[stellarfs3q12002.gif]





Condensed Interim Consolidated Financial Statements

For the Nine Months Ended May 31, 2012


(In US Dollars)


Unaudited - Prepared by Management






NOTICE OF NO AUDITOR REVIEW OF



CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS




Under National Instrument 51-102, Part 4, subsection 4.3(3)(a), if an auditor has not performed a review of the condensed interim financial statements, they must be accompanied by a notice indicating that the financial statements have not been reviewed by an auditor.


The accompanying unaudited condensed interim consolidated financial statements of the Company have been prepared by and are the responsibility of the Company’s management.


The Company’s independent auditor has not performed a review of these financial statements in accordance with standards established by the Canadian Institute of Chartered Accountants for a review of interim financial statements by an entity’s auditor.






Stellar Biotechnologies, Inc

Condensed Interim Consolidated Statements of Financial Position

(Unaudited – Prepared by Management)

(in US Dollars)


 

May 31,

2012

August 31,

2011

August 31,

2010

 

 

(Note 15)

(Note 15)

Assets:

 

 

 

 

 

 

 

Current assets:

 

 

 

Cash and cash equivalents

$  1,954,398

$   4,145,492

$   2,003,296

Accounts receivable (Note 4)

46,258

39,021

568,495

Prepaid expenses

31,992

36,604

22,940

 

 

 

 

Total current assets

2,032,648

4,221,117

2,594,731

 

 

 

 

Noncurrent assets:

 

 

 

Biological assets (Note 11)

6,177

5,763

3,173

Property, plant and equipment (Note 6)

303,683

338,224

89,577

Licensing rights (Note 7)

152,381

173,810

200,000

Deposits

17,500

17,500

8,766

 

 

 

,

Total noncurrent assets

479,741

535,297

301,516

 

 

 

 

Total Assets

$  2,512,389

$   4,756,414

$   2,896,247

 

 

 

 

Liabilities and Shareholders’ Equity:

 

 

 

 

 

 

 

Current liabilities:

 

 

 

Accounts payable and accrued liabilities

$     214,489

$     159,137

$     420,610

Deferred revenue

153,355

-

-

 

 

 

 

Total current liabilities

367,844

159,137

420,610

 

 

 

 

Long-term liabilities:

 

 

 

Warrant liability (Note 10)

117,229

1,527,374

797,310

 

 

 

 

Total Liabilities

485,073

1,686,511

1,217,920

 

 

 

 

Shareholders’ Equity:

 

 

 

Share capital (Note 10)

10,342,141

9,269,433

2,364,254

Share-based payment reserve (Note 10)

1,268,003

734,524

369,438

Deficit

(9,582,828)

(6,934,054)

(1,055,365)

Total shareholders’ equity

2,027,316

3,069,903

1,678,327

Total Liabilities and Shareholders’ Equity

$  2,512,389

$  4,756,414

$  2,896,247


Nature and Continuance of Operations (Note 1)

Commitments (Note 8)

Events after the Reporting Period (Note 13)


These condensed interim consolidated financial statements were approved for

Issuance by the Board of Directors on July 30, 2012 and are signed on its behalf by:


Director

Signed:  “Frank Oakes”


Director

Signed:  “Daniel Morse”




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





Stellar Biotechnologies, Inc

Condensed Interim Consolidated Statements of Comprehensive Loss

(Unaudited – Prepared by Management)

(in US Dollars)


 

Three Months Ended

Nine Months Ended

 

May 31,

2012

May 31,

2011

May 31,

2012

May 31,

2011

 

 

 

 

 

Revenues:

 

 

 

 

Contract income

$      15.000

$      15,000

$     45,000

$     45,000

Commercial sales

9,500

7,200

123,425

17,038

Grant revenue

18,669

19,387

68,351

594,862

 

43,169

41,587

236,776

656,900

 

 

 

 

 

Cost of Production, Aquaculture and Grants:

 

 

 

 

Costs of production and aquaculture (Note 11)

75,082

104,600

399,215

355,100

Grant costs

21,175

24,411

72,954

86,769

 

96,257

129,011

472,169

441,869

Gross Margin (Loss)

(53,088)

(87,424)

(235,393)

215,031

 

 

 

 

 

Expenses:

 

 

 

 

Salaries, wages and benefits

243,530

258,761

777,093

635,593

Research and development

393,884

421,152

1,350,293

999,332

Legal and professional services

102,658

37,964

333,291

192,035

Share-based payments (Note 10)

319,181

335,757

557,097

3,956,416

General and administration

208,709

175,032

655,464

471,503

Amortization and depreciation

27,842

14,932

82,151

44,084

Allocation of expenses to grant costs

(6,544)

(11,875)

(29,591)

(35,001)

 

1,289,260

1,231,723

3,725,798

6,263,962

 

 

 

 

 

Other Income:

 

 

 

 

Loss recovery (Note 16)

-

-

105,000

-

Foreign exchange gain (loss)

(29,209)

35

(15,569)

6,546

Change in fair value of warrant liability (Note 10)

244,568

3,907,710

1,219,720

(578,036)

Interest income

1,176

3,278

4,066

8,286

 

216,535

3,911,023

1,313,217

(563,204)

 

 

 

 

 

Income (Loss) Before Income Tax

(1,125,813)

2,591,876

(2,647,974)

(6,612,135)

Income tax expense

-

-

800

5,000

Income (Loss) and Comprehensive Income (Loss) for the Period

(1,125,813)

2,591,876

(2,648,774)

(6,617,135)

 

 

 

 

 

Income (loss) per share –basic and diluted

$           (0.03)

$            0.06

$          (0.06)

$          (0.18)

 

 

 

 

 

Weighted average number of common shares outstanding

43,953,257

41,527,804

43,650,650

36,906,651


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





Stellar Biotechnologies, Inc

Condensed Interim Consolidated Statements of Cash Flows

(Unaudited – Prepared by Management)

(in US Dollars)


 

Nine Months Ended

 

May 31,

2012

May 31,

2011

 

 

 

Cash Flows From (Used In) Operating Activities:

 

 

Loss for the period

$  (2,648,774)

$  (6,617,135)

 

 

 

Items not affecting cash:

 

 

Amortization and depreciation

82,151

44,084

Share-based payments

557,097

3,956,416

Foreign exchange (gain) loss

15,831

(7,772)

Change in fair value of warrant liability

(1,219,720)

578,036

Remeasurement of biological assets

(414)

(2,925)

 

 

 

Changes in non-cash working capital items:

 

 

Accounts receivable

(22,806)

545,651

Prepaid expenses

4,612

(38,457)

Accounts payable and accrued liabilities

55,352

(167,337)

Deferred revenue

153,355

-

Net cash used in operating activities

(3,023,316)

(1,709,439)

 

 

 

Cash Flows From (Used In) Financing Activities:

 

 

Proceeds from exercise of warrants and options

858,665

776,515

Share subscription proceeds

-

4,729,524

Share issuance costs

-

(312,103)

Repurchase dissenting shareholder shares

-

(125,025)

Payment of deposits

-

(8,734)

Net cash provided by financing activities

858,665

5,060,177

 

 

 

Cash Flows From (Used In) Investing Activities:

 

 

Acquisition of property, plant and equipment

(26,181)

(256,480)

Net cash used in investing activities

(26,181)

(256,480)

 

 

 

Effect of exchange rate changes on cash and cash equivalents

(262)

1,226

 

 

 

Net change in cash and cash equivalents

(2,191,094)

3,095,484

 

 

 

Cash and cash equivalents – beginning of period

4,145,492

2,003,296

 

 

 

Cash and cash equivalents – end of period

$   1,954,398

$     5,098,780

 

 

 

Cash

$   1,326,017

$     4,265,170

Cash equivalents

628,381

833,610

Cash and cash equivalents

$   1,954,398

$   5,098,780

 

 

 

Supplemental disclosure of non-cash transactions (Note 12)

 

 



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






Stellar Biotechnologies, Inc

Condensed Interim Consolidated Statements of Changes to Equity

(Unaudited – Prepared by Management)

(in US Dollars)


 


Number of

Shares


Share

Capital

Share-based

Payment

Reserve



Deficit



Total

Balance - September 1, 2010

26,916,692

$  2,364,254

$     369,438

$ (1,055,365)

$   1,678,327

 

 

 

 

 

 

Private placements, net of issuance costs

9,213,000

1,137,103

 

 

1,137,103

Issuance of performance shares

3,333,335

3,400,000

 

 

3,400,000

Proceeds from exercise of warrants

2,128,805

776,515

 

 

776,515

Transfer to share capital on exercise of warrants

 

1,323,201

 

 

1,323,201

Final settlement of dissenting shareholder

 

(4,222)

 

 

(4,222)

Share-based payments

 

 

556,416

 

556,416

Loss for the period

 

 

 

(6,617,135)

(6,617,135)

Balance - May 31, 2011

41,591,832

$  8,996,851

$     925,854

$ (7,672,500)

$   2,250,205

 

 

 

 

 

 

 

 

 

 

 

 

Balance – August 31, 2011

41,611,832

$  9,269,433

$     734,524

$ (6,934,054)

$   3,069,903

 

 

 

 

 

 

Proceeds from exercise of warrants

2,318,600

830,715

 

 

830,715

Transfer to share capital on exercise of warrants

 

190,425

 

 

190,425

Proceeds from exercise of options

100,000

27,950

 

 

27,950

Transfer to share capital on exercise of options

 

23,618

(23,618)

 

-

Share-based payments

 

 

557,097

 

557,097

Loss for the period

 

 

 

(2,648,774)

(2,648,774)

Balance – May 31, 2012

44,030,432

$ 10,342,141

$  1,268,003

$ (9,582,828)

$  2,027,316



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






Stellar Biotechnologies, Inc

Notes to Condensed Interim Consolidated Financial Statements

Unaudited – Prepared by Management

For the Nine Months Ended May 31, 2012

(in US Dollars)


1.

Nature and Continuance of Operations


Stellar Biotechnologies, Inc. (“the Company”, formerly CAG Capital Inc.) is listed on the TSX Venture Exchange (‘the Exchange”) as a Tier 2 issuer under the trading symbol KLH since April 19, 2010 (formerly under CAG.P).


On April 7, 2010, the Company changed its name to Stellar Biotechnologies, Inc.  On April 12, 2010, the Company completed a reverse merger transaction with Stellar Biotechnologies, Inc. (“Stellar CA”) which is incorporated under the laws of the State of California, USA. The Company’s head office is 332 E. Scott Street, Port Hueneme, California, 93041, USA, and the registered office is 1868 King George Boulevard, South Surrey, BC, V4A 5A1, Canada.


The Company’s business is to commercially produce and market Keyhole Limpet Hemocyanin (“KLH”) as well as to develop new technology related to culture and production of KLH and subunit KLH (“suKLH”) formulations.  The Company markets KLH and suKLH formulations to customers in the United States and Europe.


The Company has received grants for the development of new technology from the National Institutes of Health, National Cancer Institute (“NIH”), the National Science Foundation (“NSF”) including grants under its Technology Enhancement for Commercial Partnerships (“TECP”) program, and Internal Revenue Service (“IRS”) qualifying therapeutic discovery project grants.


These condensed interim consolidated financial statements are prepared on a going concern basis.  The going concern basis contemplates that the Company will continue in operation for the foreseeable future and will be able to realize its assets and discharge its liabilities in the normal course of business.  Should the Company be required to realize the value of its assets in other than the ordinary course of business, the net realizable value of its assets may be materially less than the amounts shown in the condensed interim consolidated financial statements.  For the period ended May 31, 2012, the Company reported a loss of $2,648,774 (2011 - $6,617,135), an accumulated deficit of $9,582,820 (August 31, 2011 - $6,934,054; September 1, 2010 - $1,055,365) and working capital of $1,664,804 (August 31, 2011 - $4,061,980: September 1, 2010 - $2,174,121).  As at May 31, 2012, the Company has remaining revenues available under the NSF grants, including the Technology Enhancement for Commercial Partnerships (“TECP”) program of approximately $471,000.  The Company also anticipates ongoing contract income and commercial sales.


The financial statements of the Company are presented in US dollars, unless otherwise stated, which is the presentation currency.


2.

Basis of Presentation and Adoption of IFRS


Statement of Compliance and Conversion to International Financial Reporting Standards


These unaudited condensed interim consolidated financial statements, including comparatives have been prepared using accounting policies consistent with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”) and Interpretations issued by the International Financial Reporting Interpretations Committee (“IFRIC”) and in accordance with International Accounting Standard (“IAS”) 34, Interim Financial Reporting.


The preparation of these condensed interim consolidated financial statements resulted in changes to the accounting policies as compared with the most recent annual financial statements prepared under Canadian Generally Accepted Accounting Principles (“Canadian GAAP”).  The accounting policies set out below have






Stellar Biotechnologies, Inc

Notes to Condensed Interim Consolidated Financial Statements

Unaudited – Prepared by Management

For the Nine Months Ended May 31, 2012

(in US Dollars)


2.

Basis of Presentation and Adoption of IFRS (continued)


been applied consistently to all periods presented in these condensed interim consolidated financial statements. They have also been applied in preparing an opening IFRS balance sheet as at September 1, 2010 for the purposes of the transition to IFRS, as required by IFRS 1, First Time Adoption of International Financial Reporting Standards (“IFRS 1”). The impact of the transition from Canadian GAAP to IFRS is explained in Note 15.


As these are the Company’s third condensed interim consolidated financial statements prepared in accordance with IFRS, the Company’s disclosures exceed the minimum requirements under IAS 34.  The Company has elected to exceed the minimum requirements in order to present the Company’s accounting policies in accordance with IFRS and the additional disclosures required under IFRS, which also highlight the changes from the Company’s August 31, 2011 annual consolidated financial statements prepared in accordance with Canadian GAAP.  In fiscal year August 31, 2013 and beyond, the Company may not provide the same amount of disclosure in the Company’s condensed interim consolidated financial statements under IFRS as the reader will be able to refer to the August 31, 2012 annual consolidated financial statements which will be prepared in accordance with IFRS.


Basis of Presentation


The condensed interim consolidated financial statements have been prepared on a historical cost basis, except for financial instruments classified as financial instruments at fair value through profit or loss, which are stated at their fair value. In addition, these financial statements have been prepared using the accrual basis of accounting except for cash flow information.


The preparation of these condensed interim consolidated financial statements requires management to make certain estimates, judgments and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and reported amounts of expenses during the period. Actual results could differ from these estimates.


These condensed interim consolidated financial statements include estimates which, by their nature, are uncertain. The impacts of such estimates are pervasive throughout the condensed interim consolidated financial statements, and may require accounting adjustments based on future occurrences. Revisions to accounting estimates are recognized in the period in which the estimate is revised and 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.


3.

Significant Accounting Policies


The accounting policies set out below are expected to be adopted for the year-ending August 31, 2012 and have been applied consistently to all periods presented in these condensed interim consolidated financial statements and in preparing the opening IFRS statement of financial position at September 1, 2010 for the purposes of the transition to IFRS, unless otherwise indicated.


a)

Principles of Consolidation


The condensed interim consolidated financial statements have been prepared in accordance with IFRS and include the accounts of the Company and its wholly-owned subsidiary Stellar Biotechnologies, Inc. (“Stellar CA”).  Intercompany balances and transactions are eliminated on consolidation.





Stellar Biotechnologies, Inc

Notes to Condensed Interim Consolidated Financial Statements

Unaudited – Prepared by Management

For the Nine Months Ended May 31, 2012

(in US Dollars)


3.

Significant Accounting Policies (continued)


b)

Use of Estimates


The preparation of financial statements in conformity with IFRS requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reported periods. The Company has made estimates for allowance of doubtful accounts, amortization and depreciation and impairment of property, plant and equipment and licensing rights, share-based payments, research and development costs, biological assets, the provision for deferred income tax recoveries and composition of deferred income tax assets and liabilities, and accrued liabilities.  Actual results could differ from these estimates.


Significant assumptions about the future and other sources of estimated uncertainty that management has made at the financial position reporting date, that could result in a material adjustment to the carrying amounts of assets and liabilities, in the event that actual results differ from assumptions made, relate to, but are not limited to the following:


1)

the inputs used in the accounting for share-based payment expense included in profit or loss.

2)

the inputs used in accounting for biological assets included in statements of financial position and profit or loss.

3)

the determination of the useful life of the licensing rights.

4)

the inputs used in the accounting for the warrant liability.


c)

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 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 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.


d)

Share-Based Payments


The Company grants share options to buy common shares of the Company to directors, officers, employees and consultants. An individual is classified as an employee when the individual is an employee for legal or tax purposes, or provides services similar to those performed by an employee.


For employees, the fair value of share options is measured on the date of grant, using the Black-Scholes option pricing model and is recognized over the vesting period using graded vesting. Consideration paid for the shares on the exercise of share options is credited to share capital and the related share-based compensation is reclassified from the share-based payment reserve to share capital. When vested options are forfeited or are not exercised at the expiry date the amount previously recognized in share-based payment reserve is transferred to accumulated losses (deficit).


In situations where equity instruments are issued to non-employees and some or all of the goods or services received by the entity as consideration cannot be specifically  identified,  they are measured at fair  value of





Stellar Biotechnologies, Inc

Notes to Condensed Interim Consolidated Financial Statements

Unaudited – Prepared by Management

For the Nine Months Ended May 31, 2012

(in US Dollars)


3.

Significant Accounting Policies (continued)


the share-based payment. Otherwise, share-based payments are measured at the fair value of goods and services rendered.


e)

Property, Plant and Equipment


Property, plant and equipment are recorded at cost less accumulated depreciation.  Depreciation is recorded on the straight-line method based on the following rates which approximate the useful life of the assets:


Aquaculture system

10-20%

Tools and equipment

20%

Leasehold improvements

10-14%

Laboratory

10-20%

Computer and office equipment

20%

Vehicles

20%


Maintenance and repairs are charged to operations as incurred.


f)

Cash and Cash Equivalents


Cash equivalents consist of demand deposits with financial institutions, money market accounts, and highly liquid investments which are readily convertible into cash with maturities of three months or less when purchased.  


g)

Income Taxes


Income tax expense comprises current and deferred tax. Income tax is recognized in profit 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 period 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 initial recognition of assets and liabilities that affect neither accounting nor taxable loss, and differences relating to investments in subsidiaries to the extent that they will be probably not reverse in the foreseeable future. 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.


A deferred tax asset is recognized only to the extent that it is probable that future taxable profits will be available against which the asset can be utilized. To the extent that the Company does not consider it probable that a deferred tax asset will be recovered, it provides a valuation allowance against that excess.  


h)

Financial Instruments


Financial assets are classified into one of the following categories based on the purpose for which the asset was acquired. All transactions related to financial instruments are recorded on a trade date basis. The Company’s accounting policy for each category is as follows:





Stellar Biotechnologies, Inc

Notes to Condensed Interim Consolidated Financial Statements

Unaudited – Prepared by Management

For the Nine Months Ended May 31, 2012

(in US Dollars)


3.

Significant Accounting Policies (continued)


Financial assets at fair value through profit or loss (“FVTPL”)


A financial asset is classified at fair value through profit or loss if it is classified as held for trading or is designated as such upon initial recognition. Financial assets are designated as at FVTPL if the Company manages such investments and makes purchase and sale decisions based on their fair value in accordance with the Company’s risk management strategy. Attributable transaction costs are recognized in profit or loss when incurred. FVTPL are measured at fair value, and changes are recognized in profit or loss.


Held-to-maturity (“HTM”)


These assets are non-derivative financial assets with fixed or determinable payments and fixed maturities that the Company’s management has the positive intention and ability to hold to maturity. These assets are measured at amortized costs using the effective interest method. If there is objective evidence that the asset is impaired, determined by reference to external credit ratings and other relevant indicators, the financial asset is measured at the present value of estimated future cash flows. Any changes to the carrying amount of the investment, including impairment losses, are recognized in profit or loss.


Loans and receivables


Loans and receivables are financial assets with fixed or determinable payments that are not quoted on an active market. Such assets are initially recognized at fair value plus any direct attributable transaction costs. Subsequent to initial recognition loans and receivables are measured at amortized cost using the effective interest method, less any impairment loss.


Available for sale (“AFS”)


Non-derivative financial assets not included in the above categories are classified as available-for-sale. They are carried at fair value with changes in fair value recognized directly in equity. Where a decline in the fair value of an available-for-sale financial asset constitutes objective evidence of impairment, the amount of the loss is removed from equity and recognized in profit or loss.


The Company has classified its financial assets as follows:


·

Cash and cash equivalents are classified as FVTPL.

·

Accounts receivable are classified as loans and receivables.


Financial liabilities


All financial liabilities are initially recorded at fair value.  Financial liabilities are classified into one of the following two categories:


Fair value through profit or loss (“FVTPL”)


This category comprises derivatives, or liabilities, acquired or incurred principally for the purpose of selling or repurchasing it in the near term. They are carried in the statement of financial position at fair value with changes in fair value recognized in profit or loss.


Warrants which do not meet the criteria to be classified as an equity instrument are classified as fair value through profit or loss financial liabilities.





Stellar Biotechnologies, Inc

Notes to Condensed Interim Consolidated Financial Statements

Unaudited – Prepared by Management

For the Nine Months Ended May 31, 2012

(in US Dollars)


3.

Significant Accounting Policies (continued)


Other financial liabilities


Financial liabilities classified as other financial liabilities are measured at amortized cost.


The Company has classified its financial liabilities as follows:


·

Accounts payable is classified as other financial liabilities.

·

Warrant liability is classified as FVTPL.


Impairment of financial assets


Financial assets, other than those at FVTPL, are assessed for indicators of impairment at the end of each reporting period. Financial assets are impaired when there is objective evidence that, as a result of one or more events that occurred after the initial recognition of the financial assets, the estimated future cash flows of the assets have been impacted.


For all financial assets objective evidence of impairment could include:


·

significant financial difficulty of the issuer or counterparty; or

·

default or delinquency in interest or principal payments; or

·

it becoming probable that the borrower will enter bankruptcy or financial re-organization.


i)

Impairment of Tangible and Intangible Assets


At the end of each reporting period, the Company’s assets are reviewed to determine whether there is any indication that those assets may be impaired. If such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment, if any. The recoverable amount is the higher of fair value less costs to sell and value in use. Fair value is determined as the amount that would be obtained from the sale of the asset in an arm’s length transaction between knowledgeable and willing parties. In assessing value in use, the estimated future cash flows are discounted to their present value using pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. If the recoverable amount of an asset is estimated to be less than its carrying amount, the carrying amount of the asset is reduced to its recoverable amount and the impairment loss is recognized in profit or loss for the period. For an asset that does not generate largely independent cash flows, the recoverable amount is determined for the cash generating unit to which the asset belongs.


Where an impairment loss subsequently reverses, the carrying amount of the asset (or cash-generating unit) is increased to the revised estimate of its recoverable amount, but to an amount that does not exceed the carrying amount that would have been determined had no impairment loss been recognized for the asset (or cash-generating unit) in prior years. A reversal of an impairment loss is recognized immediately in profit or loss.


j)

Biological Assets


Biological assets are keyhole limpets which are bearer assets to produce KLH.  They are measured at fair value less costs to sell.  Fair value is based on market prices of mature keyhole limpets which are harvested from the ocean.  The Company expenses the costs of aquaculture.  Fair value gains and losses are determined upon remeasurement at each reporting period.  Biological assets include production limpets and dedicated limpet colonies under contract.  





Stellar Biotechnologies, Inc

Notes to Condensed Interim Consolidated Financial Statements

Unaudited – Prepared by Management

For the Nine Months Ended May 31, 2012

(in US Dollars)


3.

Significant Accounting Policies (continued)


k)

Research and Development


The Company is involved in research and development.  Research costs, including materials and salaries of employees directly involved in research efforts, are expensed as incurred. Development costs are expensed in the period incurred, unless they meet criteria for technical, market and financial feasibility, in which case they are deferred and amortized over the estimated life of related products.  Research and development expenses are shown as a separate line item on the consolidated statements of comprehensive loss.   As at May 31, 2012, the Company had no deferred development costs.


l)

Foreign Exchange


Items included in the financial statements of the Company’s subsidiary 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 subsidiary is the US dollar.


Transactions in currencies other than the US dollar are recorded at exchange rates prevailing on the dates of the transactions. At the end of each reporting period, monetary assets and liabilities denominated in foreign currencies are translated at the period end exchange rate while non-monetary assets and liabilities are translated at historical rates. Revenues and expenses are translated at the exchange rates approximating those in effect on the date of the transactions. Exchange gains and losses arising on translation are included in comprehensive loss.


m)

Commercial Sales Revenue Recognition


The Company recognizes commercial sales revenue when KLH product is delivered assuming there is persuasive evidence of an arrangement, the fee is fixed or determinable, and collectability is reasonably assured.  In limited circumstance, the Company retains ownership until the product is received and inspected by the customer; revenue is recognized upon satisfaction of these conditions.  The Company documents arrangements with customers with purchase orders and sales agreements.  


Commercial sales revenue includes sales made under supply agreements with customers for a fixed price per gram of KLH products based on quantities ordered, including those produced from the customer’s dedicated limpet colonies.  The supply agreements are on a non-exclusive basis except within that customer’s field of use.


n)

Grant Revenue Recognition


The Company has taken the income approach to recognizing grant revenue.  The Company recognizes grant revenue when there is reasonable assurance that the Company will comply with the conditions attached, the benefits have been earned and it is reasonably assured of collection.  An appropriate amount in respect to earned revenue will be recognized as revenue in the period that the Company is assured of fulfilling the grant requirements.  Grant advances received prior to revenue recognition are recorded as deferred revenue.





Stellar Biotechnologies, Inc

Notes to Condensed Interim Consolidated Financial Statements

Unaudited – Prepared by Management

For the Nine Months Ended May 31, 2012

(in US Dollars)


3.

Significant Accounting Policies (continued)


o)

Contract Income Recognition


Contract income is recognized when reasonable assurance exists regarding measurement and collectability. An appropriate amount in respect to earned revenue will be recognized as revenue in the period that the Company is assured of fulfilling the contract requirements.


Contract income is earned on both the initial set up fee for establishment of limpet colonies dedicated to meet the needs of the customer and monthly fees to maintain those dedicated limpet colonies.   The Company also has the right to use raw material produced from dedicated limpet colonies at no cost with prior written consent.


Contract income is earned from research collaboration agreements whereby revenue is earned through sharing access to the Company’s KLH manufacturing methods and analytical data as well as when certain project milestones are met.  The customer and the Company will jointly own the rights to practice the resulting intellectual properties within specified fields of use.


p)

New Accounting Standards, Amendments and Interpretations Not Yet Adopted


The following is an overview of accounting standard changes that the Company will be required to adopt in future years. The Company does not expect to adopt any of these standards before their effective dates. The Company continues to evaluate the impact of these standards  on its consolidated financial statements.


·

IFRS 9 - Financial Instruments. This standard partially replaces IAS 39 - Financial Instruments: Recognition and Measurement. IFRS 9 measures financial assets, after initial recognition, at either amortized cost or fair value.  Existing IAS 39 classifies financial assets into four measurement categories.    The standard is effective for annual periods beginning on or after January 1, 2015.  In the year of adoption, the Company is required to provide additional disclosures relating to the reclassified financial assets and liabilities.  The Company may, but is not required to, apply the standard retroactively.  In and after the year of adoption, certain disclosures relating to financial assets will change to conform to the new categories.


·

IFRS 10 - Consolidated Financial Statements. IFRS 10 defines a single concept of control as the determining factor in whether an entity should be included within the consolidated financial statements of a parent company. The standard provides additional guidance to assist in the determination of control where this is difficult to assess. IFRS 10 is effective for annual periods beginning on or after January 1, 2013. Earlier application is permitted, provided IFRS 11, IFRS 12 and IAS 28 (as amended in 2011) are applied at the same time.


·

IFRS 11 - Joint Arrangements.  IFRS 11 focuses on the rights and obligations of an arrangement rather than its legal form, as is currently the case. The standard distinguishes between joint operations, where the joint operator accounts for the assets, liabilities, revenues, and expenses relating to its involvement, and joint ventures, which must be accounted for using the equity method. IFRS 11 is effective for annual periods beginning on or after January 1, 2013. Earlier application is permitted, if IFRS 10, IFRS 12, and consequential amendments to IAS 28 Investments in Associates and Joint Ventures are applied at the same time.





Stellar Biotechnologies, Inc

Notes to Condensed Interim Consolidated Financial Statements

Unaudited – Prepared by Management

For the Nine Months Ended May 31, 2012

(in US Dollars)


3.

Significant Accounting Policies (continued)


·

IFRS 12 - Disclosure of Interests in Other Entities. IFRS 12 is a new and comprehensive standard on disclosure requirements for all forms of interests in other entities, including subsidiaries, joint operations, joint ventures, associates and unconsolidated structured entities. IFRS 12 is effective for annual periods beginning on or after January 1, 2013. Earlier application is permitted.


·

IFRS 13 - Fair Value Measurement.  IFRS 13 is a new standard that applies to both financial and non-financial items measured at fair value.  It defines fair value, sets out a single framework for measuring fair value and requires disclosures about fair value measurements.  Previously, a variety of fair value techniques and disclosures were possible under the requirements of separate applicable IFRSs.  IFRS 13 is applicable for fiscal years beginning on or after January 1, 2013.  The standard, which may be early adopted, will apply prospectively from the beginning of the annual period in which it is adopted. 


·

IAS 1 - Financial Statement Presentation amendment. The amendments to IAS 1 require entities to separate items presented in other comprehensive income (“OCI”) into two groups, based on whether or not they may be recycled to profit or loss in the future. Items that will not be recycled will be presented separately from items that may be recycled in the future. Entities that choose to present OCI items before tax will be required to show the amount of tax related to the two groups separately.


·

Amendments to Other Standards. There have been amendments to existing standards, including IFRS 7 – Financial Instruments: Disclosure, IAS 27 – Separate Financial Statements, and IAS 28 – Investments in Associates and Joint Ventures effective January 1, 2013 and IAS 32 – Financial Instruments: Presentation effective January 1, 2014. IFRS 7 amendments require disclosure about the effects of offsetting financial assets and financial liabilities and related arrangements on an entity’s financial position. IAS 27 amendments address accounting for subsidiaries, jointly controlled entities and associates in non-consolidated financial statements. IAS 28 has been amended to include joint ventures in its scope and to address the changes in IFRS 10 – 13.  IAS 32 amendments address inconsistencies when applying the offsetting requirements.


4.

Accounts Receivable


 

 

May 31,

2012

August 31,

2011

September 1,

2010

 

 

 

 

 

 

Accounts receivable

$         7,287

$          4,013

$         218,770

 

Contract receivable

10,000

5,000

255,000

 

Grants receivable

-

27,575

90,212

 

HST receivable

28,971

2,433

4,513

 

 

 

 

 

 

 

$        46,258

$        39,021

$        568,495


5.

Financial Instruments


The Company is exposed to various financial instrument risks and assesses the impact and likelihood of this exposure. These risks include liquidity risk, credit risk, currency risk and interest rate risk. Where material, these risks are reviewed and monitored by the Board of Directors.





Stellar Biotechnologies, Inc

Notes to Condensed Interim Consolidated Financial Statements

Unaudited – Prepared by Management

For the Nine Months Ended May 31, 2012

(in US Dollars)


5.

Financial Instruments (continued)


Capital Management


The Company manages its capital to safeguard the Company’s ability to continue as a going concern, so that it can continue to provide adequate returns to shareholders and benefits to other stakeholders, and to have sufficient funds on hand for business opportunities as they arise.


The Company considers the items included in share capital as capital. The Company manages the capital structure and makes adjustments to it in the light of changes in economic conditions and the risk characteristics of the underlying assets. In order to maintain or adjust the capital structure, the Company may issue new shares through short-term prospectuses, private placements, sell assets, incur debt, or return capital to shareholders. As at May 31, 2012, the Company does not have any debt and is not subject to externally imposed capital requirements.


Interest Rate Risk


Interest rate risk is the risk that the fair value of future cash flows from a financial instrument will fluctuate as a result in market interest rates.  The Company is exposed to interest rate risk to the extent that the cash maintained at the financial institutions included in the Company’s cash and cash equivalents are subject to a floating rate of interest.


The interest rate risks on cash are not considered significant.


Foreign Exchange Risk


The Company incurs operating expenses and capital expenditures mostly in US dollars, with some operating expenses incurred in Canadian dollars which are subject to foreign currency fluctuations. The fluctuation of the US dollar in relation to Canadian dollars will have an impact upon the profitability of the Company and may also affect the value of the Company’s assets and the amount of shareholders’ equity.  The Company has not entered into any agreements or purchased any instruments to hedge possible currency risks.  At May 31, 2012, the US dollar was equal to 1.02645 Canadian dollars.  The currency risk is considered to be insignificant.


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.


Approximately 93% of the Company’s commercial sales and contract income during the period ended May 31, 2012 were from two customers (2011 - 91% from one customer). All of the grant revenue during the period ended May 31, 2012 was received from NSF (2011 – 82% from IRS grants and 18% from NSF).


Approximately 32% of the Company’s accounts receivables at May 31, 2012, were from two customers (August 31, 2011 - 19% from two customers, September 1, 2010 - 83% from two customers), Nil% were from the NSF grants (August 31, 2011 - 75%, September 1, 2010 - 16%), and 63% from HST refund (August 31, 2011 – 6%, September 1, 2010 – 1%).





Stellar Biotechnologies, Inc

Notes to Condensed Interim Consolidated Financial Statements

Unaudited – Prepared by Management

For the Nine Months Ended May 31, 2012

(in US Dollars)


5.

Financial Instruments (continued)


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.  


Liquidity Risk


Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they fall due.  The Company attempts to manage liquidity risk by maintaining sufficient cash and cash equivalent balances. Liquidity requirements are managed based on expected cash flows to ensure that there is sufficient capital in order to meet short term obligations.  As at May 31, 2012, the Company had a cash and cash equivalents balance of $1,954,398 (August 31, 2011 - $4,145,492, September 1, 2010 - $2,003,296) to settle current liabilities of $367,844 (August 31, 2011 - $159,137, September 1, 2010 - $420,610).


Fair Value


The fair value of the Company’s financial instruments is believed to equal the carrying amounts due to the short terms to maturity.


Fair value measurement disclosures include classification of financial instrument fair values in a fair value hierarchy comprising three levels reflecting the significance of the inputs used in making the measurements, described as follows:


Level 1:

Valuations based on quoted prices (unadjusted) in active markets for identical assets or liabilities;

Level 2:

Valuations based on directly or  indirectly observable inputs in active markets for similar assets or liabilities, other than Level 1  prices such  as quoted interest or  currency exchange rates;  and

Level 3:

Valuations based on significant inputs that are not derived from observable market data, such as discounted cash flow methodologies based on internal cash flow forecasts.


The Company’s fair value of cash and cash equivalents under the fair value hierarchy is measured using Level 1 inputs and fair value of the warrant liability is measured using Level 2 inputs.


6.

Property, Plant and Equipment




Cost:


Aquaculture

System



Laboratory

Computer

and Office

Equipment


Tools and

Equipment



Vehicles


Leasehold

Improvements


Total

PP&E

 

 

 

 

 

 

 

 

Balance – September 1, 2010

$       43,241

$       62,033

$       16,628

$     93,689

$               -

$        28,015

$     243,606

 

 

 

 

 

 

 

 

Additions

4,529

 

16,567

246,597

10,997

31,092

309,782

Balance – August 31, 2011

$       47,770

$       62,033

$       33,195

$   340,286

$     10,997

$        59,107

$     553,388

 

 

 

 

 

 

 

 

Additions

 

 

13,089

13,093

 

 

26,182

Balance – May 31, 2012

$       47,700

$       62,033

$       46,284

$   353,379

$     10,997

$        59,107

$     579,570






Stellar Biotechnologies, Inc

Notes to Condensed Interim Consolidated Financial Statements

Unaudited – Prepared by Management

For the Nine Months Ended May 31, 2012

(in US Dollars)


6.

Property, Plant and Equipment (continued)




Accumulated depreciation:


Aquaculture

System



Laboratory

Computer

and Office

Equipment


Tools and

Equipment



Vehicles


Leasehold

Improvements


Total

PP&E

 

 

 

 

 

 

 

 

Balance – September 1, 2010

$    (43,241)

$    (62,033)

$      (1,826)

$   (18,914)

$               -

$     (28,015)

$  (154,029)

 

 

 

 

 

 

 

 

Additions

(302)

 

(4,858)

(53,381)

(1,100)

(1,494)

(61,135)

Balance – August 31, 2011

$    (43,543)

$    (62,033)

$      (6,684)

$   (72,295)

$    (1,100)

$     (29,509)

$ (215,164)

 

 

 

 

 

 

 

 

Additions

(680)

 

(6,029)

(48,512)

(1,649)

(3,853)

(60,723)

Balance – May 31, 2012

$    (44,223)

$    (62,033)

$    (12,713)

$ (120,807)

$    (2,749)

$     (33,362)

$ (275,887)




Carrying Value:


Aquaculture

System



Laboratory

Computer

and Office

Equipment


Tools and

Equipment



Vehicles


Leasehold

Improvements


Total

PP&E

 

 

 

 

 

 

 

 

Balance – September 1, 2010

$                -

$                -

$       14,802

$     74,775

$              -

$                  -

$      89,577

 

 

 

 

 

 

 

 

Balance – August 31, 2011

$        4,227

$                -

$       26,511

$   267,991

$      9,897

$        29,598

$     338,224

 

 

 

 

 

 

 

 

Balance – May 31, 2012

$        3,547

$                -

$       33,571

$   232,572

$      8,248

$        25,745

$     303,683


7.

Licensing Rights


The Company received two non-recurring payments of $250,000 each in fiscal years August 31, 2009 and 2010 under a research collaboration agreement which were recorded as contract income.  During 2010 the Company paid a $200,000 license fee for intellectual property arising under this agreement to a customer for licensing rights outside the customer’s field of use.  The customer and the Company will jointly own the rights to practice the resulting intellectual properties within specified fields of use.  The research collaboration agreement terminated August 31, 2011 and there are no further milestone payments.  The related licensing rights do not have a fixed term or termination provisions.  The license rights are amortized over the useful life of seven years.


 

Licensing

Rights

Accumulated

Amortization

Carrying

Amount

Balance – September 1, 2010

$        200,000

$                  -

$       200,000

 

 

 

 

Balance – May 31, 2011

200,000

-

200,000

 

 

 

 

Amortization expense

 

(26,190)

(26,190)

Balance at August 31, 2011

200,000

(26,190)

173,810

 

 

 

 

Amortization expense

 

(21,429)

(21,429)

Balance at May 31, 2012

$        200,000

$     (47,619)

$      152,381





Stellar Biotechnologies, Inc

Notes to Condensed Interim Consolidated Financial Statements

Unaudited – Prepared by Management

For the Nine Months Ended May 31, 2012

(in US Dollars)


8.

Commitments


The Company leases three buildings and facilities under sublease agreements with the Port Hueneme Surplus Property Authority.  On September 1, 2010, the Company exercised its option to extend the three buildings and facilities sublease agreements.  The monthly base rents total $7,071 effective November 1, 2010, for a term of 5 years with rents adjusted by the CPI index every November 1st.  The Company has an option to extend the lease for another five years.


The Company also leases office facilities effective July 1, 2011 for a term of three years with the option to extend for an additional two years.  Rent is $5,126 per month with 3% cost of living increases each year during the initial three-year term and the Company must pay a portion of the common area maintenance.


Future minimum lease payments are as follows:


 

 

May 31,

2012

August 31,

2011

 

For The Year Ending August 31,

 

 

 

2012

$       36,900

$         146,676

 

2013

148,531

148,531

 

2014

139,328

139,328

 

2015

84,852

84,852

 

2016

14,142

14,142

 

 

 

 

 

 

$     423,753

$         533,529


Rent expense on these lease agreements for the period ended May 31, 2012 was $128,376 (2011 - $74,913).


The Company has purchase order commitments totalling approximately $81,000 at May 31, 2012, for contract manufacturing organizations and consultants (August 31, 2011 - $184,000, September 1, 2010 - $117,000).


The Company has 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.  Two of the agreements automatically renew each January unless terminated in writing by either party.  One agreement has a term through June 2013 and then extends for an additional one-year term with written agreement.


9.

Related Party Transactions


For the period ended May 31, 2012, the Company had the following transactions with related parties:


a)

Paid or accrued salaries and benefits expense of $504,173 (2011 - $487,136) to directors and officers of the Company and their family members;


b)

Paid or accrued director fees of $37,680 (2011 - $3,000) to directors of the Company;


c)

Paid or accrued consulting fees of $44,383 (2011 - $26,750) to directors and officers of the Company;


d)

Paid or accrued professional fees of $48,626 (2011 - $11,250) to an officer of the Company;


e)

Paid or accrued professional fees of $Nil (2011 - $10,500) to a former officer of the Company.





Stellar Biotechnologies, Inc

Notes to Condensed Interim Consolidated Financial Statements

Unaudited – Prepared by Management

For the Nine Months Ended May 31, 2012

(in US Dollars)


9.

Related Party Transactions (continued)


e)

The share-based payments to directors, family members of directors and officers of the Company during the period ended May 31, 2012 was $379,282 (2011 - $201,326). Share-based payments are the fair value of the options granted.


As at May 31, 2012, the Company owed $13,800 (2011 - $Nil) to directors and officers of the Company for consulting fees and expense reimbursements which are included in accounts payable and accrued liabilities on the consolidated balance sheets.


On August 14, 2002, the Company entered into an agreement to pay royalties to a director and officer in exchange for assignment of patent rights to the Company.  The royalty is 5% of gross receipts in excess of $500,000 annually from products using this invention.  The Company’s current operations utilize this invention.  The royalties for the period ended May 31, 2012 were $Nil (2011 - $Nil).


10.

Share Capital


Authorized: unlimited common shares without par value.


During the period ended May 31, 2012:


(a)

The Company issued 2,318,600 common shares for gross proceeds of $830,715 from the exercise of warrants. Accordingly, $190,425 was transferred from warrant liability to share capital.


(b)

The Company issued 100,000 common shares for gross proceeds of $27,950 from the exercise of options. Accordingly, $23,618 was transferred from share-based payment reserve to share capital.


During the Year Ended August 31, 2011:


(a)

In September 2010, the Company issued 3,000,000 units at a price of CDN$0.35 per unit for gross proceeds of $1,002,497 (CDN$1,050,000).  Each unit is comprised of one common share of the Company and one half share purchase warrant.  Each full warrant entitles the holder to purchase one common share of the Company at a price of CDN$0.50 exercisable on or before March 28, 2012 (extended to March 28, 2013). The warrants were valued at $291,949.  Agent’s options were issued to acquire 210,000 units of the Company (valued at $49,861) under the same terms of the private placement and are exercisable at CDN$0.35 on or before March 28, 2012 (expired unexercised).  The common shares are subject to the Exchange four month hold policy which ended on January 30, 2011.  The company paid $96,958 of share issuance costs in relation to the private placement.


(b)

In November 2010, the Company issued 6,213,000 units at a price of CDN$0.60 per unit for gross proceeds of $3,695,784 (CDN$3,727,800).  Each unit is comprised of one common share of the Company and one share purchase warrant. Each warrant entitles the holder to purchase one common share of the Company at a purchase price of CDN$0.90 per share on or before November 14, 2011, and CDN$1.15 per share if exercisable from November 15, 2011, and on or before November 14, 2012.  The warrants were valued at $2,711,921.  Agent’s options were issued to acquire 345,600 units of the Company (valued at $226,587) under the same terms of the private placement and are exercisable at CDN$0.60 on or before November 14, 2012.  The common shares are subject to the Exchange four month hold policy which ended on March 16, 2011.  The Company paid $215,145 of share issuance costs in relation to the private placement.  





Stellar Biotechnologies, Inc

Notes to Condensed Interim Consolidated Financial Statements

Unaudited – Prepared by Management

For the Nine Months Ended May 31, 2012

(in US Dollars)


10.

Share Capital (continued)


Escrow Shares


An aggregate of 2,500,000 common shares were held in escrow pursuant to an Escrow Agreement dated April 29, 2008.  Of these shares, as at May 31, 2012, 750,000 shares remain in escrow.


An aggregate of 4,119,386 common shares were held in escrow pursuant to an Escrow Agreement dated April 7, 2010. The shares are subject to release provisions, with 10% being released upon closing of the reverse takeover and the balance as to 15% every six months. Of these shares, as at May 31, 2012, 1,235,816 remain in escrow. The remaining 5,880,614 common shares are subject to resale restrictions over a period of three years, with 10% being free-trading, and the remaining shares subject to resale restrictions, as to 15% becoming free-trading every six months.


Performance Shares


There are 10,000,000 performance shares set aside for officers, directors and employees of Stellar CA 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.  During the year ended August 31, 2011, the Company reached the first performance share milestone and issued 3,333,335 shares (issued at a value of $3,400,000) of the Company to the individuals named in the Performance Share Plan.  The issuance of performance shares was recorded as share-based payments.


Warrants


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


 


Number of

Warrants

Weighted

Average

Exercise Price

 

 

CDN $

Balance, as at September 1, 2010

6,959,531

$           0.37

 

 

 

Granted

8,268,600

$           0.80

Exercised

(2,148,805)

$           0.37

 

 

 

Balance, as at August 31, 2011

13,079,326

$           0.65

 

 

 

Exercised

(2,318,600)

$           0.37

Expired

(2,702,126)

$           0.40

 

 

 

Balance, as at May 31, 2012

8,058,600

$           0.82


The weighted average trading price at the date the warrants were exercised during the period ended May 31, 2012 was CDN$0.41 (year ended August 31, 2011 - CDN$0.94).





Stellar Biotechnologies, Inc

Notes to Condensed Interim Consolidated Financial Statements

Unaudited – Prepared by Management

For the Nine Months Ended May 31, 2012

(in US Dollars)


10.

Share Capital (continued)


The following table summarizes information about the warrants outstanding as at May 31, 2012:


 

CDN Exercise

Price

Number of

Warrants


Expiry Date

 

 

 

 

 

CDN $

 

 

 

$0.50

1,500,000

March 28, 2013

 

$1.15

6,213,000

November 14, 2012

 

$0.60

345,600

November 14, 2012

 

 

 

 

 

 

8,058,600

 


Warrant Liability – Warrants Issued With Canadian Dollar Exercise Prices


Equity offerings were completed in previous periods whereby warrants were issued with exercise prices denominated in Canadian dollars.   The Company’s functional currency is in US dollars.  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 Statements of Consolidated Loss.  The fair value of the warrants was determined using the Black-Scholes option pricing model at the end of each reporting period.  Upon exercise of the warrants, the fair value of warrants included in derivative liabilities was reclassified to equity.


The fair value of warrants exercised during the periods ended May 31, 2012 and 2011 was determined using the Black-Scholes option pricing model, using the following assumptions:


 

 

2012

2011

 

Risk free interest rate

2.49%

3.14%

 

Expected life (years)

0.11

0.74

 

Expected share price volatility

110%

106%


The fair value of warrants granted was determined using the Black-Scholes option pricing model, using the following weighted average assumptions at the end of each reporting period:


 

 

2012

2011

 

Risk free interest rate

N/A

1.61%

 

Expected life (years)

N/A

1.1

 

Expected share price volatility

N/A

107%

 

Expected dividend yield

N/A

0%


Option pricing models require the input of highly subjective assumptions regarding volatility.  The Company has used historical volatility to estimate the volatility of the share price.  





Stellar Biotechnologies, Inc

Notes to Condensed Interim Consolidated Financial Statements

Unaudited – Prepared by Management

For the Nine Months Ended May 31, 2012

(in US Dollars)


10.

Share Capital (continued)


Options


The Company has a stock option plan (“the Plan”) to be administered by the Board of Directors, which has the discretion to grant options for up to a maximum of 20% of the issued and outstanding share capital amount and subject to a maximum of 8,785,000 shares.  The exercise price of an option  is subject  to a  minimum of $0.10 per  share,  not less than  the  closing price  (less applicable discount)  on the Exchange  on the  last  trading  day preceding the grant date.  However, all of the stock options which have been granted are subject to the following vesting schedule:


(a)

One-third shall vest immediately;


(b)

One-third shall vest 12 months from the Effective Date; and


(c)

One-third shall vest 18 months from the Effective Date.


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


 


Number of

Options

Weighted

Average

Exercise Price

 

 

CDN $

Balance, as at August 31, 2010

2,700,000

$           0.28

 

 

 

Granted

1,554,600

  0.68

 

 

 

Balance, as at August 31, 2011

4,254,600

$           0.43

 

 

 

Granted

1,419,600

 0.42

Exercised

(110,000)

0.28

Cancelled

(105,000)

0.77

Balance, as at May 31, 2012

5,469,200

$           0.42


The weighted average trading price at the date the options were exercised during the period ended May 31, 2012 was CDN$0.355.





Stellar Biotechnologies, Inc

Notes to Condensed Interim Consolidated Financial Statements

Unaudited – Prepared by Management

For the Nine Months Ended May 31, 2012

(in US Dollars)


10.

Share Capital (continued)


The following table summarizes information about the options under the Plan outstanding and exercisable as at May 31, 2012:


 

CDN Exercise

Price

Number of

Options

Exercisable at May

31, 2011


Expiry Date

 

 

 

 

 

 

$0.28

2,331,667

2,331,667

April 9, 2017

 

$0.25

75,000

75,000

May 17, 2017

 

$0.28

70,000

70,000

June 17, 2017

 

$0.28

20,000

20,000

June 28, 2017

 

$0.28

70,000

70,000

July 13, 2017

 

$0.64

70,000

70,000

October 25, 2017

 

$1.00

60,000

40,000

February 10, 2018

 

$1.00

23,333

23,333

March 8, 2018

 

$0.65

1,329,600

443,200

August 8, 2018

 

$0.50

5,000

1,667

September 26, 2018

 

$0.40

80,000

26,667

December 22, 2018

 

$0.42

5,000

1,667

February 16, 2019

 

$0.42

1,279,600

426,533

April 13, 2019

 

$0.42

50,000

16,667

April 26, 2019

 

 

 

 

 

 

 

5,469,200

3,616,401

 


Option pricing models require the input of highly subjective assumptions including the expected price volatility.  Changes in the subjective input assumptions can materially affect the fair value estimate, and therefore the existing models do not necessarily provide a reliable single measure of the fair value of the Company’s stock options.  The estimated fair value of the stock options granted during the periods ended May 31, 2012 and 2011 was determined using a Black-Scholes option pricing model with the following weighted average assumptions:


 

 

2012

2011

 

Risk free interest rate

1.64%

2.76%

 

Expected life (years)

7.0

7.0

 

Expected share price volatility

158%

110%

 

Expected dividend yield

0%

0%


The average fair value of stock options awarded during the period was $0.41 and $0.89 respectively.





Stellar Biotechnologies, Inc

Notes to Condensed Interim Consolidated Financial Statements

Unaudited – Prepared by Management

For the Nine Months Ended May 31, 2012

(in US Dollars)


11.

Biological Assets


Changes in biological assets are as follows:


 

 

May 31,

2012

August 31,

2011

 

 

 

 

 

Carrying amount at beginning of period

$            5,763

$           3,173

 

Increases in fair value due to purchases

1,877

4,461

 

Changes in fair value due to quantity and price changes

(1,463)

(1,871)

 

 

 

 

 

Carrying amount at end of period

$            6,177

$           5,763


12.

Supplemental Disclosure of Non-Cash Transactions


Supplemental disclosure of non-cash financing and investing activities include the following:


 

May 31,

2012

May 31,

2011

 

 

 

Financing activities:

 

 

Share issuance costs – agent’s options

$                     -

$         276,448

Warrant valuations on private placements

-

3,003,870

Transfer to share capital on exercise of warrants

190,425

1,323,201

Transfer to share capital on exercise of options

23,618

-

Cash paid during the period for taxes

800

5,000

Cash paid during the period for interest

-

-


13.

Events After the Reporting Period


Subsequent to May 31, 2012, the Company:


a)

Granted incentive stock options to an employee to purchase 90,000 common shares, exercisable at a price of CDN$0.29 per share for a period of seven years.


b)

Received funds of $18,544 from the exercise of 70,000 stock options.


14.

Reclassifications


Certain prior year amounts have been reclassified to conform to the current year presentation.


15.

First Time Adoption of IFRS


As stated in Note 2, these consolidated financial statements are the Company’s third condensed interim consolidated financial statements prepared in accordance with IFRS.






Stellar Biotechnologies, Inc

Notes to Condensed Interim Consolidated Financial Statements

Unaudited – Prepared by Management

For the Nine Months Ended May 31, 2012

(in US Dollars)


15.

First Time Adoption of IFRS (continued)


The accounting policies in Note 3 have been applied in preparing the condensed interim consolidated financial statements for the period ended May 31, 2012 and 2011, the financial statements for the year ended August 31, 2011, and the opening IFRS statement of financial position on the Transition Date, September 1, 2010.


In preparing the opening IFRS statement of financial position and the financial statements for the interim period ended May 31, 2011 and annual period ended August 31, 2011, the Company has adjusted amounts reported previously in financial statements prepared in accordance with Canadian GAAP.  An explanation of how the transition from Canadian GAAP to IFRS has effected the Company’s financial position and financial performance is set out in the following tables.


The guidance for first time adoption of IFRS is set out in IFRS 1.  IFRS 1 provides for certain mandatory exceptions and optional exemptions for first time adopters of IFRS.  The Company has elected to take the following IFRS 1 optional exemptions:


(a)

Optional exemptions


Share-based payments


IFRS 2, Share-based Payments, encourages application of its provisions to equity instruments granted on or before November 7, 2002, but permits the application only to equity instruments granted after November 7, 2002 that were not vested by the Transition Date.  The Company elected to take the exemption available under IFRS 1 and applied IFRS 2 for all equity instruments granted after November 7, 2002 that had not vested by the Transition Date.


Financial Instruments: Presentation


IAS 32, Financial Instruments: Presentation requires an entity to split a compound financial instrument at inception into separate liability and equity components.  If the liability component is no longer outstanding, retrospective application of IAS 32 involves separating two portions of equity.  The first portion is in retained earnings and represents the cumulative interest accreted on the liability component.  The other portion represents the original equity component.  However, in accordance with this IFRS, a first-time adopter need not separate these two portions if the liability component is no longer outstanding at the date of transition to IFRS.


(b)

Mandatory exceptions


Estimates


In accordance with IFRS 1, an entity’s estimates under IFRS at the date of IFRS transition must be consistent with estimates made for the same date under previous Canadian GAAP, unless there is objective evidence that those estimates were in error.  The Company’s IFRS estimates as of September 1, 2010 are consistent with Canadian GAAP estimates for the same date.


Reconciliation of Canadian GAAP and comprehensive loss to IFRS


IFRS requires an entity to reconcile equity, comprehensive loss and cash flows for prior periods.  The changes made to the statement of financial position and statements of comprehensive loss as shown below have resulted in reclassifications of various amounts on the statements of cash flows, however as there have been no material adjustments to the net cash flows, no reconciliation of the statement of cash flows has been prepared.





Stellar Biotechnologies, Inc

Notes to Condensed Interim Consolidated Financial Statements

Unaudited – Prepared by Management

For the Nine Months Ended May 31, 2012

(in US Dollars)


15.

First Time Adoption of IFRS (continued)


The September 1, 2010 Canadian GAAP balance sheet has been reconciled to IFRS as follows:


 

 

September 1, 2010

 


Note

Canadian

GAAP

Effect of transition

to IFRS


IFRS

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

Cash and cash equivalents

 

$     2,003,296

$                      -

$      2,003,296

Accounts receivable

 

568,495

 

568,495

Prepaid expenses

 

22,940

 

22,940

 

 

2,594,731

-

2,594,731

 

 

 

 

 

Noncurrent assets:

 

 

 

 

Biological assets

ii

-

3,173

3,173

Property, plant and equipment

 

89,577

 

89,577

Licensing rights

 

200,000

 

200,000

Deposits

 

8,766

 

8,766

 

 

$     2,893,074

$             3,173

$      2,896,247

 

 

 

 

 

Liabilities and Shareholders’ Equity:

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

Accounts payable and accrued liabilities

 

$        420,610

$                     -

$        420,610

 

 

 

 

 

Long-term liabilities

 

 

 

 

Warrant liability

iii

-

797,310

797,310

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

Share capital

i & iii

2,610,682

(246,428)

2,364,254

Share-based payment reserve

i & iii

870,412

(500,974)

369,438

Deficit

 

(1,008,630)

(46,735)

(1,055,365)

 

 

2,472,464

(794,137)

1,678,327

 

 

$     2,893,074

$            3,173

$    2,896,247






Stellar Biotechnologies, Inc

Notes to Condensed Interim Consolidated Financial Statements

Unaudited – Prepared by Management

For the Nine Months Ended May 31, 2012

(in US Dollars)


15.

First Time Adoption of IFRS (continued)


The May 31, 2011 Canadian GAAP interim balance sheet has been reconciled to IFRS as follows:


 

 

May 31, 2011

 


Note

Canadian

GAAP

Effect of transition

to IFRS


IFRS

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

Cash and cash equivalents

 

$     5,098,780

$                      -

$      5,098,780

Accounts receivable

 

29,390

 

23,390

Share subscription receivable

 

-

 

-

Prepaid expenses

 

61,397

 

61,397

 

 

5,189,567

-

5,189,567

 

 

 

 

 

Noncurrent assets:

 

 

 

 

Biological assets

ii

-

6,098

6,098

Property, plant and equipment

 

301,973

 

301,973

Licensing rights

 

200,000

 

200,000

Deposits

 

17,500

 

17,500

 

 

$     5,709,040

$             6,098

$      5,715,138

 

 

 

 

 

Liabilities and Shareholders’ Equity:

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

Accounts payable and accrued liabilities

 

$        132,470

$                     -

$        132,470

Deferred revenue

 

-

 

-

 

 

132,470

-

132,470

Long-term liabilities

 

 

 

 

Warrant liability

iii

-

3,332,463

3,332,463

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

Share capital

i & iii

8,947,674

49,177

8,996,851

Share-based payment reserve

i & iii

3,601,989

(2,676,135)

925,854

Deficit

 

(6,973,093)

(699,407)

(7,672,500)

 

 

5,576,570

(3,326,365)

2,250,205

 

 

$     5,709,040

$            6,098

$    5,715,138





Stellar Biotechnologies, Inc

Notes to Condensed Interim Consolidated Financial Statements

Unaudited – Prepared by Management

For the Nine Months Ended May 31, 2012

(in US Dollars)


15.

First Time Adoption of IFRS (continued)


The August 31, 2011 Canadian GAAP balance sheet has been reconciled to IFRS as follows:


 

 

August 31, 2011

 


Note

Canadian

GAAP

Effect of transition

to IFRS


IFRS

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

Cash and cash equivalents

 

$     4,145,492

$                      -

$      4,145,492

Accounts receivable

 

39,021

 

39,021

Prepaid expenses

 

36,604

 

36,604

 

 

4,221,117

-

4,221,117

 

 

 

 

 

Noncurrent assets:

 

 

 

 

Biological assets

ii

-

5,763

5,763

Property, plant and equipment

 

338,224

 

338,224

Licensing rights

 

173,810

 

173,810

Deposits

 

17,500

 

17,500

 

 

$     4,750,651

$             5,763

$      4,756,414

 

 

 

 

 

Liabilities and Shareholders’ Equity:

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

Accounts payable and accrued liabilities

 

$        159,137

$                     -

$        159,137

 

 

 

 

 

Long-term liabilities

 

 

 

 

Warrant liability

iii

-

1,527,374

1,527,374

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

Share capital

i & iii

9,213,640

55,793

9,269,433

Share-based payment reserve

i & iii

3,472,627

(2,738,103)

734,524

Deficit

 

(8,094,753)

1,160,699

(6,934,054)

 

 

4,591,514

(1,521,611)

3,069,903

 

 

$     4,750,651

$            5,763

$    4,756,414





Stellar Biotechnologies, Inc

Notes to Condensed Interim Consolidated Financial Statements

Unaudited – Prepared by Management

For the Nine Months Ended May 31, 2012

(in US Dollars)


15.

First Time Adoption of IFRS (continued)


The Canadian GAAP statement of interim comprehensive loss for the three month period ended May 31, 2011 has been reconciled to IFRS as follows:


 

 

Three Months Ended May 31, 2011

 


Note

Canadian

GAAP

Effect of transition

to IFRS


IFRS

 

 

 

 

 

Revenues:

 

 

 

 

Contract income

 

$         15,000

$                      -

$          15,000

Commercial sales

 

7,200

 

7,200

Grant revenue

 

19,387

 

19,387

 

 

41,587

-

41,587

 

 

 

 

 

Costs of Production, Aquaculture and Grants:

 

 

 

 

Cost of production and aquaculture

ii

104,433

167

104,600

Grant costs

 

24,411

 

24,411

 

 

128,844

167

129,011

Gross Margin (Loss)

 

(87,257)

(167)

(87,424)

 

 

 

 

 

Expenses:

 

 

 

 

Salaries, wages and benefits

 

258,761

 

258,761

Research and development

 

421,152

 

421,152

Legal and professional services

 

37,964

 

37,964

Share-based payments

i

317,958

17,799

335,757

General and administration

 

175,032

 

175,032

Amortization and depreciation

 

14,932

 

14,932

Allocation of expenses to grant costs

 

(11,875)

 

(11,875)

 

 

1,213,924

17,799

1,231,723

 

 

 

 

 

Other Income:

 

 

 

 

Change in fair value of warrant liability

iii

-

3,907,710

3,907,710

Foreign exchange gain (loss)

 

35

 

35

Interest income

 

3,278

 

3,278

 

 

3,313

3,907,710

3,911,023

 

 

 

 

 

Income (Loss) Before Income Tax

 

(1,297,868)

3,889,744

2,591,876

Income tax expense

 

-

 

-

Income (Loss) and Comprehensive Income (Loss)

       for the Period



$    (1,297,868)


$        3,889,744


$      2,591,876






Stellar Biotechnologies, Inc

Notes to Condensed Interim Consolidated Financial Statements

Unaudited – Prepared by Management

For the Nine Months Ended May 31, 2012

(in US Dollars)


15.

First Time Adoption of IFRS (continued)


The Canadian GAAP statement of interim comprehensive loss for the nine month period ended May 31, 2011 has been reconciled to IFRS as follows:


 

 

Nine Months Ended May 31, 2011

 


Note

Canadian

GAAP

Effect of transition

to IFRS


IFRS

 

 

 

 

 

Revenues:

 

 

 

 

Contract income

 

$         45,000

$                      -

$          45,000

Commercial sales

 

17,038

 

17,038

Grant revenue

 

594,862

 

594,862

 

 

656,900

-

656,900

 

 

 

 

 

Costs of Production, Aquaculture and Grants:

 

 

 

 

Cost of production and aquaculture

ii

358,025

(2,925)

355,100

Grant costs

 

86,769

 

86,769

 

 

444,794

(2,925)

441,869

Gross Margin (Loss)

 

212,106

2,925

215,031

 

 

 

 

 

Expenses:

 

 

 

 

Salaries, wages and benefits

 

635,593

 

635,593

Research and development

 

999,332

 

999,332

Legal and professional services

 

192,035

 

192,035

Share-based payments

i

3,878,855

77,561

3,956,416

General and administration

 

471,503

 

471,503

Amortization and depreciation

 

44,084

 

44,084

Allocation of expenses to grant costs

 

(35,001)

 

(35,001)

 

 

6,186,401

77,561

6,263,962

 

 

 

 

 

Other Income:

 

 

 

 

Change in fair value of warrant liability

iii

-

(578,036)

(578,036)

Foreign exchange gain (loss)

 

6,546

 

6,546

Interest income

 

8,286

 

8,286

 

 

14,832

(578,036)

(563,204)

 

 

 

 

 

Income (Loss) Before Income Tax

 

(5,959,463)

(652,672)

(6,612,135)

Income tax expense

 

5,000

 

5,000

Income (Loss) and Comprehensive Income (Loss)

       for the Period

 


$    (5,964,463)


$     (652,672)


$    (6,617,135)






Stellar Biotechnologies, Inc

Notes to Condensed Interim Consolidated Financial Statements

Unaudited – Prepared by Management

For the Nine Months Ended May 31, 2012

(in US Dollars)


15.

First Time Adoption of IFRS (continued)


The Canadian GAAP statement of comprehensive loss for the year ended August 31, 2011 has been reconciled to IFRS as follows:


 

 

August 31, 2011

 


Note

Canadian

GAAP

Effect of transition

to IFRS


IFRS

 

 

 

 

 

Revenues:

 

 

 

 

Contract income

 

$         60,000

$                      -

$          60,000

Commercial sales

 

18,988

 

18,988

Grant revenue

 

618,199

 

618,199

 

 

697,187

-

697,187

 

 

 

 

 

Costs of Production, Aquaculture and Grants:

 

 

 

 

Cost of production and aquaculture

ii

413,397

(2,590)

410,807

Grant costs

 

595,686

 

595,686

 

 

1,009,083

(2,590)

1,006,493

Gross Margin (Loss)

 

(311,896)

2,590

(309,306)

 

 

 

 

 

Expenses:

 

 

 

 

Salaries, wages and benefits

 

797,263

 

797,263

Research and development

 

906,518

 

906,518

Legal and professional services

 

283,122

 

283,122

Share-based payments

i

4,007,116

15,593

4,022,709

General and administration

 

747,883

 

747,883

Amortization and depreciation

 

87,325

 

87,325

Allocation of expenses to grant costs

 

(41,170)

 

(41,170)

 

 

6,788,057

15,593

6,803,650

 

 

 

 

 

Other Income:

 

 

 

 

Foreign exchange gain (loss)

 

3,333

 

3,333

Change in fair value of warrant liability

iii

-

1,220,437

1,220,437

Interest income

 

11,297

 

11,297

 

 

14,630

1,220,437

1,235,067

 

 

 

 

 

Loss Before Income Tax

 

(7,085,323)

1,207,434

(5,877,889)

Income tax expense

 

800

 

800

Loss and Comprehensive Loss for the Period

 

$   (7,086,123)

$       1,207,434

$   (5,878,689)





Stellar Biotechnologies, Inc

Notes to Condensed Interim Consolidated Financial Statements

Unaudited – Prepared by Management

For the Nine Months Ended May 31, 2012

(in US Dollars)


15.

First Time Adoption of IFRS (continued)


Explanations for the adjustments are as follows:


(i)

Share-based payments


IFRS 2 is effective for the Company as at September 1, 2010 and is applicable to:


·

New grants for share-based payments subsequent to September 1, 2010


·

Equity-settle share-based compensation awards granted subsequent to November 7, 2002 and that vest after September 1, 2010; and


·

Awards that are modified on or after September 1, 2010, even if the original grant of the award was not accounted for in accordance with IFRS 2.


Canadian GAAP allows the Company to calculate the fair value of the share-based compensation on all awards granted and recognizes the expense from the date of grant over the vesting period using the straight-line methodology.  The Company determines the fair value of share options granted using the Black-Scholes option pricing model.


IFRS 2 requires each tranche in an award with graded vesting features to be treated as a separate grant with a different vesting date and fair value.  Each grant is accounted for on that basis.


As a result, share-based payment reserves was increased by $29,216 at September 1, 2010 (May 31, 2011 - $106,777; August 31, 2011 - $44,809) and deficit has been increased by $29,216 at September 1, 2010 (May 31, 2011 - $106,777; August 31, 2011 - $44,809).  The impact on loss and comprehensive loss for the period ended May 31, 2011 was an increase of share-based payments of $77,561 (year ended August 31, 2011 - $15,593).


(ii)

Biological assets


IFRS 41 is effective for the Company as at September 1, 2010.  Biological assets are living plants or animals including those which can provide agricultural produce.  The Company’s keyhole limpet colonies are bearer assets from which KLH is harvested.  


Under IFRS, the biological assets are recorded at fair value less costs to sell, measured upon initial recognition and at the end of each reporting period. Accordingly, biological assets increased by $3,173 at September 1, 2010 (May 31, 2011 - $6,098; August 31, 2011 - $5,763).  The impact on loss and comprehensive loss for the period ended May 31, 2011 was $2,925 (year ended August 31, 2011 - $2,590).  


(iii)

Warrant Liability


Under IFRS, the warrants issued by the Company with an exercise price denominated in a currency other than its functional currency must be classified as liabilities (as they do not meet the definition if an equity instrument) and are recognized at fair value with changes in fair value being recognized as a profit or loss. There is no such requirement under Canadian GAAP as warrants issued by the Company meet the definition of an equity instrument. The Company’s outstanding warrants are denominated in Canadian dollars and the functional currency is the US dollar therefore the Company will recognize the warrants as a liability with changes to the fair value of the liability being recognized in the Statements of Consolidated Loss.





Stellar Biotechnologies, Inc

Notes to Condensed Interim Consolidated Financial Statements

Unaudited – Prepared by Management

For the Nine Months Ended May 31, 2012

(in US Dollars)


15.

First Time Adoption of IFRS (continued)


(iii)

Warrant Liability (continued)


As a result, warrant liability increased by $797,310 at September 1, 2010 (May 31, 2011 - $3,332,463; August 31, 2011 - $1,527,374).  The impact on loss and comprehensive loss for the period ended May 31, 2011 was a loss of $578,036 (year ended August 31, 2011 - $1,220,437).


16.

Loss Recovery


A shipment of KLH was damaged by a vendor.  The vendor agreed to reimburse the Company for the value of the KLH.  In accordance with IAS 37, Provisions, Contingent Liabilities and Contingent Assets, the loss recovery was recorded during the period ended May 31, 2012 when the realization of income was virtually certain.