth (10th) day following such public announcement.
In the case of a special
meeting of shareholders (which is not also an annual meeting), notice to the Company must be made not later than the close of business
on the fifteenth (15th) day following the day on which the first public announcement of the date
of
the special meeting was made.
Information
about our Board Committees
Our
Board of Directors has appointed an Audit Committee, a Compensation Committee, and a Nominating and Corporate Governance Committee.
The Board of Directors has determined that each director who serves on these committees is “independent,” as that term
is defined by the listing rules of Nasdaq and rules of the Securities and Exchange Commission. The Board of Directors has adopted
written charters for its Audit Committee, Compensation Committee, and Nominating and Corporate Governance Committee. Copies of
these charters are available on our website at
http://ir.stellarbiotechnologies.com
. In addition, our board of directors
appointed a temporary Strategic Investments Committee to approve actions related to potential strategic investments and a Pricing
Committee to approve actions related to our capital raising transactions. There was no requirement for directors who served on
these committees to be “independent”.
Audit
Committee
Our
Audit Committee is composed of Paul Chun, David Hill, and Mayank Sampat (chair). The purpose of the Audit Committee is to oversee
our accounting and financial reporting processes and the audits of our financial statements. In that regard, the Audit Committee
assists the Board in monitoring: (a) the integrity of our financial statements; (b) our independent auditor’s qualifications,
independence, and performance; (c) the performance of our system of internal controls, financial
reporting, and disclosure controls; and (d) our compliance with legal and regulatory requirements. To fulfill this obligation and
perform its duties, the Audit Committee maintains effective working relationships with the Board, management, our internal auditor,
and our independent auditor.
Mayank
Sampat is the Chair of our Audit Committee and has extensive financial experience. He received an MBA in Finance from Mercer University,
and has served in several financial positions with other companies, including several years as Chief Financial Officer for a medical
equipment manufacturer. Mr. Sampat is considered to be “independent” as defined pursuant to the listing rules of the
Nasdaq. The Board has determined that Mr. Sampat is an “audit committee financial expert” as defined in Item 407(d)(5)(ii)
of Regulation S-K.
Compensation
Committee
Our Compensation Committee is composed of Paul Chun, David Hill (chair), Charles Olson and Mayank Sampat.
The purpose of the Compensation Committee is to oversee the Board’s responsibilities relating to compensation, including
(i) the approval of compensation for our Company’s Chief Executive Officer and (ii) the review of compensation for our other
executi
ve officers. It has overall responsibility for
approving and evaluating all of our compensation plans, policies and programs as such plans, policies and programs affect executive
officers.
Nominating and Corporate Governance
Committee
Our Nominating and
Corporate Governanc
e Committee is composed of Paul Chun (chair), David Hill and Mayank Sampat.
The purpose of the Nominating and Corporate Governance Committee is to identify individuals qualified to become Board members;
recommend to the Board individuals to serve as directors; advise the Board with respect to Board composition, procedures and committees;
develop, recommend to the Board and annually review a set of corporate governance principles applicable to the Company; and oversee
any related matters required by the federal sec
urities laws.
Item 11.
|
EXECUTIVE COMPENSATION.
|
Executive Compensation
Our named executive officers for 2017 were
Frank R. Oakes, Chief Executive Officer, President and Executive Chairman of our Board of Directors; Kathi Niffenegger, CPA, Chief
Financial Officer and Corporate Secretary; and Gregory T. Baxter, Ph.D., our Executive Vice President of Corporate Development.
Summary Compensation Table
The following table sets forth information
regarding the compensation awarded to, earned by or paid to the named executive officers.
Name and Principal Position
|
|
Fiscal Year
|
|
|
Salary ($)
|
|
|
Bonus ($)
|
|
|
Stock Awards ($)
(1)
|
|
|
|
Option
Awards
($)
(2)
|
|
|
All Other
Compensation ($)
|
|
|
|
Total ($)
|
|
Frank R. Oakes
|
|
|
2017
|
|
|
$
|
257,100
|
|
|
$
|
25,000
|
|
|
$
|
296,969
|
|
(3)
|
|
$
|
-
|
|
|
$
|
23,669
|
|
(4)
|
|
|
602,738
|
|
President, Chief Executive
|
|
|
2016
|
|
|
|
250,100
|
|
|
|
120,000
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
59,737
|
|
|
|
|
429,837
|
|
Officer and Chairman of our
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Board of Directors
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kathi Niffenegger, CPA
|
|
|
2017
|
|
|
|
202,560
|
|
|
|
20,000
|
|
|
|
-
|
|
|
|
|
19,744
|
|
|
|
18,526
|
|
(5)
|
|
|
260,830
|
|
Chief Financial Officer and
|
|
|
2016
|
|
|
|
196,560
|
|
|
|
47,250
|
|
|
|
-
|
|
|
|
|
61,148
|
|
|
|
19,004
|
|
|
|
|
323,962
|
|
Corporate Secretary
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gregory T. Baxter, Ph.D.
|
|
|
2017
|
|
|
|
157,372
|
|
|
|
500
|
|
|
|
-
|
|
|
|
|
15,605
|
|
|
|
18,406
|
|
(7)
|
|
|
191,883
|
|
Executive Vice President of
Corporate Development (6)
|
|
|
2016
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
11,800
|
|
|
|
|
11,800
|
|
|
(1)
|
The amounts shown in this column represent the aggregate grant date fair value of the share awards based on the closing price on Nasdaq, not the actual amounts paid to or realized by the named executive officer
during the covered fiscal year
. It differs from the amounts recorded in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification 718, which were based on the share value at the inception of the performance share plan in April 2010 expensed over the estimated vesting period ended August 31, 2012.
The vesting requirements of these awards are set forth in Note 8 to our audited consolidated financial statements for the year ended September 30, 2017 included in this Annual Report.
|
|
(2)
|
The amounts shown in this column represent the aggregate grant date fair value of the share option awards computed in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification 718, not the actual amounts paid to or realized by the named executive officers
during the covered fiscal year. The assumptions used in determining grant date fair value of these awards are set forth in Note 8 to our audited consolidated financial statements for the year ended September 30, 2017 included in this Annual Report.
|
|
(3)
|
235,690 shares were issued under our Performance Share Plan.
|
|
(4)
|
Represents (i) $15,719 in health insurance and (ii) $7,950 in 401(k) Company contributions.
|
|
(5)
|
Represents (i) $11,984 in health insurance and (ii) $6,542 in 401(k) Company contributions.
|
|
(6)
|
Dr. Baxter’s employment with the Company began December 1, 2016. Dr. Baxter was a director of the Company from August 15, 2012 until December 1, 2016.
|
|
(7)
|
Represents (i) $8,656 in health insurance, (ii) $1,050 in director fees and (iii) $8,700 in consultant fees prior to becoming an employee.
|
Employment Agreements
We do not have employment
agreements currently in effect with any of our named executive officers. Like our other employees, our executives are eligible
for annual salary increases and discretionary equity grants.
Performance Share Plan
Under the merger agreement
between our Company and our California subsidiary, we allotted 1,000,000 common shares (the Performance Shares) under a performance
share plan (the Plan). The performance shares were reserved for issuance to certain officers, directors and employees of the Company
upon achievement of three 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. Share-based compensation was recorded over the estimated vesting period ending in August 2012.
As each milestone was met as determined by our Board of Directors, one third of the Performance Shares
were available to be released to the Plan participants. The three milestones were met on or before August 2012, and all Performance
Shares had been issued to non-director employees by August 2012. In December 2013, the Board issued 151,515 Performance Shares
to a former director of the Company. The Board issued the remaining Performance Shares in June 2017, of which (a) 13,468 Performance
Shares were issued to a former director of the Company, (b) 235,690 Performance Shares were issued to Mr. Oakes, the Company’s
current President, CEO and Chairman and an eligible participant in the Plan, and (c) 134,680 Performance Shares were issued to
Dr. Morse, a current director of the Company and an eligible participant in the Plan. Since all Performance Shares under the Plan
have been issued, the Plan was terminated.
Outstanding Equity Awards at 2017 Fiscal
Year-End
The following table
summarizes the equity awards made to our named executive officers that were outstanding at September 30, 2017.
|
|
|
|
Option Awards
|
Name
|
|
Award grant date
|
|
Number of
securities
underlying
unexercised
options (#)
exercisable
|
|
|
Number of
securities
underlying
unexercised
options (#)
unexercisable
(1)
|
|
|
Option
exercise prices ($)
|
|
|
Option
expiration date
|
Frank R. Oakes
|
|
8/8/11
|
|
|
42,560
|
|
|
|
-
|
|
|
$
|
CDN6.50
|
|
|
8/8/18
|
|
|
4/13/12
|
|
|
37,560
|
|
|
|
-
|
|
|
|
CDN4.20
|
|
|
4/13/19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kathi Niffenegger, CPA
|
|
6/18/12
|
|
|
9,000
|
|
|
|
-
|
|
|
|
CDN2.90
|
|
|
6/18/19
|
|
|
12/19/12
|
|
|
5,000
|
|
|
|
-
|
|
|
|
CDN2.50
|
|
|
12/19/19
|
|
|
5/14/13
|
|
|
9,000
|
|
|
|
-
|
|
|
|
CDN5.80
|
|
|
5/14/20
|
|
|
11/1/13
|
|
|
10,000
|
|
|
|
-
|
|
|
|
US18.30
|
|
|
11/1/20
|
|
|
11/12/14
|
|
|
9,000
|
|
|
|
-
|
|
|
|
CDN15.20
|
|
|
11/12/21
|
|
|
12/22/15
|
|
|
10,000
|
|
|
|
-
|
|
|
|
US7.24
|
|
|
12/22/22
|
|
|
12/20/16
|
|
|
3,333
|
|
|
|
6,667
|
|
|
|
US2.03
|
|
|
12/20/23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gregory T. Baxter, Ph.D.
|
|
8/16/12
|
|
|
7,000
|
|
|
|
-
|
|
|
|
CDN3.70
|
|
|
8/16/19
|
|
|
11/12/14
|
|
|
1,250
|
|
|
|
-
|
|
|
|
CDN15.20
|
|
|
11/12/21
|
|
|
3/28/17
|
|
|
-
|
|
|
|
10,000
|
|
|
|
US1.60
|
|
|
3/28/24
|
|
(1)
|
Our options vesting policy is described in the Outstanding Equity Awards Narrative Disclosure section.
|
Outstanding Equity Awards Narrative Disclosure
Incentive Compensation Plan
We adopted an Incentive Compensation Plan in 2017 (the 2017 Plan) administered by the Board of Directors,
which amended and restated the 2013 fixed share option plan (the 2013 Plan). Options, restricted shares and restricted share units
are eligible for grant under the 2017 Plan. The number of shares available for issuance under the 2017 Plan is 1,597,000, including
shares available for the exercise of outstanding options under the 2013 Plan. The purpose of the 2017 Plan is to advance the interests
of the Company by encouraging equity participation through the acquisition of common shares of the Company. Our Board is responsible
for the general administration of the 2017 Plan and the proper execution of its provisions, its interpretation and the determination
of all questions arising thereunder. Specifically, the Board has the power to, among other things:
|
·
|
allot common shares for issuance in connection with the exercise of options;
|
|
·
|
grant options, restricted shares or restricted share units;
|
|
·
|
amend, suspend, terminate or discontinue the plan; and
|
|
·
|
delegate all or a portion of its administrative powers as it may determine to one or more committees.
|
Options, restricted
shares or restricted share units may be awarded to our directors, officers, employees and consultants.
Options to purchase
410,970 common shares at prices ranging from CDN$2.50 to CDN$18.70 and $1.60 to $18.40 are outstanding at September 30, 2017. No
restricted shares or restricted share units have been granted as of September 30, 2017.
Options granted during
fiscal 2017 to employees and consultants under the 2017 Plan totaled 71,600 options to purchase common shares,
at exercise prices ranging from $1.60 to $2.03.
Options Vesting Policy
Options granted for
past service are subject to the following vesting schedule: (a) one-third of the option shall vest on the date of grant; (b) one-third
of the option shall vest 12 months from the date of grant; and (c) the remaining one-third of the option shall vest 18 months from
the date of grant. Options granted for future service are subject to the following vesting schedule: (x) one-third shall vest at
12 months from the date of grant, (y) one-third shall vest at 24 months from the date of grant and (z) one-third shall vest at
36 months from the date of grant.
Grants of Plan-Based Awards
The following table provides information
regarding grants of plan-based awards to our named executive officers during fiscal year 2017.
Name
|
|
Grant Date
|
|
All Other
Stock Awards:
Number of
Shares of
Stock or Units
(#)
|
|
|
All Other
Option Awards:
Number of
Securities Underlying
Options (#)
|
|
|
Exercise or
Base Price of
Option Awards
($/Sh)
|
|
|
Grant Date
Fair Value of
Stock and
Option Awards
($)(1)
|
|
|
Frank R. Oakes
|
|
6/26/17
|
|
|
235,690
|
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
296,969
|
|
(2)
|
Kathi Niffenegger, CPA
|
|
12/20/16
|
|
|
-
|
|
|
|
10,000
|
|
|
|
2.03
|
|
|
|
19,744
|
|
(3)
|
Gregory T. Baxter, Ph.D.
|
|
3/28/17
|
|
|
-
|
|
|
|
10,000
|
|
|
|
1.60
|
|
|
|
15,605
|
|
(4)
|
|
(1)
|
The amounts shown in this column for share
awards represent the aggregate grant date fair value of the share awards based on the closing price on Nasdaq, not the actual amounts
paid to or realized by the named executive officer
during the covered fiscal year
.
It differs from the amounts recorded in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification
718, which were based on the share value at the inception of the performance share plan in April 2010 expensed over the estimated
vesting period ended August 31, 2012.
The vesting requirements of these awards are set forth
in Note 8 to our audited consolidated financial statements for the year ended September 30, 2017 included in this Annual Report.
The amounts shown in this column for share option awards represent the aggregate grant date fair value
of the share option awards computed in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification
718, not the actual amounts paid to or realized by the named executive officers
during the
fiscal year. The assumptions used in determining grant date fair value of these awards are set forth in Note 8 to our audited
consolidated financial statements for the year ended September 30, 2017 included in this Annual Report.
|
|
(2)
|
The shares were issued under our Performance Share Plan and are fully vested.
|
|
(3)
|
The option awards were issued under our 2017 Plan for past service, and vest in thirds annually beginning December 2016.
|
|
(4)
|
The option awards were issued under our 2017 Plan for future service, and vest in thirds annually beginning March 2018.
|
Retirement Benefits
We have established
a 401(k) plan to provide retirement benefits to eligible executive officers and employees. Employees may enter the plan after they
have been employed by us for at least three consecutive months. Under the plan, we contribute a flat non-elective contribution
of 3% of eligible compensation for each plan participant at the end of the calendar year. Any Company contributions we made to
the plan for our named executive officers are reflected in the “All Other Compensation” column of the Summary Compensation
Table above.
Other than the funds
contributed under our 401(k) plan, no other funds were set aside or accrued by us during fiscal 2017 to provide pension, retirement
or similar benefits for our named executive officers.
Director Compensation
The following table
sets forth information regarding the compensation of our non-employee directors for the fiscal year ended September 30, 2017.
Name
|
|
Fees Earned or
Paid in Cash
($)
|
|
|
Stock Awards
($) (1)
|
|
|
|
Option
Awards
($) (2)
|
|
|
|
All Other
Compensation
($)
|
|
|
|
Total ($)
|
|
Tessie M. Che, Ph.D.
|
|
$
|
1,000
|
|
|
$
|
-
|
|
|
|
$
|
8,996
|
|
(4)
|
|
$
|
-
|
|
|
|
$
|
9,996
|
|
Paul Chun
|
|
|
8,850
|
|
|
|
-
|
|
|
|
|
8,996
|
|
(5)
|
|
|
-
|
|
|
|
|
17,846
|
|
David L. Hill, Ph.D.
|
|
|
10,250
|
|
|
|
-
|
|
|
|
|
8,996
|
|
(4)
|
|
|
-
|
|
|
|
|
19,246
|
|
Daniel E. Morse, Ph.D.
|
|
|
5,700
|
|
|
|
169,697
|
|
(3)
|
|
|
8,996
|
|
(4)
|
|
|
900
|
|
(6)
|
|
|
185,293
|
|
Charles V. Olson, D.Sc.
|
|
|
4,700
|
|
|
|
-
|
|
|
|
|
8,996
|
|
(5)
|
|
|
5,775
|
|
(7)
|
|
|
19,471
|
|
Mayank D. Sampat
|
|
|
10,250
|
|
|
|
-
|
|
|
|
|
8,996
|
|
(4)
|
|
|
-
|
|
|
|
|
19,246
|
|
|
(1)
|
The amounts shown in this column represent the aggregate grant date fair value of the share awards based on the closing price on Nasdaq, not the actual amounts paid to or realized by the named executive officer
during the covered fiscal year
. It differs from the amounts recorded in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification 718, which were based on the share value at the inception of the performance share plan in April 2010 expensed over the estimated vesting period ended August 31, 2012.
The vesting requirements of these awards are set forth in Note 8 to our audited consolidated financial statements for the year ended September 30, 2017 included in this Annual Report.
|
|
(2)
|
The amounts shown in this column represent the aggregate grant date fair value of the share option awards computed in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification 718, not the actual amounts paid to or realized by the directors
during the fiscal year. The assumptions used in determining grant date fair value of these awards are set forth in Note 8 to our audited consolidated financial statements for the year ended September 30, 2017 included in this Annual Report
.
|
|
(3)
|
134,680 shares were issued under our Performance Share Plan and are fully vested.
|
|
(4)
|
The option awards were issued under our 2017 Incentive Compensation Plan for past service, with 2,500 options vesting in thirds beginning December 2016 and 2,500 options vesting in thirds beginning March 2017.
|
|
(5)
|
The option awards were issued under our 2017 Incentive Compensation Plan, with 2,500
options
for future service vesting in thirds beginning December 2017 and 2,500 options for past service vesting in thirds beginning March
2017.
|
|
(6)
|
Represents amount for service as member of our Scientific Advisory Board.
|
|
(7)
|
Represents (i) $5,425 in consultant fees and (ii) $350 for service as member of our Scientific Advisory Board.
|
Outstanding Equity Awards at 2017 Fiscal
Year-End
The following table
summarizes the equity awards made to our directors that were outstanding at September 30, 2017.
Name
|
|
Outstanding
Options (#)
|
|
Tessie M. Che, Ph.D.
|
|
|
12,000
|
|
Paul Chun
|
|
|
5,000
|
|
David L. Hill, Ph.D.
|
|
|
15,000
|
|
Daniel E. Morse, Ph.D.
|
|
|
31,600
|
|
Charles V. Olson, D.Sc.
|
|
|
6,250
|
|
Mayank D. Sampat
|
|
|
12,000
|
|
Narrative to Director Compensation Table
Non-Employee Director Compensation Policy
Pursuant to our non-employee
director compensation policy, non-employee directors receive $1,000 for each Board meeting attended in person and $350 for each
Board meeting attended by telephone. Members of Board committees also receive $350 for each committee meeting attended. Non-executive
directors may also receive share option awards at the discretion of the Board of Directors.
Non-Employee Directors on our Scientific
Advisory Board
Dr. Morse and Dr. Olson are members of our Scientific Advisory Board. As compensation for their services,
the members of our Scientific Advisory Board receive certain advisory fees and expense reimbursements. Amounts for their services
as members of our Scientific Advisory Board are reflected in the Director Compensation table above.
Compensation Committee Interlocks and
Insider Participation
The members of our
Compensation Committee during the fiscal year ended September 30, 2017 were Paul Chun, David Hill (chairman), Charles Olson and
Mayank Sampat.
None of the individuals
who served as a member of the Compensation Committee during fiscal 2017 was at any time during fiscal 2017 an officer or employee
of our Company.
Item 12.
|
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
.
|
Equity Compensation Plan Information
The following table
provides certain information as of September 30, 2017 about our common shares that may be issued under our equity compensation
plans, which consists of our 2017 Incentive Compensation Plan:
Plan category
|
|
Number of securities
to be issued upon
exercise of
outstanding options,
warrants and rights
|
|
|
Weighted-average
exercise price of
outstanding options,
warrants and rights
|
|
|
Number of securities
remaining available for
future issuance under
equity compensation plans
(excluding securities
reflected in column (a))
|
|
|
|
(a)
|
|
|
(b)
|
|
|
(c)
|
|
Equity compensation plans approved by security holders
|
|
|
410,970
|
|
|
$
|
5.74
|
|
|
|
1,186,030
|
|
Equity compensation plans not approved by security holders
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Total
|
|
|
410,970
|
|
|
$
|
5.74
|
|
|
|
1,186,030
|
|
Security Ownership of Certain Beneficial Owners and Management
The following tables
sets forth certain information as of November 30, 2017, with respect to the beneficial ownership of our common shares by: (1) all
of our directors; (2) our named executive officers listed in the Summary Compensation Table; (3) all of directors and executive
officers as a group; and (4) each person known by us to beneficially own more than 5% of our outstanding common shares.
We have determined
beneficial ownership in accordance with the rules of the SEC. Except as indicated by the footnotes below, we believe, based on
the information furnished to us, that the persons and entities named in the table below have sole voting and investment power with
respect to all common shares that they beneficially own, subject to applicable community property laws.
Common shares subject
to options or warrants currently exercisable or exercisable within 60 days of November 30, 2017 are deemed outstanding for
computing the share ownership and percentage of the person holding such options and warrants, but are not deemed outstanding for
computing the percentage of any other person. The percentage ownership of our common shares of each person or entity named in the
following table is based on 10,520,096 common shares outstanding as of November 30, 2017.
Directors and Officers
Name and Address of Beneficial Owner (1)
|
|
Amount and
Nature of Beneficial
Ownership
|
|
|
Percent of Shares
Beneficially
Owned
|
|
Frank R. Oakes
|
|
|
464,587
|
(2)
|
|
|
4.4
|
%
|
Kathi Niffenegger, CPA
|
|
|
58,667
|
(3)
|
|
|
*
|
|
Gregory T. Baxter, Ph.D.
|
|
|
8,250
|
(4)
|
|
|
*
|
|
Tessie M. Che, Ph.D.
|
|
|
9,500
|
(5)
|
|
|
*
|
|
Paul Chun
|
|
|
1,666
|
(6)
|
|
|
*
|
|
David L. Hill, Ph.D.
|
|
|
14,500
|
(7)
|
|
|
*
|
|
Daniel E. Morse, Ph.D.
|
|
|
125,609
|
(8)
|
|
|
1.2
|
%
|
Charles V. Olson, D.Sc.
|
|
|
2,916
|
(9)
|
|
|
*
|
|
Mayank D. Sampat
|
|
|
9,500
|
(10)
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
All directors and executive officers as a group (9 persons)
|
|
|
695,195
|
(11)
|
|
|
6.5
|
%
|
* Percentage of shares beneficially
owned does not exceed one percent.
|
(1)
|
Unless otherwise indicated,
the address of each beneficial owner is c/o Stellar Biotechnologies, Inc., 332 E. Scott Street, Port Hueneme, California 93041.
|
|
(2)
|
This amount includes (i) 80,120 shares issuable upon the exercise of options currently exercisable or exercisable within 60 days of November 30, 2017; and excludes (ii) 20,867 common shares and 6,200 common shares issuable upon the exercise of outstanding options currently exercisa
ble or exercisable within 60 days of November 30, 2017 which are held by Mr. Oakes’ spouse who has sole voting and dispositive power over the securities, and as to which Mr. Oakes disclaims beneficial ownership. Mr. Oakes does not have the power to vote or dispose of, or to direct the voting or disposition of, the shares held by his spouse, or with respect to any shares acquired under her outstanding options.
|
|
(3)
|
Represents 58,667 shares issuable upon the exercise of options currently exercisable or exercisable within 60 days of November 30, 2017.
|
|
(4)
|
Represents 8,250 shares issuable upon the exercise of options currently exercisable or exercisable within 60 days of November 30, 2017.
|
|
(5)
|
Represents 9,500 shares issuable upon the exercise of options currently exercisable or exercisable within 60 days of November 30, 2017.
|
|
(6)
|
Represents 1,666 shares issuable upon the exercise of options currently exercisable or exercisable within 60 days of November 30, 2017.
|
|
(7)
|
This amount includes 12,500 shares issuable upon the exercise of options currently exercisable or exercisable within 60 days of November 30, 2017.
|
|
(8)
|
This amount includes 29,100 shares issuable upon the exercise of options currently exercisable or exercisable within 60 days of November 30, 2017.
|
|
(9)
|
Represents 2,916 shares issuable upon the exercise of options currently exercisable or exercisable within 60 days of November 30, 2017.
|
|
(10)
|
Represents 9,500 shares issuable upon the exercise of options currently exercisable or exercisable within 60 days of November 30, 2017.
|
|
(11)
|
This amount includes 212,219 shares issuable upon the exercise of options currently exercisable or exercisable within 60 days of November 30, 2017.
|
Shareholders Known by Us to Own 5% or
More of Our Common Shares
Name and Address of Beneficial Owner
|
|
Amount
and
Nature of Beneficial
Ownership
|
|
|
Percent of Shares
Beneficially
Owned
|
|
Ernesto Echavarria
Blvd. Anaya
1225 Culiacan Sinaloa, Mexico 80040
|
|
|
1,411,310
|
|
|
|
13.4
|
%
|
Item 13.
|
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
|
Related Party Transactions
Patent Royalty Agreement
On August 14, 2002,
through our California subsidiary, we entered into an agreement with Frank Oakes, our Chief Executive Officer, where he would receive
royalty payments in exchange for the assignment of his rights to U.S. Patent No. 6,852,338 to us. The royalty is 5% of gross receipts
from products using this invention in excess of $500,000 annually. Our current operations utilize this invention. Patent royalties
of $35,516 were paid to Mr. Oakes for the year ended September 30, 2016. No royalties were paid for the year ended September 30,
2017.
Collaboration Agreement
In December 2013, we
entered into a collaboration agreement (the Amaran Agreement) with Amaran Biotechnology, Inc. to develop and evaluate
methods for Amaran’s potential manufacture of the OBI-822 (Adagloxad Simolenin) active immunotherapy using our GMP grade
Stellar KLH. The Amaran Agreement expired by its terms on December 7, 2015.
Revenues received
from Amaran under the Amaran Agreement totaled $32,000 during the fiscal year ended September 30, 2016. The terms of the collaboration
with Amaran also provided for negotiation of a commercial supply agreement for Stellar KLH in the future, which was executed in
February 2017.
Tessie Che, a member
of our Board of Directors, currently serves as general manager and chair of the board of directors of Amaran.
Policies and Procedures for Review of Related Party Transactions
The Audit Committee
reviews, approves and oversees any transaction between us and any “related person” (as defined in Item 404 of Regulation
S-K) and any other potential conflict of interest situations, on an ongoing basis. Under these policies and procedures, the Audit
Committee is to be informed of transactions subject to review before their implementation. The procedures establish our practices
for obtaining and reporting information to the Audit Committee regarding such transactions on a periodic and an as-needed basis.
The policy provides that such transactions are to be submitted for approval before they are initiated but also provides for ratification
of such transactions. No director who is interested in a transaction may participate in the Audit Committee’s determinations
as to the appropriateness of such transaction.
Director Independence
In evaluating the independence
of our Board members and the composition of the committees of our Board of Directors, the Board of Directors utilizes the definition
of “independence” as that term is defined by the Securities Exchange Act of 1934, and the Nasdaq Listing Rules. Using
this standard, the Board of Directors has determined that Paul Chun, David Hill, Daniel Morse, Charles Olson and Mayank Sampat
are “independent directors.” This means that our Board of Directors is composed of a majority of independent directors
as required by the rules of Nasdaq.
|
Item 14.
|
PRINCIPAL ACCOUNTING FEES AND SERVICES
.
|
The following table
shows the aggregate fees paid or accrued for audit and other services provided for the years ended September 30, 2017 and 2016
rendered by Moss Adams LLP.
Principal Accountant Fees and Services
Type of Service
|
|
Fiscal Year 2017
|
|
|
Fiscal Year 2016
|
|
|
|
|
|
|
|
|
Audit Fees
|
|
$
|
190,000
|
|
|
$
|
238,000
|
|
Audit-Related Fees
|
|
|
-
|
|
|
|
-
|
|
Tax Fees
|
|
|
-
|
|
|
|
-
|
|
All Other Fees
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
190,000
|
|
|
$
|
238,000
|
|
Audit Fees
consisted
of fees incurred for professional services rendered for audits of the years ended September 30, 2017 and 2016 and include procedures
related to registrations and offerings.
Pre-Approval Policies and Procedures
The Audit Committee
is directly responsible for the appointment, compensation and oversight of our auditors. It has established procedures for the
receipt, retention, and treatment of complaints received by us regarding accounting, internal accounting controls, or auditing
matters, and the confidential, anonymous submission by our employees of concerns regarding questionable accounting or auditing
matters. The Audit Committee also has the authority and the funding to engage independent counsel and other outside advisors.
The Audit Committee
pre-approves all audit and permissible non-audit services provided by the independent registered public accounting firm.
These services may include audit services, audit-related services, tax services and other services. Pre-approval is generally
provided for up to one year, and any pre-approval is detailed as to the particular service or category of services and is generally
subject to an amount or range of estimated fees. All proposed engagements of the auditor for audit and permitted non-audit
services are submitted to the Audit Committee for approval prior to the beginning of any such services. Our auditors are required
to periodically report to the Audit Committee regarding the extent of services provided by the independent registered public accounting
firm in accordance with the pre-approval, and the fees for the services performed to date. The Audit Committee may also
pre-approve particular services on a case-by-case basis. The Audit Committee pre-approved 100% of the audit services performed
by our independent registered public accounting firm for the fiscal year ended September 30, 2017.
PART IV
Item 15.
|
EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
|
|
(a)
|
The following documents are
filed as a part of this Annual Report:
|
(1) Financial Statements
The list of consolidated
financial statements and notes required by this Item 15 (a) (1) is set forth in the “Index to Financial Statements”
on page F-1 of this Annual Report.
(2) Financial Statement
Schedules
All schedules have
been omitted because the required information is included in the financial statements or notes thereto.
The exhibits listed on the Exhibit Index
below are filed as part of this Annual Report.
EXHIBIT INDEX
101.INS
|
XBRL Instance Document
|
101.SCH
|
XBRL Taxonomy Extension Schema Document
|
101.CAL
|
XBRL Taxonomy Calculation Linkbase Document
|
101.DEF
|
XBRL Taxonomy Extension Definition Linkbase Document
|
101.LAB
|
XBRL Taxonomy Label Linkbase Document
|
101.PRE
|
XBRL Taxonomy Presentation Linkbase Document
|
|
@
|
Management contract or compensatory
plan or arrangement.
|
|
#
|
Confidential treatment has
been granted for certain portions of this exhibit. Original copies have been filed separately with the Securities and Exchange
Commission pursuant to Rule 24B-2 of the Securities Exchange Act of 1934, as amended.
|
|
^
|
A signed original of this
written statement required by Section 906 has been provided and will be retained by the Company and furnished to the Securities
and Exchange Commission or its staff upon request.
|
SIGNATURES
Pursuant to the requirements
of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: December 1, 2017
|
STELLAR BIOTECHNOLOGIES, INC.
|
|
|
|
/s/ Frank R. Oakes
|
|
Frank R. Oakes
|
|
President and Chief Executive Officer
|
|
(Principal Executive Officer)
|
Pursuant to the requirements
of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant
and in the capacities and on the dates indicated.
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
/s/
Frank R. Oakes
|
|
President, Chief Executive Officer, and
|
|
December 1, 2017
|
Frank R. Oakes
|
|
Chairman of the Board of Directors (Principal Executive Officer)
|
|
|
|
|
|
|
|
/s/
Kathi
Niffenegger
|
|
Chief Financial Officer
|
|
December 1, 2017
|
Kathi Niffenegger
|
|
(Principal Financial and Accounting Officer)
|
|
|
|
|
|
|
|
/s/
Tessie M. Che
|
|
Director
|
|
December 1, 2017
|
Tessie M. Che
|
|
|
|
|
|
|
|
|
|
/s/
Paul
Chun
|
|
Director
|
|
December 1, 2017
|
Paul Chun
|
|
|
|
|
|
|
|
|
|
/s/
David
L. Hill
|
|
Director
|
|
December 1, 2017
|
David L. Hill
|
|
|
|
|
|
|
|
|
|
/s/
Daniel E. Morse
|
|
Director
|
|
December 1, 2017
|
Daniel E. Morse
|
|
|
|
|
|
|
|
|
|
/s/
Charles V. Olson
|
|
Director
|
|
December 1, 2017
|
Charles V. Olson
|
|
|
|
|
|
|
|
|
|
/s/
Mayank D. Sampat
|
|
Director
|
|
December 1, 2017
|
Mayank D. Sampat
|
|
|
|
|
STELLAR BIOTECHNOLOGIES, INC.
INDEX TO FINANCIAL STATEMENTS
Consolidated Financial Statements
For the Years Ended September 30, 2017,
2016 and 2015
Report
of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
Stellar Biotechnologies, Inc.
We have audited the accompanying consolidated
balance sheets of Stellar Biotechnologies, Inc. (the Company) as of September 30, 2017 and 2016, and the related consolidated statements
of operations, changes in equity and cash flows for the fiscal years ended September 30, 2017, 2016 and 2015. These consolidated
financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with
the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement.
The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.
Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s
internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test
basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation.
We believe that our audits provide reasonable basis for our opinion.
In our opinion, the consolidated financial
statements referred to above present fairly, in all material respects, the consolidated financial position of Stellar Biotechnologies,
Inc. as of September 30, 2017 and 2016, and the consolidated results of its operations and its cash flows for fiscal years ended
September 30, 2017, 2016 and 2015, in conformity with accounting principles generally accepted in the United States of America.
/s/ Moss Adams LLP
|
|
Los Angeles, California
|
|
December 1, 2017
|
|
Stellar Biotechnologies, Inc.
|
Consolidated Balance Sheets
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
4,570,951
|
|
|
$
|
7,416,904
|
|
Accounts receivable
|
|
|
1,287
|
|
|
|
85,813
|
|
Short-term investments
|
|
|
1,994,401
|
|
|
|
3,988,794
|
|
Inventory
|
|
|
68,114
|
|
|
|
249,430
|
|
Prepaid expenses
|
|
|
123,694
|
|
|
|
358,714
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
6,758,447
|
|
|
|
12,099,655
|
|
|
|
|
|
|
|
|
|
|
Noncurrent assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity investment in joint venture
|
|
|
66,695
|
|
|
|
66,695
|
|
Property, plant and equipment, net
|
|
|
879,523
|
|
|
|
756,114
|
|
Deposits
|
|
|
15,340
|
|
|
|
15,340
|
|
|
|
|
|
|
|
|
|
|
Total noncurrent assets
|
|
|
961,558
|
|
|
|
838,149
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
7,720,005
|
|
|
$
|
12,937,804
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders' Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
$
|
320,947
|
|
|
$
|
623,644
|
|
|
|
|
|
|
|
|
|
|
Total Current Liabilities
|
|
|
320,947
|
|
|
|
623,644
|
|
|
|
|
|
|
|
|
|
|
Commitments
(Note 7)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders' equity:
|
|
|
|
|
|
|
|
|
Common shares, unlimited
common shares authorized, no par value, 10,520,096 and 10,136,258 issued and outstanding at September 30, 2017 and 2016
|
|
|
48,351,701
|
|
|
|
47,280,792
|
|
Accumulated share-based compensation
|
|
|
4,439,400
|
|
|
|
5,394,763
|
|
Accumulated deficit
|
|
|
(45,392,043
|
)
|
|
|
(40,361,395
|
)
|
|
|
|
|
|
|
|
|
|
Total Shareholders' Equity
|
|
|
7,399,058
|
|
|
|
12,314,160
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Shareholders' Equity
|
|
$
|
7,720,005
|
|
|
$
|
12,937,804
|
|
The accompanying notes are an integral part
of these consolidated financial statements.
Stellar Biotechnologies, Inc.
|
Consolidated Statements of Operations
|
|
|
Years Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Product sales
|
|
$
|
178,287
|
|
|
$
|
1,239,689
|
|
|
$
|
563,689
|
|
Contract services revenue
|
|
|
50,000
|
|
|
|
32,000
|
|
|
|
195,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
228,287
|
|
|
|
1,271,689
|
|
|
|
758,689
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs of sales and contract services
|
|
|
250,042
|
|
|
|
818,566
|
|
|
|
580,824
|
|
Costs of aquaculture
|
|
|
284,411
|
|
|
|
309,262
|
|
|
|
259,423
|
|
Research and development
|
|
|
1,973,400
|
|
|
|
1,729,445
|
|
|
|
1,029,489
|
|
General and administrative
|
|
|
2,944,980
|
|
|
|
3,322,772
|
|
|
|
3,227,545
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,452,833
|
|
|
|
6,180,045
|
|
|
|
5,097,281
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from Operations
|
|
|
(5,224,546
|
)
|
|
|
(4,908,356
|
)
|
|
|
(4,338,592
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange gain (loss)
|
|
|
162,028
|
|
|
|
76,800
|
|
|
|
(653,333
|
)
|
Gain (loss) in fair value of warrant liability
|
|
|
-
|
|
|
|
(211,956
|
)
|
|
|
2,131,062
|
|
Investment income
|
|
|
32,670
|
|
|
|
24,632
|
|
|
|
54,634
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
194,698
|
|
|
|
(110,524
|
)
|
|
|
1,532,363
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss Before Income Tax
|
|
|
(5,029,848
|
)
|
|
|
(5,018,880
|
)
|
|
|
(2,806,229
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
|
800
|
|
|
|
7,200
|
|
|
|
36,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(5,030,648
|
)
|
|
$
|
(5,026,080
|
)
|
|
$
|
(2,843,029
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(0.49
|
)
|
|
$
|
(0.57
|
)
|
|
$
|
(0.36
|
)
|
Weighted average number of common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
10,237,213
|
|
|
|
8,826,312
|
|
|
|
7,956,962
|
|
The accompanying notes are an integral part
of these consolidated financial statements.
Stellar Biotechnologies, Inc.
|
Consolidated Statements of Cash Flows
|
|
|
Years Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows Used In Operating Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(5,030,648
|
)
|
|
$
|
(5,026,080
|
)
|
|
$
|
(2,843,029
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
179,322
|
|
|
|
149,565
|
|
|
|
159,521
|
|
Share-based compensation
|
|
|
115,546
|
|
|
|
259,379
|
|
|
|
267,222
|
|
Foreign exchange (gain) loss
|
|
|
(162,028
|
)
|
|
|
(76,800
|
)
|
|
|
653,333
|
|
(Gain) loss in fair value of warrant liability
|
|
|
-
|
|
|
|
211,956
|
|
|
|
(2,131,062
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in working capital items:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
84,573
|
|
|
|
71,827
|
|
|
|
(113,917
|
)
|
Inventory
|
|
|
181,316
|
|
|
|
307,850
|
|
|
|
(522,389
|
)
|
Prepaid expenses
|
|
|
235,001
|
|
|
|
(197,150
|
)
|
|
|
(45,758
|
)
|
Deposits
|
|
|
-
|
|
|
|
560
|
|
|
|
-
|
|
Accounts payable and accrued liabilities
|
|
|
(302,731
|
)
|
|
|
(33,403
|
)
|
|
|
77,018
|
|
Deferred revenue
|
|
|
|
|
|
|
(173,333
|
)
|
|
|
86,666
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(4,699,649
|
)
|
|
|
(4,505,629
|
)
|
|
|
(4,412,395
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows From Investing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of property, plant and equipment
|
|
|
(302,733
|
)
|
|
|
(402,271
|
)
|
|
|
(274,589
|
)
|
Purchase of short-term investments
|
|
|
(5,005,607
|
)
|
|
|
(11,995,450
|
)
|
|
|
(13,677
|
)
|
Proceeds on sales and maturities of short-term investments
|
|
|
7,000,000
|
|
|
|
13,021,827
|
|
|
|
410,736
|
|
Contribution to joint venture
|
|
|
-
|
|
|
|
(66,695
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by investing activities
|
|
|
1,691,660
|
|
|
|
557,411
|
|
|
|
122,470
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows From Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common shares, net
|
|
|
-
|
|
|
|
6,277,500
|
|
|
|
-
|
|
Payments for share issuance costs
|
|
|
-
|
|
|
|
(332,764
|
)
|
|
|
-
|
|
Proceeds from exercise of warrants and options
|
|
|
-
|
|
|
|
1,368,260
|
|
|
|
106,777
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
-
|
|
|
|
7,312,996
|
|
|
|
106,777
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
162,036
|
|
|
|
96,623
|
|
|
|
(629,808
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents
|
|
|
(2,845,953
|
)
|
|
|
3,461,401
|
|
|
|
(4,812,956
|
)
|
Cash and cash equivalents - beginning of year
|
|
|
7,416,904
|
|
|
|
3,955,503
|
|
|
|
8,768,459
|
|
Cash and cash equivalents - end of year
|
|
$
|
4,570,951
|
|
|
$
|
7,416,904
|
|
|
$
|
3,955,503
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash (demand deposits)
|
|
$
|
3,847,655
|
|
|
$
|
972,412
|
|
|
$
|
3,955,503
|
|
Cash equivalents
|
|
|
723,296
|
|
|
|
6,444,492
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
4,570,951
|
|
|
$
|
7,416,904
|
|
|
$
|
3,955,503
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the year for taxes
|
|
$
|
800
|
|
|
$
|
7,200
|
|
|
$
|
36,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of non-cash transactions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share issuance costs withheld from escrow proceeds
|
|
$
|
-
|
|
|
$
|
472,500
|
|
|
$
|
-
|
|
The accompanying notes are an integral part
of these consolidated financial statements.
Stellar Biotechnologies, Inc.
|
Consolidated Statements of Changes in Equity
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
Common
|
|
|
Share-Based
|
|
|
Accumulated
|
|
|
Shareholders'
|
|
|
|
Shares
|
|
|
Shares
|
|
|
Compensation
|
|
|
Deficit
|
|
|
Equity
|
|
Balance - September 30, 2014
|
|
|
7,941,985
|
|
|
$
|
37,883,877
|
|
|
$
|
5,073,144
|
|
|
$
|
(32,492,286
|
)
|
|
$
|
10,464,735
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from exercise of warrants
|
|
|
4,020
|
|
|
|
12,609
|
|
|
|
-
|
|
|
|
-
|
|
|
|
12,609
|
|
Transfer to common shares on exercise of warrants
|
|
|
-
|
|
|
|
10,000
|
|
|
|
(426
|
)
|
|
|
-
|
|
|
|
9,574
|
|
Proceeds from exercise of options
|
|
|
38,753
|
|
|
|
94,168
|
|
|
|
-
|
|
|
|
-
|
|
|
|
94,168
|
|
Transfer to common shares on exercise of options
|
|
|
-
|
|
|
|
113,561
|
|
|
|
(113,561
|
)
|
|
|
-
|
|
|
|
-
|
|
Share-based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
267,222
|
|
|
|
-
|
|
|
|
267,222
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,843,029
|
)
|
|
|
(2,843,029
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance - September 30, 2015
|
|
|
7,984,758
|
|
|
$
|
38,114,215
|
|
|
$
|
5,226,379
|
|
|
$
|
(35,335,315
|
)
|
|
$
|
8,005,279
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common shares
|
|
|
1,687,500
|
|
|
|
6,750,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6,750,000
|
|
Share issuance costs
|
|
|
-
|
|
|
|
(805,264
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(805,264
|
)
|
Proceeds from exercise of warrants
|
|
|
464,000
|
|
|
|
1,368,260
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,368,260
|
|
Transfer to common shares on exercise of warrants
|
|
|
-
|
|
|
|
1,853,581
|
|
|
|
(90,995
|
)
|
|
|
-
|
|
|
|
1,762,586
|
|
Share-based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
259,379
|
|
|
|
-
|
|
|
|
259,379
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(5,026,080
|
)
|
|
|
(5,026,080
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance - September 30, 2016
|
|
|
10,136,258
|
|
|
$
|
47,280,792
|
|
|
$
|
5,394,763
|
|
|
$
|
(40,361,395
|
)
|
|
$
|
12,314,160
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of performance shares
|
|
|
383,838
|
|
|
|
1,070,909
|
|
|
|
(1,070,909
|
)
|
|
|
-
|
|
|
|
-
|
|
Share-based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
115,546
|
|
|
|
-
|
|
|
|
115,546
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(5,030,648
|
)
|
|
|
(5,030,648
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance - September 30, 2017
|
|
|
10,520,096
|
|
|
$
|
48,351,701
|
|
|
$
|
4,439,400
|
|
|
$
|
(45,392,043
|
)
|
|
$
|
7,399,058
|
|
The accompanying notes are an integral part
of these consolidated financial statements.
Stellar Biotechnologies, Inc.
|
Notes to Consolidated Financial Statements
|
For the Years Ended September 30, 2017, 2016 and 2015
|
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, North American and Asia. 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. In January 2017, the California subsidiary and the Company established a wholly-owned Mexican subsidiary
under the name BioEstelar, S.A. de C.V. in Ensenada, Baja California to perform aquaculture research and development activities
in Mexico. 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.
Functional Currency
The consolidated financial statements
of the Company are presented in U.S. dollars, which is the Company’s functional currency, unless otherwise stated.
Management Plans
Company operations have historically
been funded by the issuance of common shares, exercise of warrants, grant revenues, contract services revenue and product sales.
For the fiscal years 2017, 2016, and 2015, the Company reported net losses of approximately $5.0 million, $5.0 million, and $2.8
million, respectively. As of September 30, 2017, the Company had an accumulated deficit of approximately $45.4 million and working
capital of approximately $6.4 million. While the Company plans to finance company operations for the next twelve months with cash
on hand and product sales, management expects to continue incurring losses for the foreseeable future and will need to raise additional
capital to pursue our business plan beyond December 2018. Management is taking action to ensure the Company will continue as a
going concern for at least one year beyond the date of the issuance of the Company’s financial statements. First, management
has flexibility to adjust planned expenditures based on a number of factors including the size and timing of capital expenditures,
staffing levels, inventory levels, and the status of customer clinical trials. Management also seeks to expand the customer base
for existing marketed products, and is currently evaluating opportunities to secure additional financing through debt and/or equity
financings, including transactions with strategic customers and partners that may include debt and/or equity arrangements.
The accompanying consolidated
financial statements have been prepared in accordance with accounting principles generally accepted in the United States (U.S.
GAAP) and include the accounts of the Company, its wholly-owned subsidiaries, Stellar Biotechnologies, Inc., a California corporation
in the U.S. and BioEstelar, S.A. de C.V. a Baja California corporation in Mexico. All significant intercompany balances and transactions
have been eliminated in consolidation.
Stellar Biotechnologies, Inc.
|
Notes to Consolidated Financial Statements
|
For the Years Ended September 30, 2017, 2016 and 2015
|
|
3.
|
Significant Accounting Policies
|
The preparation
of financial statements in conformity with U.S. GAAP requires management to make certain estimates, judgments and assumptions
that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of
the consolidated financial statements and the reported amounts of revenues and expenses during the reported periods. These estimates
include warrant liabilities, share-based compensation, intangible assets, valuation of accounts receivable, valuation of inventory,
and income taxes. Actual outcomes could differ from these estimates. These consolidated financial statements include estimates,
which by their nature are uncertain. The impacts of such estimates are pervasive throughout the consolidated financial statements,
and may require accounting adjustments based on future periods if the revision affects both current and future periods. These
estimates are based on historical experience, current and future economic conditions and other factors, including expectations
of future events that are believed to be reasonable under the circumstances.
|
b)
|
Cash and Cash Equivalents
|
Cash and cash equivalents consist
of demand deposits with financial institutions and highly liquid investments which are readily convertible into cash with maturities
of three months or less when purchased.
Investments at September 30,
2017 and 2016 consisted of U.S. Treasury bills with original maturities between 13 and 52 weeks. They are classified as held-to-maturity
and are reported at amortized cost, which approximates fair value. The Company regularly reviews these investments to determine
whether any decline in fair value below the amortized cost basis has occurred that is other than temporary. If a decline in fair
value has occurred that is determined to be other than temporary, the cost basis of the investment is written down to fair value.
|
d)
|
Allowance for Doubtful Accounts Receivable
|
The Company assesses the collectability
of its accounts receivable through a review of its current aging, as well as an analysis of its historical collection rate, general
economic conditions and credit status of its customers. As of September 30, 2017 and 2016, all outstanding accounts receivable
were deemed to be fully collectible, and therefore, no allowance for doubtful accounts was recorded.
The Company records inventory
at the lower of cost or market, with market not in excess of net realizable value. Raw materials are measured using FIFO (first-in
first-out) cost. Work in process and finished goods are measured using average cost.
|
f)
|
Property, Plant and Equipment
|
Property, plant and equipment
are recorded at cost less accumulated depreciation and accumulated impairment losses, if any. Depreciation is recorded on the straight-line
method over useful lives ranging from 1.5 to 15 years. Leasehold improvements are depreciated over the shorter of the useful life
of the improvement or remaining term of lease. Maintenance and repairs are charged to operations as incurred.
|
g)
|
Impairment of Long-Lived Assets
|
If indicators of impairment exist,
the Company assesses the recoverability of the affected long-lived assets by determining whether the carrying value of such assets
can be recovered through undiscounted future operating cash flows. If impairment is indicated, the amount of such impairment is
measured by comparing the carrying value of the asset to the fair value of the asset and the Company records the impairment as
a reduction in the carrying value of the related asset and a charge to operating results. Estimating the undiscounted future cash
flows associated with long-lived assets requires judgment, and assumptions could differ materially from actual results.
|
h)
|
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. See Note 10 for fair value measurements.
Stellar Biotechnologies, Inc.
|
Notes to Consolidated Financial Statements
|
For the Years Ended September 30, 2017, 2016 and 2015
|
Product Sales
The Company recognizes product
sales when KLH product is shipped (for which the risk is typically transferred upon delivery to the shipping carrier) and there
is persuasive evidence of an arrangement, the fee is fixed or determinable, and collectability is reasonably assured. The Company
documents arrangements with customers with purchase orders and sales agreements.
Product sales include sales
made under supply agreements with customers for a fixed price per gram of KLH products based on quantities ordered. Supply agreements
are typically on a non-exclusive basis except within that customer’s field of use.
Contract services revenue
The Company recognizes contract
services revenue when contract services have been performed and reasonable assurance exists regarding measurement and collectability.
An appropriate amount will be recognized as revenue in the period that the Company is assured of fulfilling the contract requirements.
Amounts received in advance of performance of contract services are recorded as deferred revenue.
Contract services include services
performed under collaboration agreements and technology transfer and purchase agreement.
|
j)
|
Research and Development
|
Research
and development expenses principally consist of personnel costs related to the Company’s research and development staff
as well as depreciation of research and development assets. Research and development expenses also include costs incurred for
laboratory supplies,
KLH designated for internal research use only,
reimbursable
costs associated with collaborative agreements, third-party contract payments, consultants, facility and related overhead costs.
Research and development costs are expensed as incurred.
|
k)
|
Share-Based Compensation
|
The Company grants options to
buy common shares of the Company to its directors, officers, employees and consultants, and grants other equity-based instruments
to non-employees.
The fair value of share-based
compensation is measured on the date of grant, using the Black-Scholes option valuation model and is recognized over the vesting
period net of estimated forfeitures for employees or the service period for non-employees. The Black-Scholes option valuation
model requires the input of subjective assumptions, including price volatility of the underlying stock, risk-free interest rate,
dividend yield, and expected life of the option.
Items included in the financial
statements of the Company’s subsidiaries are measured using the currency of the primary economic environment in which the
entity operates (the functional currency). The functional currency of the parent and its subsidiaries is the U.S. dollar.
Transactions in currencies
other than the U.S. dollar are recorded at exchange rates prevailing on the dates of the transactions.
Income tax expense comprises
current and deferred tax. Income tax is recognized in income or loss except to the extent that it relates to items recognized directly
in equity. Current tax expense is the expected tax payable on taxable income for the year, using tax rates enacted or substantively
enacted at year-end, adjusted for amendments to tax payable with regards to previous years.
Deferred tax is recorded using
the liability method, providing for temporary differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for taxation purposes. Temporary differences are not provided for relating to goodwill
not deductible for tax purposes. The amount of deferred tax provided is based on the expected manner of realization or settlement
of the carrying amount of assets and liabilities, using tax rates enacted or substantively enacted at the balance sheet date.
Stellar Biotechnologies, Inc.
|
Notes to Consolidated Financial Statements
|
For the Years Ended September 30, 2017, 2016 and 2015
|
A deferred tax asset is recognized
only to the extent that it is more likely than not that future taxable profits will be available against which the asset can be
utilized. To the extent that the Company does not consider it more likely than not that a deferred tax asset will be recovered,
it provides a valuation allowance against that excess.
The Company periodically evaluates
its tax positions to determine whether it is more likely than not that a tax position will be sustained upon examination by the
appropriate taxing authorities. The Company has not incurred any interest or penalties as of September 30, 2017 with respect to
uncertain income tax matters. The Company does not expect that there will be unrecognized tax benefits of a significant nature
that will increase or decrease within 12 months of the reporting date.
The Company files income tax
returns in the U.S. federal and state jurisdictions and in Canada. Mexico tax returns are on a calendar year basis. Management
believes that there are no material uncertain tax positions that would impact the accompanying consolidated financial statements.
The Company's policy is to recognize interest and penalties related to unrecognized tax benefits in income tax expense. The Company
may be subject to examination by the Internal Revenue Service for tax years 2013 through 2016 and by the Canada Revenue Agency
for tax years 2013 through 2017. The Company may also be subject to examination on certain state, local and other foreign jurisdictions
for the tax years 2012 through 2017.
|
n)
|
Earnings (Loss) Per Share
|
Basic earnings (loss) per share
is calculated by dividing income available to common shareholders by the weighted average number of common shares outstanding during
the period.
The computation of diluted
earnings (loss) per share assumes the conversion, exercise or contingent issuance of securities only when such conversion, exercise
or issuance would have a dilutive effect on earnings (loss) per share. The dilutive effect of convertible securities is reflected
in diluted earnings per share by application of the “if converted” method. The dilutive effect of outstanding options
and warrants and their equivalents is reflected in diluted earnings per share by application of the treasury stock method. Conversion
of outstanding warrants, broker units and options would have an antidilutive effect on loss per share for the years ended September
30, 2017, 2016 and 2015 and are therefore excluded from the computation of diluted loss per share.
The Company operates in one
reportable segment and, accordingly, no segment disclosures have been presented. All equipment, leasehold improvements and other
fixed assets owned by the Company are physically located within the United States (except for insignificant leasehold improvements
under evaluation in Baja California, Mexico), and all supply, collaboration and licensing agreements are denominated in U.S. dollars.
|
p)
|
Recent Accounting Pronouncements
|
In May 2014, the Financial Accounting
Standards Board (FASB) issued guidance codified in Accounting Standards Codification (ASC) 606
Revenue Recognition –
Revenue from Contracts with Customers
which amends the guidance in ASC 605,
Revenue Recognition
and adds a new Subtopic
to the Codification, ASC 340-40,
Other Assets and Deferred Costs: Contracts with Customers
.
The
standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers
in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services.
To achieve that core principle, an entity should apply the following steps: Step 1: Identify the contract(s) with a customer;
Step 2: Identify the performance obligations in the contract;
Step 3: Determine the transaction price; Step 4: Allocate
the transaction price to the performance obligations in the contract; and Step 5: Recognize revenue when (or as) the entity satisfies
a performance
obligation. ASC 606 permits two methods of adoption:
retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect
of initially applying the guidance recognized at the date of initial application (the modified retrospective method). In August
2015, the FASB issued an accounting update to defer the effective date by one year for public entities such that it is now
effective for public entities for annual reporting periods beginning after December 15, 2017, including interim periods
within
those years
, with early application permitted by one year. Subsequently, the FASB issued supplemental adoption guidance
and clarification to ASC 606 related to principal vs. agent considerations, identifying performance obligations and licensing,
technical corrections and improvements, which must be adopted at the same time as ASC 606. These standards are effective for the
Company during the fiscal year ending September 30, 2019. Management is in the process of assessing the impact this guidance will
have on the Company’s consolidated financial statements.
We anticipate
adoption of ASC 606 using the modified retrospective method with a cumulative catch-up adjustment to the opening balance sheet
of retained earnings at the effective date, during the first quarter of fiscal 2019. The Company will continue to review separate
performance obligations, potential disclosures, and the method of adoption in order to complete the evaluation of the impact on
the consolidated financial statements.
Stellar Biotechnologies, Inc.
|
Notes to Consolidated Financial Statements
|
For the Years Ended September 30, 2017, 2016 and 2015
|
In July 2015, FASB issued
ASU 2015-11,
Inventory (Topic 330): Simplifying the Measurement of Inventory
. ASU 2015-11 indicates that an entity should
measure inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary
course of business, less reasonably predictable costs of completion, disposal, and transportation. The ASU does not apply to inventory
measured using LIFO or the retail inventory method. It does apply to all other inventory, including inventory measured using FIFO
or average cost. The guidance in ASU 2015-11 is effective for public entities for annual reporting periods beginning after December
15, 2016, including interim periods
within those years
. The provisions should be
applied prospectively with early application permitted as of the beginning of an interim or annual reporting period. These standards
are effective for the Company during the fiscal year ending September 30, 2018. Management believes ASU 2015-11 will not have
a significant impact 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
, 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. These standards are effective for the Company during the fiscal year ending September 30, 2019.
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)
, 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. These standards are effective for the Company during the fiscal year ending September 30, 2020.
Management
is in the process of assessing the impact of ASU 2016-02 on the Company’s consolidated financial statements.
We
anticipate adoption of
ASU 2016-02,
will result in lease
liabilities and right-of-use assets
on
the Company’s consolidated
financial
statements for several long-term operating leases.
In
March 2016, the FASB issued ASU 2016-09,
Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based
Payment Accounting
, which is part of the FASB’s Simplification Initiative. The updated guidance simplifies the accounting
for share-based payment transactions,
including the income tax consequences, classification of awards as either equity or
liabilities, and classification on the statement of cash flows
. The amended guidance is effective
for public entities for fiscal years beginning after December 15, 2016, including interim periods within those years, with early
adoption permitted.
These standards are effective for the Company during the fiscal year ending September 30, 2018. Management
believes
ASU 2016-09
will not have a significant impact
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
, 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. These standards are effective for the Company during the
fiscal year ending September 30, 2021.
Management is in the process of assessing the impact of ASU 2016-13 on the Company’s
consolidated financial statements
.
In
May 2017, the FASB issued ASU 2017-09,
Scope of Modification Accounting
, which provides new guidance on changes
to the terms or conditions of share-based payment awards that would be required to apply modification accounting under ASC 718,
Compensation-Stock Compensation
. The amendments are effective for annual reporting periods beginning after December
15, 2017 with early adoption permitted. These standards are effective for the Company during the fiscal year ending September
30, 2019. Management is in the process of assessing the impact of ASU 2017-09 on the Company's consolidated
financial statements.
Stellar Biotechnologies, Inc.
|
Notes to Consolidated Financial Statements
|
For the Years Ended September 30, 2017, 2016 and 2015
|
Short-term investments consisted of the following:
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury Bills
|
|
$
|
1,994,401
|
|
|
$
|
3,988,794
|
|
U.S. Treasury Bills are carried
at amortized cost which approximates fair value and classified as held-to-maturity investments.
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 year. Finished goods include products
that are complete and available for sale. At September 30, 2017 and 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:
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
21,761
|
|
|
$
|
38,764
|
|
Work in process
|
|
|
-
|
|
|
|
43,498
|
|
Finished goods
|
|
|
46,353
|
|
|
|
167,168
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
68,114
|
|
|
$
|
249,430
|
|
|
6.
|
Property, Plant and Equipment,
net
|
Property, plant and equipment, net consisted of the
following:
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Aquaculture system
|
|
$
|
126,257
|
|
|
$
|
126,257
|
|
Laboratory facilities
|
|
|
62,033
|
|
|
|
62,033
|
|
Computer and office equipment
|
|
|
117,840
|
|
|
|
102,030
|
|
Tools and equipment
|
|
|
982,439
|
|
|
|
894,319
|
|
Vehicles
|
|
|
77,994
|
|
|
|
49,347
|
|
Leasehold improvements
|
|
|
337,060
|
|
|
|
282,305
|
|
|
|
|
1,703,623
|
|
|
|
1,516,291
|
|
Less: accumulated depreciation
|
|
|
(969,418
|
)
|
|
|
(793,057
|
)
|
|
|
|
|
|
|
|
|
|
Depreciable assets, net
|
|
|
734,205
|
|
|
|
723,234
|
|
Construction in progress
|
|
|
145,318
|
|
|
|
32,880
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
879,523
|
|
|
$
|
756,114
|
|
Depreciation expense amounted
to $179,322, $149,565 and $159,521 for the years ended September 30, 2017, 2016 and 2015, respectively.
Stellar Biotechnologies, Inc.
|
Notes to Consolidated Financial Statements
|
For the Years Ended September 30, 2017, 2016 and 2015
|
Operating leases
The Company leases buildings
and facilities used in its operations under two sublease agreements. 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 rent has been prepaid, and is 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.
Aggregate future minimum lease
payments at September 30, 2017 are as follows:
For The Year Ending September 30,
|
|
|
|
2018
|
|
|
160,000
|
|
2019
|
|
|
106,000
|
|
2020
|
|
|
106,000
|
|
2021
|
|
|
6,000
|
|
|
|
|
|
|
|
|
$
|
378,000
|
|
Rent expense on these lease
agreements amounted to approximately $238,000, $235,000 and $192,000 for the years ended September 30, 2017, 2016 and 2015, respectively.
Purchase obligations
The Company has commitments
totaling approximately $252,000 at September 30, 2017, for signed agreements with contract research organizations, consultants
and construction contractors. All purchase obligations are expected to be fulfilled within the next 12 months, except for approximately
$65,100, which is expected to be fulfilled in the following fiscal year.
Supply agreements
The Company has commitments
under supply agreements with customers for fixed prices per gram of KLH in connection with clinical trials on a non-exclusive
basis except within that customer’s field of use. The expiration dates of these supply agreements range from October 2019
to February 2022, and are generally renewable 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.
Stellar Biotechnologies, Inc.
|
Notes to Consolidated Financial Statements
|
For the Years Ended September 30, 2017, 2016 and 2015
|
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 our equity interest. If the joint venture does not achieve certain milestones by December 31, 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. These milestones have not been achieved, and the parties have discussed their
mutual desire to extend the deadline. Each of the parties is entitled, upon the occurrence of certain defined events, to acquire
the interest of the other party. Except as described herein, 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 its participation in the joint venture, the other party will have a right to acquire all of such terminating
party’s equity interests in the joint venture.
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.
Licensing agreement and technology
transfer agreement
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) under a written agreement (the License Agreement) with a University (the Licensor). Annual license
fees of $20,000 each were paid for the years ended September 30, 2016 and 2015. The Company also reimbursed patent filing, prosecution,
and maintenance costs of approximately $12,000, $11,000 and $52,000 for the years ended September 30, 2017, 2016 and 2015, respectively.
License fees and patent cost reimbursements have been accounted for as research and development expense in the accompanying consolidated
statements of operations.
In March 2017, (i) the Company
entered into an agreement to terminate the License Agreement, (ii) the Company concurrently entered into a technology transfer
and purchase agreement (the Transfer Agreement) with a vaccine biotechnology company (the Transferee), and (iii) the Licensor and
Transferee entered into a direct licensing arrangement relating to the patented C. diff technology. Under the Transfer Agreement,
the Company transferred to the Transferee its proprietary rights and know-how of immunogens and vaccine technology for C. diff,
in exchange for an upfront payment and a percentage of future fees, milestone payments, sublicensing income and royalties, if any,
paid by the Transferee or its assigns to the Licensor.
As a result of the termination
of the License Agreement, there are no early termination penalties and no further annual licensing fees, contingent milestone
payments, royalties, sub-licensing fees or other financial obligations payable by the Company to the Licensor.
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
$62,000, $64,000 and $58,000 for the years ended September 30, 2017, 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, where 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 years ended September 30, 2016 and 2015 was approximately $35,500 and $1,500. There was no royalty expense
incurred during the year ended September 30, 2017.
Stellar Biotechnologies, Inc.
|
Notes to Consolidated Financial Statements
|
For the Years Ended September 30, 2017, 2016 and 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 (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 which was executed in February 2017.
A member of the Company’s
Board of Directors currently serves as the manufacturer’s general manager and chair of its board of directors.
The Company
had the following transactions in share capital:
|
|
Years Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
Number of common shares issued
|
|
|
383,838
|
|
|
|
2,151,500
|
|
|
|
42,773
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common shares
|
|
$
|
-
|
|
|
$
|
6,750,000
|
|
|
$
|
-
|
|
Share issuance costs
|
|
|
-
|
|
|
|
(805,264
|
)
|
|
|
-
|
|
Proceeds from exercise of warrants
|
|
|
-
|
|
|
|
1,368,260
|
|
|
|
12,609
|
|
Transfer to common shares on issuance of performance shares
|
|
|
1,070,909
|
|
|
|
-
|
|
|
|
-
|
|
Transfer to common shares on exercise of warrants
|
|
|
-
|
|
|
|
1,853,581
|
|
|
|
10,000
|
|
Proceeds from exercise of options
|
|
|
-
|
|
|
|
-
|
|
|
|
94,168
|
|
Transfer to common shares on exercise of options
|
|
|
-
|
|
|
|
-
|
|
|
|
113,561
|
|
Share-based compensation
|
|
|
115,546
|
|
|
|
259,379
|
|
|
|
267,222
|
|
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 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 consolidated financial
statements.
Performance
Shares
Pursuant to a performance share
plan approved by shareholders in 2010, 1,000,000 common shares were reserved for issuance to certain officers, directors and employees
of the Company upon achievement of certain 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. Share-based compensation was recorded over the estimated vesting period ending
in August 2012.
At September 30, 2017, all vested
performance shares under the plan have been issued, and the performance share plan was terminated.
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 Consolidated Financial Statements
|
For the Years Ended September 30, 2017, 2016 and 2015
|
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 2017
|
|
|
1,265,626
|
|
|
$
|
4.50
|
|
|
There are no outstanding warrants
with exercise prices denominated in Canadian dollar at September 30, 2017.
The weighted average contractual
life remaining on the outstanding warrants at September 30, 2017 is 51 months.
The following table summarizes information about
the warrants outstanding at September 30, 2017:
Exercise Price
|
|
|
Number of
Warrants
|
|
|
Expiry Date
|
|
|
|
|
|
|
|
$
|
4.50
|
|
|
|
1,265,626
|
|
|
January 6, 2022
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,265,626
|
|
|
|
Warrant Liability
All warrants with exercise prices
denominated in Canadian dollars were exercised or expired. Therefore, there is no outstanding warrant liability at September 30,
2017.
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.
The fair value of warrants exercised was determined
using the Black-Scholes option valuation model, using the following weighted average assumptions:
|
|
Years Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
Risk free interest rate
|
|
|
0.48
|
%
|
|
|
0.44
|
%
|
Expected life (years)
|
|
|
0.04
|
|
|
|
0.40
|
|
Expected share price volatility
|
|
|
92
|
%
|
|
|
92
|
%
|
There were no warrants exercised
during the year ended September 30, 2017.
Stellar Biotechnologies, Inc.
|
Notes to Consolidated Financial Statements
|
For the Years Ended September 30, 2017, 2016 and 2015
|
The fair value of warrants granted was determined
using the Black-Scholes option valuation model, using the following weighted average assumptions at the date of the grant:
|
|
Year Ended
|
|
|
|
September 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 years ended September 30, 2017 or 2015.
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 2017
|
|
|
-
|
|
|
$
|
-
|
|
|
There were no broker units granted during the years
ended September 30, 2017, 2016 and 2015.
Options
The Company has an incentive
compensation plan adopted in 2017 (the Plan) administered by the Board of Directors, which amended and restated the 2013 fixed
share option plan (the 2013 Plan). Options, restricted shares and restricted share units are eligible for grants under the Plan.
The number of shares available for issuance under the Plan is 1,597,000, including shares available for the exercise of outstanding
options under the 2013 Plan. No restricted shares or restricted share units have been granted as of September 30, 2017.
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 certain individual 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 certain individual 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.
Stellar Biotechnologies, Inc.
|
Notes to Consolidated Financial Statements
|
For the Years Ended September 30, 2017, 2016 and 2015
|
Share options granted to certain
individual 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
|
|
|
71,600
|
|
|
|
1.89
|
|
|
Expired
|
|
|
(28,233
|
)
|
|
|
11.14
|
|
|
Expired
|
|
|
(171,500
|
)
|
|
|
2.90
|
|
CDN $
|
|
|
|
|
|
|
|
|
|
|
Balance - September 30, 2017
|
|
|
410,970
|
|
|
$
|
5.74
|
|
|
The weighted average contractual
life remaining on the outstanding options is 35 months.
The following table summarizes
information about the options under the Plan outstanding and exercisable at September 30, 2017:
Number of
Options
|
|
|
Exercisable at
September 30, 2017
|
|
|
Range of exercise prices
|
|
Expiry Dates
|
|
115,110
|
|
|
|
115,110
|
|
|
CDN$0.01 - 5.00
|
|
Apr 2017-Dec 2019
|
|
79,900
|
|
|
|
17,733
|
|
|
$0.01 - 5.00
|
|
Sep 2023-Mar 2024
|
|
139,860
|
|
|
|
139,860
|
|
|
CDN$5.01 - 10.00
|
|
Oct 2017-Jun 2022
|
|
15,100
|
|
|
|
15,100
|
|
|
$5.01 - 10.00
|
|
Dec 2022
|
|
21,500
|
|
|
|
21,500
|
|
|
CDN$15.01 - 20.00
|
|
Nov 2018-Nov 2021
|
|
39,500
|
|
|
|
39,500
|
|
|
$15.01 - 20.00
|
|
Nov 2020
|
|
410,970
|
|
|
|
348,803
|
|
|
|
|
|
The estimated fair value of the share options granted was determined
using a Black-Scholes option valuation model with the following weighted average assumptions:
|
|
Years Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Risk free interest rate
|
|
|
1.44
|
%
|
|
|
1.01
|
%
|
|
|
1.65
|
%
|
Expected life (years)
|
|
|
7.00
|
|
|
|
7.00
|
|
|
|
7.00
|
|
Expected share price volatility
|
|
|
166
|
%
|
|
|
117
|
%
|
|
|
115
|
%
|
Expected dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
The weighted average fair value
of share options granted during the years ended September 30, 2017, 2016 and 2015 was $1.84, $5.56, and $9.48, respectively.
As of September 30, 2017, the
Company had approximately $62,000 of unrecognized share-based compensation expense, which is expected to be recognized over a period
of 30 months.
Stellar Biotechnologies, Inc.
|
Notes to Consolidated Financial Statements
|
For the Years Ended September 30, 2017, 2016 and 2015
|
The intrinsic value of the options
exercised during the year ended September 30, 2015 was $8.28. There were no options exercised during the years ended September
30, 2017 and 2016. There was no intrinsic value of the vested options at September 30, 2017.
The breakdown of loss before
income tax by jurisdiction is as follows:
|
|
Years Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
$
|
(4,540,094
|
)
|
|
$
|
(4,001,206
|
)
|
|
$
|
(3,258,355
|
)
|
Canadian
|
|
|
(464,990
|
)
|
|
|
(1,026,520
|
)
|
|
|
405,203
|
|
Other foreign
|
|
|
(24,764
|
)
|
|
|
8,846
|
|
|
|
46,923
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Loss Before Income Tax
|
|
$
|
(5,029,848
|
)
|
|
$
|
(5,018,880
|
)
|
|
$
|
(2,806,229
|
)
|
Deferred income tax assets and
liabilities of the Company are as follows:
|
|
September 30,
2017
|
|
|
September 30,
2016
|
|
|
September 30,
2015
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-capital loss carry-forwards
|
|
$
|
12,164,100
|
|
|
$
|
10,000,000
|
|
|
$
|
8,028,900
|
|
Research and development tax credits
|
|
|
947,300
|
|
|
|
808,000
|
|
|
|
716,400
|
|
Deferred expenses
|
|
|
34,300
|
|
|
|
70,000
|
|
|
|
82,900
|
|
Property, plant and equipment
|
|
|
2,200
|
|
|
|
400
|
|
|
|
1,700
|
|
Share issuance costs
|
|
|
142,600
|
|
|
|
207,200
|
|
|
|
67,800
|
|
Deferred income tax liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. federal benefit net of state taxes
|
|
|
(923,700
|
)
|
|
|
(764,500
|
)
|
|
|
(628,800
|
)
|
Valuation allowance
|
|
|
(12,366,800
|
)
|
|
|
(10,321,100
|
)
|
|
|
(8,268,900
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred income tax asset (liability)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Realization of the deferred
tax assets is dependent upon the generation of future taxable income, the amount and timing of which are uncertain. Accordingly,
the net deferred tax assets have been fully offset by a valuation allowance.
As of September 30, 2017, the
Company had federal net operating loss (NOL) carryforwards of approximately $25.3 million expiring 2030 through 2037, California
NOL carryforwards of approximately $25.0 million expiring 2018 through 2037, and Canadian federal and provincial NOL carryforwards
of approximately CDN$6.8 million expiring 2028 through 2037. Portions of these NOL carryforwards may be used to offset future
taxable income, if any.
As of September 30, 2017, the Company
also has federal and California research and development tax credit carryforwards of approximately $.45 million and $.50 million,
respectively, available to offset future taxes. The federal credits begin expiring in 2030 and continue expiring through 2037.
The state tax credits do not expire.
Under the provisions of Section
382 of the Internal Revenue Code, substantial changes in the Company's ownership limit the amount of net operating loss carryforwards
and tax credit carryforwards that can be utilized annually in the future to offset taxable income. A valuation allowance has been
established to reserve the potential benefits of these carryforwards in the Company's consolidated financial statements to reflect
the uncertainty of future taxable income required to utilize available tax loss carryforwards and other deferred tax assets.
Stellar Biotechnologies, Inc.
|
Notes to Consolidated Financial Statements
|
For the Years Ended September 30, 2017, 2016 and 2015
|
The recovery of income taxes
shown in the consolidated statements of operations differs from the amounts obtained by applying statutory rates to the loss before
provision for income taxes due to the following:
|
|
September 30,
2017
|
|
|
September 30,
2016
|
|
|
September 30,
2015
|
|
|
|
|
|
|
|
|
|
|
|
Combined Canadian federal and provincial tax rates
|
|
|
26.0
|
%
|
|
|
26.0
|
%
|
|
|
26.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected income tax (recovery)/expense
|
|
$
|
(1,307,800
|
)
|
|
$
|
(1,304,900
|
)
|
|
$
|
(729,600
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nondeductible share-based payments
|
|
|
30,000
|
|
|
|
(67,400
|
)
|
|
|
69,500
|
|
Nondeductible change in fair value of warrant liability
|
|
|
-
|
|
|
|
(55,100
|
)
|
|
|
(554,100
|
)
|
Effect of higher income tax rate in U.S.
|
|
|
(624,400
|
)
|
|
|
(550,600
|
)
|
|
|
(445,800
|
)
|
Foreign currency differences
|
|
|
(42,200
|
)
|
|
|
20,000
|
|
|
|
169,900
|
|
Other
|
|
|
(174,500
|
)
|
|
|
(2,800
|
)
|
|
|
(43,300
|
)
|
Change in valuation allowance on deferred tax assets
|
|
|
2,119,700
|
|
|
|
1,968,000
|
|
|
|
1,570,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
$
|
800
|
|
|
$
|
7,200
|
|
|
$
|
36,800
|
|
The components of income tax
provision (benefits) are as follows:
|
|
September 30,
2017
|
|
|
September 30,
2016
|
|
|
September 30,
2015
|
|
|
|
|
|
|
|
|
|
|
|
Current tax provision
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. federal
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Canadian
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Other foreign
|
|
|
-
|
|
|
|
6,400
|
|
|
|
36,000
|
|
State
|
|
|
800
|
|
|
|
800
|
|
|
|
800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax provision
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. federal
|
|
|
(1,447,100
|
)
|
|
|
(1,265,700
|
)
|
|
|
(1,032,200
|
)
|
Canadian
|
|
|
(199,100
|
)
|
|
|
(303,300
|
)
|
|
|
(209,300
|
)
|
Other foreign
|
|
|
(5,200
|
)
|
|
|
-
|
|
|
|
-
|
|
State
|
|
|
(468,300
|
)
|
|
|
(399,000
|
)
|
|
|
(328,700
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in valuation allowance on deferred tax assets
|
|
|
2,119,700
|
|
|
|
1,968,000
|
|
|
|
1,570,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
800
|
|
|
$
|
7,200
|
|
|
$
|
36,800
|
|
|
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.
Stellar Biotechnologies, Inc.
|
Notes to Consolidated Financial Statements
|
For the Years Ended September 30, 2017, 2016 and 2015
|
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.
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments in U.S. Treasury Bills
|
|
$
|
1,994,401
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,994,401
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 maturities 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.
Stellar Biotechnologies, Inc.
|
Notes to Consolidated Financial Statements
|
For the Years Ended September 30, 2017, 2016 and 2015
|
The Company had the following
concentrations of revenues by customers, each of which accounted for more than 10% of revenues in the applicable period:
|
|
Years Ended
|
|
|
September 30,
|
|
September 30,
|
|
September 30,
|
|
|
2017
|
|
2016
|
|
2015
|
|
|
|
|
|
|
|
Product sales and contract services revenue
|
|
79% from
2 customers
|
|
76% from
3 customers
|
|
86% from
5 customers
|
The Company had the following
concentrations of revenues by geographic areas:
|
|
Years Ended
|
|
|
|
September 30,
|
|
September 30,
|
|
September 30,
|
|
|
|
2017
|
|
2016
|
|
2015
|
|
|
|
|
|
|
|
|
|
Europe
|
|
|
64
|
%
|
|
43
|
%
|
|
53
|
%
|
North America
|
|
|
33
|
%
|
|
12
|
%
|
|
9
|
%
|
Asia
|
|
|
3
|
%
|
|
45
|
%
|
|
38
|
%
|
The Company had the following
concentrations of accounts receivable from its customers, each of which accounted for more than 10% in the applicable period:
|
|
September 30,
|
|
|
2016
|
|
|
|
Accounts receivable
|
|
100% from
1 customer
|
There were no customer accounts
receivable at September 30, 2017.
Stellar Biotechnologies Inc. (NASDAQ:SBOT)
Historical Stock Chart
From Aug 2024 to Sep 2024
Stellar Biotechnologies Inc. (NASDAQ:SBOT)
Historical Stock Chart
From Sep 2023 to Sep 2024