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Condensed Interim Consolidated Financial Statements

For the Three Months Ended November 30, 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)

(Expressed in US Dollars)


 

November 30,

2012

August 31,

2012

 

 

(Note 13)

Assets:

 

 

 

 

 

Current assets:

 

 

Cash and cash equivalents

$    1,631,969

$      998,998

Accounts receivable (Note 4)

39,407

16,924

Prepaid expenses

21,481

32,228

 

 

 

Total current assets

1,692,857

1,048,150

 

 

 

Noncurrent assets:

 

 

Property, plant and equipment (Note 5)

311,593

332,990

Licensing rights (Note 6)

138,095

145,238

Deposits

17,500

17,500

 

 

 

Total noncurrent assets

467,188

495,728

 

 

 

Total Assets

$     2,160,045

$   1,543,878

 

 

 

Liabilities and Shareholders’ Equity:

 

 

 

 

 

Current liabilities:

 

 

Accounts payable and accrued liabilities

$        381,514

$      434,654

Deferred revenue

181,240

127,477

 

 

 

Total current liabilities

562,754

562,131

 

 

 

Long-term liabilities:

 

 

Warrant liability (Note 8)

913,445

130,137

 

 

 

Total Liabilities

1,476,199

692,268

 

 

 

Shareholders’ Equity:

 

 

Share capital (Note 8)

8,052,430

8,016,895

Shares subscribed (Note 8)

399,640

-

Shares to be issued (Note 8)

1,493,637

1,493,637

Share-based payment reserve (Note 8)

1,821,507

1,658,591

Deficit

(11,083,368)

(10,317,513)

Total shareholders’ equity

683,846

851,610

Total Liabilities and Shareholders’ Equity

$      2,160,045

$     1,543,878


Nature of Operations and Going Concern (Note 1)

Commitments (Note 7)

Events after the Reporting Period (Note 14)


These condensed interim consolidated financial statements were approved for

Issuance by the Board of Directors on January 24, 2013 and are signed on its behalf by:


Director

Signed:  “Frank Oakes”


Director

Signed:  “Mayank Sampat”




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





Stellar Biotechnologies, Inc

Condensed Interim Consolidated Statements of Loss and Comprehensive Loss

(Unaudited – Prepared by Management)

(Expressed in US Dollars)


 

Three Months Ended

 

November 30,

2012

November 30,

2011

 

 

(Note 13)

Revenues:

 

 

Contract income

$      15.000

$      15,000

Commercial sales

29,850

100,350

Grant revenue

70,877

20,017

 

115,727

135,367

 

 

 

Cost of Production, Aquaculture and Grants:

 

 

Costs of production and aquaculture

92,597

208,171

Grant costs

70,877

22,866

 

163,474

231,037

Gross Margin (Loss)

(47,747)

(95,670)

 

 

 

Expenses:

 

 

Salaries, wages and benefits

184,642

281,234

Research and development

269,628

512,509

Legal, consulting and professional services

113,399

159,687

Share-based payments (Note 8)

162,916

556,718

General and administration

123,266

133,917

Amortization and depreciation

30,951

27,065

Allocation of expenses to grant costs

(28,112)

(10,759)

 

856,690

1,660,371

 

 

 

Other Income:

 

 

Loss recovery (Note 10)

-

105,000

Foreign exchange gain (loss)

(951)

(22,065)

Change in fair value of warrant liability (Note 8)

138,662

713,935

Interest income

871

1,919

 

138,582

798,789

 

 

 

Loss Before Income Tax

(765,855)

(957,252)

Income tax expense

-

-

Loss and Comprehensive Loss for the Year

$     (765,855)

$     (957,252)

 

 

 

Loss per common share – basic and diluted

$            (0.02)

$           (0.02)

 

 

 

Weighted average number of common shares outstanding

46,995,979

43,064,936



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)

(Expressed in US Dollars)


 

Three Months Ended

 

November 30,

2012

November 30,

2011

 

 

(Note 13)

 

 

 

Cash Flows From (Used In) Operating Activities:

 

 

Loss for the period

$     (765,855)

$     (957,252)

 

 

 

Items not affecting cash:

 

 

Amortization and depreciation

30,951

27,065

Share-based payments

162,916

556,718

Foreign exchange (gain) loss

667

22,377

Change in fair value of warrant liability

(138,662)

(713,935)

 

 

 

Changes in non-cash working capital items:

 

 

Amounts receivable

(23,434)

(211,276)

Prepaid expenses

10,747

28,351

Accounts payable and accrued liabilities

(53,140)

280,026

Deferred revenue

53,763

77,048

Net cash used in operating activities

(722,047)

(890,878)

 

 

 

Cash Flows From (Used In) Financing Activities:

 

 

Proceeds from exercise of warrants and options

-

830,715

Share subscription proceeds

1,407,540

-

Share issuance costs

(50,395)

-

Payment of deposits

-

(1,000)

Net cash provided by financing activities

1,357,145

829,715

 

 

 

Cash Flows From (Used In) Investing Activities:

 

 

Acquisition of property, plant and equipment

(2,411)

(8,534)

Net cash used in investing activities

(2,411)

(8,534)

 

 

 

Effect of exchange rate changes on cash and cash equivalents

284

(312)

 

 

 

Net change in cash and cash equivalents

632,971

(70,009)

 

 

 

Cash and cash equivalents – beginning of period

998,998

4,145,492

 

 

 

Cash and cash equivalents – end of period

$   1,631,969

$    4,075,483

 

 

 

Cash (demand deposits)

$      775,075

$    1,407,480

Cash equivalents

856,894

2,668,003

Cash and cash equivalents

$   1,631,969

$   4,075,483

 

 

 

Supplemental disclosure of non-cash transactions (Note 11)

 

 



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)

(Expressed in US Dollars)


 


Number of

Shares


Share

Capital


Shares

Subscribed


Shares to

be Issued

Share-based

Payment

Reserve



Deficit



Total

Balance – August 31, 2011 (Note 13)

41,611,831

$  6,541,810

$             -

$      651,000

$      992,147

$     (5,120,817)

$   3,064,140

 

 

 

 

 

 

 

 

Performance shares to be issued

-

-

-

279,000

-

-

279,000

Proceeds from exercise of warrants

2,318,600

830,716

-

-

-

-

830,716

Transfer to share capital on exercise of warrants

-

190,425

-

-

-

-

190,425

Share-based payments

-

-

-

-

277,718

-

277,718

Loss for the period

-

-

-

-

-

(957,252)

(957,252)

Balance - November 30, 2011 (Note 13)

43,930,431

$  7,562,951

$              -

$      930,000

$   1,269,865

$     (6,078,069)

$   3,684,747

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance – August 31, 2012

45,413,561

$  8,016,895

$              -

$   1,493,637

$   1,658,591

$ (10,317,513)

$      851,610

 

 

 

 

 

 

 

 

Private Placement, net of issuance costs

4,000,000

35,535

-

-

-

-

35,535

Subscriptions received for private placement

-

-

399,640

-

-

-

399,640

Share-based payments

-

-

-

-

162,916

-

162,916

Loss for the period

-

-

-

-

-

(765,855)

(765,855)

Balance – November 30, 2012

49,413,561

$  8,052,430

$  399,640

$   1,493,637

$   1,821,507

$ (11,083,368)

$     683,846



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 Three Months Ended November 30, 2012

(in US Dollars)


1.

Nature of Operations and Going Concern


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) and in the US under the trading symbol SBOTF as of April 4, 2012, and uplisted to OTCQB effective January 14, 2013.


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 and records office is 401 – 1231 Barclay Street, Vancouver, BC, V6E 1H5, 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.


The accompanying financial statements have been prepared on the 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.  


For the three months ended November 30, 2012, the Company reported a loss of $765,855 (2011 - $957,252), an accumulated deficit of $11,083,368 (August 31, 2012 - $10,317,513) and working capital of $1,130,103 (August 31, 2012 - $486,019).  


In the past, operations of the Company have primarily been funded by the issuance of common shares, exercise of warrants, grant revenues, contract income, and commercial sales.  As at November 30, 2012, the Company has remaining revenues available under the NSF SBIR Phase IIB grant program of approximately $375,000.  Subsequent to November 30, 2012, the Company closed a private placement with gross proceeds of CDN$499,600.  However, additional financial resources are needed to support the Company’s initiatives at the current level.   Ongoing effort is placed by management on expanding the customer base for existing marketed products, reducing operating costs, and the Company is continuing to seek additional financing alternatives, including nondilutive financing through grants, collaboration and licensing arrangements, and additional equity financing.  The Company’s ability to increase its revenues or raise additional capital to generate sufficient cash flows to continue as a going concern is subject to risks which are beyond management’s control. There can be no assurance that such financing can be obtained on a timely basis or on favorable terms.


Without raising additional financial resources or achieving profitable operations, there is substantial doubt about the ability of the Company to continue as a going concern.  These condensed interim consolidated financial statements do not reflect the adjustments that might be necessary should the Company be unable to continue as a going concern and therefore be required to realize its assets and settle its liabilities and commitments in other than the normal course of business and at amounts different from those in the accompanying condensed interim consolidated financial statements.  Such adjustments could be material.





Stellar Biotechnologies, Inc

Notes to Condensed Interim Consolidated Financial Statements

Unaudited – Prepared by Management

For the Three Months Ended November 30, 2012

(in US Dollars)


2.

Basis of Presentation and IFRS Statement of Compliance


International Financial Reporting Standards Statement of Compliance


These condensed interim consolidated financial statements, including comparatives, have been prepared in accordance with International Accounting Standards (“IAS”) 34, Interim Financial Reporting using  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”).  These condensed interim consolidated financial statements have been prepared on the basis of accounting, policies and methods of computation consistent with those applied in, and should be read in conjunction with, the Company’s August 31, 2012 consolidated financial statements.  


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 application of policies and 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.


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


3.

Significant Accounting Policies


The preparation of financial data is based on accounting principles and practices consistent with those used in the preparation of the audited annual consolidated financial statements as at August 31, 2012. These unaudited condensed interim consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements for the year ended August 31, 2012.





Stellar Biotechnologies, Inc

Notes to Condensed Interim Consolidated Financial Statements

Unaudited – Prepared by Management

For the Three Months Ended November 30, 2012

(in US Dollars)


4.

Amounts Receivable


 

 

November 30,

2012

August 31,

2012

 

 

 

 

 

Accounts receivable

$       27,079

$          9,318

 

Contract receivable

5,000

5,000

 

HST receivable

7,328

2,606

 

 

 

 

 

 

$        39,407

$        16,924


5.

Property, Plant and Equipment




Cost:


Aquaculture

System



Laboratory

Computer

and Office

Equipment


Tools and

Equipment



Vehicles


Leasehold

Improvements


Total

PP&E

 

 

 

 

 

 

 

 

Balance – August 31, 2012

$       58,923

$       62,033

$       56,710

$   383,956

$     10,997

$        59,107

$     631,726

 

 

 

 

 

 

 

 

Additions

 

 

 

2,411

 

 

2,411

Balance – November 30, 2012

$       58,923

$       62,033

$       56,710

$   386,367

$     10,997

$        59,107

$     634,137




Accumulated depreciation:


Aquaculture

System



Laboratory

Computer

and Office

Equipment


Tools and

Equipment



Vehicles


Leasehold

Improvements


Total

PP&E

 

 

 

 

 

 

 

 

Balance – August 31, 2012

$    (44,803)

$    (62,033)

$     (14,978)

$ (138,977)

$    (3,299)

$     (34,646)

$ (298,736)

 

 

 

 

 

 

 

 

Additions

(758)

 

(2,907)

(18,309)

(550)

(1,284)

(23,808)

Balance – November 30, 2012

$    (45,561)

$    (62,033)

$     (17,885)

$ (157,286)

$    (3,849)

$     (35,930)

$ (322,544)




Carrying Value:


Aquaculture

System



Laboratory

Computer

and Office

Equipment


Tools and

Equipment



Vehicles


Leasehold

Improvements


Total

PP&E

 

 

 

 

 

 

 

 

Balance – August 31, 2012

$      14,120

$                -

$       41,732

$   244,979

$      7,698

$        24,461

$     332,990

 

 

 

 

 

 

 

 

Balance – November 30, 2012

$      13,362

$                -

$       38,825

$   229,081

$      7,148

$        23,177

$     311,593





Stellar Biotechnologies, Inc

Notes to Condensed Interim Consolidated Financial Statements

Unaudited – Prepared by Management

For the Three Months Ended November 30, 2012

(in US Dollars)


6.

Licensing Rights


During 2010 the Company paid a $200,000 license fee for intellectual property arising under a research collaboration 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.  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 and are shown net of accumulated impairment losses, if any.


 

Licensing

Rights

Accumulated

Amortization

Carrying

Amount

 

 

 

 

Balance at August 31, 2012

$        200,000

$     (54,762)

$      145,238

 

 

 

 

Amortization expense

 

(7,143)

(7,143)

Balance at November 30, 2012

$        200,000

$     (61,905)

$      138,095


7.

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 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.  The Company must also pay a portion of the common area maintenance.


Future minimum lease payments are as follows:


 

 

November 30,

2012

August 31,

2011

 

For The Year Ending August 31,

 

 

 

2013

$     114,850

$          148,531

 

2014

143,735

139,238

 

2015

89,349

84,852

 

2016

14,892

14,142

 

 

 

 

 

 

$     362,826

$         386,763


Rent expense on these lease agreements for the three months ended November 30, 2012 was $43,612 (2011 - $42,616).


The Company has purchase order commitments totalling approximately $179,000 as at November 30, 2012, for contracts and consultants (August 31, 2012 - $157,000 ).


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.




Stellar Biotechnologies, Inc

Notes to Condensed Interim Consolidated Financial Statements

Unaudited – Prepared by Management

For the Three Months Ended November 30, 2012

(in US Dollars)


8.

Share Capital


Authorized: unlimited common shares without par value.


Private Placements During the Period Ended November 30, 2012:


In October 2012, the Company issued 4,000,000 units at a price of CDN$0.25 per unit for gross proceeds of $1,007,900 (CDN$1,000,000).  Each unit is comprised of one common share of the Company and one transferable share purchase warrant.  Each warrant entitles the holder to purchase one common share of the Company at a price of CDN$0.40 exercisable on or before October 25, 2015. The warrants were valued at $830,975.  Agent’s options were issued to acquire 400,000 units of the Company (valued at $90,995) under the same terms of the private placement and are exercisable at CDN$0.25 on or before October 25, 2015.  The common shares are subject to the Exchange four month hold policy which ends on February 26, 2013.  The Company paid $50,395 of share issuance costs in relation to the private placement.


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 November 30, 2012, 375,000 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 November 30, 2012, 617,908 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 were 10,000,000 performance shares set aside for officers, directors and employees of Stellar 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 of the Company to the individuals named in the Performance Share Plan.  Accordingly, $930,000 was transferred from shares to be issued to share capital.  


During the year ended August 31, 2012, the Company reached the final two share milestones and issued 1,313,130 shares of the Company to non-director individuals named in the Performance Share Plan.  Accordingly, $366,363 was transferred from shares to be issued to share capital.  As at November 30, 2012, there are 5,353,535 performance shares outstanding to be issued.


During the three months ended November 30, 2012, $Nil (2011 - $279,000) was recorded as share-based payments representing the measurement of vested performance shares during the period.





Stellar Biotechnologies, Inc

Notes to Condensed Interim Consolidated Financial Statements

Unaudited – Prepared by Management

For the Three Months Ended November 30, 2012

(in US Dollars)


8.

Share Capital (continued)


Warrants


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


 


Number of

Warrants

Weighted

Average

Exercise Price

 

 

CDN $

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 August 31, 2012

8,058,600

$           1.01

 

 

 

Granted

4,400,000

$           0.39

Expired

(405,600)

$           0.62

Balance, as at November 30, 2012

12,053,000

$           0.57


The weighted average trading price at the date the warrants were exercised during the three months ended November 30, 2012 was $Nil (year ended August 31, 2012 - CDN$0.41).


The following table summarizes information about the warrants outstanding as at November 30, 2012:


 

CDN Exercise

Price

Number of

Warrants


Expiry Date

 

 

 

 

 

 

 

CDN $

 

 

 

 

$0.50

1,500,000

March 28, 2013

 

 

$0.71

6,153,000

November 14, 2013

 

 

$0.40

4,000,000

October 25, 2015

 

 

$0.25

400,000

October 25, 2015

Agents options

 

 

 

 

 

 

 

12,053,000

 

 


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 condensed interim consolidated statements of loss and comprehensive 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.





Stellar Biotechnologies, Inc

Notes to Condensed Interim Consolidated Financial Statements

Unaudited – Prepared by Management

For the Three Months Ended November 30, 2012

(in US Dollars)


8.

Share Capital (continued)


The fair value of warrants exercised during the three months ended November 30, 2012 and 2011 was determined using the Black-Scholes option pricing model, using the following assumptions:


 

 

2012

2011

 

Risk free interest rate

N/A

2.49%

 

Expected life (years)

N/A

0.11

 

Expected share price volatility

N/A

110%


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

1.15%

N/A

 

Expected life (years)

3.0

N/A

 

Expected share price volatility

126%

N/A

 

Expected dividend yield

0%

N/A


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.  


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 CDN$0.10 preceding the grant date.  Stock options granted to directors, officers, employees and consultants are subject to the following vesting schedule:


(a)

One-third shall vest immediately;


(b)

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


(c)

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


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





Stellar Biotechnologies, Inc

Notes to Condensed Interim Consolidated Financial Statements

Unaudited – Prepared by Management

For the Three Months Ended November 30, 2012

(in US Dollars)


8.

Share Capital (continued)


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, 2011

4,254,600

$           0.43

 

 

 

Granted

1,809,600

$           0.40

Exercised

(170,000)

$           0.28

Cancelled

(105,000)

$           0.77

Balance, as at August 31, 2012

5,789,200

$           0.42

 

 

 

Granted

325,000

0.25

Balance, as at November 30, 2012

6,114,200

$           0.41


The weighted average trading price at the date the options were exercised during the three months ended November 30, 2012 was $Nil (year ended August 31, 2012 - CDN$0.33).


The following table summarizes information about the options under the Plan outstanding and exercisable as at November 30, 2012:


 

CDN Exercise

Price

Number of

Options

Exercisable at

November 30, 2012


Expiry Date

 

 

 

 

 

 

$0.25

250,000

83,333

October 23, 2015

 

$0.28

2,281,667

2,281,667

April 9, 2017

 

$0.25

55,000

55,000

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

60,000

February 10, 2018

 

$1.00

23,333

23,333

March 8, 2018

 

$0.65

1,329,600

886,400

August 8, 2018

 

$0.50

5,000

3,333

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

 

$0.29

90,000

30,000

June 18, 2019

 

$0.37

150,000

50,000

August 9, 2019

 

$0.37

150,000

50,000

August 16, 2019

 

$0.25

75,000

25,000

October 23, 2019

 

 

6,114,200

4,249,600

 




Stellar Biotechnologies, Inc

Notes to Condensed Interim Consolidated Financial Statements

Unaudited – Prepared by Management

For the Three Months Ended November 30, 2012

(in US Dollars)


8.

Share Capital (continued)


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 three months ended November 30, 2012 and 2011 was determined using a Black-Scholes option pricing model with the following weighted average assumptions:


 

 

2012

2011

 

Risk free interest rate

1.31%

1.71%

 

Expected life (years)

4.0

7.0

 

Expected share price volatility

124%

112%

 

Expected dividend yield

0%

0%


The average fair value of stock options awarded during the period was $0.23 and $0.50 respectively.


9.

Related Party Disclosures


For the three months ended November 30, 2012, the Company had the following transactions with key management personnel.  There are no other related parties as defined by IAS 24.


a)

Paid or accrued salaries of $152,890 (2011 - $240,424) to directors and officers of the Company and their family members;


b)

Paid or accrued short-term employee benefits of $16,575 (2011 - $15,459) to directors and officers of the Company and their family members;


c)

Paid or accrued director fees of $Nil (2011 - $5,850) to directors of the Company;


d)

Paid or accrued consulting fees of $6,000 (2011 - $19,250) to directors and officers of the Company;


e)

Paid or accrued professional fees of $13,669 (2011 - $13,309) to an officer of the Company;


f)

The share-based payments to directors, family members of directors and officers of the Company during the three months ended November 30, 2012 were $115,140 (2011 - $350,019). Share-based payments are the fair value of the options granted plus the vested value of performance shares.


As at November 30, 2012, the Company owed $4,289 (2011 - $18,600) to directors and officers of the Company for consulting fees and expense reimbursements which are included in accounts payable and accrued liabilities on the condensed interim consolidated statements of financial position.


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 three months ended November 30, 2012 were $Nil (2011 - $Nil).


10.

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 year ended August 31, 2012 when the realization of income was virtually certain. 




Stellar Biotechnologies, Inc

Notes to Condensed Interim Consolidated Financial Statements

Unaudited – Prepared by Management

For the Three Months Ended November 30, 2012

(in US Dollars)


11.

Supplemental Disclosure of Non-Cash Transactions


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


 

November 30,

2012

November 30,

2011

 

 

 

Financing activities:

 

 

Share issuance costs – agent’s options

$           90,995

$                   -

Warrant valuations on private placements

830,975

-

Transfer to share capital on exercise of warrants

-

190,425

Cash paid during the year for taxes

-

800

Cash paid during the year for interest

-

-


12.

Financial Instruments and Risk Management


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, foreign exchange risk and interest rate risk. Where material, these risks are reviewed and monitored by the Board of Directors.


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 November 30, 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 November 30, 2012, the US dollar was equal to .99207 Canadian dollars.  The currency risk is considered to be insignificant.





Stellar Biotechnologies, Inc

Notes to Condensed Interim Consolidated Financial Statements

Unaudited – Prepared by Management

For the Three Months Ended November 30, 2012

(in US Dollars)


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 amounts 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 89% of the Company’s commercial sales and contract income during the three months ended November 30, 2012 were from two customers (2011 - 87% from one customer). All of the grant revenue during the three months ended November 30, 2012 was received from NSF (2011 - 100% from NSF).


Approximately 61% of the Company’s amounts receivables at November 30, 2012, were from two customers (August 31, 2012 - 77% from three customers), Nil% were from the NSF grants (August 31, 2012 - Nil) and 19% from HST refund (August 31, 2012 - 15%).


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 amounts receivable at the amount recorded on the statement of financial position.  


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 November 30, 2012, the Company had a cash and cash equivalents balance of $1,631,969 (August 31, 2012 - $998,998) to settle current liabilities of $562,754 (August 31, 2012 - $562,131 ).


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.




Stellar Biotechnologies, Inc

Notes to Condensed Interim Consolidated Financial Statements

Unaudited – Prepared by Management

For the Three Months Ended November 30, 2012

(in US Dollars)


13.

Correction of Error


The comparative amounts have been adjusted to reflect the correction of an error described in the audited consolidated financial statements for the year ended August 31, 2012.


14.

Events After the Reporting Period


Subsequent to November 30, 2012, the Company:


a)

Closed a non-brokered private placement for 1,998,400 units at a price of CDN$0.25 per unit for gross proceeds of CDN$499,600.  Each unit is comprised of one common share of the Company and one transferable share purchase warrant.  Each warrant entitles the holder to purchase one common share of the Company at a price of CDN$0.40 exercisable on or before January 4, 2016.  Agent’s options were issued to acquire 97,200 units of the Company under the same terms of the private placement and are exercisable at CDN$0.25 on or before January 4, 2016.  The common shares are subject to the Exchange four month hold policy which ends on May 3, 2013.  The Company paid CDN$24,300 of cash share issuance costs in relation to the private placement.


b)

Granted incentive stock options to officers and employees to purchase 215,000 common shares, exercisable at a price of CDN$0.25 per share for a period of seven years.


15.

Segment Information


The Company operates in one reportable segment, the aquaculture, research and development, production and marketing of KLH products.  The Company’s operations are in California, USA, and its corporate assets, comprising mainly cash, are located in Canada.


 

 

KLH Operations

(USA)

Corporate

(Canada)


Total

 

 

 

November 30, 2012

 

 

Total assets

$       921,601

$      1,238,444

$      2,160,045

 

Current liabilities

514,352

48,402

562,754

 

Warrant liabilities

-

913,445

913,445

 

Revenues from external parties

115,727

-

115,727

 

Net loss

(653,464)

(112,391)

(765,855)

 

 

 

 

 

 

 

 

November 30, 2011

 

 

Total assets

$    3,659,112

$      1,170,622

$     4,829,734

 

Current liabilities

449,345

66,866

516,211

 

Warrant liability

-

623,014

623,014

 

Revenues from external parties

135,367

-

135,367

 

Net loss

(975,465)

18,213

(957,252)