UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

FORM 10-Q

 

 

 

xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2015

 

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: 000-54598

 

 

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

 

 

 

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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

  Large accelerated filer  ¨ Accelerated filer  x
  Non-accelerated filer    ¨ Smaller reporting company  ¨  

 

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 August 1, 2015, the registrant had 79,546,650 common shares issued and outstanding.

 

 
 

 

Stellar Biotechnologies, Inc.

Quarterly Report on Form 10-Q

For the Quarter Ended June 30, 2015

 

Table of Contents

 

PART I — FINANCIAL INFORMATION 1
Item 1. Financial Statements (Unaudited). 1
Condensed Interim Consolidated Balance Sheets – June 30, 2015, September 30, 2014 and August 31, 2014 1
Condensed Interim Consolidated Statements of Operations – Three Months and Nine Months Ended June 30, 2015 and 2014 2
Condensed Interim Consolidated Statements of Cash Flows – Nine Months Ended June 30, 2015 and 2014 3
Notes to Condensed Interim Consolidated Financial Statements 4
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. 17
Item 3. Quantitative and Qualitative Disclosures About Market Risk. 22
Item 4. Controls and Procedures. 23
   
PART II — OTHER INFORMATION 24
Item 1. Legal Proceedings. 24
Item 1A. Risk Factors. 24
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. 24
Item 3. Defaults Upon Senior Securities. 24
Item 4. Mine Safety Disclosures. 24
Item 5. Other Information. 24
Item 6. Exhibits. 24

  

 
 

 

PART I — FINANCIAL INFORMATION

 

Item 1. Financial Statements

   

Stellar Biotechnologies, Inc.

Condensed Interim Consolidated Balance Sheets

(Unaudited)

(Expressed in U.S. Dollars )

 

    June 30     September 30,      August 31,  
    2015     2014     2014  
Assets:                  
                   
Current assets:                        
Cash and cash equivalents   $ 10,161,458     $ 13,769,953     $ 13,427,404  
Accounts receivable     112,964       44,159       56,575  
Short-term investments     -       448,632       458,098  
Inventory     194,367       34,891       -  
Prepaid expenses     256,402       125,840       128,593  
Total current assets     10,725,191       14,423,475       14,070,670  
                         
Noncurrent assets:                        
Property, plant and equipment, net     471,927       388,340       387,392  
Deposits     15,900       15,900       15,900  
                         
Total noncurrent assets     487,827       404,240       403,292  
Total Assets   $ 11,213,018     $ 14,827,715     $ 14,473,962  
                         
Liabilities and Shareholders' Equity:                        
                         
Current liabilities:                        
Accounts payable and accrued liabilities   $ 371,200     $ 585,047     $ 526,626  
Deferred revenue     173,333       86,667       15,000  
Warrant liability, current portion     1,235,905       460       879,040  
Total current liabilities     1,780,438       672,174       1,420,666  
                         
Long-term liabilities:                        
Warrant liability, less current portion     -       3,690,806       5,352,663  
                         
Total Liabilities     1,780,438       4,362,980       6,773,329  
Commitments (Note 7)                        
                         
Shareholders' equity:                        
Common shares, unlimited common shares authorized, no par                        
    value, 79,546,650, 79,419,850 and 78,268,850 issued and                        
    outstanding at June 30, 2015, September 30, 2014 and                        
    August 31, 2014, respectively     37,940,641       37,883,877       36,240,838  
Accumulated share-based compensation     5,289,880       5,073,144       5,079,985  
Accumulated deficit     (33,797,941 )     (32,492,286 )     (33,620,190 )
Total shareholders' equity     9,432,580       10,464,735       7,700,633  
Total Liabilities and Shareholders' Equity   $ 11,213,018     $ 14,827,715     $ 14,473,962  

 

The accompanying notes are an integral part of these condensed interim consolidated financial statements.

1
 

 

Stellar Biotechnologies, Inc.

Condensed Interim Consolidated Statements of Operations

(Unaudited)

(Expressed in U.S. Dollars )    

 

    Three Months Ended     Nine Months Ended
    June 30,     June 30,     June 30,     June 30,  
    2015     2014     2015     2014  
                         
Revenues:                                
Contract services revenue   $ 45,000     $ 60,000     $ 150,000     $ 147,000  
Product sales     112,748       12,538       408,036       70,994  
Grant revenue     -       -       -       27,740  
      157,748       72,538       558,036       245,734  
                                 
Expenses:                                
Costs of contract services     34,434       41,075       110,891       78,739  
Costs of production and aquaculture     251,004       147,907       661,644       442,820  
Grant costs     -       -       -       27,740  
Research and development     129,710       543,233       830,115       1,824,554  
General and administration     618,185       612,468       2,346,019       2,280,268  
                                 
      1,033,333       1,344,683       3,948,669       4,654,121  
                                 
Other Income (Loss)                                
Foreign exchange gain (loss)     77,468       146,302       (391,190 )     (52,527 )
Gain (loss) in fair value of warrant liability     1,254,029       4,528,450       2,455,361       833,862  
Investment income     17,074       14,719       48,607       45,534  
      1,348,571       4,689,471       2,112,778       826,869  
                                 
Income (Loss) Before Income Tax     472,986       3,417,326       (1,277,855 )     (3,581,518 )
Income tax expense     9,000       9,000       27,800       21,200  
Net Income (Loss)   $ 463,986     $ 3,408,326     $ (1,305,655 )   $ (3,602,718 )
                                 
Income (loss) per common share - basic   $ 0.01     $ 0.04     $ (0.02 )   $ (0.05 )
Income (loss) per common share - diluted   $ 0.01     $ 0.04     $ (0.02 )   $ (0.05 )
Weighted average number of common shares outstanding:                                
Basic     79,546,650       76,237,455       79,517,791       76,299,105  
Diluted     85,020,352       86,898,996       79,517,791       76,299,105  

 

The accompanying notes are an integral part of these condensed interim consolidated financial statements. 

2
 

Stellar Biotechnologies, Inc.

Condensed Interim Consolidated Statements of Cash Flows

(Unaudited)

(Expressed in U.S. Dollars )    

 

    Nine Months Ended
    June 30,     June 30,  
    2015     2014  
             
Cash Flows Used In Operating Activities:                
Net loss   $ (1,305,655 )   $ (3,602,718 )
Adjustments to reconcile net loss to net cash used in operating activities:                
Depreciation and amortization     119,410       120,507  
Share-based compensation     244,781       770,777  
Foreign exchange (gain) loss     391,190       52,527  
(Gain) loss in fair value of warrant liability     (2,455,361 )     (833,862 )
                 
Changes in working capital items:                
Accounts receivable     (69,242 )     163,331  
Inventory     (159,476 )     -  
Prepaid expenses     (137,939 )     (106,237 )
Accounts payable and accrued liabilities     (211,667 )     (224,629 )
Deferred revenue     86,666       -  
     Net cash used in operating activities     (3,497,293 )     (3,660,304 )
                 
Cash Flows From Investing Activities:                
Acquisition of property, plant and equipment     (202,997 )     (278,401 )
Proceeds on maturities of short-term investments     419,283       -  
     Net cash provided by (used in) investing activities     216,286       (278,401 )
                 
Cash Flows From Financing Activities:                
Proceeds from exercise of warrants and options     28,719       2,963,162  
     Net cash provided by financing activities     28,719       2,963,162  
Effect of exchange rate changes on cash and cash equivalents     (356,207 )     (60,321 )
Net change in cash and cash equivalents     (3,608,495 )     (1,035,864 )
Cash and cash equivalents - beginning of period     13,769,953       15,478,038  
Cash and cash equivalents - end of period   $ 10,161,458     $ 14,442,174  

 

Supplemental disclosure of non-cash transactions (Note 10)

 

The accompanying notes are an integral part of these condensed interim consolidated financial statements. 

3
 

Stellar Biotechnologies, Inc.

Notes to Condensed Interim Consolidated Financial Statements (Unaudited)

(Expressed in U.S. Dollars)

 

 

1.Nature of Operations

 

Stellar Biotechnologies, Inc. (“the Company”) is organized under the laws of British Columbia, Canada. The Company’s common shares are quoted on the U.S. OTCQB Marketplace Exchange under the trading symbol, SBOTF, and are listed on the TSX Venture Exchange as a Tier 2 issuer under the trading symbol, KLH.

 

On April 7, 2010, the Company changed its name from CAG Capital, Inc. to Stellar Biotechnologies, Inc. On April 12, 2010, the Company completed a reverse merger transaction with Stellar Biotechnologies, Inc. a California corporation, which was founded in September 1999, and remains the Company’s wholly-owned subsidiary and principal operating entity. The Company’s executive offices are located at 332 E. Scott Street, Port Hueneme, California, 93041, USA, and its registered and records office is Royal Centre, 1055 West Georgia Street, Suite 1500, Vancouver, BC, V6E 4N7, Canada.

 

Nature of Operations

 

The Company’s business is the aquaculture, research and development, manufacture and commercialization of Keyhole Limpet Hemocyanin (“KLH”). The Company markets and distributes its KLH products to biotechnology and pharmaceutical companies, academic institutions, and clinical research organizations in Europe, the United States, and Asia.

 

Management Plans

 

For the nine months ended June 30, 2015 and 2014, the Company reported net losses of approximately $1.3 million and $3.6 million, respectively. The most significant factor in the fluctuations in net income and losses relates to noncash changes in the fair value of warrant liability, which was a gain of $2.5 million and $0.8 million for the nine months ended June 30, 2015 and 2014, respectively. As of June 30, 2015, the Company had an accumulated deficit of approximately $33.8 million and working capital of approximately $8.9 million.

 

In the past, operations of the Company have primarily been funded by the issuance of common shares, exercise of warrants, grant revenues, contract services revenue, and product sales. In September 2013, the Company closed a private placement with gross proceeds of $12 million. Management believes these financial resources are adequate to support the Company’s initiatives at the current level for at least 12 months. Management is also continuing the ongoing effort toward expanding the customer base for existing marketed products, and the Company may seek additional financing alternatives, including nondilutive financing through grants, collaboration and licensing arrangements, and additional equity financing.

 

The accompanying condensed interim consolidated financial statements have been prepared on a going concern basis, which assumes that the Company will continue in operation for the foreseeable future and be able to realize its assets and discharge its liabilities and commitments in the normal course of business.

 

Functional Currency

 

The condensed interim consolidated financial statements of the Company are presented in U.S. dollars, unless otherwise stated, which is the Company’s functional currency.

 

2.Basis of Presentation

 

The accompanying unaudited condensed interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q. They do not include all information and footnotes necessary for a fair presentation of financial position, results of operations and cash flows in conformity with U.S. GAAP for complete financial statements. These condensed interim consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes contained in the Company’s Annual Report on Form 10-K for the year ended August 31, 2014.

 

4
 

Stellar Biotechnologies, Inc.

Notes to Condensed Interim Consolidated Financial Statements (Unaudited)

(Expressed in U.S. Dollars)

 

The accompanying condensed interim consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, Stellar Biotechnologies, Inc. All significant intercompany balances and transactions have been eliminated in consolidation. In the opinion of management, all adjustments (consisting of normal recurring adjustments and accruals) considered necessary for a fair presentation of the results of operations for the period presented have been included in the interim period. Operating results for the nine months ended June 30, 2015 are not necessarily indicative of the results that may be expected for other interim periods or the year ending September 30, 2015. The condensed interim consolidated financial data at August 31, 2014 is derived from audited financial statements included in the Company’s Annual Report on Form 10-K for the year ended August 31, 2014, as filed on November 14, 2014 with the SEC.

 

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates.

 

Change in Fiscal Year End

 

On June 3, 2014, the Board of Directors of the Company approved a change in the Company’s fiscal year end from August 31 to September 30 of each year. This change to the calendar quarter reporting cycle began September 1, 2014. As a result of the change, the Company had a one-month transition period from September 1, 2014 to September 30, 2014. The unaudited results for the one month ended September 30, 2014 are included in the Company’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2014, as filed on February 9, 2015 with the SEC. The unaudited balance sheet at September 30, 2014 is included in these condensed interim consolidated financial statements for comparative purposes. The audited results for the one month ended September 30, 2014 will be included in the Company’s Annual Report on Form 10-K for the fiscal year ending September 30, 2015, if not filed with the SEC prior thereto.

 

In addition, the results for the three months and nine months ended June 30, 2015 are compared with the results of the three months and nine months ended June 30, 2014, which have been recast on a calendar quarter basis due to the change in the Company’s fiscal year end from August 31 to September 30.

 

3.Significant Accounting Policies

 

Recent Accounting Pronouncements

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2014-09 creates a new topic in the ASC Topic 606 and establishes a new control-based revenue recognition model, changes the basis for deciding when revenue is recognized over time or at a point in time, provides new and more detailed guidance on specific topics, and expands and improves disclosures about revenue. In addition, ASU 2014-09 adds a new Subtopic to the Codification, ASC 340-40, Other Assets and Deferred Costs: Contracts with Customers, to provide guidance on costs related to obtaining a contract with a customer and costs incurred in fulfilling a contract with a customer that are not in the scope of another ASC Topic. The guidance in ASU 2014-09 is effective for public entities for annual reporting periods beginning after December 15, 2017, including interim periods therein. Early application is not permitted. Management is in the process of assessing the impact of ASU 2014-09 on the Company’s financial statements.

 

In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements - Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern. ASU 2014-15 defines management's responsibility to evaluate whether there is substantial doubt about an organization's ability to continue as a going concern and to provide related footnote disclosures. The guidance in ASU 2014-15 is effective for annual reporting periods beginning after December 15, 2016, with early application permitted. Management is in the process of assessing the impact of ASU 2014-15 on the Company’s financial statements.

 

5
 

Stellar Biotechnologies, Inc.

Notes to Condensed Interim Consolidated Financial Statements (Unaudited)

(Expressed in U.S. Dollars)

 

In July 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2015-11, Simplifying the Measurement of Inventory (Topic 330). 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 Update 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 therein. The provisions should be applied prospectively with early application permitted. Management is in the process of assessing the impact of ASU 2015-11 on the Company’s financial statements.

 

 

4.Inventory

 

The Company records inventory for custom manufacturing of products for specific customers, including manufacturing under supply agreements. 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 custom manufacturing in process at the end of the period. Finished goods include custom manufactured products that are complete, but not yet shipped to the customers. There was no inventory for custom manufactured products at August 31, 2014. Inventory consisted of the following at June 30, 2015 and September 30, 2014:

 

   June 30,   September 30, 
   2015   2014 
         
Raw materials  $5,573   $10,480 
Work in process   80,720    24,411 
Finished goods   108,074      
           
           
   $194,367   $34,891 

 

6
 

Stellar Biotechnologies, Inc.

Notes to Condensed Interim Consolidated Financial Statements (Unaudited)

(Expressed in U.S. Dollars)

 

5.Property, Plant and Equipment, net

 

Property, plant and equipment, net consisted of the following:

 

   June 30,   September 30,   August 31, 
   2015   2014   2014 
             
Aquaculture system  $58,923   $58,923   $58,923 
Laboratory facilities   62,033    62,033    62,033 
Computer and office equipment   77,678    77,697    77,697 
Tools and equipment   700,011    635,766    622,289 
Vehicles   10,997    10,997    10,997 
Leasehold improvements   109,800    61,187    61,187 
    1,019,442    906,603    893,126 
                
Less: accumulated depreciation   (636,962)   (518,263)   (505,734)
Depreciable assets, net   382,480    388,340    387,392 
Construction in progress   89,447    -    - 
                
   $471,927   $388,340   $387,392 

 

Depreciation expense amounted to $41,808 and $34,307 for the three months and $119,410 and $99,078 for the nine months ended June 30, 2015 and 2014, respectively.

 

7
 

Stellar Biotechnologies, Inc.

Notes to Condensed Interim Consolidated Financial Statements (Unaudited)

(Expressed in U.S. Dollars)

 

6.Intangible Assets - Licensing Rights

 

In December 2010, the Company entered into a research collaboration agreement with a customer. When the agreement terminated according to its terms in August 2011, the Company acquired an exclusive, worldwide sub-licensable and royalty-free license for certain technology developed in collaboration with the customer. The Company paid a $200,000 license fee for the licensing rights, which are jointly owned by the Company and the customer. The licensing rights do not have a fixed term or termination provisions. The licensing rights are amortized over the estimated useful life of seven years and are shown net of accumulated amortization and impairment losses. During the year ended August 31, 2014, the Company discontinued its use of these licensing rights and recorded impairment loss for the remaining value of licensing rights.

 

Amortization expense amounted to $7,143 and $21,429 for the three and nine months ended June 30, 2014, respectively.

 

7.Commitments

 

Operating leases

 

The Company leases three buildings and facilities used in its operations under sublease agreements with the Port Hueneme Surplus Property Authority. In June 2015, the Company exercised its option to extend these sublease agreements for an additional five-year term beginning in October and November 2015. The Company negotiated an option to extend the leases for two additional five-year terms.

 

The Company leases facilities used for executive offices and laboratories. The Company must pay a portion of the common area maintenance. In July 2014, the Company exercised its option to extend this lease for a two-year term.

 

In June 2015, the Company began leasing undeveloped land in Baja California, Mexico to assess its suitability for the long-term development and potential expansion of the Company’s production capability. The first two years of rent under the lease were prepaid in June 2015. The initial term is three years and the Company may terminate early with 30 days’ notice. If the Company decides to proceed with development of the site, it has options to extend the lease for 30 years.

 

Future minimum lease payments are as follows:

 

   June 30, 
   2015 
For The Year Ending September 30,     
2015  $57,000 
2016   157,000 
2017   143,000 
2018   106,000 
2019   106,000 
2020   106,000 
Thereafter   6,000 
      
   $681,000 

 

Rent expense on these lease agreements amounted to approximately $137,000, and $135,000 for the nine months ended June 30, 2015 and 2014, respectively.

 

Purchase obligations

 

The Company has commitments totaling approximately $152,000 at June 30, 2015 for signed agreements with contract manufacturing organizations and consultants. The Company also has agreements to pay time and materials to contractors, which are estimated at approximately $25,000 at June 30, 2015. All purchase obligations are expected to be fulfilled within the next 12 months.

 

8
 

Stellar Biotechnologies, Inc.

Notes to Condensed Interim Consolidated Financial Statements (Unaudited)

(Expressed in U.S. Dollars)

 

Supply agreements

 

The Company has three commitments under certain supply agreements with customers for fixed prices per gram on a non-exclusive basis except within that customer’s field of use. One amended and restated supply agreement replaced two prior agreements that automatically renewed each year. The new agreement is effective March 2015 through March 2020 and is renewable for one-year terms upon written request of the customer. One agreement is effective October 2014 through October 2019 and is renewable for one-year terms upon written request of the customer. One agreement is effective October 2014 through October 2017 and is renewable for one-year terms upon written request of the customer.

 

Licensing fees

 

In July 2013, the Company acquired the exclusive, worldwide license to certain patented technology for the development of human immunotherapies against Clostridium difficile infection (“C. diff”). The license agreement required an initial, non-refundable license fee of $25,000, which was paid in fiscal August 2013, and payment of an aggregate of $200,000 in delayed license fees, which were paid in fiscal August 2014. Beginning September 2014, the terms also require a license fee of $20,000 to be paid annually, creditable against royalties due, if any. Royalties are payable for a percentage of related net sales, if any. License fees are also payable for a percentage of related non-royalty sublicensing revenue, if any. No royalties are due or have been paid to date. The Company also reimbursed patent filing costs of approximately $50,000 and $26,000 in the nine months ended June 30, 2015 and 2014, respectively, and will reimburse certain future patent filing, prosecution, and maintenance costs. License fees and patent cost reimbursements paid during the nine months ended June 30, 2015 and 2014, have been accounted for as research and development expense in the accompanying condensed interim consolidated statements of operations.

 

The license agreement expires when the last valid patent claim licensed under the license agreement expires. Prior to that time, the license agreement can be terminated by the licensor upon certain conditions. The Company will have 30 days after written notice from the licensor to cure the problem prior to termination of the license agreement. The Company can terminate the agreement with three months’ prior written notice.

 

Upon execution of the license agreement, the Company issued 371,200 common shares and warrants to purchase up to 278,400 of the Company’s common shares to the licensor. The warrants expired on January 23, 2015 and were not exercised.

 

The license agreement provides for the Company to pay up to an aggregate of $6,020,000 in milestone payments to the licensor upon achievement of various financing and development targets up to the first regulatory approval. Remaining contingent milestone payments to the licensor totaling $57,025,000 are related to achievement of sales targets. A financing milestone was met during the year ended August 31, 2014, and accordingly, the Company made a milestone payment of $100,000. No milestones were met during the nine months ended June 30, 2015 and 2014, and there can be no assurance that any of the remaining milestones will be met in the future.

 

Retirement savings plan 401(k) contributions

 

The Company sponsors a 401(k) retirement savings plan that requires an annual non-elective safe harbor employer contribution of 3% of eligible employee wages. All employees over 21 years of age are eligible beginning the first payroll after 3 consecutive months of employment. Employees are 100% vested in employer contributions and in any voluntary employee contributions. Contributions to the 401(k) plan were approximately $45,000 and $40,000 for the nine months ended June 30, 2015 and 2014, respectively.

 

Related party commitments

 

See Note 9 “Related Party Disclosures”.

 

9
 

Stellar Biotechnologies, Inc.

Notes to Condensed Interim Consolidated Financial Statements (Unaudited)

(Expressed in U.S. Dollars)

 

8.Share Capital

 

The Company had the following transactions in share capital:

 

   Nine Months Ended 
   June 30,   June 30, 
   2015   2014 
         
Number of common shares issued   126,800    6,475,820 
           
Proceeds from exercise of warrants and broker units  $938   $2,587,014 
Transfer to common shares on exercise of warrants and broker units   426    5,308,382 
Proceeds from exercise of options   27,781    376,148 
Transfer to common shares on exercise of options   27,619    341,594 
Share-based compensation   244,781    770,777 

 

Performance shares

 

There were 10,000,000 common shares allotted as performance shares to be issued to certain officers, directors and employees of the Company based on meeting milestones related to completion of method development for commercial-scale manufacture of KLH, compilation and regulatory submittal of all required chemistry, manufacturing and control data and completion of preclinical toxicity and immunogenicity testing of products under a performance share plan. Share-based compensation was recorded over the estimated vesting period ending in August 2012.

 

At June 30, 2015, there are 3,838,383 performance shares reserved for issuance.

 

Black-Scholes option valuation model

 

The Company uses the Black-Scholes option valuation model to determine the fair value of warrants, broker units and stock 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 stock options.

 

10
 

Stellar Biotechnologies, Inc.

Notes to Condensed Interim Consolidated Financial Statements (Unaudited)

(Expressed in U.S. Dollars)

 

Warrants

 

A summary of the Company’s warrants activity is as follows:

 

   Number of Warrants   Weighted
Average
Exercise Price
    
            
Balance - September 30, 2014   10,545,312   $1.01   CDN $
              
Exercised   (600)   0.75   CDN $
Expired   (278,700)   1.25   CDN $
              
Balance - June 30, 2015   10,266,012   $1.13   CDN $

 

The weighted average contractual life remaining on the outstanding warrants at June 30, 2015 is .84 years.

 

The following table summarizes information about the outstanding warrants at June 30, 2015:

 

Exercise Price  Number of
Warrants
   Expiry Date   
            
CDN$0.40   4,000,000   October 25, 2015   
CDN$0.40   278,400   January 4, 2016   
$1.35   4,701,902   September 9, 2016   
$1.05   200,000   September 9, 2016  Broker warrants
$1.35   952,377   September 20, 2016   
$1.05   133,333   September 20, 2016  Broker warrants
            
    10,266,012       

 

Warrant liability

 

Equity offerings conducted by the Company in prior years included the issuance of warrants with exercise prices denominated in Canadian dollars. The Company’s functional currency is the U.S. dollar. As a result of having exercise prices denominated in other than the Company’s functional currency, these warrants meet the definition of derivatives and are therefore classified as derivative liabilities measured at fair value with adjustments to fair value recognized through the consolidated statements of operations. As these warrants are exercised, the fair value of the recorded warrant liability on date of exercise is included in common shares along with the proceeds from the exercise. If these warrants expire, the related decrease in warrant liability is recognized in profit or loss, as part of the change in fair value of warrant liability. There is no cash flow impact as a result of this accounting treatment.

 

The fair value of the warrants is determined using the Black-Scholes option valuation model at the end of each reporting period. Upon exercise of the warrants, the fair value of warrants included in derivative liabilities is reclassified to equity.

 

11
 

Stellar Biotechnologies, Inc.

Notes to Condensed Interim Consolidated Financial Statements (Unaudited)

(Expressed in U.S. Dollars)

 

The fair value of warrants exercised during the nine months ended June 30, 2015 and 2014 was determined using the Black-Scholes option valuation model, using the following weighted average assumptions:

 

   Nine Months Ended
   June 30, 2015  June 30, 2014
Risk free interest rate  1.12%  1.07%
Expected life (years)  0.01  0.29
Expected share price volatility  97%  106%

 

There were no warrants granted during the nine months ended June 30, 2015 and 2014.

 

Broker units

 

The Company granted broker units as finders’ fees in conjunction with equity offerings in prior years. Broker units are fully vested when granted and allow the holders to purchase equity units. A unit consists of one common share and either one whole warrant or one half warrant to purchase common shares.

 

A summary of broker units activity is as follows:

 

   Number of
Units
   Weighted
Average
Exercise Price
    
              
Balance - September 30, 2014   467,200   $0.25   CDN $
              
Exercised   (1,200)   0.50   CDN $
              
Balance - June 30, 2015   466,000   $0.25   CDN $

 

The weighted average contractual life remaining on the outstanding broker units is 0.35 years.

 

The following table summarizes information about the outstanding broker units at June 30, 2015:

 

Exercise Price  Number of
Units
   Expiry Date
         
CDN$0.25   400,000   October 25, 2015
CDN$0.25   66,000   January 4, 2016
         
    466,000    

 

The outstanding broker units at June 30, 2015 include one warrant.

 

There were no broker units granted during the nine months ended June 30, 2015 and 2014.

 

12
 

Stellar Biotechnologies, Inc.

Notes to Condensed Interim Consolidated Financial Statements (Unaudited)

(Expressed in U.S. Dollars)

 

Options

 

The Company has a 2013 fixed stock option plan (“the Plan”) administered by the Board of Directors, who have the discretion to grant up to an aggregate of 10,000,000 options. The exercise price of an option is set at the closing price of the Company’s common shares on the date of grant. Stock options granted to directors, officers, employees and consultants are subject to the following vesting schedule:

 

(a)One-third of the shares subject to the option shall vest immediately;

 

(b)One-third of the shares subject to the option shall vest 12 months from the date of grant; and

 

(c)One-third of the shares subject to the option shall vest 18 months from the date of grant.

 

Stock options granted to investor relations consultants vest over a period of not less than 12 months with 25% of the shares subject to the option vesting on the date that is three months from the date of grant, and a further 25% vesting on each successive date that is three months from the date of the prior vesting.

 

Options have been granted under the Plan allowing the holders to purchase common shares of the Company as follows:

 

   Number of Options   Weighted
Average
Exercise Price
    
              
Balance - September 30, 2014   5,885,533   $0.62   CDN $
              
        Granted   165,000    1.33   CDN $
        Exercised   (125,000)   0.25   CDN $
              
Balance - June 30, 2015   5,925,533   $0.67   CDN $

 

The weighted average contractual life remaining on the outstanding options is 3.48 years.

 

13
 

Stellar Biotechnologies, Inc.

Notes to Condensed Interim Consolidated Financial Statements (Unaudited)

(Expressed in U.S. Dollars)

 

The following table summarizes information about the options under the Plan outstanding and exercisable at June 30, 2015:

 

Exercise Price  Number of     Options   Exercisable at
June 30, 2015
   Expiry Date
              
CDN$0.28   1,645,000    1,645,000   April 9, 2017
CDN$0.25   55,000    55,000   May 17, 2017
CDN$0.28   20,000    20,000   June 28, 2017
CDN$0.28   70,000    70,000   July 13, 2017
CDN$0.64   70,000    70,000   October 25, 2017
CDN$1.00   60,000    60,000   February 10, 2018
CDN$0.65   848,600    848,600   August 8, 2018
CDN$0.50   5,000    5,000   September 26, 2018
CDN$1.87   100,000    100,000   November 7, 2018
CDN$0.40   70,000    70,000   December 22, 2018
CDN$0.42   853,600    853,600   April 13, 2019
CDN$0.29   90,000    90,000   June 18, 2019
CDN$0.37   150,000    150,000   August 9, 2019
CDN$0.37   150,000    150,000   August 16, 2019
CDN$0.25   8,333    8,333   October 23, 2019
CDN$0.25   215,000    215,000   December 19, 2019
CDN$0.58   560,000    560,000   May 14, 2020
CDN$0.58   100,000    100,000   May 23, 2020
$1.83   495,000    495,000   November 1, 2020
$1.84   100,000    100,000   November 15, 2020
CDN$0.94   95,000    63,333   June 27, 2021
CDN$1.52   115,000    38,333   November 12, 2021
CDN$0.89   50,000    16,667   June 10, 2022
              
    5,925,533    5,783,866    

 

The estimated fair value of the stock options granted during the nine months ended June 30, 2015 and 2014 was determined using a Black-Scholes option valuation model with the following weighted average assumptions.

 

   Nine Months Ended 
   June 30, 2015   June 30, 2014 
Risk free interest rate   1.65%   2.01%
Expected life (years)   7.00    6.75 
Expected share price volatility   115%   120%
Expected dividend yield   0%   0%

 

The weighted average fair value of stock options awarded during the nine months ended June 30, 2015 and 2014 was CDN$1.17 and CDN$1.51, respectively.

 

As of June 30, 2015, the Company had approximately $66,000 of unrecognized share-based compensation expense, which is expected to be recognized over a period of 1.51 years.

 

The intrinsic value of the options exercised during the nine months ended June 30, 2015 and 2014 was CDN$1.15 and CDN$1.32, respectively. The intrinsic value of the vested options at June 30, 2015 was $0.27.

 

14
 

Stellar Biotechnologies, Inc.

Notes to Condensed Interim Consolidated Financial Statements (Unaudited)

(Expressed in U.S. Dollars)

 

9.Related Party Disclosures

 

Royalty 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. There was no royalty expense incurred during the nine months ended June 30, 2015 and 2014.

 

Collaboration agreement

 

In December 2013, the Company entered into a collaboration agreement with a privately-held Taiwan biopharmaceuticals manufacturer and a beneficial owner of over 5% of the Company’s common shares. Under the terms of the agreement, the Company will be responsible for the production and delivery of GMP grade KLH for evaluation as a carrier molecule in the collaboration partner’s potential manufacture of OBI-822 active immunotherapy. The Company is also responsible for method development, product formulation, and process qualification for certain KLH reference standards. The collaboration partner is responsible for development objectives and product specifications. The agreement provides 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 provides for the parties to negotiate a commercial supply agreement for Stellar KLH™ in the future. However, there can be no assurance that any such negotiations will lead to successful execution of any further agreements related to this collaboration.

 

10.Supplemental Disclosure of Cash Flow and Non-Cash Transactions

 

Supplemental disclosure of cash flow information follows:

 

   Nine Months Ended 
   June 30,   June 30, 
   2015   2014 
         
Cash paid during the period for taxes  $27,800   $21,200 

 

Supplemental disclosure of noncash financing and investing activities follows:

 

   Nine Months Ended 
   June 30,   June 30, 
   2015   2014 
         
Transfer to common shares on exercise of warrants and broker units  $426   $5,308,382 
Transfer to common shares on exercise of options   27,619    341,594 

 

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, cash equivalents and accounts receivable. Management’s assessment of the Company’s credit risk for cash and cash equivalents is low as cash and cash equivalents are held in financial institutions believed to be credit worthy. The Company limits its exposure to credit loss by placing its cash with major financial institutions and invests only in short-term obligations.

 

15
 

Stellar Biotechnologies, Inc.

Notes to Condensed Interim Consolidated Financial Statements (Unaudited)

(Expressed in U.S. Dollars)

 

Approximately 67% and 63% of the Company’s product sales and contract services revenue during the nine months ended June 30, 2015 and 2014, were from three customers and two customers, respectively. All of the grant revenue during the nine months ended June 30, 2014 was received from the National Science Foundation.

 

Approximately 99% and 76% of the Company’s accounts receivable at June 30, 2015 and August 31, 2014, respectively, were from one customer and approximately 81% of the Company’s accounts receivable at September 30, 2014 was from two customers.

 

While the Company is exposed to credit losses due to the non-performance of its counterparties, the Company considers the risk of this remote. The Company estimates its maximum credit risk for accounts receivable at the amount recorded on the balance sheet.

 

12.Subsequent Event

 

In July 2015, the Company entered into an exclusive collaboration agreement with Ostiones Guerrero SA de CV (“Ostiones”) in Baja California, Mexico for the potential development of an additional aquaculture locale and expansion of production, subject to a site suitability study to be conducted over the next three years.

 

Under the terms of the agreement, the Company and Ostiones will collaborate on the design, expansion and development of marine aquaculture resources and KLH production facilities in Baja California, Mexico to provide, exclusively for the Company, an additional site for hatchery and maturation of keyhole limpets and production of KLH. Ostiones will provide local manpower, labor and operational support to the Company, the costs of which are subject to prior approval and will be reimbursed by the Company on a monthly basis. As part of the collaboration, Ostiones will gain access to the Company’s advanced aquaculture techniques, proprietary expertise, support services and training to facilitate the expansion of Ostiones’ seafood production business. During the three year term of the agreement and for five years thereafter, the parties are subject to customary non-competition and non-contravention provisions.

 

The Company will be responsible for certain improvements to the leased undeveloped land in Baja California, Mexico described in Note 7, including construction of certain structures and a power-generating facility which will be owned by the Company. The collaboration agreement is co-terminus with the date of the initial expiration of that lease in June 2018, unless terminated earlier.

 

16
 

  

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

The following management’s discussion and analysis of our financial condition and results of operations should be read in conjunction with the unaudited condensed interim consolidated financial statements and notes thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q as of June 30, 2015 and our audited consolidated financial statements for the year ended August 31, 2014 included in our Annual Report on Form 10-K, filed with the Securities and Exchange Commission on November 14, 2014, as amended on November 21, 2014.

 

This Quarterly Report on Form 10-Q contains forward-looking statements. When used in this report, the words “expects,” “anticipates,” “suggests,” “believes,” “intends,” “estimates,” “plans,” “projects,” “continue,” “ongoing,” “potential,” “expect,” “predict,” “believe,” “intend,” “may,” “will,” “should,” “could,” “would” and similar expressions are intended to identify forward-looking statements. You should not place undue reliance on these forward-looking statements. Our actual results could differ materially from those anticipated in the forward-looking statements for many reasons, including the risks described in this report, the risks described in our Annual Report on Form 10-K for the year ended August 31, 2014 and other reports we file with the Securities and Exchange Commission. Although we believe the expectations reflected in the forward-looking statements are reasonable, they relate only to events as of the date on which the statements are made. We do not intend to update any of the forward-looking statements after the date of this report to conform these statements to actual results or to changes in our expectations, except as required by law.

 

The discussion and analysis of our financial condition and results of operations are based on our unaudited condensed interim consolidated financial statements as of June 30, 2015 and August 31, 2014, and for the three months and nine months ended June 30, 2015 and 2014 included in Part I, Item 1 of this Quarterly Report on Form 10-Q, which we have prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported revenues and expenses during the reporting periods. On an ongoing basis, we evaluate such estimates and judgments, including those described in greater detail below. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

 

Overview

 

Stellar Biotechnologies, Inc. (“Stellar,” the “Company,” “we,” “our” and “us”) is a biotechnology company engaged in the aquaculture, research and development, manufacture and commercialization of Keyhole Limpet Hemocyanin, or KLH, protein. KLH is a high molecular weight, immune-stimulating protein with an extensive history (over 40 years) of safe and effective use in immunological applications.

 

KLH can be used as an active pharmaceutical ingredient, or API, and combined with a disease-targeting agent to create immunotherapies targeting cancer, immune disorders, Alzheimer’s disease, and inflammatory diseases, or it can be used as a finished, injectable product in the immunodiagnostic market for measuring immune response in patients and research settings. Our mission is to become the world leader in the sustainable manufacture of KLH and use our unique, proprietary methods and intellectual property to serve the growing demand for KLH in immunotherapeutic and immunodiagnostic markets.

 

Change in Fiscal Year End

 

On June 3, 2014, the Company’s Board of Directors approved a change in the Company’s fiscal year end from August 31 to September 30 of each year, with effect from September 1, 2014. As a result, the Company had a one-month transition period from September 1, 2014 to September 30, 2014 (“Transition Period”), which was included in our Quarterly Report on Form 10-Q, for the quarter ended December 31, 2014, as filed with the Securities and Exchange Commission on February 9, 2015.

 

17
 

 

Significant Accounting Policies and Estimates

 

For a discussion of our significant accounting policies and estimates, refer to Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in our Annual Report on Form 10-K for the fiscal year ended August 31, 2014, as filed with the Securities and Exchange Commission on November 14, 2014, as amended on November 21, 2014. There are no material changes in our significant accounting policies and estimates from the disclosure provided in our Annual Report on Form 10-K for the fiscal year ended August 31, 2014, except that we have established the following accounting policy for inventory:

 

Inventory

 

Inventory is recorded for custom manufacturing of products for specific customers, including manufacturing under supply agreements. 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 custom manufacturing in process at the end of the period. Finished goods include custom manufactured products that are complete, but not yet shipped to the customers.

 

Results of Operations

 

Comparison of Nine Months Ended June 30, 2015 and 2014

 

Our net loss for the nine months ended June 30, 2015 was $1,305,655, or ($0.02) per basic share, as compared to a net loss of $3,602,718, or ($0.05) per basic share, for the nine months ended June 30, 2014. The decrease in net loss reported in the nine months ended June 30, 2015 compared to the prior period was primarily due to a significant noncash change in the fair value of warrant liability, increased sales and decreased research and development expenses.

 

Revenue for the nine months ended June 30, 2015 totaled $558,036, as compared to revenue of $245,734 in the nine months ended June 30, 2014. As expected during this early stage of our development, our revenues have high volatility as we establish a market for our products and services. Revenue for the nine months ended June 30, 2015 included product sales of $408,036, as compared to $70,994 in the prior period. The increase in revenue for the nine months ended June 30, 2015 was due to an increase in customers and associated greater product sales volume including sales under supply agreements and custom manufactured products. Contract services revenue was $150,000 for the nine months ended June 30, 2015, as compared to $147,000 in the prior period. The increase in contract services revenue for the nine months ended June 30, 2015 was due to the net impact of services performed under a collaboration agreement entered into mid-December 2013 and completion of services in December 2014 related to a supply agreement. Grant revenue for the nine months ended June 30, 2014 totaled $27,740 and related to the completion of work associated with our Phase II/IIB grants from the National Science Foundation (“NSF”) Small Business Innovation Research (“SBIR”) through the Technology Enhancement for Commercial Partnerships program. No grant revenue was recorded during the nine months ended June 30, 2015.

 

Expenses for the nine months ended June 30, 2015 decreased to $3,948,669, as compared to expenses of $4,654,121 incurred in the nine months ended June 30, 2014. Costs of production and aquaculture for the nine months ended June 30, 2015 increased to $661,644, as compared to costs of $442,820 incurred in the nine months ended June 30, 2014, consistent with the increase in sales revenues. Research and development was $830,115 for the nine months ended June 30, 2015, as compared to $1,824,554 for the prior period. The decrease for the nine months ended June 30, 2015 was a result of the decreased use of contract research organizations due to a realignment of our focus from internal research and process development to manufacturing our Stellar KLH™ products in response to increased demand. General and administration expenses increased to $2,346,019 for the nine months ended June 30, 2015, as compared to $2,280,268 in the prior period. The increase in general and administration expenses for the nine months ended June 30, 2015 was caused by the net impact of increased corporate development expenses related to our transition to reporting as a U.S. domestic issuer rather than a foreign private issuer, partially offset by decreases in share-based compensation. Share-based compensation is allocated to all expense types; however, the greatest portion of the expenses is recorded as general and administration expenses. Share-based compensation was recorded as $244,781 for the nine months ended June 30, 2015, which was a decrease from share-based compensation of $770,777 recorded in the nine months ended June 30, 2014. The fluctuations in share-based compensation relate to the timing of the grant of stock options, changes in our share price that affect the valuation model and the vesting of options granted in prior years.

 

18
 

 

Other income (loss) was an overall gain of $2,112,778 for the nine months ended June 30, 2015, as compared to $826,869 for the nine months ended June 30, 2014. The most significant factor in the change for the nine months ended June 30, 2015 as compared to the prior period resulted from the noncash change in fair value of warrant liability, which fluctuated to a gain of $2,455,361 for the nine months ended June 30, 2015 from $833,862 in the prior period. These fair value gains and losses occur in inverse relation to changes in our share price that affect the valuation model. The increase in overall gain for the nine months ended June 30, 2015 was offset by an increase in foreign exchange loss to $391,190 for the nine months ended June 30, 2015, as compared to $52,527 for the nine months ended June 30, 2014. The change was due to unfavorable exchange rates for our Canadian cash and cash equivalents. The portion of foreign exchange loss realized in cash was $13,517 for the nine months ended June 30, 2015, and $188,795 for the nine months ended June 30, 2014.

 

Comparison of Three Months Ended June 30, 2015 and 2014

 

Our net income for the three months ended June 30, 2015 was $463,986, or $0.01 per basic share, as compared to $3,408,326, or $0.04 per basic share, for the three months ended June 30, 2014. The decrease in net income reported in the three months ended June 30, 2015 compared to the prior period was primarily due to a significant noncash change in the fair value of warrant liability and decreased research and development expenses.

 

Revenue for the three months ended June 30, 2015 totaled $157,748, as compared to revenue of $72,538 in the three months ended June 30, 2014. As expected during this early stage of our development, our revenues have high volatility as we establish a market for our products and services. Revenue for the three months ended June 30, 2015 included product sales of $112,748, as compared to $12,538 in the prior period. The increase in revenue for the three months ended June 30, 2015 was due to an increase in customers and associated greater product sales volume. Contract services revenue was $45,000 for the three months ended June 30, 2015, as compared to $60,000 in the prior period. The decrease in contract services revenue for the three months ended June 30, 2015 was due to completion of services in December 2014 related to a supply agreement. No grant revenue was recorded during the three months ended June 30, 2015 or 2014.

 

Expenses for the three months ended June 30, 2015 decreased to $1,033,333, as compared to expenses of $1,344,683 incurred in the three months ended June 30, 2014. Costs of production and aquaculture for the three months ended June 30, 2015 increased to $251,004, as compared to costs of $147,907 incurred in the three months ended June 30, 2014, due to additional manufacturing activities required for increased product demand. Research and development was $129,710 for the three months ended June 30, 2015, as compared to $543,233 for the prior period. The decrease for the three months ended June 30, 2015 was a result of the decreased use of contract research organizations due to a realignment of our focus from internal research and process development to manufacturing our Stellar KLH™ products in response to increased demand. General and administration expenses increased to $618,185 for the three months ended June 30, 2015, as compared to $612,468 in the prior period. The general and administration expenses for the three months ended June 30, 2015 was comparable to the prior period. Many of the increased corporate development expenses related to our transition to reporting as a U.S. domestic issuer rather than a foreign private issuer occurred prior to the three months ended June 30, 2015.

 

Other income (loss) was an overall income of $1,348,571 for the three months ended June 30, 2015, as compared to $4,689,471 for the three months ended June 30, 2014. The most significant factor in the change for the three months ended June 30, 2015 as compared to the prior period resulted from the noncash change in fair value of warrant liability, which fluctuated to a gain of $1,254,029 for the three months ended June 30, 2015 from $4,528,450 in the prior period. These fair value gains and losses occur in inverse relation to changes in our share price that affect the valuation model. The decrease in overall other income for the three months ended June 30, 2015 was offset by a decrease in foreign exchange gain to $77,468 for the three months ended June 30, 2015, as compared to $146,302 for the three months ended June 30, 2014. The change was due to improved exchange rates for our Canadian cash and cash equivalents from the end of the prior quarters. The portion of foreign exchange loss realized in cash was $4,765 for the three months ended June 30, 2015, and $167,588 for the three months ended June 30, 2014.

 

19
 

 

Capital Expenditures

 

Our capital expenditures, which primarily consist of scientific, manufacturing, and aquaculture equipment, for the nine months ended June 30, 2015 and 2014 are as follows:

 

   Nine Months Ended 
   June 30,   June 30, 
Assets Acquired  2015   2014 
         
Property, plant and equipment  $114,134   $280,553 
Construction in progress   89,447    - 

 

Liquidity and Capital Resources

 

Our working capital position at June 30, 2015 was $8,944,753, including cash and cash equivalents of $10,161,458 and noncash current portion of our warrant liability of $1,235,905. Management believes the current working capital is sufficient to meet our present requirements, including all contractual obligations and anticipated research and development expenditures for at least the next 12 months. We expect to finance our future expenditures and obligations through revenues from product sales, contract services income, grant revenues, and sales of our equity and debt securities. We expect to continue incurring losses for the foreseeable future and may need to raise additional capital to pursue our business plan and continue as a going concern. We may raise additional capital through the sale of our equity or debt securities in the public or private markets or through strategic collaborations. We cannot provide any assurances that we will be able to raise additional capital on commercially acceptable terms.

 

Nine Months Ended June 30, 2015

 

As of June 30, 2015, our working capital position was $8,944,753, as compared to working capital of $13,751,301 as of September 30, 2014, our new fiscal year-end. Working capital is reduced by the noncash current portion of our warrant liability in the amount of $1,235,905 and $460 at June 30, 2015 and September 30, 2014, respectively.

 

Our cash and cash equivalents totaled $10,161,458 at June 30, 2015, as compared to cash and cash equivalents of $13,769,953 at September 30, 2014, which represented a decrease of $3,608,495 over the nine month period.

 

During the nine months ended June 30, 2015, operating activities used cash of $3,497,293. Items not affecting cash included: depreciation and amortization of $119,410; share-based compensation related to the issuance and vesting of stock options of $244,781; unrealized foreign exchange loss of $391,190; and gain in fair value of warrant liability of $2,455,361 due to the adjustment to the fair value of warrants previously issued. Changes in noncash working capital items include an increase in accounts receivable of $69,242; increase in inventory related to custom manufacturing orders in process of $159,476; increase in prepaid expenses of $137,939; decrease in accounts payable and accrued liabilities of $211,667; and increase in deferred revenue of $86,666.

 

Investing activities provided cash of $216,286. The acquisition of property, plant and equipment used cash of $202,997. Proceeds on maturities of short-term investments provided cash of $419,283. The effect of fluctuations in exchange rate on cash and cash equivalents was a reduction of $356,207 due to a decline in the Canadian dollar relative to the U.S. dollar.

 

Financing activities provided cash of $28,719 related to proceeds from the exercise of warrants, broker units and options. As a result of such exercises, 126,800 common shares were issued during the period.

 

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Nine Months Ended June 30, 2014

 

As of June 30, 2014, our working capital position was $13,908,471, as compared to working capital of $12,663,239 as of September 30, 2013. Working capital is reduced by the noncash current portion of our warrant liability in the amount of $281,632 and $2,391,399 at June 30, 2014 and September 30, 2013, respectively.

 

Our cash and cash equivalents totaled $14,442,174 at June 30, 2014, as compared to cash and cash equivalents of $15,478,038 at September 30, 2013, which represented a decrease of $1,035,864.

 

During the nine months ended June 30, 2014, operating activities used cash of $3,660,304. Items not affecting cash included: depreciation and amortization of $120,507; share-based compensation related to the issuance and vesting of stock options of $770,777; unrealized foreign exchange loss of $52,527; and gain in fair value of warrant liability of $833,862 due to adjustment to fair value of warrants previously issued. Changes in noncash working capital items include a decrease in accounts receivable of $163,331 related mostly to grants; increase in prepaid expenses of $106,237; and decrease in accounts payable and accrued liabilities of $224,629.

 

Investing activities used cash of $278,401 for the acquisition of property, plant and equipment. The effect of exchange rate changes on cash and cash equivalents was a reduction of $60,321 due to a decline in Canadian dollars relative to U.S. dollars.

 

Financing activities provided cash of $2,963,162 related to proceeds from exercise of warrants, broker units and options, particularly “in-the-money” warrants and broker units that expired November 14, 2013. As a result of such exercises, 6,475,820 common shares were issued during the period.

 

Geographic Concentrations

 

The geographic markets of our customers are principally Europe, the United States and Asia. The geographic breakdown of revenues for the nine months ended June 30, 2015 was 43% Europe, 10% U.S, and 47% Asia and the nine months ended June 30, 2014 was 34% Europe, 10% U.S. 9% Canada, and 47% Asia. The increase in revenues from Asia for the nine months ended June 30, 2015 is due to contract income received under a collaboration agreement with our Taiwanese customer and sales of custom manufactured products for an Asian customer.

 

Research and Development

 

Our core business is developing and commercializing natural, sustainable KLH for use in immunotherapy and immunodiagnostic applications. Our internal research includes, among other activities, continual improvement of methods for the culture and growth of Giant Keyhole Limpet, innovations in aquaculture systems and infrastructure, biophysical and biochemical characterization of the KLH molecule, analytical processes to enhance performance of our products, KLH manufacturing process improvements, new KLH formulations, and early development of potential new KLH-based immunotherapies. However, from time to time we may engage in non-related research and development activities as opportunities arise.

  

Research and development costs, including materials and salaries of employees directly involved in research and development efforts, are expensed as incurred.

 

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The following table includes our research and development costs for each of the nine months ended June 30, 2015 and 2014:

 

   Nine Months Ended 
   June 30,   June 30, 
   2015   2014 
           
Research and development expense  $830,115   $1,824,554 

 

Disclosure of Contractual Obligations

 

We lease three buildings and facilities used in operations under sublease agreements with the Port Hueneme Surplus Property Authority. 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.

 

We lease facilities used for executive offices and laboratories, and we must pay a portion of the common area maintenance. In July 2014, we exercised our option to extend this lease for a two-year term.

 

In June 2015, we leased undeveloped land in Baja California, Mexico to assess its suitability for the long-term development and potential expansion of our production capability. The first two years rent was prepaid in June 2015. The initial term is three years and we may terminate early with 30 days’ notice. If we decide to proceed with development of the site, we have options to extend the lease for 30 years.

 

We have purchase commitments for contract research organizations and consultants.

 

Our contractual obligations have increased from those previously disclosed in our Annual Report on Form 10-K for the fiscal year ended August 31, 2014, as filed with the Securities and Exchange Commission on November 14, 2014, as amended on November 21, 2014, due to the exercise of options to extend leases. The approximate amounts of our contractual obligations at June 30, 2015 are as follows:

 

       Less than 1   1-3   3-5   More than 
   Total   year   years   years   5 years 
                     
Operating lease obligations  $681,000   $57,000   $406,000   $212,000   $6,000 
Purchase obligations   177,000    177,000    -    -    - 
                          
Total  $858,000   $234,000   $406,000   $212,000   $6,000 

 

Off-Balance Sheet Arrangements

 

We have no off-balance sheet arrangements, including unrecorded derivative instruments, that have or are reasonably likely to have a current or future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

 

Item 3. 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. For a discussion of our market risk exposure, refer to Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” in our Annual Report on Form 10-K for the fiscal year ended August 31, 2014, as filed with the Securities and Exchange Commission on November 14, 2014, as amended on November 21, 2014. There are no material changes in market risk from the disclosure provided in our Annual Report on Form 10-K for the fiscal year ended August 31, 2014.

 

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Item 4. 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 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 June 30, 2015. Our Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures, as of June 30, 2015, were effective to give reasonable assurance that the information required to be disclosed by us in reports that we file or submit under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (ii) accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

 

Changes in Internal Control over Financial Reporting

 

There were no changes in our internal control over financial reporting that occurred during the quarter ended June 30, 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II — OTHER INFORMATION

 

Item 1. 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 1A. Risk Factors.

 

There have been no material changes in the risk factors previously disclosed in our Annual Report on Form 10-K for the fiscal year ended August 31, 2014, as filed with the Securities and Exchange Commission on November 14, 2014, as amended on November 21, 2014.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

 

None.

 

Item 3. Defaults Upon Senior Securities.

 

None.

 

Item 4. Mine Safety Disclosures.

 

Not applicable.

 

Item 5. Other Information.

 

None.

 

Item 6. Exhibits.

 

The Exhibits listed in the Exhibit Index immediately preceding such Exhibits are filed with or incorporated by reference in this Quarterly Report.

 

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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: August 10, 2015   STELLAR BIOTECHNOLOGIES, INC.
     
    /s/ Kathi Niffenegger
   

Kathi Niffenegger

Chief Financial Officer

(Principal Financial Officer)

 

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EXHIBIT INDEX

 

Exhibit
Number
  Description
     
31.1   Certification of the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
31.2   Certification of the Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
32.1   Certification of the Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
32.2   Certification of the Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
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

 

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