UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14A
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
(Amendment No. )

 

Filed by the Registrant x
Filed by a Party other than the Registrant ¨
Check the appropriate box:

 

x Preliminary Proxy Statement
¨ Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))
¨ Definitive Proxy Statement
¨ Definitive Additional Materials
¨ Soliciting Material under §240.14a-12

 

Stellar Biotechnologies, Inc.
(Name of Registrant as Specified In Its Charter)
 
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
 
Payment of Filing Fee (Check the appropriate box):

 

¨ No fee required.
x Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
  (1)

Title of each class of securities to which transaction applies:

Stellar Biotechnologies, Inc. (“Stellar”) common shares, no par value (the “Stellar Common Shares”).

  (2)

Aggregate number of securities to which transaction applies:

49,137,435 Stellar Common Shares to be issued pursuant to that Share Exchange Agreement, dated as of March 7, 2019, by and among Stellar, Edesa Biotech Inc. (“Edesa”) and the shareholders of Edesa, determined based on information as to equity ownership as of March 7, 2019 and other assumptions discussed in this proxy statement and Stellar’s shareholders owning 10% of the combined company and Edesa’s shareholders owning 90% of the combined company on a fully diluted basis.

  (3)

Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined):

Since Edesa has an accumulated capital deficit, the maximum aggregate value was determined based on one-third of the stated value of the outstanding capital shares of Edesa to be acquired by Stellar upon the completion of the Exchange.  In accordance with Section 14(g) of the Securities Exchange Act of 1934, as amended, the filing fee was determined by multiplying .0001212 by the amount calculated in the preceding sentence.

  (4)

Proposed maximum aggregate value of transaction:

$2,391,755

  (5)

Total fee paid:

$290

¨ Fee paid previously with preliminary materials.
¨ Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously.  Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing.
  (1) Amount Previously Paid:
  (2) Form, Schedule or Registration Statement No.:
  (3) Filing Party:
  (4) Date Filed:

 

 

 

  

 

 

[   ], 2019

 

To the Shareholders of Stellar Biotechnologies, Inc.:

 

You are cordially invited to attend the annual general meeting of the shareholders of Stellar Biotechnologies, Inc., organized under the laws of British Columbia, Canada, which will be held at [   ], local time, on [   ], 2019, at [ ], unless postponed or adjourned to a later date. This is an important meeting that affects your investment in Stellar.

 

On March 7, 2019, Stellar, Edesa Biotech Inc. and the shareholders of Edesa entered into a Share Exchange Agreement pursuant to which Stellar will purchase all of the capital shares of Edesa from the shareholders of Edesa in exchange for newly-issued common shares of Stellar, which we refer to as the Exchange. Following the completion of the Exchange, current Stellar shareholders are expected to own approximately 10%, and the shareholders and option holders of Edesa are expected to own approximately 90%, of the combined company on a fully-diluted basis, subject to a 2% upward or downward adjustment based upon the amount of Stellar’s working capital balance on the day before the completion of the Exchange.

 

Following the completion of the Exchange, Stellar will change its name to “Edesa Biotech Inc.” The Exchange has been approved by the boards of directors of both Stellar and Edesa and is expected to close in the second quarter of 2019, subject to certain approvals of the shareholders of Stellar as well as other customary conditions. Following completion of the Exchange, Stellar intends to develop a plan for the disposition of Stellar’s operations, which is expected to include the wind down or spin-off of Stellar’s current operations. 

 

Upon the completion of the Exchange, Dr. Pardeep Nijhawan, Edesa’s Chief Executive Officer, President and Secretary will be appointed as Stellar’s Chief Executive Officer, President and Secretary, Dr. Michael Brooks, Edesa’s Vice President of Corporate Development and Strategy, will be appointed President of Stellar and Kathi Niffenegger, Stellar’s current Chief Financial Officer and Corporate Secretary, will retain the position of Chief Financial Officer. Upon the completion of the Exchange, the other officers of Stellar will resign.

 

Also, following the completion of the Exchange, the combined company is expected to have a seven-member board of directors which will be composed of four members proposed by Edesa, one member proposed by Stellar and two “independent” directors as defined under Nasdaq corporate governance rules. Upon the completion of the Exchange, the other directors of Stellar will resign. Following the completion of the Exchange, the headquarters of Stellar will be located at 100 Spy Court, Markham, Ontario, Canada L3R 5H6.

 

Stellar’s common shares are currently listed on the Nasdaq Capital Market under the symbol “SBOT.” Prior to the completion of the Exchange, Stellar and Edesa intend to file an initial listing application with the Nasdaq Capital Market pursuant to Nasdaq’s “change of control” rules. After completion of the Exchange, Stellar will be renamed “Edesa Biotech Inc.” and expects to trade on the Nasdaq Capital Market under the symbol “EDSA.”

 

Stellar is holding its annual general meeting of shareholders in order to obtain the shareholder approvals necessary to complete the Exchange and related matters. At the annual general meeting, Stellar will ask its shareholders to (1) approve the issuance of Stellar common shares in the Exchange; (2) elect seven members to the board of directors; (3) appoint the independent registered public accounting firm; and (4) adjourn the Annual Meeting, if necessary, to solicit additional votes in favor of the proposal to approve the issuance of Stellar common shares in the Exchange. Stellar will also consider such other business as may properly come before the annual general meeting or any adjournments or postponements thereof. However, if Proposal No. 1 is approved by the Stellar shareholders and the Exchange is completed, the Stellar board of directors will be reconstituted in accordance with the terms of the Share Exchange Agreement, as described above. See the section entitled “Directors and Officers of the Combined Company” in this proxy statement.

 

After careful consideration, Stellar’s Board has approved the Share Exchange Agreement and the proposals referred to above, and has determined that they are in the best interests of Stellar’s shareholders. Accordingly, Stellar’s Board recommends that our shareholders vote FOR each of the proposals (1) through (4) described in the preceding paragraph.

 

Your vote is very important, regardless of the number of shares you own.  Whether or not you expect to attend the Annual Meeting in person, please complete, date, sign and promptly return the accompanying proxy card in the enclosed postage paid envelope to ensure that your shares will be represented and voted at the Annual Meeting.

 

  

 

 

More information about Stellar, Edesa and the proposed transactions is contained in this proxy statement. Stellar urges you to read the accompanying proxy statement carefully and in its entirety. IN PARTICULAR, YOU SHOULD CAREFULLY CONSIDER THE MATTERS DISCUSSED UNDER “RISK FACTORS” BEGINNING ON PAGE 15.

 

Stellar is excited about the opportunities the Exchange brings to its shareholders, and thanks you for your consideration and continued support.

 

 Yours sincerely,

 

/s/ Frank R. Oakes  
Frank R. Oakes  
President, Chief Executive Officer and Chairman  

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of the securities to be issued in the Exchange or passed upon the adequacy or accuracy of this proxy statement. Any representation to the contrary is a criminal offense.

 

The accompanying proxy statement is dated April [   ], 2019, and is first being mailed to Stellar shareholders on or about April [   ], 2019.

 

  

 

  

Stellar Biotechnologies, Inc.
332 E. Scott Street
Port Hueneme, California 93041

 

NOTICE OF 2019 ANNUAL GENERAL MEETING OF SHAREHOLDERS
To be Held on [   ], 2019

 

To the Shareholders of Stellar Biotechnologies, Inc.:

 

Notice is hereby given that the 2019 Annual General Meeting of Shareholders (the “Annual Meeting”) of Stellar Biotechnologies, Inc. (“Stellar”) will be held at [   ] (local time) on [   ], 2019, at [ ], to consider and act upon the following matters:

 

  Proposal No. 1: the issuance of common shares of Stellar, no par value (the “Stellar Common Shares”), pursuant to the Share Exchange Agreement, dated as of March 7, 2019 (the “Exchange Agreement”), by and among Stellar, Edesa Biotech Inc. (“Edesa”) and the shareholders of Edesa, a copy of which is attached as Annex A to the accompanying proxy statement;

 

  Proposal No. 2 the election of seven directors, nominated by the board of directors of Stellar (the “Stellar Board”), to serve until Stellar’s 2020 annual meeting of shareholders or until their successors are duly elected and qualified;

 

  Proposal No. 3:

the appointment of Moss Adams LLP as Stellar’s independent registered public accounting firm until the close of the 2020 annual meeting of shareholders; and

 

  Proposal No. 4: the adjournment of the Annual Meeting, if necessary, to solicit additional votes in favor of Proposal No. 1, the issuance of Stellar Common Shares pursuant to the Exchange Agreement.

 

Stellar will also consider such other business as may properly come before the Annual Meeting or any adjournments or postponements thereof. 

 

Only Stellar shareholders of record at the close of business on [   ], 2019, the record date, are entitled to notice of, and to vote at, the Annual Meeting and any adjournments or postponements thereof.

 

All Stellar shareholders are cordially invited to attend the Annual Meeting and vote in person. To assure your representation at the Annual Meeting, however, you are urged to sign, date and return the proxy as soon as possible, to vote by telephone or on the Internet. You may vote in person at the Annual Meeting even if you have previously returned a proxy.

 

  By Order of the Board of Directors,
   
  /s/ Frank R. Oakes
  Frank R. Oakes
  President, Chief Executive Officer, and Chairman

 

Port Hueneme, California
 [   ], 2019

 

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ABOUT THIS DOCUMENT

 

Stellar Biotechnologies, Inc., is referred to herein as the “Company,” “Stellar,” “we,” “our,” or “us,” is providing these proxy materials in connection with the solicitation by Stellar’s Board of proxies to be voted at the Annual Meeting to be held on [   ], 2019, commencing at [  ] local time, at [   ], or at any adjournment or postponement thereof. This proxy statement and the enclosed proxy card will be mailed to each Stellar shareholder entitled to notice of, and to vote at, the Annual Meeting commencing on or about [   ], 2019.

 

We refer to Edesa Biotech Inc. herein as “Edesa.”

 

When we refer to the “combined company,” we are referring to Stellar, upon the completion of the Exchange.

 

You should rely only on the information contained in or incorporated by reference into this proxy statement. No one has been authorized to provide you with information that is different from that contained in or incorporated by reference into this proxy statement. This proxy statement is dated [   ], 2019. You should not assume that the information contained in this proxy statement is accurate as of any other date, nor should you assume that the information incorporated by reference into this proxy statement is accurate as of any date other than the date of such incorporated document. The mailing of this proxy statement to Stellar’s shareholders will not create any implication to the contrary.

 

This proxy statement does not constitute an offer to sell, or a solicitation of an offer to buy, any securities, or the solicitation of a proxy, in any jurisdiction in which or from any person to whom it is unlawful to make any such offer or solicitation in such jurisdiction.

 

ii

 

 

TABLE OF CONTENTS

 

QUESTIONS AND ANSWERS ABOUT THE EXCHANGE AND THE ANNUAL MEETING 1
SUMMARY TERM SHEET 10
RISK FACTORS 15
Risks Related to the Exchange 15
Risks Related to a Reverse Share Split 19
Risks Related to Stellar 19
Risks Related to the Stellar Common Shares 20
Risks Related to Edesa’s Business 23
Risks Related to the Combined Company 44
FORWARD-LOOKING STATEMENTS 49
THE ANNUAL MEETING OF STELLAR SHAREHOLDERS 51
THE EXCHANGE 54
EXCHANGE AGREEMENT 76
MATTERS BEING SUBMITTED TO A VOTE OF STELLAR SHAREHOLDERS 87
PROPOSAL NO. 1 APPROVAL OF THE ISSUANCE OF STELLAR COMMON SHARES IN THE EXCHANGE 87
PROPOSAL NO. 2 ELECTION OF DIRECTORS 88
STELLAR’S CORPORATE GOVERNANCE 91
STELLAR’S EXECUTIVE COMPENSATION 97
STELLAR’S DIRECTOR COMPENSATION 99
STELLAR’S CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 101
STELLAR’S SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 102
AUDIT COMMITTEE REPORT 104
PROPOSAL NO. 3 APPOINTMENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 105
PROPOSAL NO. 4 ADJOURNMENT PROPOSAL 107
STELLAR’S BUSINESS 108
EDESA’S BUSINESS 108
EDESA’S EXECUTIVE COMPENSATION 121
STELLAR’S MANAGEMENT’S DISCUSSION AND ANALYSIS 125
EDESA’S MANAGEMENT’S DISCUSSION AND ANALYSIS 129
DIRECTORS AND OFFICERS OF THE COMBINED COMPANY 134
RELATED PARTY TRANSACTIONS OF DIRECTORS AND EXECUTIVE OFFICERS OF THE COMBINED COMPANY 139
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF THE COMBINED COMPANY 140
DESCRIPTION OF STELLAR SHARE CAPITAL 142
DIVIDENDS 143
HOW TO OBTAIN ADDITIONAL INFORMATION 144
HOUSEHOLDING OF MATERIALS 145
WHERE YOU CAN FIND ADDITIONAL INFORMATION 145
SOLICITATION 145
OTHER BUSINESS 145
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS F-1
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS F-34
ANNEX A A-1
ANNEX B B-1

 

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QUESTIONS AND ANSWERS ABOUT THE EXCHANGE AND THE ANNUAL MEETING

 

The following section provides answers to frequently asked questions about the Exchange and other matters relating to the Annual Meeting. This section, however, provides only summary information. For a more complete response to these questions and for additional information, please refer to the cross-referenced sections. Stellar urges its shareholders to read this document in its entirety prior to making any decision.

 

Q:What is the Exchange?

 

A:Stellar, Edesa and the Edesa shareholders have entered into the Exchange Agreement, dated March 7, 2019. The Exchange Agreement contains the terms and conditions of the proposed business combination of Stellar and Edesa. Under the Exchange Agreement, Stellar will acquire the entire issued share capital of Edesa in exchange for newly issued Stellar Common Shares, with Edesa becoming a wholly-owned subsidiary of Stellar. This transaction is referred to as the “Exchange.”

 

Upon completion of the Exchange, current Stellar shareholders are expected to own approximately 10%, and the Edesa shareholders and option holders are expected to own approximately 90% of the combined company on a fully-diluted basis, subject to a 2% upward or downward adjustment based upon the amount of Stellar’s working capital balance on the day before the completion of the Exchange. As discussed below under “What will the Edesa shareholders receive in the Exchange?”, the exchange ratio is subject to adjustment if Stellar’s working capital is more than $3 million or less than $2 million on the day before the completion of the Exchange.

 

The Exchange has been approved by the boards of directors of both Stellar and Edesa and is expected to close in the second quarter of 2019, subject to certain approvals of the Stellar shareholders as well as other customary conditions. Upon completion of the Exchange, Stellar will change its corporate name, to “Edesa Biotech Inc.” as required by the Exchange Agreement.

 

For a more complete description of the Exchange, please see the section entitled “Exchange Agreement.”

 

Q:What will happen to Stellar if, for any reason, the Exchange does not close?

 

A:If, for any reason, the Exchange is not completed, the Stellar Board may elect to, among other things, attempt to complete another business combination transaction like the Exchange, attempt to sell or otherwise dispose of the various assets of Stellar or continue to operate the business of Stellar.

 

Q:Why are the two companies proposing to combine?

 

  A: Stellar and Edesa believe that the proposed business combination provides new growth opportunities for Stellar and Edesa shareholders. The combined company will be focused primarily on the development of innovative therapeutics for dermatological and gastrointestinal indications with clear unmet medical needs.  Following completion of the Exchange, Stellar intends to develop a plan for the disposition of Stellar’s operations, which is expected to include the wind down or spin-off of Stellar’s current operations.

   

·The Stellar Board considered a number of factors that supported its decision to approve the Exchange Agreement. In the course of its deliberations, the Stellar Board also considered a variety of risks and other countervailing factors related to entering into the Exchange Agreement.

 

  · For a discussion of Stellar’s reasons for the Exchange, please see the section entitled “The Exchange — Reasons for the Exchange.”

 

Q:Why am I receiving this proxy statement?

 

A:

You are receiving this proxy statement because you have been identified as a shareholder of record of Stellar, and you may be entitled to vote at the Annual Meeting, to be held at [  ], local time, on [   ], 2019 to approve, among other things, the issuance of Stellar Common Shares pursuant to the Exchange Agreement. This proxy statement contains important information about the Exchange and the Annual Meeting and you should read it carefully and in its entirety. The enclosed voting materials allow you to authorize a proxy to vote your Stellar Common Shares held without attending the Annual Meeting. As promptly as practicable, please complete, sign, date and mail your proxy card in the pre-addressed postage-paid envelope provided.

 

 1 

 

  

Q:What is required to complete the Exchange?

 

A:To complete the Exchange, Stellar shareholders must approve the issuance of Stellar Common Shares pursuant to the Exchange Agreement.

 

The approval of the issuance of Stellar Common Shares pursuant to the Exchange Agreement requires the affirmative vote of the majority of votes properly cast (not counting “abstentions” or “broker non-votes” as votes cast).

 

Each holder of Edesa shares exchangeable for Stellar Common Shares is a party to the Exchange Agreement, so no meeting of the Edesa shareholders related to the Exchange is required or will be held.

 

In addition to the requirement of obtaining such Stellar shareholder approvals, each of the other closing conditions set forth in the Exchange Agreement must be satisfied or waived.

 

For a more complete description of the closing conditions under the Exchange Agreement, Stellar urges you to read the section entitled “Exchange Agreement – Conditions to the Completion of the Exchange” in this proxy statement.

 

Q:Are there any federal or state regulatory requirements that must be complied with or federal or state regulatory approvals or clearances that must be obtained in order to complete the Exchange?

 

  A: Neither Stellar nor Edesa is required to make any filings or obtain any approvals or clearances from any antitrust regulatory authorities in the U.S. or other countries to complete the Exchange. In the U.S., Stellar must comply with applicable federal and state securities laws and the listing rules of the Nasdaq Stock Market (“Nasdaq”), in connection with the issuance of the Stellar Common Shares in connection with the Exchange, including the filing with the Securities and Exchange Commission (the “SEC”) of this proxy statement.

 

  Q:

What will the Edesa shareholders and option holders receive in the Exchange?

 

  A: Upon completion of the Exchange, the Edesa shareholders will receive Stellar Common Shares in exchange for the outstanding capital shares of Edesa and Edesa option holders will receive options to purchase Stellar Common Shares.

 

  · Immediately following the completion of the Exchange, the Edesa shareholders and option holders are expected to own 90% of the aggregate number of the shares of the combined company on a fully diluted basis, and the Stellar shareholders are expected to own 10% of the aggregate number of shares of the combined company, on a fully diluted basis. This exchange ratio of 90% (Edesa)/10% (Stellar) (the “Base Ratio”) is subject to adjustment if Stellar’s working capital, calculated on the day before the completion of the Exchange, is more than $3 million or less than $2 million, resulting in a maximum exchange ratio of 88% (Edesa)/12% (Stellar) if working capital is $3.5 million or more, and a minimum exchange ratio of 92% (Edesa)/8% (Stellar) if working capital is less than $1,750,000 (the “Adjusted Ratio”).

 

  · The number of Stellar Common Shares issuable to the Edesa shareholders upon completion of the Exchange is subject to a holdback of an amount of Stellar Common Shares to be determined by the parties five business days before the completion of the Exchange (the “Holdback Shares”).  The final number of Stellar Common Shares to be issued to the Edesa shareholders will be determined within 35 days after the completion of the Exchange. After the final calculation is complete, the Holdback Shares will be issued to the Edesa shareholders to the extent needed to meet the Base Ratio or Adjusted Ratio, as applicable. Please see “Exchange Agreement —Exchange Consideration” for further details.

 

  ·

Upon completion of the Exchange, holders of warrants of Stellar to purchase 2,049,808 Stellar Common Shares will be offered cash for their warrants and all outstanding options to purchase approximately 47,000 Stellar Common Shares will become immediately vested and exercisable. The purpose of the Holdback Shares is to allow for any reduction in the number of Stellar Common Shares issuable to the Edesa shareholders and option holders if any Stellar warrant holders do not accept the cash offer for their outstanding warrants or if there are any other changes in the final working capital of Stellar, which could impact the exchange ratio.

 

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  · For a more complete description of what the Edesa shareholders will receive upon the completion of the Exchange, please see the sections entitled “Dividends” and “Exchange Agreement —Exchange Consideration” in this proxy statement. Please also see the section entitled “Risk Factors” in this proxy statement for a discussion of the risks associated with the Exchange.

 

Q:Will holders of the Stellar Common Shares issued as consideration in the Exchange be able to trade those shares?

 

A:The Stellar Common Shares issued as consideration in the Exchange will be issued in transactions exempt from registration under the Securities Act of 1933 in reliance on Regulation S promulgated thereunder and may not be offered or sold by the holders of those shares absent registration or an applicable exemption from registration requirements. As a general matter, holders of such Stellar Common Shares will not be able to transfer any of their Stellar Common Shares until at least six months after receiving the Stellar Common Shares, which is when the Stellar Common Shares would first be eligible to be sold under Rule 144 promulgated under the Securities Act, assuming the conditions thereof are otherwise satisfied.

 

Q:Who will be the directors of Stellar following the Annual Meeting and the completion of the Exchange?

 

  A:

Upon the completion of the Exchange, the Stellar Board is expected to initially have seven members which will be composed of four members proposed by Edesa, one proposed by Stellar and two “independent” directors as defined under Nasdaq corporate governance rules. Upon the completion of the Exchange, the other directors of Stellar will resign. Following the Exchange, the headquarters of Stellar will be located at 100 Spy Court, Markham, Ontario, Canada L3R 5H6.

 

Upon and following the completion of the Exchange, the Stellar Board and its committees are expected to be composed of the individuals set forth in the table below. The directors shall serve until their respective successors are duly elected or appointed and qualified or their earlier death, resignation or removal.

 

  Directors   Audit
Committee
  Compensation
Committee
  Nominating
and
Corporate
Governance
Committee
Edesa Appointees Dr. Pardeep Nijhawan      
  Sean MacDonald  

X

 

X

 

X

  Paul William Pay   X   X  
  Peter van der Velden           X
               
Stellar Appointees

Frank R. Oakes

           
               
Independent Appointees Lorin Johnson    

X

 
  Carlo Sistilli   X       X

 

Q:Who will be the executive officers of the combined company upon the completion of the Exchange?

 

A:Upon the completion of the Exchange, the executive officers of the combined company are expected to be:

 

 

Name

  Position with the
Combined Company
  Current Position
Dr. Pardeep Nijhawan   Chief Executive Officer   Chief Executive Officer, President and Secretary, Edesa
Dr. Michael Brooks   President   Vice President Corporate Development and Strategy, Edesa

Kathi Niffenegger, CPA

  Chief Financial Officer   Chief Financial Officer and Corporate Secretary, Stellar

 

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Q:What are the material U.S. federal and Canadian income tax consequences of the Exchange?

 

  A: The Exchange will not result in any taxable gain or loss for U.S. federal or Canadian income tax purposes to Edesa, Stellar or any Stellar shareholder in his or her capacity as a Stellar shareholder.

 

Q:Why is Stellar seeking Stellar shareholder approval of the issuance of Stellar Common Shares in the Exchange?

 

A:The Stellar Common Shares are listed on The Nasdaq Capital Market, and Stellar is subject to the Nasdaq listing rules as follows:

 

·Nasdaq Rule 5635(b) requires shareholder approval of any issuance or potential issuance of securities when the issuance will result in a “change of control” of the issuer. Nasdaq has previously indicated that the Exchange of, or right to acquire, by a single investor or affiliated investor group, as little as 20% of the common shares (or securities convertible into or exercisable for common shares) or voting power of an issuer could constitute a change of control.

 

·Shareholder approval is also required under Nasdaq Rule 5635(a) prior to the issuance of securities in connection with the Exchange of the shares or assets of another company if, among other things, the number of common shares to be issued is or will be equal to or in excess of 20% of the number of shares of common shares outstanding before the issuance of the shares or securities.

 

·In addition, Nasdaq Rule 5635(d) requires shareholder approval if a listed company issues common shares in a private placement equal to 20% or more of the common shares outstanding before the issuance for less than the closing price immediately preceding the signing of the Exchange Agreement or the average closing price of the common shares for the five trading days immediately preceding the execution of the Exchange Agreement.

 

·The number of Stellar Common Shares to be issued to the Edesa shareholders will exceed 20% of the shares of Stellar Common Shares issued and outstanding immediately prior to the completion of the Exchange. Moreover, as described above, the proposed issuance of the Stellar Common Shares will result in a change in control of Stellar within the meaning of Nasdaq Rule 5635(b). Accordingly, approval of the issuance of the Stellar Common Shares in the Exchange is required under the Nasdaq listing rules.

 

Q:Why is Stellar holding the Annual Meeting?

 
A:Stellar is holding the Annual Meeting to vote on proposals for (1) the issuance of Stellar Common Shares pursuant to the Exchange Agreement; (2) the election of seven directors to serve on the Stellar Board until the 2020 annual meeting of shareholders; (3) the appointment of Moss Adams LLP as Stellar’s independent registered public accounting firm; and (4) the approval of any adjournment of the Annual Meeting, if necessary in order to solicit votes in favor of Proposal No. 1.

 

However, if Proposal No. 1 is approved by the Stellar shareholders and the Exchange is completed, the directors and executive officers of Stellar will be reconstituted in accordance with the terms of the Exchange Agreement. See the section entitled “Directors and Officers of the Combined Company” in this proxy statement.

 

Q:As a Stellar shareholder, how does the Stellar Board recommend that I vote?

 

A:After careful consideration, the Stellar Board recommends that Stellar shareholders vote:

 

·“FOR” Proposal No. 1 to approve the issuance of Stellar Common Shares pursuant to the Exchange Agreement;

 

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·“FOR” Proposal No. 2 to approve the election of directors;

 

·“FOR” Proposal No. 3 to appoint the independent registered public accounting firm; and

 

·“FOR” Proposal No. 4 to adjourn the Annual Meeting, if necessary, to solicit additional votes in favor of the proposal to approve the issuance of Stellar Common Shares pursuant to the Exchange Agreement.

 

Q:What happens if the Annual Meeting is postposed or adjourned?

 

A:Unless a new record date is fixed for such postponement or adjournment, your proxy will still be valid and may be voted at the postponed or adjourned Annual Meeting. You will still be able to change or revoke your proxy at any time until it is voted.

 

Q:What risks should I consider in deciding whether to vote in favor of the share issuance?

 

A:You should carefully review the section of this proxy statement entitled “Risk Factors,” which sets forth the certain risks and uncertainties related to the Exchange, risks and uncertainties to which the combined company’s business will be subject, risks and uncertainties to which Stellar, as an independent company, is subject and risks and uncertainties to which Edesa, as an independent company, is subject.

 

  Q: What happens if the Base Ratio is adjusted?

 

  A: Pursuant to the Exchange Agreement, the Base Ratio is subject to adjustment in the event that Stellar’s working capital is more than $3 million or less than $2 million, as calculated on the day before the completion of the Exchange. Any adjustment to the Base Ratio could affect the proportional ownership of Stellar Common Shares following the Exchange.

 

Q:When do you expect the Exchange to be completed?

 

A: Stellar anticipates that the Exchange will occur as promptly as practicable after the Annual Meeting to be held on [   ], 2019 and following satisfaction or waiver of all closing conditions, but Stellar cannot predict the exact timing. For a more complete description of the closing conditions under the Exchange Agreement, please see the section entitled “Exchange Agreement – Conditions to the Completion of the Exchange” in this proxy statement.

 

Q:What is included in these materials?

 

A:These materials include:

 

·This Proxy Statement for the Annual Meeting;

 

·A proxy card for the Annual Meeting; and

 

·Stellar’s Annual Report on Form 10-K for the year ended September 30, 2018, as filed with the SEC on November 30, 2018 (the “Annual Report”).

 

Q:Will there be any other items of business on the agenda?

 

A:At present, management knows of no additional business to be presented at the Annual Meeting, but if other business is presented, the persons named in the proxy card as proxy holders will vote or refrain from voting in accordance with their best judgment pursuant to the discretionary authority conferred by the proxy.

 

Q:Who is entitled to vote at the Annual Meeting?

 

  A: Only Stellar shareholders of record at the close of business on [  ] may vote at the Annual Meeting. As of the close of business on [   ], there were [   ] Stellar Common Shares outstanding, all of which are entitled to vote at the Annual Meeting.

 

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Q:How many votes am I entitled to per Stellar Common Share?

 

A:Each Stellar shareholder is entitled to one vote for each Stellar Common Share held as of the record date on all matters properly brought before the Annual Meeting.

 

Q:What is the difference between holding Stellar Common Shares as a shareholder of record and as a beneficial owner?

 

A:Stellar Shareholder of Record. If your Stellar Common Shares are registered directly in your name with Stellar’s transfer agent, Computershare, Inc., you are considered, with respect to those Stellar Common Shares, the shareholder of record. If you are a shareholder of record, you will receive a proxy card.

 

Beneficial Owner. If your Stellar Common Shares are held in a brokerage account or by a bank or other nominee, you are considered the beneficial owner of Stellar Common Shares held in street name. The organization holding your account is considered the shareholder of record for purposes of voting at the Annual Meeting. As the beneficial owner, you have the right to instruct that organization on how to vote the Stellar Common Shares held in your account. Those instructions are contained in a “voting instruction form.”

 

Q:If my Stellar Common Shares are held in “street name” by my broker, will my broker vote my Stellar Common Shares for me?

 

A:Stellar Common Shares held in “street name” by a broker or nominee who indicates on a proxy that it does not have discretionary authority to vote those Stellar Common Shares on a proposal are referred to as “broker non-votes.” Under current rules, brokers, banks or other nominees may not vote and have no discretionary authority to vote shares on the election of directors and other governance matters, or “non-routine” matters, unless they receive specific voting instructions from their clients.

 

Your bank or broker does not have discretion to vote uninstructed Stellar Common Shares on the proposals in this Proxy Statement, except for Proposal No. 3 to appoint the independent registered public accounting firm until the close of the 2020 annual meeting of shareholders.

 

If you are a beneficial holder and do not provide specific voting instructions to your broker, the organization that holds your Stellar Common Shares will not be authorized to vote on Proposals No. 1, 2, and 4. Accordingly, for your vote to be counted, you now will need to communicate your voting decisions to your broker, bank, or other nominee before the date of the Annual Meeting. Accordingly, Stellar encourages you to vote promptly, even if you plan to attend the Annual Meeting.

 

Q:If I am a Stellar shareholder of record, how do I vote my Stellar Common Shares?

 

A:There are three ways to vote:

 

·By Mail –You may vote your proxy by filling out the proxy card and sending it back in the envelope provided.

 

·By Telephone or the Internet – Stellar has established telephone and Internet voting procedures for shareholders of record. These procedures are designed to authenticate your identity, to allow you to give your voting instructions and to confirm that those instructions have been properly recorded. The toll-free telephone number for telephone voting is 1-800-690-6903. Please have your proxy card handy when you call. Easy-to-follow voice prompts will allow you to vote your shares and confirm that your instructions have been properly recorded. The website for Internet voting is http://www.proxyvote.com/. As with telephone voting, you will be able to confirm that your instructions have been properly recorded. Telephone and Internet voting facilities for shareholders of record will be available 24 hours a day until 11:59 p.m. Eastern Time, on [   ], 2019.

 

·In Person – If you are a shareholder of record, you may vote in person at the Annual Meeting. Stellar will give you a ballot when you arrive.

 

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Q:If I am a beneficial owner of Stellar Common Shares held in street name, how do I vote my Stellar Common Shares?

 

A:There are three ways to vote:

 

·By Mail –You may vote your proxy by filing out the voting instruction form and sending it back in the envelope provided by your brokerage firm, bank, broker-dealer or other similar organization that holds your Stellar Common Shares.

 

·By Telephone or the Internet – You may vote by proxy via telephone by calling 1-800-690-6903. You may vote by proxy via telephone or the Internet at http://www.proxyvote.com/, as further set forth in the instructions provided by your brokerage firm, bank, broker-dealer or other similar organization that holds your Stellar Common Shares.

 

·In Person – Stellar Common Shares held in “street name” may be voted by you in person at the Annual Meeting only if you obtain a “legal proxy” from the bank, broker or other agent that holds your Stellar Common Shares, which “legal proxy” grants you the right to vote the shares. You must present that “legal proxy” to attend the Annual Meeting and to be entitled to vote in person Stellar Common Shares that are held for you in “street name.”

 

Q:What is the proxy card?

 

A:The proxy card enables you to appoint each of Frank R. Oakes, the Stellar President, Chief Executive Officer, and Chairman, and Gary Koppenjan, the Stellar Senior Director of Investor Relations and Communications, as your representative at the Annual Meeting. By completing and returning the proxy card, you are authorizing these persons to vote your shares at the Annual Meeting in accordance with your instructions on the proxy card. This way, your shares will be voted whether or not you attend the Annual Meeting. Even if you plan to attend the Annual Meeting, it is strongly recommended that you complete and return your proxy card before the Annual Meeting date just in case your plans change. If a proposal comes up for vote at the Annual Meeting that is not on the proxy card, the proxies will vote your shares, under your proxy, according to their best judgment.

 

Q:I share an address with another Stellar shareholder and we received only one paper copy of the proxy materials. How may I obtain an additional copy of the proxy materials?

 

A:As permitted under SEC rules, Stellar has adopted a procedure called “householding.” Under this procedure, Stellar delivers a single copy of the proxy materials to multiple Stellar shareholders who share the same address unless it received contrary instructions from one or more of the Stellar shareholders. This procedure reduces Stellar’s printing costs, mailing costs and fees. Stellar shareholders who participate in householding will continue to be able to access and receive separate proxy cards. Upon written request, Stellar will deliver promptly a separate copy of the proxy materials to any Stellar shareholder at a shared address to which Stellar delivered a single copy of any of these documents. To receive a separate copy of the proxy materials, Stellar shareholders may contact Stellar as follows:

 

Stellar Biotechnologies, Inc.
332 E. Scott Street
Port Hueneme, California 93041
Attention: Corporate Secretary

 

Stellar shareholders who hold shares in street name may contact their brokerage firm, bank, broker-dealer, or other similar organization to request information about householding.

 

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Q:Can I change my vote or revoke my proxy?

 

A:You may change your vote or revoke your proxy at any time prior to the vote at the Annual Meeting. If you are the shareholder of record, a proxy may be revoked at any time prior to its exercise:

 

·by submitting a written notice revoking that proxy, addressed to the Stellar Corporate Secretary at the Stellar executive offices located at 332 E. Scott Street, Port Hueneme, California 93041, at any time up to and including the last business day before the Annual Meeting;

 

·if you submitted your proxy by telephone or the Internet, you may change your vote or revoke your proxy with a later telephone or Internet proxy, as the case may be; or

 

·at the Annual Meeting prior to the taking of a vote.

 

Any Stellar shareholder entitled to vote at the Annual Meeting may attend the meeting and vote in person on any matter presented for a vote to the Stellar shareholders at the meeting, whether or not that Stellar shareholder has previously given a proxy. However, with respect to a shareholder of record, attendance at the Annual Meeting will not have the effect of revoking a proxy unless you give written notice of revocation to the Stellar Corporate Secretary before any vote in which the proxy has been given. If you hold your shares in “street name” and have instructed your broker, bank or other nominee to vote your shares for you, you must follow directions received from your broker, bank or other nominee to change those instructions.

 

Q:What happens if I do not indicate how to vote my proxy?

 

A:If you just sign your proxy card without providing further instructions, your shares will be voted “FOR” the issuance of Stellar Common Shares in the Exchange, “FOR” all the director nominees, “FOR” the appointment of Moss Adams LLP as Stellar’s independent registered public accounting firm, and “FOR” the adjournment of the Annual Meeting, if necessary, to solicit additional votes in favor of Proposal No. 1.

 

Q:Is my vote kept confidential?

 

A:Proxies, ballots and voting tabulations identifying Stellar shareholders are kept confidential and will not be disclosed except as may be necessary to meet legal requirements.

 

Q:Where do I find the voting results of the Annual Meeting?

 

A:Stellar will announce voting results at the Annual Meeting. The final voting results will be tallied by the inspector of election and published by Stellar in a Current Report on Form 8-K, which Stellar is required to file with the SEC within four business days following the Annual Meeting. In Canada, Stellar is also required to file on SEDAR a brief description of the proposals voted upon at the Annual Meeting and the outcome of the votes for such proposals promptly following the Annual Meeting, which description must include the percentage of votes for and against such proposals.

 

Q:What constitutes a quorum?

 

A:The Amended and Restated Articles of Stellar (the “Amended Articles”) require the representation of at least one person entitled to vote at the Annual Meeting who holds at least thirty-three and one-third percent (33 – 1/3%) of the issued Stellar Common Shares, in person or represented by proxy, or a duly appointed proxy holder or representative for a shareholder so entitled and holding or represented by proxy at least thirty-three and one-third percent (33 – 1/3%) of the issued Stellar Common Shares, in order to establish a quorum for the transaction of business. Abstentions and “broker non-votes” will be counted for purposes of determining whether a quorum is present for the transaction of business at the Annual Meeting.

 

Q:What is the vote required for a proposal to pass?

 

A:

 

·Proposal No. 1 — Exchange proposal: The affirmative vote of a majority of the votes cast in person or represented by proxy at the Annual Meeting and entitled to vote is required for approval. With regard to this proposal, Stellar Common Shares which are entitled to vote but abstain from voting on a matter will be excluded from the vote and will have no effect on its outcome.

 

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·Proposal No. 2 — Election of directors: The affirmative vote of the holders of a plurality of the votes cast in person or represented by proxy at the Annual Meeting and entitled to vote is required for approval. With regard to this proposal, Stellar Common Shares which are entitled to vote but abstain from voting on a matter will be excluded from the vote and will have no effect on its outcome.

 

  ·

Proposal No. 3 — Appointment of independent registered public accounting firm: The affirmative vote of the holders of a majority of the votes cast in person or represented by proxy at the Annual Meeting and entitled to vote is required for approval. With regard to this proposal, Stellar Common Shares which are entitled to vote but abstain from voting on a matter will be excluded from the vote and will have no effect on its outcome.

 

·Proposal No. 4 — Adjournment: The affirmative vote of a majority of Stellar Common Shares cast in person or represented by proxy at the Annual Meeting and entitled to vote is required for approval. With regard to this proposal, Stellar Common Shares which are entitled to vote but abstain from voting on a matter will be excluded from the vote and will have no effect on its outcome.

 

Q:Who will pay the costs of soliciting proxies?

 

A:The cost of preparing, assembling, printing and mailing this proxy statement and the accompanying form of proxy, and the cost of soliciting proxies relating to the Annual Meeting, will be borne by Stellar. Some banks and brokers have customers who beneficially own shares listed of record in the names of nominees. Stellar intends to request banks and brokers to solicit such customers and will reimburse them for their reasonable out-of-pocket expenses for such solicitations. If any additional solicitation of the holders of Stellar outstanding shares is deemed necessary, Stellar (through Stellar directors and officers) anticipates making such solicitation directly or may use a proxy solicitation firm. The solicitation of proxies by mail may be supplemented by telephone, email and personal solicitation by officers, directors and regular employees of Stellar.

 

Q:Who can help answer my questions?

 

A:If you are a Stellar shareholder and would like additional copies, without charge, of this proxy statement or if you have questions about the Exchange, including the procedures for voting your Stellar Common Shares, you should contact Stellar Investor Relations at the following address:

 

Stellar Biotechnologies, Inc.
332 E. Scott Street
Port Hueneme, California 93041
Attention: Investor Relations
Tel:     (805) 488-2800 ext. 104
Email:   ir@stellarbiotech.com

 

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SUMMARY TERM SHEET

 

This summary highlights selected information from this proxy statement and may not contain all of the information that is important to you. To better understand the Exchange, and the proposals being considered at the Annual Meeting, you should read this entire proxy statement carefully, including the Exchange Agreement attached as Annex A, (and the other documents to which you are referred herein). You may obtain the information incorporated by reference into this proxy statement without charge by following the instructions in the section entitled “Where You Can Find Additional Information” beginning on page 145.

 

The Companies

 

Stellar Biotechnologies, Inc.

Stellar Biotechnologies, Inc.
332 E. Scott Street
Port Hueneme, California 93041
(805) 488-2800

 

Stellar is a biotechnology company engaged in the aquaculture, research and development, manufacture and commercialization of Keyhole Limpet Hemocyanin (KLH).  KLH is an immune-stimulating protein with an extensive history of safe and effective use in immunological applications. Today, multiple companies are developing drugs that combine disease-targeting agents with KLH. The successful commercialization of one or more of these drugs could have a significant impact on the industry’s ability to produce sufficient quantities of KLH. Stellar believes that its aquaculture production methods and technology can provide scalable, fully traceable supplies of KLH for its customers current and future needs.

 

Edesa Biotech Inc.

Edesa Biotech Inc.

100 Spy Court

Markham, Ontario, Canada, L3R 5H6

(905) 475-1234

 

Edesa Biotech Inc. is a biopharmaceutical company focused on acquiring, developing and commercializing clinical stage drugs for dermatological and gastrointestinal indications with clear unmet medical needs. Edesa’s lead product candidate, referred to as “EB01,” is a novel sPLA2 inhibitor for the topical treatment of chronic ACD. EB01 employs a novel mechanism of action and in two clinical studies has demonstrated statistically significant improvement of multiple symptoms in contact dermatitis patients. Edesa’s Investigational New Drug (“IND”) application for EB01 was accepted by the U.S. Food and Drug Administration (“FDA”) in November 2018 and Edesa is planning on conducting a 160 patient Phase 2B clinical study evaluating EB01. Edesa expects the first patient to be enrolled in the Phase 2B clinical study evaluating EB01 by midyear.

 

Edesa also intends to expand the utility of its sPLA2 inhibitor technology, which forms the basis for EB01, across multiple indications, which could include acne or other inflammatory disorders. For example, “EB02” is a sPLA2 inhibitor formulated to treat hemorrhoids, and Edesa is planning to evaluate EB02 in a proof-of-concept study in the second half of 2019. In addition to EB01 and EB02, Edesa has licensed technology to treat other indications such as anal fissures, and is in discussions with third parties to expand its portfolio with assets to treat other serious skin and gastrointestinal conditions.

 

The Exchange (see page 54)

 

Upon the terms and conditions of the Exchange Agreement, Stellar will acquire the entire issued share capital of Edesa, with Edesa becoming a wholly-owned subsidiary of Stellar.

 

Following the completion of the Exchange, Stellar will change its name to “Edesa Biotech Inc.” Edesa and Stellar expect the Exchange to be completed in the second quarter of 2019, subject to the satisfaction of applicable conditions. Upon completion of the Exchange, the current Stellar shareholders are expected to own approximately 10%, and the Edesa shareholders and option holders are expected to own approximately 90%, of the combined company on a fully-diluted basis, subject to a 2% upward or downward adjustment based upon the amount of Stellar’s working capital balance on the day before the completion of the Exchange. See the section entitled “Questions and Answers about the Exchange — What will the Edesa shareholders receive in the Exchange?” above.

 

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The Exchange Ratio (see page 74)

 

Pursuant to the Exchange Agreement, the Base Ratio of 90% (Edesa)/10% (Stellar) is subject to adjustment in the event that Stellar’s working capital is more than $3 million or less than $2 million, as calculated on the day before the Exchange. Any adjustment to the Base Ratio could affect the proportional ownership of Stellar Common Shares following the completion of the Exchange. See the section entitled “Exchange Agreement.”

 

Reasons for the Exchange (see page 62)

 

The Stellar Board considered various reasons for the Exchange, as described later in this proxy statement.

 

Opinion of Cassel Salpeter (see page 64)

 

At the meeting of the Stellar Board on March 5, 2019, Cassel Salpeter & Co. LLC (“Cassel Salpeter”), a financial advisor of Stellar, reviewed with the Stellar Board its financial analyses of Stellar, Edesa and the proposed Exchange. Thereafter, at the request of the Stellar Board, Cassel Salpeter orally rendered its opinion to the Stellar Board (which was subsequently confirmed in writing by delivery of Cassel Salpeter’s written opinion addressed to the Stellar Board dated March 5, 2019), to the effect that and subject to the various assumptions, qualifications and limitations set forth in its opinion as of that date, the Base Ratio in the transaction pursuant to the Exchange Agreement was fair from a financial point of view to Stellar.

 

The summary of Cassel Salpeter’s opinion in this proxy statement is qualified in its entirety by reference to the full text of the written opinion, which is included as Annex B to this proxy statement and sets forth the procedures followed, assumptions made, qualifications and limitations on the review undertaken and other matters considered by Cassel Salpeter in preparing its opinion. However, neither Cassel Salpeter’s written opinion nor the summary of its opinion and the related analyses set forth in this proxy statement are intended to be, and do not constitute, advice or a recommendation to any shareholder as to how such shareholder should act or vote with respect to any matter relating to the proposed transaction or otherwise.

 

Overview of the Exchange Agreement

 

Exchange Consideration (see page 74)

 

The Edesa shareholders will receive Stellar Common Shares in exchange for Edesa’s entire issued share capital at the Base Ratio, as adjusted pursuant to the terms of the Exchange Agreement.

 

Treatment of Stellar Options and Warrants (see page 72)

 

Upon completion of the Exchange, holders of warrants of Stellar to purchase 2,049,808 Stellar Common Shares will be offered cash for their warrants and all outstanding options to purchase approximately 47,000 Stellar Common Shares will become immediately vested and exercisable.

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Conditions to the Completion of the Exchange (see page 77)

 

The obligations to complete the Exchange and the other transactions contemplated by the Exchange Agreement are subject to Stellar shareholder approval and other customary conditions as set forth in the section entitled “Exchange Agreement — Conditions to the Completion of the Exchange” below.

 

No Solicitation (see page 81)

 

Both Edesa and Stellar are prohibited by the terms of the Exchange Agreement from directly or indirectly soliciting, initiating, encouraging or facilitating the making, submission or announcement of any Acquisition Proposal or Acquisition Inquiry (as defined below) or taking any action that would reasonably be expected to lead to an Acquisition Proposal or Acquisition Inquiry.  However, before obtaining shareholder approval of the issuance of Stellar Common Shares in the Exchange, Stellar may provide information in response to an Acquisition Proposal if the Stellar Board concludes in good faith, after consultation with its outside legal counsel and financial advisors, that the failure to take such action is reasonably likely to be inconsistent with the fiduciary duties of the Stellar Board to the Stellar shareholders under applicable legal requirements.

 

Termination and Termination Fee (see page 85)

 

Either Stellar or Edesa can terminate the Exchange Agreement under certain circumstances, which would prevent the completion of the Exchange.

 

If the Exchange Agreement is terminated under certain circumstances, Stellar would be required to pay Edesa a termination fee of $1 million and, in some circumstances, reimburse Edesa and the Edesa shareholders for fees and expenses incurred in connection with the Exchange, up to a maximum of $250,000.

 

Interests of the Stellar Directors and Executive Officers in the Exchange (see page 72)

 

In considering the recommendation of the Stellar Board with respect to the issuance of Stellar Common Shares in the Exchange, Stellar shareholders should be aware that members of the Stellar Board and executive officers of Stellar have interests in the Exchange that may be different from, or in addition to, your interests.

 

Material U.S. Federal and Canadian Income Tax Consequences of the Exchange (see page 74)

 

There are no material U.S. federal or Canadian income tax consequences to Stellar shareholders directly as a result of the issuance of Stellar Common Shares in the Exchange. The Exchange is expected to restrict the utility of Stellar’s net operating loss carryforwards and certain other tax attributes. For additional information, see Risk Factors — “Because the Exchange will result in an ownership change of Stellar for purposes of the Code and is expected to result in an acquisition of control of Stellar for purposes of the Income Tax Act (Canada), Stellar’s pre-Exchange net operating loss carryforwards and certain other tax attributes will be subject to limitation.”

 

Risk Factors (see page 15)

 

Both Stellar and Edesa are subject to various risks associated with their businesses and their industries. In addition, the Exchange, including the possibility that the Exchange may not be completed, poses a number of risks to each company and its respective shareholders, including the following risks:

 

·The exchange ratio is not adjustable based on the market price of Stellar Common Shares so the Exchange consideration upon the completion of the Exchange may have a greater or lesser value than the market price of Stellar Common Shares at the time the Exchange Agreement was signed;

 

·Stellar’s shareholders will experience immediate and substantial dilution upon the completion of the Exchange;

 

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·The announcement and pendency of the Exchange could have an adverse effect on the market price of Stellar Common Shares and/or the business, financial condition, results of operations, or business prospects for Stellar and/or Edesa;

 

·The Exchange may be completed even though material adverse changes may result solely from the announcement of the Exchange, changes in the industry in which Stellar and Edesa operate that apply to all companies generally and other causes;

 

·Some Stellar officers and directors have interests that are different than, or in addition to, those of other Stellar shareholders and may influence them to support or approve the transactions contemplated by the Exchange Agreement without regard to your interests;

 

·Stellar Common Shares could be delisted from The Nasdaq Capital Market if Stellar does not comply with Nasdaq’s listing standards;

 

·Stellar and Edesa shareholders may not realize a benefit from the Exchange commensurate with the ownership dilution they will experience in connection with the Exchange;

 

·During the pendency of the Exchange, Stellar may not be able to enter into a business combination with another party under certain circumstances because of restrictions in the Exchange Agreement, which could adversely affect its business;

 

·Certain provisions of the Exchange Agreement may discourage third parties from submitting alternative takeover proposals, including proposals that may be superior to the arrangements contemplated by the Exchange Agreement;

 

·Because the lack of a public market for Edesa shares makes it difficult to evaluate the fairness of the exchange ratio, Stellar may pay more than the fair market value of the Edesa shares;

 

·The issuance of the shares pursuant to the Exchange and certain related matters are subject to approval by Stellar shareholders, and there can be no assurance that Stellar’s shareholders will approve such matters;

 

·If the conditions to the Exchange are not met or waived, the Exchange will not occur;

 

·Failure to complete the Exchange may result in Stellar paying a termination fee or expenses to Edesa and could harm the Common Share price of Stellar and future business and operations of Stellar;

 

·Failure to complete the Exchange may result in Stellar pursuing alternative strategic transactions or filing for liquidation and dissolution;

 

·The announcement and pendency of the Exchange could cause disruptions in the business of Edesa, which could have an adverse effect on its business and financial results; and

 

·The ownership of the Stellar Common Shares following the Exchange will be highly concentrated and it may prevent you and other shareholders from influencing significant corporate decisions and may result in conflicts of interest that could cause the Common Share price to decline.

 

These risks and other risks are discussed in greater detail under the section entitled “Risk Factors” in this proxy statement. Stellar encourages you to read and consider all of these risks carefully.

 

Regulatory Approvals (see page 74) 

In the U.S., Stellar must comply with applicable federal and state securities laws and the rules and regulations of The Nasdaq Capital Market in connection with the issuance of Stellar Common Shares and the filing of this proxy statement with the SEC.

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Nasdaq Stock Market Listing (see page 75)

 

Prior to the completion of the Exchange, Stellar and Edesa intend to file an initial listing application with The Nasdaq Capital Market pursuant to Nasdaq Stock Market “change of control” rules. If such application is accepted, Stellar anticipates that the Stellar Common Shares will be listed on The Nasdaq Capital Market following the completion of the Exchange and will trade under Stellar’s new name, “Edesa Biotech Inc.” and new trading symbol, “EDSA.”

 

If necessary to obtain listing of the Stellar Common Shares on The Nasdaq Capital Market, Stellar may effect a reverse share split of the Stellar Common Shares in a ratio to be determined prior to the completion of the Exchange. Under Canadian law, prior shareholder approval of the reverse share split would not be required. The terms of any reverse share split have not yet been determined. Any reverse share split will reduce the number of Stellar Common Shares outstanding. See “Risk Factors — Risks Related to a Reverse Share Split.”

 

In addition, if necessary to obtain listing of the Stellar Common Shares on The Nasdaq Capital Market, or if otherwise desirable, Edesa may raise additional funds through the issuance of equity securities (or securities convertible into equity securities) of Edesa before the completion of the Exchange. The terms of any financing have not yet been determined. Any financing will not impact the aggregate number of Stellar Common Shares that are issued in the Exchange to the Edesa shareholders and option holders, or the exchange ratio.

 

Anticipated Accounting Treatment (see page 75)

 

The Exchange will be treated by Stellar as a reverse acquisition under the acquisition method of accounting in accordance with accounting principles generally accepted in the U.S. For accounting purposes, Edesa is considered to be acquiring Stellar in the Exchange.

 

Vote Required for Approval of the Stellar Common Shares in the Exchange (see page 87)

 

The affirmative vote of the holders of a majority of the votes cast by holders present in person or represented by proxy at the Annual Meeting and entitled to vote is required for the approval of the issuance of Stellar Common Shares in the Exchange. With regard to this proposal, broker non-votes and shares which are entitled to vote but abstain from voting on a matter will be excluded from the vote and will have no effect on its outcome.

 

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RISK FACTORS

 

The combined company will be faced with a market environment that cannot be predicted and that involves significant risks, many of which will be beyond its control. In addition to the other information contained in this proxy statement, you should carefully consider the material risks described below before deciding how to vote your Stellar Common Shares. In addition, you should read and consider the risks associated with the business of Stellar because these risks may also affect the combined company — these risks can be found in the Annual Report, which is incorporated by reference into this proxy statement. You should also read and consider the other information in this proxy statement. Please see the section entitled “Where You Can Find Additional Information” in this proxy statement.

 

Risks Related to the Exchange

 

The exchange ratio is not adjustable based on the market price of Stellar Common Shares, so the Stellar Common Shares issuable upon the completion of the Exchange may have a greater or lesser value than at the time the Exchange Agreement was signed.

 

The Exchange Agreement has set a fixed exchange ratio at which Edesa shares will be exchanged for Stellar Common Shares in the Exchange, and the exchange ratio is only subject to adjustment if Stellar’s working capital is more than $3 million or less than $2 million upon the completion of the Exchange. Any changes in the market price of Stellar Common Shares before the completion of the Exchange will not affect the number of Stellar Common Shares Edesa shareholders will be entitled to receive pursuant to the Exchange Agreement. Therefore, if before the completion of the Exchange the market price of the Stellar Common Shares declines from the market price on the date of the Exchange Agreement, then Edesa shareholders could receive Stellar Common Shares with substantially lower value than the parties had negotiated for in the establishment of the exchange ratio. Similarly, if before the completion of the Exchange the market price of Stellar Common Shares increases from the market price on the date of the Exchange Agreement, then Edesa shareholders could receive Stellar Common Shares with substantially higher value than the parties had negotiated for in the establishment of the exchange ratio. The Exchange Agreement does not include a price-based termination right. Because the exchange ratio does not adjust as a result of changes in the market value of Stellar Common Shares, for each percentage point that the market value of Stellar Common Shares rises or declines from the date of the Exchange Agreement, there is a corresponding one percentage point rise or decline in the value of the Stellar Common Shares issued to Edesa shareholders (assuming no adjustment to the exchange ratio relating to working capital).

 

Stellar’s shareholders will experience immediate and substantial dilution upon the completion of the Exchange.

 

Upon completion of the Exchange, current Stellar shareholders are expected to own approximately 10%, and the Edesa shareholders and option holders are expected to own approximately 90% of the combined company on a fully-diluted basis, subject to a 2% upward or downward adjustment based upon the amount of Stellar’s working capital balance calculated on the day before the completion of the Exchange. As a result, the current Stellar shareholders’ ownership of Stellar will be substantially diluted upon completion of the Exchange.

 

The announcement and pendency of the Exchange could have an adverse effect on the market price of Stellar Common Shares and/or the business, financial condition, results of operations, or business prospects for Stellar and/or Edesa.

 

The market price of Stellar Common Shares may decline as a result of the Exchange for a number of reasons including if:

 

·investors react negatively to the prospects of the combined company’s business and prospects from the Exchange;

 

·the effect of the Exchange on the combined company’s business and prospects is not consistent with the expectations of financial or industry analysts; or

 

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·the combined company does not achieve the perceived benefits of the Exchange as rapidly or to the extent anticipated by financial or industry analysts.

 

 

The announcement and pendency of the Exchange could also disrupt Edesa’s and/or Stellar’s businesses. For example, Edesa and Stellar management may need to focus additional attention on the completion of the Exchange and related matters, thereby diverting their attention from the day-to-day business operations of their respective companies. Should these disruptions occur, any of these matters could adversely affect the Stellar Common Share price or harm the financial condition, results of operations, or business prospects of Edesa and/or Stellar.

 

The Exchange may be completed even though material adverse changes may result from the announcement of the Exchange, industry-wide changes and other causes.

 

Although both Stellar and Edesa have certain termination rights, there could be material adverse changes that affect either or both of Stellar or Edesa that do not give rise to a termination right. In particular certain matters which affect the wider industry or markets and certain matters which are not within the control of the companies may give rise to material adverse changes but may not give rise to a termination right.

 

If adverse changes occur and Stellar and Edesa still complete the Exchange, the combined company share price may suffer. This in turn may reduce the value of the Exchange to the shareholders of Stellar, Edesa or both.

 

Some Stellar officers and directors have interests in the Exchange that are different from, or in addition to, yours and that may influence them to support or approve the issuance of Stellar Common Shares in connection with the Exchange and the related matters to be acted upon by Stellar’s shareholders at the Annual Meeting.

 

Certain officers and directors of Stellar participate in arrangements that provide them with interests in the Exchange that are different from, or in addition to, yours, including, among others, the continued service as an officer or director of the combined company, the acceleration of option vesting, and continued indemnification.

 

For example, Kathi Niffenegger, the Chief Financial Officer and Corporate Secretary of Stellar, will enter into an employment agreement, effective upon completion of the Exchange, and Frank R. Oakes, the President, Chief Executive Officer, and Chairman of Stellar, will remain as a director.

 

These interests, among others, may influence the executive officers and directors of Stellar to support or approve the issuance of Stellar Common Shares in the Exchange. For more information concerning the interests of Stellar executive officers and directors, see the section entitled “The Exchange — Interests of the Stellar Directors and Executive Officers in the Exchange” in this proxy statement.

 

The Stellar Common Shares could be delisted from The Nasdaq Capital Market if Stellar does not comply with Nasdaq’s listing standards.

 

Pursuant to the Nasdaq listing standards, the completion of the Exchange requires the combined company to submit an initial listing application and, at the time of the Exchange, meet all of the criteria applicable to a company initially requesting listing. Stellar and Edesa intend to file an initial listing application with The Nasdaq Capital Market. While Stellar and Edesa intend to obtain listing status for the combined company and maintain such listing, no guarantees can be made about the ability to do so.

 

If the Stellar Common Shares are delisted by Nasdaq, the Stellar Common Shares may be eligible to trade on the OTCQB or another over-the-counter market. Any such alternative would likely result in it being more difficult for Stellar to raise additional capital through the public or private sale of equity securities and for investors to dispose of, or obtain accurate quotations as to the market value of, the Stellar Common Shares. In addition, there can be no assurance that the Stellar Common Shares would be eligible for trading on any such alternative exchange or markets.

 

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Stellar and Edesa shareholders may not realize a benefit from the Exchange commensurate with the ownership dilution they will experience in connection with the Exchange.

 

If the combined company is unable to realize the full strategic and financial benefits currently anticipated from the Exchange, Stellar and Edesa shareholders will have experienced substantial dilution of their ownership interests in their respective companies without receiving any commensurate benefit, or only receiving part of the commensurate benefit to the extent the combined company is able to realize only part of the strategic and financial benefits currently anticipated from the Exchange. Significant management attention and resources will be required to integrate the two companies, including the anticipated wind-down or spin-off of Stellar’s current operations. Delays in this process could adversely affect the combined company’s business, financial results, financial condition and share price following the Exchange. Even if the combined company were able to integrate the business operations successfully, there can be no assurance that this integration will result in the realization of the full benefits of synergies, innovation and operational efficiencies that may be possible from this integration and that these benefits will be achieved within a reasonable period of time.

 

Prior to the completion of the Exchange, Stellar may not be able to enter into a business combination with another party at a more favorable price because of restrictions in the Exchange Agreement, which may discourage third parties from making alternative takeover proposals.

 

Both Edesa and Stellar are prohibited by the terms of the Exchange Agreement from directly or indirectly soliciting, initiating, encouraging or facilitating the making, submission or announcement of any Acquisition Proposal or Acquisition Inquiry or taking any action that would reasonably be expected to lead to an Acquisition Proposal or Acquisition Inquiry.  However, before obtaining shareholder approval of the issuance of Stellar Common Shares in the Exchange, Stellar may provide information in response to an Acquisition Proposal if the Stellar Board concludes in good faith, after consultation with its outside legal counsel and financial advisors, that the failure to take such action is reasonably likely to be inconsistent with the fiduciary duties of the Stellar Board to the Stellar shareholders under applicable legal requirements.

 

In addition, if Stellar or Edesa terminate the Exchange Agreement under certain circumstances, including because Stellar enters into an acquisition agreement with respect to a Superior Offer, or because Stellar breaches or fails to perform the representations, warranties, covenants or other agreements in the Exchange Agreement resulting in a failure to satisfy the applicable closing conditions and which breach or failure is not capable of being cured or is not subsequently cured and Stellar then consummates an Acquisition Transaction under certain circumstances within six months after the termination of the Exchange Agreement, Stellar would be required to pay a termination fee of $1.0 million to Edesa. This termination fee may discourage third parties from submitting alternative takeover proposals to Stellar or the Stellar shareholders and may cause the Stellar Board to be less inclined to recommend an alternative proposal.

 

Failure to complete the Exchange may result in Stellar paying a termination fee or reimbursing fees and expenses incurred by Edesa and the Edesa shareholders and could harm the Stellar Common Share price and future business and operations of Stellar.

 

If the Exchange is not completed, Stellar is subject to the following risks: 

 

·if the Exchange Agreement is terminated under certain circumstances, Stellar will be required to pay Edesa a termination fee of $1.0 million;

 

·if the Exchange Agreement is terminated under certain circumstances, Stellar will be required to reimburse certain transaction fees and expenses incurred by Edesa and the Edesa shareholders;

 

·the price of Stellar Common Shares may decline and remain volatile; and

 

  · substantial costs related to the Exchange, such as legal and accounting fees (which Stellar estimates will total approximately $925,000), must be paid even if the Exchange is not completed.

 

In addition, if the Exchange Agreement is terminated, the Stellar Board may elect to, among other things, attempt to complete another business combination transaction like the Exchange, attempt to sell or otherwise dispose of the various assets of Stellar, or continue to operate the business of Stellar, any of which involves significant risks and uncertainties. As more fully described in the section entitled “Exchange Agreement — Termination” below.

 

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Because the lack of a public market for Edesa shares makes it difficult to evaluate the fairness of the exchange ratio, Stellar may pay more than the fair market value of the Edesa shares.

 

The outstanding share capital of Edesa is privately held and is not traded in any public market. The lack of a public market makes it difficult to determine the fair market value of the Edesa shares. Because the percentage of Stellar equity to be issued to Edesa shareholders was determined based on negotiations between the parties, it is possible that Stellar may pay more than the aggregate fair market value for the Edesa shares.

 

The Stellar Common Shares issuable in the Exchange will constitute restricted securities under federal securities laws and are subject to additional restrictions on transfer. As a result, the shares will not be freely tradable following the Exchange, and shareholders receiving them may never be able to achieve liquidity.

 

The Stellar Common Shares issued as consideration in the Exchange will not immediately be registered under the Securities Act. The Stellar Common Shares will constitute “restricted stock” under the Securities Act and, therefore, such shares may not be sold unless the shares are registered or unless an exemption from the registration and prospectus delivery requirements of the Securities Act is available. As a general matter, holders of such shares will not be able to transfer any of their shares until at least six (6) months after receiving Stellar Common Shares, which is when the shares would first be eligible to be sold under Rule 144 promulgated under the Securities Act, assuming the conditions thereof are otherwise satisfied.

 

If the conditions to the Exchange are not met or waived, the Exchange will not occur.

 

Specified conditions must be satisfied or waived to complete the Exchange. These conditions are set forth in the Exchange Agreement and described in the section entitled “Exchange Agreement — Conditions to the Completion of the Exchange” in this proxy statement. Neither Stellar nor Edesa can assure you that all of the conditions will be satisfied or waived. If the conditions are not satisfied or waived, the Exchange will not occur or will be delayed, and Stellar and Edesa each may lose some or all of the intended benefits of the Exchange. In the event that the Exchange is not completed, Stellar may be subject to many risks, including the fees and the costs related to the Exchange, such as legal, accounting and advisory fees, which must be paid even if the Exchange is not completed.

 

If there is substantial fluctuation in Stellar’s working capital, the Base Ratio could fluctuate.

 

Pursuant to the Exchange Agreement, the Base Ratio is subject to adjustment in the event that Stellar’s working capital is more than $3 million or less than $2 million, as calculated on the day before the Exchange. Any adjustment to the Base Ratio could affect the proportional ownership of Stellar Common Shares following the Exchange.

 

The combined company may become involved in securities class action litigation that could divert management’s attention and harm the combined company’s business and insurance coverage may not be sufficient to cover all costs and damages.

 

In the past, securities class action or shareholder derivative litigation often follows certain significant business transactions, such as the sale of a business division or announcement of a merger. The combined company may become involved in this type of litigation in the future. Litigation often is expensive and diverts management’s attention and resources, which could adversely affect the combined company’s business.

 

The success of the proposed business combination of Stellar and Edesa will depend in part on relationships with third parties, which relationships may be affected by third-party preferences or public attitudes about the Exchange. Any adverse changes in these relationships could adversely affect the combined company’s business, financial condition, or results of operations.

 

The success of the Exchange will be in part dependent on the combined company’s ability to maintain and renew business relationships and to establish new business relationships. There can be no assurance that management of the combined company will be able to maintain such business relationships, or enter into or maintain new business contracts and other business relationships, on acceptable terms, if at all. The failure to maintain important business relationships could have a material adverse effect on the business, financial condition, or results of operations of the combined company.   

 

 18 

 

  

If any of the events described in “Risks Related to Edesa’s Business” occur, those events could cause the potential benefits of the Exchange not to be realized.

 

Edesa’s business is expected to constitute most, if not all, of the business of the combined company following the Exchange. To the extent any of the events in the risks described below in the section entitled “Risks Related to Edesa’s Business” beginning on page 23 occur, those events could cause the potential benefits of the Exchange not to be realized and the market price of the combined company’s common shares to decline.

 

Because the Exchange will result in an ownership change of Stellar for purposes of the Internal Revenue Code and is expected to result in an acquisition of control of Stellar for purposes of the Income Tax Act (Canada), Stellar’s pre-Exchange net operating loss carryforwards and certain other tax attributes will be subject to limitation.

 

If a corporation undergoes an “ownership change” within the meaning of Section 382 of the Internal Revenue Code (the “Code”), or Section 382, the corporation’s US federal net operating loss carryforwards and certain other tax attributes arising from before the ownership change are subject to limitations on use after the ownership change. In general, an ownership change occurs if there is a cumulative change in the corporation’s equity ownership by certain shareholders that exceeds fifty percentage points by value over a rolling three-year period. Similar rules may apply under state tax laws. The Exchange will result in an ownership change for Stellar and, accordingly, Stellar’s U.S. federal and state net operating loss carryforwards and certain other tax attributes will be subject to limitation and possibly elimination after the Exchange. Additional ownership changes in the future could result in additional limitations on the combined company’s net operating loss carryforwards and certain other tax attributes.

 

Similarly, for purposes of the Income Tax Act (Canada) (the “ITA”), in general terms, where control of a corporation is acquired or deemed to be acquired, as is expected to apply to Stellar as a result of the Exchange, the corporation is subject to a “loss restriction event”, and the corporation’s net operating loss carryforwards, other losses and certain other tax attributes will also be subject to limitation and possibly elimination for purposes of the ITA after the Exchange. Similar rules are expected to apply for Canadian provincial purposes, not addressed herein.

 

Consequently, even if the combined company achieves profitability, it may not be able to utilize a material portion of the combined company’s net operating loss carryforwards and certain other tax attributes, which could have an adverse effect on cash flow and results of operations.

 

Risks Related to a Reverse Share Split

 

A reverse share split may not increase the combined company’s share price over the long-term.

 

Stellar may effect a reverse share split of the Stellar Common Shares in a ratio to be determined prior to the completion of the Exchange. Under Canadian law, prior shareholder approval of the reverse share split would not be required. The terms of any reverse share split have not yet been determined. The principal purpose of any reverse share split is to increase the per-share market price of Stellar’s Common Shares in order to obtain listing of the combined company’s shares following the completion of the Exchange. It cannot be assured, however, that any reverse share split will accomplish this objective for any meaningful period of time. While it is expected that a reduction in the number of outstanding Stellar Common Shares will proportionally increase the market price of Stellar’s Common Shares, it cannot be assured that any reverse share split will increase the market price of the Stellar Common Shares share by a multiple of the proposed reverse share split ratio, or result in any permanent or sustained increase in the market price of Stellar’s Common Shares, which is dependent upon many factors, including the combined company’s business and financial performance, general market conditions, and prospects for future success. Thus, while the share price of the combined company might meet the continued listing requirements for The Nasdaq Capital Market initially, it cannot be assured that it will continue to do so.

 

A reverse share split may decrease the liquidity of the combined company’s common shares.

 

The liquidity of the Stellar Common Shares could also be adversely affected by the reduced number of shares outstanding after a reverse share split. The reduction in the number of outstanding shares may lead to reduced trading and a smaller number of market makers for Stellar’s Common Shares.

 

A reverse share split may lead to a decrease in the combined company’s overall market capitalization.

 

Should the market price of the combined company’s common share decline after any reverse share split, the percentage decline may be greater, due to the smaller number of shares outstanding, than it would have been prior to any reverse share split. A reverse share split may be viewed negatively by the market and, consequently, can lead to a decrease in the combined company’s overall market capitalization. If the per share market price does not increase in proportion to the reverse share split ratio, then the value of the combined company, as measured by its share capitalization, will be reduced. In some cases, the per-share price of companies that have effected reverse share splits subsequently declined back to pre-reverse split levels, and accordingly, it cannot be assured that the total market value of Stellar’s Common Shares will remain the same after any reverse share split is effected, or that a reverse share split will not have an adverse effect on the price of Stellar’s Common Shares due to the reduced number of shares outstanding after a reverse share split.

 

Risks Related to Stellar

 

Stellar may not be able to complete the Exchange and may elect to pursue another business combination transaction similar to the Exchange, which may not occur on commercially reasonably terms or at all.

 

Stellar cannot assure you that it will complete the Exchange in a timely manner or at all. The Exchange Agreement is subject to many closing conditions and termination rights, as set forth in more detail in “Exchange Agreement — Conditions to the Completion of the Exchange” and “Exchange Agreement — Termination” below. If Stellar does not close the Exchange, the Stellar Board may elect to attempt to complete another business combination transaction similar to the Exchange. Attempting to complete another business combination transaction similar to the Exchange will be costly and time consuming, and Stellar cannot make any assurances that a future business combination transaction will occur on commercially reasonable terms or at all. Even if Stellar does complete the Exchange, the Exchange ultimately may not deliver the anticipated benefits or enhance shareholder value.

 

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If Stellar does not successfully complete the Exchange, it will require substantial additional funding and may need to curtail operations if it has insufficient capital.

 

Stellar had cash and cash equivalents of approximately $7.4 million at December 31, 2018. Stellar expects its negative cash flows from operations to continue for the foreseeable future.

 

Stellar currently believes that its available cash, cash equivalents and marketable securities and interest income will be sufficient to fund its anticipated levels of operations for the next 12 months. However, if Stellar does not successfully complete the Exchange and increases its level of operations, Stellar will require additional funding and such funding may be substantial. As such, its future capital requirements will depend on many factors, including:

 

·Stellar’s ability to complete the Exchange;

 

·the timing and nature of any future strategic transactions that Stellar undertakes, including, but not limited to licensing a product candidate or potential partnerships;

 

·the cost of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights;

 

·the effect of competing technological and market developments; and

 

·the cost incurred in responding to disruptive actions by activist shareholders.

 

Having an insufficient level of capital may require Stellar to significantly curtail its operations, which could have a negative impact on Stellar’s financial condition and Stellar’s ability to successfully pursue its business strategy.

 

Risks Related to the Stellar Common Shares

 

Ownership of Stellar Common Shares involves a high degree of risk.

 

Investing in and owning Stellar Common Shares involves a high degree of risk. Stellar shareholders should read carefully the risk factors provided within this section, as well as Stellar’s public documents filed with the SEC, including the financial statements therein.

 

If the Stellar warrant holders do not elect to cash-out their warrants, Stellar’s shareholders’ ownership in the combined company may be further diluted.

 

Upon completion of the Exchange, holders of warrants of Stellar to purchase 2,049,808 Stellar Common Shares will be offered cash for their warrants. If any Stellar warrant holders do not accept the cash offer for their outstanding warrants, under the exchange ratio, the number of Stellar Common Shares that must be issued to Edesa in the Exchange may increase. As a result, following the completion of the Exchange, the Stellar shareholders’ ownership in the combined company may be further diluted.

 

If the Exchange is not completed, the Stellar Common Share price may continue to be volatile.

 

The market price of Stellar is subject to significant fluctuations. During the six-month period ended March 7, 2019, the trading day before the Exchange was announced, the closing price per share of Stellar on The Nasdaq Capital Market ranged from a high of $1.43 in September 2018 to a low of $0.84 in December 2018. Market prices for securities of early-stage pharmaceutical, biotechnology and other life sciences companies have historically been particularly volatile. The volatility of the market price of Stellar can be exacerbated by low trading volume. Some of the factors that may cause the market price of Stellar to fluctuate include:

 

  · sales or potential sales of substantial amounts of Stellar’s Common Shares;

  

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·delay or failure in initiating, enrolling, or completing pre-clinical or clinical trials of third-party drug candidates utilizing Stellar KLH protein or unsatisfactory results of these trials or events reported in any of current or future clinical trials of third-party drug candidates utilizing Stellar KLH protein;

 

·announcements about Stellar or its competitors, including funding announcements, corporate or business updates, updates on manufacturing of Stellar’s products, third-party clinical trial results of KLH-based drug candidates, regulatory approvals or new product introductions;

 

·developments concerning Stellar’s product manufacturers;

 

·litigation and other developments relating to Stellar’s patents or other proprietary rights or those of Stellar’s competitors;

 

·governmental regulation and legislation;

 

·change in securities analysts’ estimates of Stellar’s performance, or Stellar’s failure to meet analysts’ expectations;

 

·Stellar’s ability to enter into new collaborative arrangements with respect to Stellar’s product candidates;

 

·the terms and timing of any future collaborative, licensing or other arrangements that Stellar may establish;

 

·Stellar’s ability to raise additional capital to carry through with its development plans and current and future operations;

 

·the timing of achievement of, or failure to achieve, Stellar’s and any potential future collaborators’ manufacturing, pre-clinical, clinical, regulatory and other milestones, such as the commencement of clinical development, the completion of a clinical trial or the receipt of regulatory approval;

 

·actions taken by regulatory agencies with respect to product candidates or products containing Stellar KLH;

 

·uncontemplated problems in the supply of the raw materials used to produce Stellar KLH;

 

·introductions or announcements of technological innovations or new products by Stellar, its potential future collaborators, or its competitors, and the timing of these introductions or announcements;

 

·market conditions for equity investments in general, or the biotechnology or pharmaceutical industries in particular;

 

·Stellar may have limited or very low trading volume that may increase the volatility of the market price of Stellar Common Shares;

 

·actual or anticipated fluctuations in Stellar’s results of operations;

 

·hedging or arbitrage trading activity that may develop regarding the Stellar Common Shares;

 

·regional or worldwide recession;

 

·sales of large blocks of the Stellar Common Shares;

 

·sales of Stellar Common Shares by its executive officers, directors and significant shareholders;

 

·managerial costs and expenses;

 

·changes in accounting principles; and

 

·the loss of any of Stellar’s key scientific or management personnel.

 

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Moreover, the stock markets in general have experienced substantial volatility that has often been unrelated to the operating performance of individual companies. These broad market fluctuations may also adversely affect the trading price of Stellar Common Shares.

 

In the past, following periods of volatility in the market price of a company’s securities, shareholders have often instituted class action securities litigation. Such litigation, if instituted, could result in substantial costs and diversion of management attention and resources, which could significantly harm Stellar’s profitability and reputation.

 

If Stellar fails to meet all applicable Nasdaq Capital Market requirements and Nasdaq determines to delist Stellar Common Shares, the delisting could adversely affect the market liquidity of the Stellar Common Shares and the market price of Stellar Common Shares could decrease.

 

Stellar Common Shares are listed on The Nasdaq Capital Market. To maintain its listing, Stellar must meet minimum financial, operating and other requirements, including requirements for a minimum amount of capital, a minimum price per share, and active operations. If Stellar is unable to comply with Nasdaq’s listing standards, Nasdaq may determine to delist the Stellar Common Shares from The Nasdaq Capital Market. If Stellar Common Shares are delisted for any reason, it could reduce the value of the Stellar Common Shares and its liquidity. Delisting could also adversely affect Stellar’s ability to obtain financing for the continuation of its operations, or to use the Stellar Common Shares in acquisitions, including the Exchange. Delisting may also result in the loss of confidence by suppliers, investors and employees.

 

Raising additional funds by issuing securities may cause dilution to existing shareholders.

 

Additional financing may not be available to Stellar when it needs it or such financing may not be available on favorable terms. To the extent that Stellar raises additional capital by issuing equity securities, its existing shareholders’ ownership will be diluted and the terms of any new equity securities may have preferences over the Stellar Common Shares.

 

Failure to maintain effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002 could have a material adverse effect on Stellar’s share price.

 

Section 404 of the Sarbanes-Oxley Act of 2002 and the related rules and regulations of the SEC require an annual management assessment of the effectiveness of Stellar’s internal control over financial reporting. If Stellar fails to maintain the adequacy of its internal control over financial reporting as such standards are modified, supplemented or amended from time to time, it may not be able to ensure that it can conclude on an ongoing basis that Stellar has effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002 and the related rules and regulations of the SEC. If Stellar cannot in the future favorably assess the effectiveness of its internal control over financial reporting, investor confidence in the reliability of its financial reports may be adversely affected, which could have a material adverse effect on Stellar’s share price.

 

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Risks Related to Edesa’s Business

 

Risks Related to Edesa’s Financial Position and Need for Additional Capital

 

Edesa has incurred significant losses since its inception. Edesa expects to continue to incur losses and may never generate profits from operations or maintain profitability.

 

Since inception, Edesa has incurred significant operating losses. Edesa’s net loss for the years ended December 31, 2018 and 2017 was approximately $1,536,000 and $876,000, respectively, and Edesa’s accumulated deficit as of December 31, 2018 was approximately $3,762,000. To date, Edesa has financed its operations primarily through issuances of preferred shares, loans that were converted into shares of common stock and government grants. Edesa has devoted substantially all of its efforts to research and development, including clinical trials and has not completed the development of any of its drug candidates. Upon completion of the Exchange, Edesa expects to continue to incur significant expenses and increasing operating losses for the foreseeable future as it continues the development of, and seeks marketing approvals for its product candidates, prepares for and begins the commercialization of any approved products, and adds infrastructure and personnel to support its product development efforts and operations as a public company in the United States. The net losses Edesa incurs may fluctuate significantly from quarter to quarter and year to year.

 

Edesa’s ability to generate profits from operations and thereafter to remain profitable depends heavily on, among other things:

 

·the scope, number, progress, duration, cost, results and timing of clinical trials and nonclinical studies of Edesa’s current or future product candidates;
·the combined company’s ability to raise sufficient funds to support the development and potential commercialization of Edesa’s product candidates;
·the outcomes and timing of regulatory reviews, approvals or other actions;
·Edesa’s ability to obtain marketing approval for its product candidates;
·Edesa’s ability to establish and maintain licensing, collaboration or similar arrangements on favorable terms and whether and to what extent Edesa retains development or commercialization responsibilities under any new licensing, collaboration or similar arrangement;
·the success of any other business, product or technology that Edesa acquires or in which Edesa invests;
·Edesa’s ability to maintain, expand and defend the scope of its intellectual property portfolio;
·Edesa’s ability to manufacture any approved products on commercially reasonable terms;
·Edesa’s ability to establish a sales and marketing organization or suitable third-party alternatives for any approved product; and
·the number and characteristics of product candidates and programs that Edesa pursues.

 

Edesa must generate significant revenue to achieve and maintain profitability.

 

Edesa must generate significant revenue to achieve and maintain profitability. Based on Edesa’s current plans, Edesa does not expect to generate significant revenue unless and until it or a current or potential future licensee obtains marketing approval for, and commercializes, one or more of its product candidates, which it does not expect to occur for at least the next few years. Neither Edesa nor a licensee may ever succeed in obtaining marketing approval for, or commercializing Edesa’s product candidates and, even if marketing approval is obtained, Edesa may never generate revenues that are significant enough to generate profits from operations. Even if Edesa does generate profits from operations, Edesa may not be able to sustain or increase profitability on a quarterly or annual basis. Edesa’s failure to generate profits from operations and remain profitable would decrease the value of the combined company and could impair its ability to raise capital, expand its business, maintain its research and development efforts, diversify its product offerings or continue its operations. A decline in the value of the combined company could also cause you to lose all or part of your investment.

 

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Edesa’s limited operating history may make it difficult for you to evaluate the success of its business to date and to assess its future viability.

 

Edesa was formed on July 9, 2015. To date, Edesa’s operations have been limited to organization and staffing, developing and securing its technology, entering into licensing arrangements, raising capital and undertaking preclinical studies and clinical trials of its product candidates. Edesa’s business is subject to all of the risks inherent in the establishment of a new business enterprise. Edesa’s likelihood of success must be considered in light of the problems, expenses, difficulties, complications and delays frequently encountered in connection with development and expansion of a new business enterprise. Consequently, any predictions made about Edesa’s future success or viability may not be as accurate as they could be if Edesa had a longer operating history.

 

Edesa has not yet demonstrated its ability to successfully complete development of any product candidate, obtain marketing approval, manufacture a commercial scale product, or arrange for a third-party to do so on its behalf, or conduct sales and marketing activities necessary for successful product commercialization. Assuming Edesa obtains marketing approval for any of its product candidates, Edesa will need to transition from a company with a research and development focus to a company capable of supporting commercial activities. Edesa may encounter unforeseen expenses, difficulties, complications and delays and may not be successful in such a transition.

 

The combined company will need substantial additional funding to finance its operations through regulatory approval of one or more of its product candidates. If the combined company is unable to raise capital when needed, it could be forced to delay, reduce or eliminate its product development programs or commercialization efforts.

 

Edesa expects its research and development expenses to increase substantially in the future, particularly as it advances EB01 beyond Phase 2 clinical development for the treatment of ACD. Edesa expects that its research and development expenses will increase even further if it advances any other current or future product candidates into further clinical trials. In addition, if Edesa obtains marketing approval for any of its product candidates that are not then subject to licensing, collaboration or similar arrangements with third parties, it expects to incur significant commercialization expenses related to product sales, marketing, distribution and manufacturing. Furthermore, upon the completion of the Exchange, Edesa expects to incur additional costs associated with operating as a public company in the United States. If the combined company is unable to raise capital when needed, or on attractive terms, it could be forced to delay, reduce or eliminate research and development programs or future commercialization efforts.

 

Raising additional capital may cause dilution to the combined company’s investors, restrict its operations or require it to relinquish rights to its technologies or product candidates

 

Until such time, if ever, as the combined company can generate substantial product revenues, it expects to finance its cash needs through a combination of equity offerings, licensing, collaboration or similar arrangements, grants and debt financings. The combined company does not have any committed external source of funds. To the extent that the combined company raises additional capital through the sale of equity or convertible debt securities, your ownership interest will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect your rights as a holder of the combined company’s common stock. Debt financing, if available, may involve agreements that include covenants limiting or restricting the combined company’s ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends or other distributions.

 

If the combined company raises additional funds through licensing, collaboration or similar arrangements, it may have to relinquish valuable rights to its technologies, future revenue streams, research and development programs or product candidates or to grant licenses on terms that may not be favorable to the combined company. If the combined company is unable to raise additional funds through equity or debt financings or other arrangements when needed, it may be required to delay, limit, reduce or terminate its product development or future commercialization efforts or grant rights to develop and market product candidates that it would otherwise prefer to develop and market itself.

 

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Risks Related to the Development, Regulatory Approval and Commercialization of Edesa’s Product Candidates 

 

Edesa depends heavily on the success of its lead product candidate, EB01, which Edesa is developing for the treatment of chronic ACD. If Edesa is unable to obtain regulatory approval or commercialize EB01, or experiences significant delays in doing so, Edesa’s business will be materially harmed.

 

EB01 is in Phase 2B clinical development. Edesa’s ability to generate product revenues, which may not occur for multiple years, if at all, will depend heavily on the successful development and commercialization of EB01 as a treatment for chronic ACD. The success of Edesa’s product candidates, including EB01, will depend on a number of factors, including the following:

 

·the combined company’s ability, following completion of the Exchange, to obtain additional capital from potential future licensing, collaboration or similar arrangements or from any future offering of its debt or equity securities;
·the combined company’s ability to identify and enter into potential future licenses or other collaboration arrangements with third parties and the terms of the arrangements;
·successful completion of clinical development;
·the ability to provide acceptable evidence demonstrating a product candidates’ safety and efficacy;
·receipt of marketing approvals from applicable regulatory authorities and similar foreign regulatory authorities;
·the availability of raw materials to produce Edesa’s product candidates;
·obtaining and maintaining commercial manufacturing arrangements with third-party manufacturers or establishing commercial-scale manufacturing capabilities;
·obtaining and maintaining patent and trade secret protection and regulatory exclusivity;
·establishing sales, marketing and distribution capabilities;
·generating commercial sales of the product candidate, if and when approved, whether alone or in collaboration with others;
·acceptance of the product candidate, if and when approved, by patients, the medical community and third-party payors;
·effectively competing with other therapies; and
·maintaining an acceptable safety profile of the product candidate following approval.

 

If Edesa does not achieve one or more of these factors in a timely manner or at all, Edesa could experience significant delays or an inability to successfully commercialize EB01 or any of its other product candidates, which would materially harm its business. Many of these factors are beyond Edesa’s control. Accordingly, Edesa may never be able to generate revenues through the license or sale of any of its product candidates.

 

If clinical trials of Edesa’s product candidates fail to demonstrate safety and efficacy to the satisfaction of the FDA, the Health Canada (HC) or the European Medicines Agency (EMA), or do not otherwise produce favorable results, Edesa may incur additional costs or experience delays in completing, or ultimately be unable to complete, the development and commercialization of EB01 or any other Edesa product candidate.

 

In connection with obtaining marketing approval from regulatory authorities for the sale of any product candidate, Edesa must complete preclinical development and then conduct extensive clinical trials to demonstrate the safety and efficacy of its product candidates in humans. Clinical trials are expensive, difficult to design and implement, can take many years to complete and are uncertain as to outcome. A failure of one or more clinical trials can occur at any stage of testing. The outcome of preclinical testing and early clinical trials may not be predictive of the success of later clinical trials. In particular, the small number of subjects and patients in Edesa’s early clinical trials may make the results of these clinical trials less predictive of the outcome of later clinical trials. The design of a clinical trial can determine whether its results will support approval of a product, and flaws in the design of a clinical trial may not become apparent until the clinical trial is well advanced or completed. There is no assurance that Edesa will be able to design and execute a clinical trial to support marketing approval. Moreover, preclinical and clinical data are often susceptible to varying interpretations and analyses, and many companies that have believed their product candidates performed satisfactorily in preclinical studies and clinical trials have nonetheless failed to obtain marketing approval of their products.

 

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Positive results in pre-clinical studies of a product candidate may not be predictive of similar results in humans during clinical trials, and promising results from early clinical trials of a product candidate may not be replicated in later clinical trials. Interim results of a clinical trial do not necessarily predict final results. A number of companies in the pharmaceutical and biotechnology industries have suffered significant setbacks in late-stage clinical trials even after achieving promising results in early-stage development. Accordingly, the results from completed pre-clinical studies and clinical trials for Edesa’s product candidates may not be predictive of the results Edesa may obtain in later stage trials or studies. Pre-clinical studies or clinical trials may produce negative or inconclusive results, and Edesa may decide, or regulators may require Edesa, to conduct additional pre-clinical studies or clinical trials, or to discontinue clinical trials altogether. Ultimately, Edesa may be unable to complete the development and commercialization of EB01 or any other Edesa product candidate.

 

If Edesa’s clinical trials for its product candidates are prolonged or delayed, Edesa may be unable to commercialize its product candidates on a timely basis, which would require Edesa to incur additional costs and delay its receipt of any revenue from potential product sales.

 

Edesa cannot predict whether it will encounter problems with any of its ongoing or planned clinical trials that will cause Edesa or any regulatory authority to delay or suspend those clinical trials. A number of events, including any of the following, could delay the completion of Edesa’s ongoing and planned clinical trials and negatively impact its ability to obtain regulatory approval for, and to market and sell, a particular product candidate:

 

conditions imposed by the FDA or any foreign regulatory authority regarding the scope or design of Edesa’s clinical trials;

 

delays in obtaining, or the inability to obtain, required approvals from institutional review boards, or IRBs, or other reviewing entities at clinical sites selected for participation in Edesa’s clinical trials;

 

insufficient supply or deficient quality of product candidates supply or materials to produce Edesa’s product candidates or other materials necessary to conduct its clinical trials;

 

delays in obtaining regulatory agreement for the conduct of the clinical trials;

 

lower than anticipated enrollment and retention rate of subjects in clinical trials for a variety of reasons, including size of patient population, nature of trial protocol, the availability of approved effective treatments for the relevant disease and competition from other clinical trial programs for similar indications;

 

serious and unexpected drug-related side effects experienced by patients in clinical trials;

 

failure of third-party contractors to meet their contractual obligations in a timely manner;

 

pre-clinical or clinical trials may produce negative or inconclusive results, which may require Edesa or any potential future collaborators to conduct additional pre-clinical or clinical testing or to abandon projects that Edesa expects to be promising;

 

even if pre-clinical or clinical trial results are positive, the FDA or foreign regulatory authorities could nonetheless require unanticipated additional clinical trials;

 

regulators or institutional review boards may suspend or terminate clinical research for various reasons, including noncompliance with regulatory requirements;

 

product candidates may not have the desired effects; and

 

the lack of adequate funding to continue clinical trials.

 

Additionally, changes in standard of care or regulatory requirements and guidance may occur and Edesa may need to amend clinical trial protocols to reflect these changes. Such amendments may require Edesa to resubmit its clinical trial protocols to IRBs for re-examination, which may impact the cost, timing or successful completion of a clinical trial. Such changes may also require Edesa to reassess the viability of the program in question.

 

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Edesa does not know whether its clinical trials will begin as planned, will need to be restructured or will be completed on schedule, if at all. Delays in clinical trials will result in increased development costs for Edesa’s product candidates. In addition, if Edesa experiences delays in completion of, or if Edesa terminates, any of its clinical trials, the commercial prospects for its product candidates may be affected and Edesa’s ability to generate product revenues will be delayed. Furthermore, many of the factors that cause, or lead to, a delay in the commencement or completion of clinical trials may also ultimately lead to the denial of regulatory approval of a product candidate.

 

The clinical trial designs, endpoints and outcomes that will be required to obtain marketing approval of a drug to treat chronic ACD or any other indication are uncertain. Edesa may never receive marketing approval for EB01 as a treatment for chronic ACD.

 

To Edesa’s knowledge, there are currently no FDA approved treatment options specifically indicated for chronic ACD. Accordingly, there is not a well-established development path that, with positive outcomes in clinical trials, would be reasonably assured of receiving marketing approval for chronic ACD. In particular, if Edesa’s ongoing Phase 2B clinical trial of EB01 in individuals with chronic ACD is successful, Edesa plans to use the trial to support pivotal clinical trials designed to establish the efficacy of EB01 to support, together with additional long-term safety data, an application for regulatory approval as a treatment for chronic ACD. The FDA or any regulatory authority outside of the United States may determine that the designs or endpoints of any potentially pivotal trial that Edesa conducts, or that the outcome shown on any particular endpoint in any potentially pivotal trial that Edesa conducts, are not sufficient to establish a clinically meaningful benefit for EB01 in the treatment of chronic ACD or otherwise to support approval, even if the primary endpoint or endpoints of the trial is or are met with statistical significance. If this occurs, Edesa’s business could be materially harmed. Moreover, if the FDA requires Edesa to conduct additional clinical trials beyond the ones that Edesa currently contemplates in order to support regulatory approval in the United States of EB01 for the treatment of chronic ACD, the company’s finances and results from operations will be adversely impacted.

 

Likewise, if Edesa conducts any future clinical trials designed to support marketing approval of EB02 as a treatment for hemorrhoids or clinical trials designed to support marketing approval of any other of its product candidates, the FDA or any regulatory authority outside of the United States may determine that the designs or endpoints of the trial, or that the outcomes shown on any particular endpoint in the trial, are not sufficient to establish a clinically meaningful benefit or otherwise to support approval, even if the primary endpoint of the trial is met with statistical significance.

 

Edesa’s Phase 2B clinical trial of EB01 in individuals with chronic ACD will not be sufficient to be considered a pivotal trial to support an application for marketing approval of EB01. Even if Edesa’s Phase IIB study meets its primary endpoints, it is not certain that additional pivotal Phase III studies, together with additional long-term safety data will have positive outcomes and or will be sufficient to enable EB01 to gain regulatory approval as a treatment for chronic ACD.

 

If Edesa’s Phase 2B clinical trial of EB01 in individuals with chronic ACD meets its primary endpoints, Edesa plans to request an end of Phase 2 meeting with the FDA and regulatory authorities outside the United States to seek guidance on the requirements for a new drug application. Edesa cannot predict the requirements for each of these regulatory agencies and the requirements set forth by the agencies could delay and/or negatively impact Edesa’s ability to obtain regulatory approval for, and to market and sell a particular product candidate. Edesa expects to be required by the FDA to conduct two phase 3 pivotal clinical trials in patients with chronic ACD to establish the efficacy of EB01 to support, together with additional long-term safety data, an application for regulatory approval of EB01 as a treatment for chronic ACD. The likelihood that the FDA or any regulatory authority outside the United States will concur with Edesa’s plan is uncertain. The FDA or any other regulatory authority may instead determine that additional clinical and/or non-clinical trials are required to establish the efficacy of EB01 as a treatment for chronic ACD, even if the outcome of Edesa’s Phase 2B study in individuals is favorable. The risk that the FDA or any other regulatory authority will determine that additional clinical and/or non-clinical trials are required to establish the efficacy of EB01 as a treatment for chronic ACD may be even higher if Edesa selects a primary endpoint for its planned pivotal Phase 3 trials in chronic ACD for which there is only limited data generated in Edesa’s Phase 2 studies. In addition, Edesa is enrolling in its ongoing study individuals with chronic ACD caused by any of a number of different conditions (allergens). This may also increase the risk of the FDA or another regulatory authority determining that additional clinical and/or non-clinical trials are required to establish the efficacy of EB01 as a treatment for chronic ACD. If the FDA or a regulatory authority outside of the United States makes the determination that additional clinical and/or non-clinical trials are required, it would result in a more expensive and potentially longer development program for EB01 than Edesa currently contemplates, which could delay Edesa’s ability to generate product revenues with EB01, interfere with Edesa’s ability to enter into any potential licensing or collaboration arrangements with respect to this program, cause the value of the combined company to decline, and limit the combined company’s ability to obtain additional financing.

 

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If Edesa experiences new or additional delays or difficulties in the enrollment of patients in its clinical trial of EB01 or any other product candidate, Edesa’s application and or receipt of marketing approvals could be delayed or prevented.

 

Recruiting patients with moderate to severe chronic ACD may be challenging as there have not been recent clinical studies conducted with this patient population. If Edesa is unable to locate and enroll a sufficient number of eligible patients to participate in clinical trials of its product candidates including, in particular, its ongoing trial of EB01 and its planned pivotal trials of EB01 as a treatment for ACD, Edesa may not be able to initiate or complete the clinical trials. Patient enrollment is affected by many factors, including:

 

·size of the target patient population;
·severity of the disease or disorder under investigation;
·eligibility criteria for the clinical trial in question;
·other clinical trials being conducted at the same time involving patients who have the disease or disorder under investigation;
·perceived risks and benefits of the product candidate under study;
·approval and availability of other therapies to treat the disease or disorder that is being investigated in the clinical trial;
·efforts to facilitate timely enrollment in clinical trials;
·patient referral practices of physicians;
·the ability to monitor patients adequately during and after treatment; and
·proximity and availability of clinical trial sites for prospective patients.

 

Enrollment delays in Edesa’s ongoing or planned clinical trials may result in increased development costs for its product candidates, which would cause the value of the combined company to decline and limit the combined company’s ability to obtain additional financing. Edesa’s inability to enroll a sufficient number of patients in its ongoing or planned clinical trials of EB01, or any other Edesa product candidate, would result in significant delays or may require Edesa to abandon one or more clinical trials altogether.

 

If the commercial opportunity in chronic ACD is smaller than Edesa anticipates, or if Edesa elects to develop EB01 to treat only a specific subpopulation of patients with chronic ACD, Edesa’s future revenue from EB01 will be adversely affected and Edesa’s business will suffer.

 

It is critical to Edesa’s ability to grow and become profitable that Edesa successfully identifies patients with chronic ACD. Edesa’s projections of the number of people who have chronic ACD as well as the subset who have the potential to benefit from treatment with EB01, are based on a variety of sources, including third-party estimates and analyses in the scientific literature, and may prove to be incorrect. Further, new information may emerge that changes Edesa’s estimate of the prevalence of these diseases or the number of patient candidates for EB01. The effort to identify patients with chronic ACD or Edesa’s other potential target indications is at an early stage, and Edesa cannot accurately predict the number of patients for whom treatment might be possible. Additionally, the potentially addressable patient population for EB01 may be limited or may not be amenable to treatment with EB01, and new patients may become increasingly difficult to identify or access. If the commercial opportunity in chronic ACD is smaller than Edesa anticipates, or if Edesa elects to develop EB01 to treat only a specific subpopulation of patients with chronic ACD, Edesa’s future financial performance may be adversely impacted.

 

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While Edesa has chosen to test its product candidates in specific clinical indications based in part on its understanding of their mechanisms of action, Edesa’s understanding may be incorrect or incomplete and, therefore, Edesa’s product candidates may not be effective against the diseases tested in its clinical trials.

 

Edesa’s rationale for selecting the particular therapeutic indications for each of its product candidates is based in part on its understanding of the mechanism of action of these product candidates. However, Edesa’s understanding of the product candidate’s mechanism of action may be incomplete or incorrect, or the mechanism may not be clinically relevant to the diseases treated. In such cases, Edesa’s product candidates may prove to be ineffective in the clinical trials for treating those diseases, and adverse clinical trial results would likely negatively impact Edesa’s business and results from operations.

 

A successful sPLA2 drug has not been developed to date and Edesa can provide no assurances that Edesa will be successful or that there will be no adverse side effects.

 

Edesa’s unique lead product candidates are first-in-class, novel, non-steroidal, synthetic anti-inflammatory products that address the need to target sPLA2 in a broad-ranged manner while avoiding any interference with the homeostatic cPLA2 family. To date no drug companies have successfully commercialized an sPLA2 inhibitor and as a result the efficacy and long-term side effects are not known. There is no guarantee that Edesa will successfully develop and/or commercialize an sPLA2 inhibitor and/or that the product candidate will have no adverse side effects.

 

If serious or unacceptable side effects are identified during the development of EB01 or any of Edesa’s other product candidates, Edesa may need to abandon or limit its development of that product candidate.

 

All of Edesa’s product candidates are in clinical or preclinical development and their risk of failure is high. It is impossible to predict when or if any of Edesa’s product candidates will prove effective or safe in humans or will receive marketing approval. If Edesa’s product candidates are associated with undesirable side effects or have other unexpected, unacceptable characteristics, Edesa may need to abandon their development or limit development to certain uses or subpopulations in which the undesirable side effects or other characteristics are less prevalent, less severe or more acceptable from a risk-benefit perspective. Many investigational products that initially showed promise in clinical or earlier stage testing have later been found to cause side effects or other safety issues that prevented further development. If any of these events occur, Edesa’s business may be adversely impacted.

 

Even if EB01 or any future product candidate of Edesa’s receives marketing approval, it may fail to achieve the degree of market acceptance by physicians, patients, third-party payors and others in the medical community necessary for commercial success.

 

If EB01 or any future product candidate of Edesa’s receives marketing approval, the approved product may nonetheless fail to gain sufficient market acceptance by physicians, patients, third-party payors and others in the medical community. If an approved product does not achieve an adequate level of acceptance, Edesa may not generate significant product revenues or any profits from operations. The degree of market acceptance of Edesa’s product candidates, if approved for commercial sale, will depend on a number of factors, including:

 

·the efficacy and potential advantages compared to alternative treatments or competitive products;
·the prevalence and severity of any side effects;
·the ability to offer Edesa’s product candidates for sale at competitive prices;
·convenience and ease of administration compared to alternative treatments;
·the willingness of the target patient population to try new therapies and of physicians to prescribe these therapies;
·the strength of marketing and distribution support;
·the adequacy of supply of Edesa’s product candidates;

 

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·the availability of third-party coverage and adequate reimbursement;
·the timing of any such marketing approval in relation to other product approvals;
·support from patient advocacy groups; and
·any restrictions on concomitant use of other medications.

 

Edesa’s ability to negotiate, secure and maintain third-party coverage and reimbursement for its product candidates may be affected by political, economic and regulatory developments in the United States, Canada, the European Union and other jurisdictions. Governments continue to impose cost containment measures, and third-party payors are increasingly challenging prices charged for medicines and examining their cost effectiveness, in addition to their safety and efficacy. These and other similar developments could significantly limit the degree of market acceptance of EB01 or any of Edesa’s other future product candidates that receive marketing approval.

 

If Edesa is unable to establish sales and marketing capabilities or enter into agreements with third parties to market and sell EB01 or any of its other current or future product candidates, Edesa may not be successful in commercializing the applicable product candidate if it receives marketing approval.

 

Edesa does not have a sales or marketing infrastructure and has no experience as a company in the sale or marketing of pharmaceutical products. To achieve commercial success for any approved product, Edesa must either develop a sales and marketing organization or outsource these functions to third parties. There are risks involved with establishing Edesa’s own sales and marketing capabilities and entering into arrangements with third parties to perform these services. For example, recruiting and training a sales force is expensive and time consuming and could delay any product launch. If the commercial launch of a product candidate for which Edesa recruits a sales force and establishes marketing capabilities is delayed or does not occur for any reason, Edesa would have prematurely or unnecessarily incurred these commercialization expenses. This may be costly, and Edesa’s investment would be lost if it cannot retain or reposition its sales and marketing personnel. Factors that may inhibit Edesa’s efforts to commercialize its products on its own include:

 

·Edesa’s inability to recruit, train and retain adequate numbers of effective sales and marketing personnel;
·the inability of sales personnel to obtain access to or persuade adequate numbers of physicians to prescribe any future products;
·the lack of complementary products to be offered by sales personnel, which may put Edesa at a competitive disadvantage relative to companies with more extensive product lines; and
·unforeseen costs and expenses associated with creating an independent sales and marketing organization.

 

If Edesa enters into arrangements with third parties to perform sales and marketing services, Edesa’s product revenues or the profitability of these product revenues to Edesa could be lower than if Edesa were to market and sell any products that Edesa develops itself. In addition, Edesa may not be successful in entering into arrangements with third parties to sell and market its product candidates or may be unable to do so on terms that are acceptable to Edesa. Edesa likely will have little control over such third parties, and any of them may fail to devote the necessary resources and attention to sell and market Edesa’s products effectively. If Edesa does not establish sales and marketing capabilities successfully, either on Edesa’s own or in collaboration with third parties, Edesa will not be successful in commercializing its product candidates.

 

Edesa faces substantial competition, which may result in others discovering, developing or commercializing products to treat Edesa’s target indications or markets before or more successfully than Edesa does.

 

The development and commercialization of new drug products is highly competitive. Edesa faces competition with respect to its current product candidates and any products Edesa may seek to develop or commercialize in the future from major pharmaceutical companies, specialty pharmaceutical companies and biotechnology companies worldwide.

 

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Competitors may also include academic institutions, government agencies and other public and private research organizations that conduct research, seek patent protection and establish collaborative arrangements for research, development, manufacturing and commercialization. Many of Edesa’s competitors have significantly greater financial resources and expertise in research and development, manufacturing, preclinical testing, conducting clinical trials, obtaining approvals from regulatory authorities and marketing approved products than Edesa does. Mergers and acquisitions in the pharmaceutical and biotechnology industries may result in even more resources being concentrated among a smaller number of Edesa’s competitors. Smaller and other early-stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large and established companies. These third parties compete with Edesa in recruiting and retaining qualified scientific and management personnel, establishing clinical trial sites and patient registration for clinical trials, as well as in acquiring technologies that may be complementary to or necessary for Edesa’s programs.

 

Edesa’s commercial opportunities could be reduced or eliminated if Edesa’s competitors develop and commercialize products that are more effective, safer, have fewer or less severe side effects, are approved for broader indications or patient populations, or are more convenient or less expensive than any products that Edesa develops and commercializes. Edesa’s competitors may also obtain marketing approval for their products more rapidly than Edesa may obtain approval for its products, which could result in Edesa’s competitors establishing a strong market position before Edesa is able to enter the market.

 

If approved, Edesa’s product candidates will compete for a share of the existing market with numerous other products being used to treat ACD.

 

Even if Edesa is able to commercialize EB01 or any other product candidate that Edesa develops, the product may become subject to unfavorable pricing regulations, third-party reimbursement practices or healthcare reform initiatives, which would harm Edesa’s business.

 

The regulations that govern marketing approvals, pricing, coverage and reimbursement for new drug products vary widely from country to country. Current and future legislation may significantly change the approval requirements in ways that could involve additional costs and cause delays in obtaining approvals. Some countries require approval of the sale price of a drug before it can be marketed. In many countries, the pricing review period begins after marketing or product licensing approval is granted and, in some markets, prescription pharmaceutical pricing remains subject to continuing governmental control even after initial approval is granted. As a result, Edesa might obtain marketing approval for a product in a particular country, but then be subject to price regulations that delay Edesa’s commercial launch of the product, possibly for lengthy time periods, and negatively impact the revenues Edesa is able to generate from the sale of the product in that country. Adverse pricing limitations may hinder Edesa’s ability to recoup its investment in one or more product candidates, even if Edesa’s product candidates obtain marketing approval.

 

Edesa’s ability to commercialize EB01 or any other product candidate successfully also will depend in part on the extent to which coverage and adequate reimbursement for these products and related treatments will be available from government health administration authorities, private health insurers and other organizations. Government authorities and other third-party payors, such as private health insurers and health maintenance organizations, decide which medications they will pay for and establish reimbursement levels. A primary trend in the U.S., Canada and E.U. healthcare industries and elsewhere is cost containment. Government authorities and other third-party payors have attempted to control costs by limiting coverage and the amount of reimbursement for particular medications. Increasingly, third-party payors are requiring that drug companies provide them with predetermined discounts from list prices and are challenging the prices charged for medical products. Edesa cannot be sure that coverage and reimbursement will be available for EB01 or any other product that Edesa commercializes and, if coverage and reimbursement is available, the level of reimbursement. Reimbursement may impact the demand for, or the price of, any product candidate for which Edesa obtains marketing approval. In addition, third-party payors are likely to impose strict requirements for reimbursement of a higher priced drug, and any launch of a competitive product is likely to create downward pressure on the price initially charged. If reimbursement is not available or is available only to a limited degree, Edesa may not be able to successfully commercialize any product candidate for which Edesa obtains marketing approval.

 

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There may be significant delays in obtaining coverage and reimbursement for newly approved drugs, and coverage may be more limited than the purposes for which the drug is approved by the applicable regulatory authority. Moreover, eligibility for coverage and reimbursement does not imply that any drug will be paid for in all cases or at a rate that covers Edesa’s costs, including research, development, intellectual property, manufacturing, sale and distribution expenses. Interim reimbursement levels for new drugs, if applicable, may also not be sufficient to cover Edesa’s costs and may not be made permanent. Reimbursement rates may vary according to the use of the drug and the clinical setting in which it is used, may be based on reimbursement levels already set for lower cost drugs, and may be incorporated into existing payments for other services. Net prices for drugs may be reduced by mandatory discounts or rebates required by government healthcare programs or private payors and by any future relaxation of laws that presently restrict imports of drugs from countries where they may be sold at lower prices than in the United States. In the United States, third-party payors often rely upon Medicare coverage policy and payment limitations in setting their own reimbursement policies. In the European Union, reference pricing systems and other measures may lead to cost containment and reduced prices. Edesa’s inability to promptly obtain coverage and adequate reimbursement rates from both government-funded and private payors for any approved products that Edesa develops could have a material adverse effect on Edesa’s operating results, the combined company’s ability to raise capital needed to commercialize products and Edesa’s overall financial condition.

 

Governments outside the United States tend to impose strict price controls, which may adversely affect Edesa’s revenues, if any.

 

In some countries, particularly Canada and the member states of the European Union, the pricing of prescription pharmaceuticals is subject to governmental control. In these countries, pricing negotiations with governmental authorities can take considerable time after the receipt of marketing approval for a product. In addition, there can be considerable pressure by governments and other stakeholders on prices and reimbursement levels, including as part of cost containment measures. Political, economic and regulatory developments may further complicate pricing negotiations, and pricing negotiations may continue after reimbursement has been obtained. Reference pricing used by Canada and various E.U. member states and parallel distribution, or arbitrage between low-priced and high-priced member states, can further reduce prices. In some countries, Edesa may be required to conduct a clinical trial or other studies that compare the cost-effectiveness of Edesa’s product candidate to other available therapies in order to obtain or maintain reimbursement or pricing approval. Publication of discounts by third-party payors or authorities may lead to further pressure on prices or reimbursement levels within the country of publication and other countries. If reimbursement of Edesa’s products is unavailable or limited in scope or amount, or if pricing is set at unsatisfactory levels, Edesa’s business could be adversely affected.

 

Product liability lawsuits against Edesa could cause it to incur substantial liabilities and to limit commercialization of any products that Edesa may develop.

 

Edesa faces an inherent risk of product liability exposure related to the testing of Edesa’s product candidates in human clinical trials and will face an even greater risk if Edesa commercially sells any products that it may develop. If Edesa cannot successfully defend itself against claims that Edesa’s product candidates or products caused injuries, Edesa will incur substantial liabilities. Regardless of merit or eventual outcome, liability claims may result in:

 

·reduced resources of Edesa’s management to pursue Edesa’s business strategy;
·decreased demand for any product candidates or products that Edesa may develop;
·injury to Edesa’s reputation and significant negative media attention;
·withdrawal of clinical trial participants;
·significant costs to defend the related litigation;
·substantial monetary awards to clinical trial participants or patients;
·loss of revenue;
·increased insurance costs; and
·the inability to commercialize any products that Edesa may develop.

 

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Edesa has separate liability insurance policies that cover each of Edesa’s ongoing clinical trials, which provide coverage in varying amounts. The amount of insurance that Edesa currently holds may not be adequate to cover all liabilities that it may incur. Edesa will need to increase its insurance coverage when and if it begins conducting more expansive clinical development of, or commercializing, EB01 or any other of its product candidates. Insurance coverage is increasingly expensive. Edesa may not be able to maintain insurance coverage at a reasonable cost or in an amount adequate to satisfy any liability that may arise.

 

Edesa may expend its limited resources to pursue a particular product candidate and fail to capitalize on product candidates that may be more profitable or for which there is a greater likelihood of success.

 

Because Edesa has limited financial and managerial resources, Edesa focuses on specific product candidates. As a result, Edesa may forego or delay pursuit of opportunities with other product candidates that later could prove to have greater commercial potential. Edesa’s resource allocation decisions may cause it to fail to capitalize on viable commercial products or profitable market opportunities.

 

If Edesa does not accurately evaluate the commercial potential or target market for a particular product candidate, its business may be negatively impacted.

 

Risks Related to Edesa’s Dependence on Third Parties

 

Edesa will be dependent on third-parties for the synthesis, formulation, and manufacturing, including optimization, technology transfers and scaling up of clinical scale quantities of all of its product candidates.

 

Edesa has no direct experience in synthesizing, formulating and manufacturing any of its product candidates, and currently lacks the resources or capability to synthesize, formulate and manufacture any of its product candidates on a clinical or commercial scale. As a result, Edesa will be dependent on third-parties for the synthesis, formulation, and manufacturing, including optimization, technology transfers and scaling up of clinical scale quantities of all its product candidates. Edesa believes that this strategy will enable it to direct operational and financial resources to the development of its product candidates rather than diverting resources to establishing manufacturing infrastructure.

 

Reliance on third-party manufacturers entails risks, to which Edesa would not be subject if Edesa manufactured product candidates or products itself, including:

 

reliance on the third party for regulatory compliance and quality assurance;

 

the possible breach of the manufacturing agreement by the third party because of factors beyond Edesa’s control;

 

the possible termination or non-renewal of the agreement by the third party, based on its own business priorities, at a time that is costly or inconvenient for Edesa; and

 

drug product supplies not meeting the requisite requirements for clinical trial use.

 

If Edesa is not able to obtain adequate supplies of its product candidates, it will be more difficult for Edesa to develop its product candidates and compete effectively. Edesa’s product candidates and any products that Edesa and/or its potential future collaborators may develop may compete with other product candidates and products for access to manufacturing facilities.

 

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Use of third parties to manufacture Edesa’s product candidates may increase the risk that Edesa will not have sufficient quantities of its product candidates or products or such quantities at an acceptable cost, which could delay, prevent or impair Edesa’s development or commercialization efforts.

 

Edesa does not own or operate manufacturing facilities for the production of clinical or commercial supplies of its product candidates. Edesa has limited personnel with experience in drug manufacturing and lacks the resources and the capabilities to manufacture any of its product candidates on a clinical or commercial scale. Edesa currently relies on third parties for supply of the active pharmaceutical ingredients, or API, in Edesa’s product candidates. Edesa’s strategy is to outsource all manufacturing of its product candidates and products to third parties.

 

Edesa does not currently have any agreements with third-party manufacturers for the long-term clinical or commercial supply of any of its product candidates. Edesa currently engages a single third-party manufacturer to provide API for EB01. Edesa also currently engages a single third-party vendor to manufacture the final drug product formulation of EB01 that is being used in Edesa’s clinical trials. Edesa may in the future be unable to scale-up and/or conclude agreements for commercial supply with commercial third-party manufacturers on acceptable terms, or at all.

 

Even if Edesa is able to establish and maintain arrangements with third-party manufacturers, reliance on third-party manufacturers entails additional risks, including:

 

·reliance on the third party for regulatory compliance and quality assurance;
·the possible breach of the manufacturing agreement by the third party;
·the possible misappropriation of Edesa’s proprietary information, including Edesa’s trade secrets and know-how; and
·the possible termination or nonrenewal of the agreement by the third party at a time that is costly or inconvenient for Edesa.

 

Third-party manufacturers may encounter difficulties in achieving volume production, laboratory testing, quality control or quality assurance or suffer shortages of qualified personnel, any of which could result in its inability to manufacture sufficient quantities to meet clinical timelines for a particular product candidate, to obtain marketing approval for the product candidate or to commercialize the product candidate. In addition, third-party manufacturers may not be able to comply with current good manufacturing practice, or GMP, regulations or similar regulatory requirements outside the United States. Edesa’s failure, or the failure of Edesa’s third-party manufacturers, to comply with applicable regulations could result in sanctions being imposed on Edesa, including fines, injunctions, civil penalties, delays, suspension or withdrawal of approvals, license revocation, seizures or recalls of product candidates or products, operating restrictions and criminal prosecutions, any of which could significantly and adversely affect supplies of Edesa’s product candidates.

 

Edesa’s product candidates and any products that it may develop may compete with other product candidates and products for access to manufacturing facilities. There are a limited number of manufacturers that operate under cGMP regulations and that might be capable of manufacturing for Edesa.

 

If the third parties that Edesa engages to manufacture product for its non-clinical tests and clinical trials cease to continue to do so for any reason, Edesa likely would experience delays in advancing these clinical trials while Edesa identifies and qualifies replacement suppliers and Edesa may be unable to obtain replacement supplies on terms that are favorable to it. In addition, if Edesa is not able to obtain adequate supplies of Edesa’s product candidates or the drug substances used to manufacture them, it will be more difficult for Edesa to develop its product candidates and compete effectively.

 

Edesa’s current and anticipated future dependence upon others for the manufacture of its product candidates may adversely affect its future profit margins and its ability to develop product candidates and commercialize any products that receive marketing approval on a timely and competitive basis.

 

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Edesa depends on third-party suppliers for key raw materials used in its manufacturing processes, and the loss of these third-party suppliers or their inability to supply Edesa with adequate raw materials could harm its business.

 

Edesa relies on third-party suppliers for the raw materials required for the production of its product candidates. Edesa’s dependence on these third-party suppliers and the challenges Edesa may face in obtaining adequate supplies of raw materials involve several risks, including limited control over pricing, availability, quality, and delivery schedules. Edesa cannot be certain that its current suppliers will continue to provide it with the quantities of these raw materials that Edesa requires to satisfy its anticipated specifications and quality requirements. Any supply interruption in limited or sole sourced raw materials could materially harm Edesa’s ability to manufacture its products until a new source of supply, if any, can be identified and qualified. Although Edesa believes there are several other suppliers of these raw materials, Edesa may be unable to find a sufficient alternative supply channel in a reasonable time or on commercially reasonable terms. Any performance failure on the part of Edesa’s suppliers could delay the development and commercialization of Edesa’s product candidates, including limiting supplies necessary for clinical trials and regulatory approvals, or interrupt production of the existing products that are already marketed, which would have a material adverse effect on Edesa’s business.

 

Edesa relies on Yissum for the successful development and commercialization of EB01 to treat ACD.

 

In 2016, the Company entered into an exclusive license agreement with Yissum Research Development Company of the Hebrew University of Jerusalem ("Yissum") to obtain exclusive rights to certain know-how, patents and data relating to a pharmaceutical product. The Company is using the exclusive rights to develop the product for therapeutic, prophylactic and diagnostic uses in topical dermal applications and anorectal applications, including for the development of EB01 to treat ACD. Concurrently, the Company also entered into a consulting agreement with an individual associated with Yissum for the development of the product. If Edesa defaults or fails to perform any of the terms, covenants, provisions or its obligations under the License Agreement, Yissum has the option to terminate the License Agreement, subject to advance notice to cure such default. Any termination of this license agreement would have a materially adverse impact on Edesa’s business and results from operations.

 

Edesa relies on third-parties to conduct its clinical trials and those third-parties may not perform satisfactorily, including failing to meet deadlines for the completion of such clinical trials.

 

Edesa does not independently conduct clinical trials for its product candidates. Edesa relies on third-parties, such as contract research organizations, clinical data management organizations, medical institutions, clinical investigators and government agencies, to perform this function. Any of these third-parties may terminate their engagements with Edesa at any time. If Edesa needs to enter into alternative arrangements, it would delay Edesa’s product development activities.

 

Edesa’s reliance on these third parties for clinical development activities reduces its control over these activities but does not relieve Edesa of its responsibilities. For example, Edesa remains responsible for ensuring that each of Edesa’s clinical trials is conducted in accordance with the general investigational plan and protocols for the clinical trial. Moreover, the FDA and foreign regulatory authorities require Edesa to comply with standards, commonly referred to as Good Clinical Practice, or GCP, for conducting, recording and reporting the results of clinical trials to assure that data and reported results are credible and accurate and that the rights, integrity of data and confidentiality of clinical trial participants are protected. Edesa also is required to register clinical trials subject to FDA regulation and, with some exceptions, post the results of completed clinical trials on a government-sponsored database, www.ClinicalTrials.gov, within certain timeframes. Failure to do so can result in fines, adverse publicity and civil and criminal sanctions. The National Institutes of Health also has announced plans to require sponsors to post results of clinical trials for unapproved products, including unfavorable results in clinical trials for unapproved uses of approved products.

 

Furthermore, third parties that Edesa relies on for its clinical development activities may also have relationships with other entities, some of which may be Edesa’s competitors. If these third parties do not successfully carry out their contractual duties, meet expected deadlines or conduct Edesa’s clinical trials in accordance with regulatory requirements or Edesa’s stated protocols, Edesa will not be able to obtain, or may be delayed in obtaining, marketing approvals for its product candidates and will not be able to, or may be delayed in its efforts to, successfully commercialize Edesa’s product candidates. Edesa’s product development costs will increase if Edesa experiences delays in testing or obtaining marketing approvals.

 

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Edesa also relies on other third parties to store and distribute drug supplies for its clinical trials. Any performance failure on the part of Edesa’s distributors could delay clinical development or marketing approval of its product candidates or commercialization of Edesa’s products, producing additional losses and depriving Edesa of potential product revenue.

 

Edesa may depend on additional collaborations, licenses or similar arrangements with third parties for the development and commercialization of some of its product candidates. If those collaborations are not successful, Edesa may not be able to capitalize on the market potential of these product candidates.

 

Edesa may in the future enter into other licensing, collaboration or similar arrangements for the development and commercialization of EB01 or any future product candidate of Edesa’s for any or all indications and for any or all territories.

 

Edesa’s likely counterparties for any licensing, collaboration or similar arrangement include large and mid-size pharmaceutical companies, regional and national pharmaceutical companies and biotechnology companies. However, if Edesa does enter into any such arrangements with any third parties in the future, Edesa will likely have limited control over the amount and timing of resources that its collaborators dedicate to the development or commercialization of the applicable product candidate. Edesa’s ability to generate revenues from these arrangements will depend on its collaborators’ abilities and efforts to successfully perform the functions assigned to them in these arrangements.

 

Any licensing, collaboration or similar arrangement involving Edesa’s product candidates would pose numerous risks to Edesa, including the following:

 

·collaborators have significant discretion in determining the efforts and resources that they will apply to these collaborations and may not perform their obligations as expected;
·collaborators may deemphasize or not pursue development and commercialization of Edesa’s product candidates or may elect not to continue or renew development or commercialization programs based on clinical trial results, changes in the collaborators’ strategic focus, including as a result of a sale or disposition of a business unit or development function, or available funding, or external factors such as an acquisition that diverts resources or creates competing priorities;
·collaborators may delay clinical trials, provide insufficient funding for a clinical trial program, stop a clinical trial or abandon a product candidate, repeat or conduct new clinical trials or require a new formulation of a product candidate for clinical testing;
·collaborators may independently develop, or develop with third parties, products that compete directly or indirectly with Edesa’s products or product candidates if the collaborators believe that competitive products are more likely to be successfully developed or can be commercialized under terms that are more economically attractive than Edesa’s;
·a collaborator with marketing and distribution rights to multiple products may not commit sufficient resources to the marketing and distribution of Edesa’s product relative to other products;
·collaborators may not properly maintain or defend Edesa’s intellectual property rights or may use Edesa’s proprietary information in such a way as to invite litigation that could jeopardize or invalidate Edesa’s intellectual property or proprietary information or expose Edesa to potential litigation;
·collaborators may infringe the intellectual property rights of third parties, which may expose Edesa to litigation and potential liability;
·disputes may arise between the collaborator and Edesa as to the ownership of intellectual property arising during the collaboration;
·Edesa may grant exclusive rights to its collaborators, which would prevent it from collaborating with others;

 

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·disputes may arise between the collaborators and Edesa that result in the delay or termination of the research, development or commercialization of its products or product candidates or that result in costly litigation or arbitration that diverts management attention and resources; and
·collaborations may be terminated and, if terminated, may result in a need to identify and enter into a new licensing, collaboration or similar arrangement or obtain additional capital to pursue further development or commercialization of the applicable product candidates.

 

Collaboration agreements may not lead to development or commercialization of product candidates in the most efficient manner or at all. If a collaborator of Edesa’s were to be involved in a business combination, the continued pursuit and emphasis on Edesa’s product development or commercialization program could be delayed, diminished or terminated.

 

If Edesa is not able to establish additional collaborations, Edesa may have to alter its development and commercialization plans.

 

Edesa’s product development programs and the potential commercialization of its product candidates will require substantial additional cash to fund expenses. For some of Edesa’s product candidates, Edesa may decide to collaborate with pharmaceutical and biotechnology companies for the development and potential commercialization of those product candidates.

 

Edesa faces significant competition in seeking appropriate collaborators. Whether Edesa reaches a definitive agreement for a collaboration will depend, among other things, upon Edesa’s assessment of the collaborator’s resources and expertise, the terms and conditions of the proposed collaboration and the proposed collaborator’s evaluation of a number of factors. Those factors may include the design or results of clinical trials, the likelihood of approval by regulatory authorities, the potential market for the subject product candidate, the costs and complexities of manufacturing and delivering such product candidate to patients, the potential of competing products, the existence of uncertainty with respect to Edesa’s ownership of technology, which can exist if there is a challenge to such ownership without regard to the merits of the challenge, and industry and market conditions generally. The collaborator may also consider alternative product candidates or technologies for similar indications that may be available to collaborate on and whether such a collaboration could be more attractive than the one with Edesa for Edesa’s product candidate. Edesa may also be restricted under future license agreements from entering into agreements on certain terms with potential collaborators. Collaborations are complex and time-consuming to negotiate and document. In addition, there have been a significant number of recent business combinations among large pharmaceutical companies that have resulted in a reduced number of potential future collaborators.

 

Edesa may not be able to negotiate collaborations on a timely basis, on acceptable terms, or at all. If Edesa is unable to do so, Edesa may have to curtail the development of a product candidate, reduce or delay its development program or one or more of Edesa’s other development programs, delay its potential commercialization or reduce the scope of any sales or marketing activities, or increase its expenditures and undertake development or commercialization activities at its own expense. If Edesa elects to increase its expenditures to fund development or commercialization activities on its own, Edesa would likely need to obtain additional capital, which may not be available to Edesa on acceptable terms, or at all. If Edesa does not have sufficient funds, it may not be able to further develop its product candidates or bring them to market and generate product revenue.

 

Risks Related to Edesa’s Intellectual Property

 

If Edesa is unable to obtain and maintain patent protection for its licensed technology and products, or if the scope of the patent protection is not sufficiently broad, Edesa’s competitors could develop and commercialize technology and products similar or identical to Edesa’s, and Edesa’s ability to successfully commercialize its licensed technology and products may be adversely affected.

 

Edesa’s success will partially depend on its ability to obtain and maintain patent protection in the United States and other countries with respect to its proprietary technology and products. Edesa intends to protect its proprietary position by filing patent applications in the United States, in Europe and in certain additional jurisdictions related to its novel technologies and product candidates that are important to its business. This process is expensive and time-consuming, and Edesa may not be able to file and prosecute all necessary or desirable patent applications at a reasonable cost or in a timely manner. It is also possible that Edesa will fail to identify patentable aspects of its research and development output before it is too late to obtain patent protection. Moreover, if Edesa licenses technology or product candidates from third parties in the future, these license agreements may not permit Edesa to control the preparation, filing and prosecution of patent applications, or to maintain or enforce the patents, covering the licensed technology or product candidates. These agreements could also give Edesa’s licensors the right to enforce the licensed patents without Edesa’s involvement, or to decide not to enforce the patents at all. Therefore, in these circumstances, these patents and applications may not be prosecuted or enforced in a manner consistent with the best interests of Edesa’s business.

 

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The patent position of biotechnology and pharmaceutical companies generally is highly uncertain, involves complex legal and factual questions and has in recent years been the subject of much litigation. As a result, the issuance, scope, validity, enforceability and commercial value of any patents issued to Edesa will likely be highly uncertain. Patent applications that Edesa files may not result in patents being issued which protect Edesa’s technology or products, in whole or in part, or which effectively prevent others from commercializing competitive technologies and products. Changes in either the patent laws or interpretation of the patent laws in the United States and other countries may also diminish the value of patents issued to Edesa, narrow the scope of Edesa’s patent protection or make enforcement more difficult or uncertain.

 

Edesa may become involved in lawsuits or other enforcement proceedings to protect or enforce its patents or other intellectual property, which could be expensive, time consuming and potentially unsuccessful.

 

Competitors may infringe Edesa’s patents, trademarks, copyrights or other intellectual property. To counter infringement or unauthorized use, Edesa may be required to file claims, which can be expensive and time consuming to prosecute. Any claims Edesa asserts against perceived infringers could provoke these parties to assert counterclaims against Edesa alleging that Edesa infringes their intellectual property or that Edesa’s patent and other intellectual property rights are invalid or unenforceable, including for antitrust reasons. As a result, in a patent infringement proceeding, a court or administrative body may decide that a patent of Edesa’s is invalid or unenforceable, in whole or in part, or may construe the patent’s claims narrowly and so refuse to stop the other party from using the technology at issue on the grounds that Edesa’s patents do not cover the competitor technology in question. Even if Edesa is successful in a patent infringement action, the unsuccessful party may subsequently raise antitrust issues and bring a follow-on action thereon. Antitrust issues may also provide a bar to settlement or constrain the permissible settlement terms.

 

Third parties may initiate legal proceedings alleging that Edesa is infringing their intellectual property rights, the outcome of which would be uncertain and could have a material adverse effect on the success of Edesa’s business.

 

Edesa’s commercial success depends upon its ability and the ability of its collaborators to develop, manufacture, market and sell Edesa’s product candidates and use Edesa’s proprietary technologies without infringing the intellectual property and other proprietary rights of third parties. There is considerable intellectual property litigation in the biotechnology and pharmaceutical industries, and Edesa may become party to, or threatened with, future adversarial proceedings or litigation regarding intellectual property rights with respect to Edesa’s products and technology, including interference, derivation, inter partes review, reexamination, reissue or post-grant review proceedings before the USPTO. The risks of being involved in such litigation and office proceedings may also increase as Edesa’s product candidates approach commercialization, and as Edesa’s business gains greater visibility operating as a publicly traded company in the United States. Third parties may assert infringement claims against Edesa based on existing or future intellectual property rights and to restrict Edesa’s freedom to operate. Third parties may also seek injunctive relief against Edesa, whereby they would attempt to prevent Edesa from practicing its technologies altogether pending outcome of any litigation against Edesa. Edesa may not be aware of all such intellectual property rights potentially relating to Edesa’s product candidates prior to their assertion against Edesa. For example, Edesa has not conducted an in-depth freedom-to-operate search or analysis for EB01 or any of Edesa’s other product candidates. Any freedom-to-operate search or analysis previously conducted may not have uncovered all relevant patents and pending patent applications, and there may be pending or future patent applications that, if issued, would block Edesa from commercializing EB01 or any of Edesa’s other product candidates. Thus, Edesa does not know with certainty whether EB01, or any other product candidate or Edesa’s commercialization thereof, does not and will not infringe any third party’s intellectual property.

 

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If Edesa is found to infringe a third party’s intellectual property rights, to avoid or settle litigation, Edesa could be required to obtain a license to enable Edesa to continue developing and marketing its products and technology. However, Edesa may not be able to obtain any required license on commercially reasonable terms, or at all. Even if Edesa were able to obtain a license, it could be nonexclusive, thereby giving its competitors access to the same technologies as are licensed to Edesa, and could require Edesa to make substantial payments. Absent a license, Edesa could be forced, including by court order, to cease commercializing the infringing technology or product. In addition, Edesa could be found liable for monetary damages, including treble damages and attorneys’ fees if Edesa is found to have willfully infringed a patent or other intellectual property right. A finding of infringement could prevent Edesa from commercializing its product candidates or force it to cease some of its business operations, which could materially harm its business.

 

Edesa may be subject to claims by third parties asserting that Edesa or its employees have misappropriated their intellectual property, or claiming ownership of what Edesa regards as its own intellectual property.

 

Many of Edesa’s employees were previously employed at universities or other biotechnology or pharmaceutical companies. Although Edesa tries to ensure that its employees do not use the proprietary or otherwise confidential information or know-how of others in their work for Edesa, Edesa may be subject to claims that Edesa or these employees have without authorization used or disclosed intellectual property, including trade secrets or other proprietary or confidential information, of any such employee’s former employer. Litigation may be necessary to defend against these claims.

 

In addition, while Edesa typically requires its employees and contractors who may be involved in the development of intellectual property to execute agreements assigning such intellectual property to Edesa and agreeing to cooperate and assist Edesa with securing and defending Edesa’s intellectual property, Edesa may be unsuccessful in executing such an agreement with each party who in fact develops intellectual property that Edesa regards as its own. These assignment agreements may not be self-executing or may be breached, and Edesa may be forced to bring claims against third parties, or defend claims they may bring against Edesa, to determine the ownership of what Edesa regards as its intellectual property.

 

If Edesa fails in prosecuting or defending any such claims, in addition to paying monetary damages, Edesa may lose valuable intellectual property rights or personnel. Even if Edesa is successful in prosecuting or defending against such claims, litigation could result in substantial costs and be a distraction to management.

 

Intellectual property litigation could cause Edesa to spend substantial resources and could distract Edesa’s personnel from their normal responsibilities.

 

Even if resolved in Edesa’s favor, litigation or other legal proceedings relating to intellectual property claims may cause Edesa to incur significant expenses and likely would distract its technical and management personnel from their normal responsibilities. In addition, there could be public announcements of the results of hearings, motions or other interim proceedings or developments. If securities analysts or investors perceive these results to be negative, it could have a substantial adverse effect on the price of the combined company’s common stock. Such litigation or proceedings could substantially increase Edesa’s operating losses and reduce the resources available for development, sales, marketing or distribution activities. Edesa may not have sufficient financial or other resources to adequately conduct such litigation or proceedings. Some of Edesa’s competitors may be able to sustain the costs of such litigation or proceedings more effectively than Edesa can because of their greater financial resources. Accordingly, costs and lost management time, as well as uncertainties resulting from the initiation and continuation of patent litigation or other proceedings, could have a material adverse effect on Edesa’s ability to compete in the marketplace.

 

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If Edesa is unable to protect the confidentiality of its trade secrets, Edesa’s business and competitive position would be harmed.

 

Edesa partially relies on trade secrets and know-how, including unpatented know-how, technology and other proprietary and confidential information, to maintain its competitive position. Edesa seeks to protect these trade secrets, in part, by entering into nondisclosure and confidentiality agreements with parties who have access to them, such as Edesa’s employees, corporate collaborators, outside scientific collaborators, contract manufacturers, consultants, advisors and other third parties. However, Edesa cannot guarantee that it has executed these agreements with each party that may have or have had access to Edesa’s trade secrets or that the agreements Edesa has executed will provide adequate protection. Any party with whom Edesa has executed such an agreement may breach that agreement and disclose Edesa’s proprietary or confidential information, including Edesa’s trade secrets, and Edesa may not be able to obtain adequate remedies for such breaches. Enforcing a claim that a party illegally disclosed or misappropriated a trade secret is difficult, expensive and time-consuming, and the outcome is unpredictable. In addition, some courts inside and outside the United States are less willing or unwilling to protect trade secrets. If any of Edesa’s trade secrets were to be lawfully obtained or independently developed by a competitor, Edesa would have no right to prevent them, or those to whom they communicate it, from using that technology or information to compete with Edesa. If any of Edesa’s trade secrets, particularly unpatented know-how, were to be obtained or independently developed by a competitor, Edesa’s competitive position would be harmed.

 

Risks Related to Regulatory Approval and Marketing of Edesa’s Product Candidates

 

Even if Edesa completes the necessary clinical trials, the marketing approval process is expensive, time consuming and uncertain and may prevent Edesa from obtaining approvals for the commercialization of some or all of its product candidates. If Edesa is not able to obtain, or if there are delays in obtaining, required marketing approvals, Edesa will not be able to commercialize its product candidates, and Edesa’s ability to generate revenue will be materially impaired.

 

Edesa’s product candidates, including EB01, and the activities associated with its development and commercialization, including their design, testing, manufacture, safety, efficacy, recordkeeping, labeling, storage, approval, advertising, promotion, sale and distribution, are subject to comprehensive regulation by the FDA and by comparable authorities in other countries. Failure to obtain marketing approval for a product candidate will prevent Edesa from commercializing the product candidate. Edesa has not received approval to market EB01 or any other Edesa product candidate from regulatory authorities in any jurisdiction.

 

Edesa has only limited experience in filing and supporting the applications necessary to obtain marketing approvals for product candidates and expects to rely on third-party contract research organizations to assist Edesa in this process. Securing marketing approval requires the submission of extensive preclinical and clinical data and supporting information to regulatory authorities for each therapeutic indication to establish the product candidate’s safety and effectiveness. Securing marketing approval also requires the submission of information about the product manufacturing process to, and inspection of manufacturing facilities by, the regulatory authorities. Regulatory authorities may determine that EB01, or any other Edesa product candidate is not effective, is only moderately effective or has undesirable or unintended side effects, toxicities, safety profiles or other characteristics that preclude Edesa from obtaining marketing approval or that prevent or limit commercial use.

 

The process of obtaining marketing approvals is expensive, may take many years, if approval is obtained at all, and can vary substantially based upon a variety of factors, including the type, complexity and novelty of the product candidates involved. Changes in marketing approval policies during the development period, changes in or the enactment of additional statutes or regulations, or changes in regulatory review for each submitted product application, may cause delays in the approval or rejection of an application. Regulatory authorities have substantial discretion in the approval process and may refuse to accept any application or may decide that Edesa’s data are insufficient for approval and require additional preclinical studies, clinical trials or other trials. In addition, varying interpretations of the data obtained from preclinical and clinical testing could delay, limit or prevent marketing approval of a product candidate. Any marketing approval Edesa ultimately obtains may be limited or subject to restrictions or post-approval commitments that render the approved product not commercially viable. If Edesa experiences delays in obtaining approval or if Edesa fails to obtain approval of its product candidates, the commercial prospects for Edesa’s product candidates may be harmed and its ability to generate revenues will be materially impaired.

 

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Even if Edesa obtains marketing approval for its product candidates, the terms of approvals and ongoing regulation of Edesa’s products may limit how it manufactures and markets its products and compliance with such requirements may involve substantial resources, which could materially impair Edesa’s ability to generate revenue.

 

Even if marketing approval of a product candidate is granted, an approved product and its manufacturer and marketer are subject to ongoing review and extensive regulation, including the possible requirement to implement a risk evaluation and mitigation strategy or to conduct costly post-marketing studies or clinical trials and surveillance to monitor the safety or efficacy of the product. Edesa must also comply with requirements concerning advertising and promotion for any of its product candidates for which Edesa obtains marketing approval. Promotional communications with respect to prescription drugs are subject to a variety of legal and regulatory restrictions and must be consistent with the information in the product’s approved labeling. Thus, Edesa will not be able to promote any products it develops for indications or uses for which they are not approved. In addition, manufacturers of approved products and those manufacturers’ facilities are required to ensure that quality control and manufacturing procedures conform to cGMP, which include requirements relating to quality control and quality assurance as well as the corresponding maintenance of records and documentation and reporting requirements. Edesa and its contract manufacturers could be subject to periodic unannounced inspections by the FDA to monitor and ensure compliance with cGMP.

 

Accordingly, assuming Edesa receives marketing approval for one or more of its product candidates, Edesa and its contract manufacturers will continue to expend time, money and effort in all areas of regulatory compliance, including manufacturing, production, product surveillance and quality control. If Edesa is not able to comply with post-approval regulatory requirements, Edesa could have the marketing approvals for its products withdrawn by regulatory authorities and Edesa’s ability to market any future products could be limited, which could adversely affect Edesa’s ability to achieve or sustain profitability. Thus, the cost of compliance with post-approval regulations may have a negative effect on Edesa’s operating results and financial condition.

 

Edesa’s relationships with customers, healthcare providers and professionals and third-party payors will be subject to applicable anti-kickback, fraud and abuse and other healthcare laws and regulations, which could expose Edesa to criminal sanctions, civil penalties, contractual damages, reputational harm and diminished profits and future earnings.

 

Healthcare providers, physicians and third-party payors play a primary role in the recommendation and prescription of any product candidate, including EB01, for which Edesa may obtain marketing approval. Edesa’s future arrangements with customers, healthcare providers and professionals, and third-party payors may expose Edesa to broadly applicable federal anti-kickback, federal and state fraud and abuse and other healthcare laws and regulations that may constrain the business or financial arrangements and relationships through which Edesa markets, sells and distributes any product candidate for which Edesa obtains marketing approval.

 

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Efforts to ensure that Edesa’s business arrangements with third parties will comply with applicable healthcare laws and regulations will involve substantial costs. It is possible that governmental authorities will conclude that Edesa’s business practices may not comply with current or future statutes, regulations or case law involving applicable fraud and abuse or other healthcare laws and regulations. If Edesa’s operations are found to be in violation of any of these laws or any other governmental regulations that may apply to it, Edesa may be subject to significant civil, criminal and administrative penalties, damages, fines, exclusion from government funded healthcare programs, such as Medicare and Medicaid, and the curtailment or restructuring of Edesa’s operations. Violation of certain of these laws could also result in exclusion, suspension and debarment from government funded healthcare programs. Exclusion, suspension or debarment would significantly impact Edesa’s ability to commercialize, sell or distribute any product candidate for which Edesa obtains regulatory approval. If any of the physicians or other providers or entities with whom Edesa expects to do business are found to be not in compliance with applicable laws, they may be subject to criminal, civil or administrative sanctions, including exclusions from government funded healthcare programs.

 

Edesa is subject to anti-corruption laws, as well as export control laws, customs laws, sanctions laws and other laws governing Edesa’s operations. If Edesa fails to comply with these laws, it could be subject to civil or criminal penalties, other remedial measures and legal expenses, which could adversely affect Edesa’s business, results of operations and financial condition.

 

Edesa’s operations are subject to anti-corruption laws, including the U.S. Foreign Corrupt Practices Act, or the FCPA, and other anti-corruption laws that apply in countries where Edesa does business and may do business in the future. The FCPA and these other laws generally prohibit Edesa, Edesa’s officers, and Edesa’s employees and intermediaries from bribing, being bribed or making other prohibited payments to government officials or other persons to obtain or retain business or gain some other business advantage. Edesa may in the future operate in jurisdictions that pose a high risk of potential FCPA violations, and Edesa may participate in collaborations and relationships with third parties whose actions could potentially subject Edesa to liability under the FCPA or local anti-corruption laws. In addition, Edesa cannot predict the nature, scope or effect of future regulatory requirements to which Edesa’s international operations might be subject or the manner in which existing laws might be administered or interpreted.

 

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Edesa is also subject to other laws and regulations governing its international operations, including regulations administered by the government of the United States and authorities in the European Union, including applicable export control regulations, economic sanctions on countries and persons, customs requirements and currency exchange regulations, collectively referred to as the Trade Control laws.

 

There is no assurance that Edesa will be completely effective in ensuring its compliance with all applicable anti-corruption laws, including the FCPA or other legal requirements, including Trade Control laws. If Edesa is not in compliance with the FCPA and other anti-corruption laws or Trade Control laws, it may be subject to criminal and civil penalties, disgorgement and other sanctions and remedial measures, and legal expenses, which could have an adverse impact on Edesa’s business, financial condition, results of operations and liquidity. Likewise, any investigation of any potential violations of the FCPA, other anti-corruption laws or Trade Control laws by U.S. or other authorities could also have an adverse impact on Edesa’s reputation, its business, results of operations and financial condition.

 

Edesa relies significantly on information technology and any failure, inadequacy, interruption or security lapse of that technology, including any cyber security incidents, could harm Edesa’s ability to operate its business effectively.

 

Despite the implementation of security measures, Edesa’s internal computer systems and those of third parties with which Edesa contracts are vulnerable to damage from cyber-attacks, computer viruses, unauthorized access, natural disasters, terrorism, war and telecommunication and electrical failures. System failures, accidents or security breaches could cause interruptions in Edesa’s operations, and could result in a material disruption of Edesa’s clinical and commercialization activities and business operations, in addition to possibly requiring substantial expenditures of resources to remedy. The loss of clinical trial data could result in delays in Edesa’s regulatory approval efforts and significantly increase Edesa’s costs to recover or reproduce the data. To the extent that any disruption or security breach were to result in a loss of, or damage to, Edesa’s data or applications, or inappropriate disclosure of confidential or proprietary information, Edesa could incur liability and its product research, development and commercialization efforts could be delayed.

 

Risks Related to Edesa’s Business Operations, Employee Matters and Managing Growth

 

Edesa’s future success depends on its ability to retain its chief executive officer and other key executives and to attract, retain and motivate qualified personnel.

 

Edesa is highly dependent on Dr. Pardeep Nijhawan, its Chief Executive Officer, President and Secretary, and Michael Brooks, its Vice President of Corporate Development and Strategy, and other principal members of its management and scientific teams. Although the combined company will have formal employment agreements with each of its executive officers, these agreements do not prevent the combined company’s executives from terminating their employment with it at any time. The unplanned loss of the services of any of these persons could materially impact the achievement of Edesa’s research, development and commercialization objectives.

 

Recruiting and retaining qualified scientific, clinical, manufacturing and sales and marketing personnel, including in the United States and Canada, will also be critical to Edesa’s success. Edesa may not be able to attract and retain these personnel on acceptable terms given the competition among numerous biotechnology and pharmaceutical companies for similar personnel. Edesa also experiences competition for the hiring of scientific and clinical personnel from universities and research institutions. In addition, Edesa relies on consultants and advisors, including scientific and clinical advisors, to assist it in formulating Edesa’s research and development and commercialization strategy. Edesa’s consultants and advisors may be employed by employers other than Edesa and may have commitments under consulting or advisory contracts with other entities that may limit their availability to Edesa.

 

Edesa expects to expand its capabilities, and as a result, Edesa may encounter difficulties in managing its growth, which could disrupt its operations.

 

Edesa expects to experience significant growth in the number of its employees and the scope of its operations, particularly in the areas of drug development, regulatory affairs, finance and administration and, potentially, sales and marketing. To manage Edesa’s anticipated future growth, Edesa must continue to implement and improve its managerial, operational and financial systems, expand its facilities and continue to recruit and train additional qualified personnel. Due to Edesa’s limited financial resources and the limited experience of its management team in managing a company with such anticipated growth, Edesa may not be able to effectively manage the expansion of its operations or recruit and train additional qualified personnel. The physical expansion of Edesa’s operations may lead to significant costs and may divert its management and business development resources. Any inability to manage growth could delay the execution of Edesa’s business plans or disrupt its operations.

 

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Edesa is exposed to risks related to currency exchange rates.

 

Edesa conducts a significant portion of its operations outside of the United States. Because Edesa’s financial statements are presented in U.S. dollars, changes in currency exchange rates have had and could have in the future a significant effect on Edesa’s operating results when Edesa’s operating results are translated into U.S. dollars. Exchange rate fluctuations between local currencies and the dollar create risk in several ways, including the following: weakening of the dollar may increase the cost of research and development expenses outside of the United States and the cost of sourced product components outside the United States; strengthening of the dollar may decrease the value of Edesa’s revenues denominated in other currencies; the exchange rates on nondollar transactions and cash deposits can distort Edesa’s financial results; and affecting commercial pricing and profit margins.

 

Edesa’s employees, principal investigators, consultants and commercial partners may engage in misconduct or other improper activities, including noncompliance with regulatory standards and requirements and insider trading, which could cause significant liability for Edesa and harm its reputation.

 

Edesa is exposed to the risk of fraud or other misconduct by its employees, principal investigators, consultants and collaborators, including intentional failures to comply with FDA or Office of Inspector General regulations or similar regulations of comparable non-U.S. regulatory authorities, provide accurate information to the FDA or comparable non-U.S. regulatory authorities, comply with manufacturing standards Edesa has established, comply with federal and state healthcare fraud and abuse laws and regulations and similar laws and regulations established and enforced by comparable non-U.S. regulatory authorities, report financial information or data accurately or disclose unauthorized activities to Edesa. Misconduct by these parties could also involve the improper use of information obtained in the course of clinical trials, which could result in regulatory sanctions and serious harm to Edesa’s reputation. It is not always possible to identify and deter employee misconduct, and the precautions Edesa takes to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting Edesa from governmental investigations or other actions or lawsuits stemming from a failure to be in compliance with such laws, standards or regulations. If any such actions are instituted against Edesa, and Edesa is not successful in defending itself or asserting its rights, those actions could have a significant impact on its business and results of operations, including the imposition of significant fines or other sanctions.

 

Risks Related to the Combined Company

 

In determining whether you should approve the Exchange, the issuance of Stellar Common Shares and other matters related to the Exchange, as the case may be, you should carefully read the following risk factors in addition to the other risks described under this section which will also apply to the combined company.

 

The combined company will incur losses for the foreseeable future and might never achieve profitability.

 

The combined company may never become profitable, even if the combined company is able to complete clinical development for one or more product candidates and eventually commercialize such product candidates. The combined company will need to successfully complete significant research, development, testing and regulatory compliance activities that, together with projected general and administrative expenses, is expected to result in substantial increased operating losses for at least the next several years. Even if the combined company does achieve profitability, it may not be able to sustain or increase profitability on a quarterly or annual basis.

 

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The combined company will continue to be a smaller reporting company. The combined company cannot be certain if the reduced disclosure requirements applicable to smaller reporting companies will make the combined company’s common shares less attractive to investors or otherwise limit the combined company’s ability to raise additional funds.

 

Stellar is currently, and the combined company will continue to be upon completion of the Exchange, a “smaller reporting company” under applicable securities regulations. A smaller reporting company is a company that has an aggregate market value of the company’s voting stock held by non-affiliates, or public float, of less than $250 million as of the last business day of its most recently completed second fiscal quarter and does not meet certain exceptions. SEC rules provide that companies with a public float of less than $75 million may only sell shares under a Form S-3 shelf registration statement, during any 12-month period, in an amount less than or equal to one-third of the public float. If the combined company does not meet this public float requirement, any offering by the combined company under a Form S-3 will be limited to raising an aggregate of one-third of the combined company’s public float in any 12-month period. In addition, a smaller reporting company is able to provide simplified executive compensation disclosures in its filings, is exempt from the provisions of Section 404(b) of the Sarbanes-Oxley Act requiring that an independent registered public accounting firm provide an attestation report on the effectiveness of internal control over financial reporting if its public float is less than $75 million, and has certain other reduced disclosure obligations in their SEC filings, including, among other things, only being required to provide two years of audited financial statements in annual reports. Reduced disclosure in the combined company’s SEC filings due to its status as a smaller reporting company may make it harder for investors to analyze its results of operations and financial prospects.

 

Stellar expects the share price of the combined company to be volatile, and the market price of the Stellar Common Shares may drop following the Exchange.

 

The market price of Stellar Common Shares following the Exchange could be subject to significant fluctuations. Market prices for securities of early-stage pharmaceutical, biotechnology and other life sciences companies have historically been particularly volatile. Some of the factors that may cause the market price of Stellar Common Shares to fluctuate include:

 

·the results of the combined company’s current and any future clinical trials of its product candidates;

 

·failure of any of the combined company’s product candidates, if approved, to achieve commercial success;

 

·issues in manufacturing the combined company’s approved products, if any, or product candidates;

 

·the entry into, or termination of, key agreements, including key commercial partner agreements;

 

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·the initiation of, material developments in, or conclusion of litigation to enforce or defend any of the combined company’s intellectual property rights or defend against the intellectual property rights of others;

 

·announcements of any dilutive equity financings;

 

·announcements by commercial partners or competitors of new commercial products, clinical progress or the lack thereof, significant contracts, commercial relationships or capital commitments;

 

·the introduction of technological innovations or new therapies that compete with potential products of the combined company;

 

·the loss of key employees;

 

·changes in estimates or recommendations by securities analysts, if any, who cover the Stellar Common Shares following the Exchange;

 

·general and industry-specific economic conditions that may affect the combined company’s research and development expenditures;

 

·changes in the structure of health care payment systems;

 

·failure to maintain compliance with the listing requirements of The Nasdaq Capital Market; and

 

·period-to-period fluctuations in the combined company’s financial results.

 

Moreover, the stock markets in general have experienced substantial volatility that has often been unrelated to the operating performance of individual companies. These broad market fluctuations may also adversely affect the trading price of the Stellar Common Shares after the Exchange.

 

In the past, following periods of volatility in the market price of a company’s securities, shareholders have often instituted class action securities litigation against those companies. Such litigation, if instituted, could result in substantial costs and diversion of management attention and resources, which could significantly harm the combined company’s profitability and reputation.

 

The failure to integrate successfully the businesses of Edesa and Stellar in the expected timeframe could adversely affect the future results of the combined company following the completion of the Exchange.

 

The success of the Exchange will depend, in part, on the ability of the combined company following the completion of the Exchange to realize the anticipated benefits from combining the businesses of Stellar and Edesa.

 

The failure to integrate successfully and to manage successfully the challenges presented by the integration process may result in the combined company’s failure to achieve some or all of the anticipated benefits of the Exchange.

 

Potential difficulties that may be encountered in the integration process include the following:

 

·using the combined company’s cash and other assets efficiently to develop the business of Edesa;

 

·appropriately managing the liabilities of the combined company;

 

·potential unknown or currently unquantifiable liabilities associated with the Exchange and the operations of the combined company;

 

·potential unknown and unforeseen expenses, delays or regulatory conditions associated with the Exchange; and

 

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·performance shortfalls at one or both of the companies as a result of the diversion of management’s attention caused by completing the Exchange and integrating the companies’ operations.

 

The combined company will incur costs and demands upon management as a result of complying with the laws and regulations affecting public companies.

 

The combined company will incur significant legal, accounting and other expenses that Edesa did not primarily incur as a private company, including costs associated with public company reporting requirements. The combined company will also incur costs associated with corporate governance requirements, including requirements under the Sarbanes-Oxley Act, as well as new rules implemented by the SEC and The Nasdaq Stock Market. These rules and regulations are expected to increase the combined company’s legal and financial compliance costs and to make some activities more time-consuming and costly. For example, the combined company’s management team will primarily consist of the executive officers of Edesa prior to the Exchange, many of whom have not previously managed and operated a public company. These executive officers and other personnel will need to devote substantial time to gaining expertise regarding operations as a public company and compliance with applicable laws and regulations. These rules and regulations may also make it difficult and expensive for the combined company to obtain directors and officers liability insurance. As a result, it may be more difficult for the combined company to attract and retain qualified individuals to serve on the combined company’s board of directors or as executive officers of the combined company, which may adversely affect investor confidence in the combined company and could cause the combined company’s business or share price to suffer.

 

Stellar and Edesa do not anticipate that the combined company will pay any cash dividends in the foreseeable future.

 

The current expectation is that the combined company will retain its future earnings to fund the development and growth of the combined company’s business. As a result, capital appreciation, if any, of the Stellar Common Shares after the Exchange will be your sole source of gain, if any, for the foreseeable future.

 

The pro forma financial statements are presented for illustrative purposes only and may not be indicative of the combined company’s financial condition or results of operations following the completion of the Exchange.

 

The pro forma financial statements contained in this proxy statement are presented for illustrative purposes only and may not be indicative of the combined company’s financial condition or results of operations following the Exchange for several reasons. The pro forma financial statements have been derived from the historical financial statements of Stellar and Edesa and adjustments and assumptions have been made regarding the combined company after giving effect to the Exchange. The information upon which these adjustments and assumptions have been made is preliminary, and these kinds of adjustments and assumptions are difficult to make with accuracy. Moreover, the pro forma financial statements do not reflect all costs that are expected to be incurred by the combined company in connection with the Exchange. For example, the impact of any incremental costs incurred in integrating the two companies is not reflected in the pro forma financial statements. As a result, the actual financial condition of the combined company following the Exchange may not be consistent with, or evident from, these pro forma financial statements. The assumptions used in preparing the pro forma financial information may not prove to be accurate, and other factors may affect the combined company’s financial condition following the transaction. See section entitled “Unaudited Pro Forma Combined Financial Statements” below.

 

Future sales of shares by existing shareholders could cause the Stellar Common Share price to decline, after the Exchange.

 

If existing shareholders of Stellar and Edesa sell, or indicate an intention to sell, substantial amounts of the Stellar Common Shares after the Exchange in the public market after the legal restrictions on resale discussed in this proxy statement lapse, the trading price of the Stellar Common Shares, following the Exchange could decline.

 

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The ownership of the Stellar Common Shares following the completion of the Exchange will be highly concentrated, which may prevent you and other shareholders from influencing significant corporate decisions and may result in conflicts of interest that could cause the Stellar Common Shares price to decline.

 

The Edesa shareholders and option holders are expected to beneficially own or control approximately 90% of the outstanding Stellar Common Shares on a fully-diluted basis upon the completion of the Exchange. Accordingly, the Edesa shareholders will have substantial influence over the outcome of corporate actions requiring shareholder approval, including the election of directors, any merger, consolidation or sale of all or substantially all of the combined company’s assets or any other significant corporate transaction. The Edesa shareholders may also delay or prevent a change of control of the combined company, even if such a change of control would benefit the other shareholders of the combined company. The significant concentration of share ownership may adversely affect the trading price of the Stellar Common Shares after the Exchange due to investors’ perception that conflicts of interest may exist or arise.

 

Upon completion of the Exchange, it is expected that the combined company will qualify as a foreign private issuer, and as a result, shareholders of the combined company may receive less information and be afforded less protection under the U.S. federal securities laws.

 

Following completion of the Exchange, it is expected that the combined company will qualify as a foreign private issuer within the meaning of rules promulgated under the Securities and Exchange Act of 1934, as amended, (the “Exchange Act”) because a majority of the Stellar Common Shares will be held by non U.S. persons. As a foreign private issuer, the combined company will be exempt from certain Exchange Act rules and requirements that apply to U.S. public companies, including: (i) the requirement to file with the SEC quarterly reports on Form 10-Q and current reports on Form 8-K; (ii) rules regulating the solicitation of proxies in connection with shareholder meetings; (iii) Regulation FD prohibiting selective disclosures of material information; and (iv) rules requiring insiders to disclose stock ownership and trading activities and establishing liability for profits realized from “short-swing” trading transactions (i.e., a purchase and sale, or sale and purchase, of the issuer’s equity securities within less than six months). If the combined company elects to be treated as a foreign private issuer, shareholders of the combined company will receive less information about the combined company and trading in the combined company’s shares by its affiliates than was provided by Stellar, which is treated as a domestic issuer under the Exchange Act, and shareholders will be afforded less protection under the U.S. federal securities laws than would be afforded to shareholders of a domestic U.S. company.

 

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FORWARD-LOOKING STATEMENTS

 

This proxy statement and the documents incorporated by reference into this proxy statement contain forward-looking statements. These forward-looking statements are based on current expectations and beliefs and involve numerous risks and uncertainties that could cause actual results to differ materially from expectations. These forward-looking statements should not be relied upon as predictions of future events as Stellar cannot assure you that the events or circumstances reflected in these statements will be achieved or will occur. You can identify forward-looking statements by the use of forward-looking terminology including “believes,” “expects,” “may,” “will,” “should,” “seeks,” “intends,” “plans,” “pro forma,” “estimates,” or “anticipates” or the negative of these words and phrases or other variations of these words and phrases or comparable terminology. All statements other than statements of historical fact are statements that could be deemed forward-looking statements. For example, forward-looking statements include, but are not limited to statements about: (i) expectations related to the Exchange, including the benefits of the Exchange and the timing of the Exchange; (ii) expectations relating to the resulting ownership of the combined company; (iii) expectations and plans relating to the business of the combined company; (iv) expectations regarding listing of the Stellar Common Shares on the Nasdaq Capital Market; (v) expectations related to cash flows from operations; and (v) beliefs about Stellar’s ability to fund its anticipated levels of operations;

 

Readers should not unduly rely on these forward-looking statements, which are not a guarantee of future performance. There can be no assurance that forward-looking statements will prove to be accurate, as all such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause actual results or future events to differ materially from the forward-looking statements. Such risks include, but may not be limited to: the possibility that Stellar may be unable to obtain shareholder approval required for the Exchange, the expected timing and likelihood of completion of the Exchange, the possibility that Stellar’s working capital decreases prior to the Exchange, and therefore, the Stellar shareholders are subject to decreased ownership in the combined company, the inability to successfully integrate the businesses or the risk that such integration may be more difficult, time-consuming or costly than expected, the occurrence of any event, change or other circumstances that could give rise to the termination of the Exchange Agreement, the inability of the parties to meet expectations regarding the accounting and tax treatments of the Exchange, the potential for the Exchange to involve unexpected costs, the risk that the parties may not be able to satisfy the conditions to the proposed transaction in a timely manner or at all, risks related to disruption of management time from ongoing business operations due to the Exchange, the risk that the expected benefits of the proposed combined company are not realized, the risk that any announcements relating to the Exchange could have adverse effects on the market price of Stellar’s Common Shares, the ability to maintain and enforce patents and other intellectual property rights or the unexpected costs associated with such enforcement or litigation, as well as general economic and business conditions, technology changes, competition, changes in strategy or development plans, availability of funds and resources, anticipated requirements for operating capital, governmental regulations and the ability or failure to comply with governmental regulations, changes in trade policy and international law and other factors referenced in Stellar’s filings with securities regulators. Risks and uncertainties related to Edesa that may cause actual results to differ materially from those expressed or implied in any forward-looking statements include, but are not limited to: the ability of Edesa to obtain regulatory approval for or successfully commercialize any of its product candidates, the risk that access to sufficient capital to fund Edesa’s operations may not be available or may be available on terms that are not commercially favorable to Edesa, the risk that Edesa’s product candidates may not be effective against the diseases tested in its clinical trials, the risk that Edesa fails to comply with the terms of license agreements with third parties and as a result loses the right to use key intellectual property in its business, Edesa’s ability to protect its intellectual property and the timing and success of submission, acceptance and approval of regulatory filings. Many of these factors that will determine actual results are beyond Stellar’s, Edesa’s or the combined company's ability to control or predict.

 

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Other risks and uncertainties are more fully described in periodic filings with the SEC, including the factors described in the section entitled "Risk Factors" in our Annual Report, which is incorporated by reference into this proxy statement and any Quarterly Reports on Form 10-Q filed thereafter, and in other filings that Stellar makes and will make with the SEC in connection with the proposed transactions, including the proxy statement, as well as its filings with the British Columbia Securities Commission. Existing and prospective investors are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof.

 

For a discussion of the factors that may cause Stellar, Edesa or the combined company’s actual results, performance or achievements to differ materially from any future results, performance or achievements expressed or implied in such forward-looking statements, or for a discussion of risk associated with the ability of Stellar and Edesa to complete the Exchange and the effect of the Exchange on the business of Stellar, Edesa and the combined company, see “Risk Factors” beginning on page 15.

 

Additional factors that could cause actual results to differ materially from those expressed in the forward-looking statements are discussed in reports filed with the SEC by Stellar. See “Where You Can Find Additional Information” beginning on page 145.

 

If any of these risks or uncertainties materializes or any of these assumptions proves incorrect, the results of Stellar, Edesa or the combined company could differ materially from the forward-looking statements. All forward-looking statements in this proxy statement are current only as of the date on which the statements were made. Stellar and Edesa do not undertake any obligation to publicly update any forward-looking statement to reflect events or circumstances after the date on which any statement is made or to reflect the occurrence of unanticipated events.

 

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THE ANNUAL MEETING OF STELLAR SHAREHOLDERS

 

2019 Annual Meeting of Stellar Shareholders

 

This Proxy Statement is being furnished to the holders of Stellar Common Shares in connection with the solicitation of proxies for use at the Annual Meeting. The Annual Meeting is to be held at [   ] (local time) on [   ], at [   ] and at any adjournment or adjournments thereof.

 

Record Date

 

The Stellar Board has fixed the close of business on [   ] as the record date (the “Record Date”) for the determination of shareholders entitled to notice of, and to vote and act at, the Annual Meeting. Only shareholders of record at the close of business on that date are entitled to notice of, and to vote and act at, the Annual Meeting.

 

Proposals to be Submitted at the Annual Meeting

 

At the Annual Meeting, shareholders will be acting upon the following proposals:

 

1.To approve the issuance of the Stellar Common Shares pursuant to the Exchange Agreement, dated as of March 7, 2019, by and among Stellar, Edesa and the Edesa shareholders, a copy of which is attached as Annex A to the accompanying proxy statement;

 

2.To elect Frank R. Oakes, Deborah F. Aghib, Ph.D., Tessie M. Che, Ph.D., Paul Chun, David L. Hill, Ph.D., Charles V. Olson, D.Sc. and Mayank D. Sampat, nominated by the Stellar Board, as directors to serve until Stellar’s 2020 annual meeting of shareholders or until their successors are duly elected and qualified;

 

  3. To appoint Moss Adams LLP as Stellar’s independent registered public accounting firm until the close of the 2020 annual meeting of shareholders; and

 

4.To adjourn the Annual Meeting, if necessary, to solicit additional votes in favor of Proposal No. 1.

 

Stellar will also consider such other business as may properly come before the Annual Meeting or any adjournments or postponements thereof.

 

Recommendation of the Stellar Board

 

After careful consideration, the Stellar Board recommends that Stellar shareholders vote:

 

·“FOR” Proposal No. 1 to approve the issuance of Stellar Common Shares pursuant to the Exchange Agreement;

 

·“FOR” Proposal No. 2 to approve the election of directors;

 

·“FOR” Proposal No. 3 to appoint the independent registered public accounting firm; and

 

·“FOR” Proposal No. 4 to adjourn the Annual Meeting, if necessary, to solicit additional votes in favor of the proposal to approve the issuance of Stellar Common Shares pursuant to the Exchange Agreement.

 

Information Concerning Solicitation and Voting

 

As of the Record Date, there were [  ] outstanding Stellar Common Shares, each share entitled to one vote on each matter to be voted on at the Annual Meeting.  Only holders of Stellar Common Shares on the Record Date will be entitled to vote at the Annual Meeting.  Stellar’s Amended Articles require the representation of at least one person entitled to vote at the Annual Meeting who holds at least thirty-three and one-third percent (33 – 1/3%) of the issued Stellar Common Shares, in person or represented by proxy, or a duly appointed proxy holder or representative for a shareholder so entitled and holding or represented by proxy at least thirty-three and one-third percent (33 – 1/3%) of the issued Stellar Common Shares, in order to establish a quorum for the transaction of business. Abstentions and “broker non-votes” will be counted for purposes of determining whether a quorum is present for the transaction of business at the Annual Meeting. If a quorum is not present, the Annual Meeting may be adjourned until a quorum is obtained. 

 

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Proposal No. 1 – To approve the Exchange, Proposal No. 1 must receive the vote of a majority of the votes of the Stellar Common Shares cast in person or represented by proxy at the Annual Meeting. For the purposes of the approval, although abstentions will count toward the presence of a quorum, they will not be counted as votes cast and will have no effect on the result of the vote. “Broker non-votes,” which occur when brokers are prohibited from exercising discretionary voting authority for beneficial owners who have not provided voting instructions, will not be counted for the purpose of determining the number of shares present in person or by proxy on Proposal No. 1 and will have no effect on the outcome of the vote.  Brokers who hold shares in street name may not vote on behalf of beneficial owners with respect to Proposal No. 1 without instruction from beneficial owners.

 

Proposal No. 2 To be elected, the nominees named in Proposal No. 2 must receive the vote of a plurality of votes of the Stellar Common Shares cast in person or represented by proxy at the Annual Meeting. For the purposes of the approval, although abstentions will count toward the presence of a quorum, they will not be counted as votes cast and will have no effect on the result of the vote. “Broker non-votes” will not be counted for the purpose of determining the number of shares present in person or by proxy on Proposal No. 2 and will have no effect on the outcome of the vote.  Brokers who hold shares in street name may not vote on behalf of beneficial owners with respect to Proposal No. 2 without instruction from beneficial owners.

 

Proposal No. 3 – For the appointment of the independent registered public accounting firm, Proposal No. 3 must receive the vote of a majority of votes cast in person or represented by proxy at the Annual Meeting.  For the purposes of the appointment, although abstentions will count toward the presence of a quorum, they will not be counted as votes cast and will have no effect on the result of the vote.  Brokers who hold shares in street name may vote on behalf of beneficial owners with respect to Proposal No. 3.

 

Proposal No. 4 For the approval of the adjournment with respect to Proposal No. 1, this Proposal No. 4 must receive the vote of a majority of the shares cast in person or represented by proxy at the Annual Meeting.  For the purposes of the adjournment, although abstentions will count toward the presence of a quorum, they will not be counted as votes cast and will have no effect on the result of the vote.  “Broker non-votes” will not be counted for the purpose of determining the number of shares present in person or by proxy on Proposal No. 4 and will have no effect on the outcome of the vote.  Brokers who hold shares in street name may not vote on behalf of beneficial owners with respect to Proposal No. 4 without instruction from beneficial owners.

 

As of the date of this proxy statement, the Stellar Board does not know of any business to be presented at the Annual Meeting other than as described above. If any other matters should properly come before the Annual Meeting, it is intended that the shares represented by proxies will be voted with respect to such matters in accordance with the judgment of the persons voting the proxies.

 

Expenses

 

The expense of preparing, printing and mailing this Proxy Statement and Annual Report and the proxies solicited hereby will be borne by Stellar. In addition to the use of the mails, proxies may be solicited by officers, directors and regular employees of Stellar, without additional remuneration, by personal interviews, telephone, email or facsimile transmission. Stellar will also request brokerage firms, nominees, custodians and fiduciaries to forward proxy materials to the beneficial owners of Stellar Common Shares held of record and will provide reimbursements for the cost of forwarding the material in accordance with customary charges.

 

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No Right of Appraisal

 

None of British Columbia law, Stellar’s Certificate of Incorporation, Stellar’s Notice of Articles nor Stellar’s Articles provide for appraisal or other similar rights for dissenting shareholders in connection with the Exchange. Accordingly, Stellar shareholders will have no right to dissent and obtain payment for their Stellar Common Shares.

 

Attending the Annual Meeting

 

Only shareholders and invited guests are permitted to attend the Annual Meeting. To gain admittance, you must bring a form of personal identification to the Annual Meeting, where your name will be verified against the Stellar shareholder list. If a nominee holds your Stellar Common Shares and you plan to attend the Annual Meeting, you should bring a brokerage statement showing your ownership of the Stellar Common Shares as of the record date or a letter from the nominee confirming such ownership, and a form of personal identification. If you wish to vote your Stellar Common Shares that are held by a nominee at the meeting, you must obtain a proxy from your nominee and bring such proxy to the meeting.

 

Stellar Shareholder Proposals for 2020 Annual Meeting of Shareholders

 

Stellar Shareholder proposals for inclusion in the Stellar proxy statement: If a shareholder wishes to present a proposal to be included in the proxy statement and form of proxy for the 2020 annual meeting of shareholders, the proponent and the proposal must comply with the proxy proposal submission rules of the SEC and namely, Rule 14a-8 promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). One of the requirements is that the proposal must be received by the Corporate Secretary at the executive offices no earlier than the close of business on [    ] and no later than the close of business on [    ] which is 120 calendar days before [   ], 2020, the anniversary date that this proxy statement was released to shareholders in connection with the Annual Meeting. Such proposal must also comply with the applicable requirements as to form and substance established by the SEC if those proposals are to be included in the proxy statement and form of proxy. If the date of next year’s annual meeting is changed by more than 30 days from the anniversary date of the Annual Meeting, then the deadline is a reasonable time before Stellar prints and mails proxy materials.

 

Other Stellar shareholder proposals: The Stellar Board has approved an advance notice policy, which was subsequently approved by the Stellar shareholders at its 2014 annual meeting of shareholders, that requires advance notice be given to Stellar in certain circumstances where nominations of persons for election to the Stellar Board are made by Stellar shareholders.

 

In the case of an annual meeting of Stellar shareholders, notice to Stellar must be made not less than 30 days nor more than 65 days prior to the date of the annual meeting. However, in the event that the annual meeting is to be held on a date that is less than 40 days after the date on which the first public announcement of the date of the annual meeting was made, notice may be made not later than the close of business on the tenth day following such public announcement.

 

In the case of a special meeting of Stellar shareholders (which is not also an annual meeting), notice to Stellar must be made not later than the close of business on the fifteenth day following the day on which the first public announcement of the date of the special meeting was made.

 

ALL PROXIES RECEIVED WILL BE VOTED IN ACCORDANCE WITH THE CHOICES SPECIFIED ON SUCH PROXIES. PROXIES WILL BE VOTED IN FAVOR OF A PROPOSAL IF NO CONTRARY SPECIFICATION IS MADE. ALL VALID PROXIES OBTAINED WILL BE VOTED AT THE DISCRETION OF THE PERSONS NAMED IN THE PROXY WITH RESPECT TO ANY OTHER BUSINESS THAT MAY COME BEFORE THE ANNUAL MEETING.

 

THE BOARD RECOMMENDS A VOTE “FOR” THE APPROVAL OF EACH OF THE PROPOSALS TO BE SUBMITTED AT THE MEETING.

 

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THE EXCHANGE

 

This section and the section entitled “Exchange Agreement” in this proxy statement describe the material aspects of the Exchange, including the Exchange Agreement. While Stellar and Edesa believe that this description covers the material terms of the Exchange and the Exchange Agreement, it may not contain all of the information that is important to you. You should read carefully this entire proxy statement for a more complete understanding of the Exchange and the Exchange Agreement, including the Exchange Agreement attached as Annex A, and the other documents to which you are referred herein. See the section entitled “Where You Can Find Additional Information” in this proxy statement.

 

Background of the Exchange

 

The terms of the Exchange Agreement between Stellar and Edesa (together, “the companies”) with respect to Stellar’s acquisition of the entire issued share capital of Edesa are the result of extensive arm’s-length negotiations among the management teams, and representatives of the management teams, of Stellar and Edesa, under the guidance of each company’s board of directors, and involving outside advisors retained by each of the companies. From the beginning of the process, Stellar followed a careful process assisted by experienced outside financial and legal advisors to rigorously examine potential merger and acquisition partners in a broad and inclusive manner. The following is a summary of the background of the process, the negotiations, the Exchange and related transactions, including the circumstances surrounding Stellar’s decision to review strategic alternatives available to it.

 

Since Stellar became a public company in April 2010, the Stellar Board and management have periodically reviewed Stellar’s operating and strategic plans in an effort to enhance Stellar shareholder value. These reviews and discussions have focused on, among other things, the opportunities and risks associated with Stellar’s business and financial condition; the status and progress of clinical development studies of drug candidates utilizing Stellar KLH, including risks associated with these activities; the cost of scaling manufacturing capacity and meeting regulatory requirements for commercial drug substances; possible sources of additional financing; and potential strategic relationships and other strategic options. During the course of these strategic reviews, Stellar’s management from time to time sought to identify parties with whom Stellar could pursue strategic partnerships or the sale of intellectual property, technology or other assets.

 

From January 2017 to March 2018, due in part to the magnitude of the resources required to transfer and scale-up Stellar KLH production and manufacturing methods, Stellar has sought strategic arrangements with customers and potential partners to help finance these and other Stellar operations. Stellar management engaged in wide-ranging strategic discussions with six parties. These discussions, which relied on publicly available information or information shared under existing non-disclosure agreements, centered primarily around securing supplies of KLH and technical collaborations, but included potential financing arrangements such as direct equity investments in Stellar of up to 19.99% of the shares outstanding, debt instruments, share exchange agreements, business combinations, and binding supply arrangements. None of these discussions advanced past non-binding draft proposals due to, among other reasons, these parties’ uncertain drug development timelines and results, their lack of access to capital or other strategic priorities or timing considerations.

 

In May 2018, Company A was introduced to Steller management by a former company consultant as part of Stellar’s routine corporate development activities, and through a Stellar Board member. Company A believed that there was an opportunity to incorporate Stellar KLH protein in its planned clinical studies. After initial discussions, the parties executed a mutual non-disclosure agreement on May 25, 2018 and shared details regarding their respective technologies and their mutual interest in a potential strategic arrangement.

 

On May 29, 2018, at the request of Stellar management, Company A presented its technology to Stellar’s Scientific Advisory Board and answered Stellar’s Scientific Advisory Board’s technical questions.

 

On June 12, 2018, the chief executive officers of Stellar and Company A met for lunch in Camarillo, California at the request of Company A. The parties discussed publicly available information, Company A’s technology and business model and various potential business arrangements. The parties agreed to continue discussions.

 

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On June 13, 2018, on a regularly scheduled teleconference meeting of the Stellar Board, management provided an update on various customer activities and the anticipated timing of third-party clinical study results, including Stellar’s future need for Phase 3-ready KLH manufacturing facilities. Given the potential for negative results or delays in anticipated demand for Stellar KLH, management reported that they have been exploring strategic alternatives, including business partnerships or arrangements with third parties, including Company A, who are interested in the clinical development and commercialization of drug therapies that incorporate KLH in new ways. The chair of Stellar’s Scientific Advisory Board reported on the scientific merits of Company A’s clinical-stage asset and the potential fit for Stellar KLH. The Scientific Advisory Board recommended that additional due diligence be performed.

 

Later, on June 13, 2018, Company A emailed Stellar a draft term sheet, which included provisions for a license for certain of Company A’s technology as well as a merger proposal that contemplated, among other considerations, Company A becoming a wholly owned subsidiary of Stellar, Stellar paying $1 million to Company A on the signing of a definitive agreement, a requirement for a $10 million equity raise by Stellar prior to the completion of the merger, and a ratio of equity of following the close of the transaction of 15%/85% for Stellar and Company A shareholders, respectively. Moreover, Stellar would be responsible for all expenses relating to the capital raise and the completion of the merger, including the legal and accounting fees for both parties. Subsequent discussion of terms, counter-proposals and due diligence continued from June 13, 2018 through June 21, 2018. During this time, Stellar proposed that, prior to any merger-related discussions, the parties first complete a proof-of-concept trial, which would be managed by Company A and sponsored and paid for by Stellar, to demonstrate the technical merit of combining Company A’s drug candidate with Stellar KLH. Company A expressed its support for this approach, and discussions continued. On June 28, 2018, the parties acknowledged that they were not able to reach mutually agreeable terms, primarily related to compensation for Company A’s management of the proposed trial, and discussions were discontinued.

 

On July 20, 2018, at a regularly scheduled board meeting held in Millbrae, California, Stellar management reviewed recent clinical study results of a third party KLH-based drug candidate and various customer product development timelines and their collective impact on revenue projections. Stellar management also updated the Stellar Board regarding the termination of discussions with Company A. The Stellar Board engaged in a wide-ranging discussion of potential strategic opportunities available, including, continuing to finance Stellar’s operations through the issuance of equity or debt instruments, the acquisition of clinical assets and/or the sale of the business, or the liquidation of the business and distribution of assets to Stellar shareholders.

 

Following the board meeting, on July 20, 2018, Stellar management contacted a strategic customer, Company B, and inquired if it or its affiliated company, Company C, was interested in pursuing a strategic transaction with Stellar. Company B agreed to consider the proposal. On July 23, 2018, Company B requested more details regarding Stellar’s financial condition, including contractual liabilities, staffing and operational costs. This information was provided on July 31, 2018 under existing nondisclosure agreements with Company B and Company C, dated May 1, 2013 and July 6, 2011, respectively.

 

During the week of July 23, 2018, the chief executive officers from Stellar and Company A discussed their continued openness to exploring strategic opportunities. Company A informed Stellar that it decided to use Stout Risius Ross Advisors, LLC (“Stout”), as its representative in the negotiations. The parties discussed new paths forward toward a merger agreement. On July 30, 2018, Stout emailed Stellar a non-binding term sheet setting forth a summary of the basic terms of a contemplated merger transaction. Among other terms, Company A proposed to include technology from an affiliated company of Company A in the merger structured as described in the July 13, 2018 proposal. Stellar would continue to be responsible for all expenses and fees relating to the completion of the merger, including legal and accounting fees for both parties. From July 30, 2018 to August 8, 2018, the parties continued to discuss terms, counter-proposals related to the sharing of transaction cost, exchange ratios, inclusion of Stellar KLH in clinical trials and other covenants, as well as due diligence.

 

On August 8, 2018, Stellar’s Chief Executive Officer and Stellar’s counsel from Greenberg Traurig, LLP (“Greenberg Traurig”) met with Company A’s representatives from Stout at the Stout offices in Los Angeles, California. The parties agreed to work toward a revised term sheet that could be presented to the Stellar Board by the end of August.

 

On August 10, 2018, Stellar’s Chief Executive Officer held a teleconference with management and technical staff from Company B regarding strategic business opportunities, including a potential technology transfer. Company B agreed to contact its affiliate, Company C to determine its interest in pursuing these opportunities.

 

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On August 14, 2018, at the offices of Greenberg Traurig in Los Angeles, California, Stellar and Greenberg Traurig, at the request of Stellar’s Chief Executive Officer, met with representatives from Company A and Stout to continue negotiations of a non-binding term sheet. Following subsequent negotiations and due diligence, on August 16, 2018, the parties completed a draft term sheet for review by Stellar’s Board. Among other provisions, the parties proposed a 20%/80% exchange ratio of the surviving company for Stellar and Company A shareholders, respectively, and a 25% earnout to Company A shareholders for certain milestones achieved by the surviving company. The surviving company would also incorporate Stellar’s KLH protein in a planned Phase 2 or Phase 3 clinical study of Company A’s technology. Stellar would agree to provide or raise $8 to $10 million in cash to the combined company and continue to be responsible for all expenses relating to the completion of the exchange transaction, including legal and accounting fees for both parties.

 

On August 22, 2018, Stellar management held an introductory teleconference with Company D, a privately held biopharmaceutical company identified by Stellar’s executive vice president of corporate development. The parties shared publicly available information about their respective companies and technologies, and discussed where there may be business and scientific synergies between the companies. To continue discussions, the parties executed a mutual nondisclosure agreement on August 23, 2018 and agreed to meet in person in the near future.

 

On August 23, 2018, the Stellar Board held a special meeting telephonically to discuss the strategic process and the draft term sheet with Company A. The Stellar Board took no action regarding the term sheet after agreeing that it was not in the best interest of shareholders to pursue the transaction due in part to the cost of the transaction, the previous inability of Company A to attract financing, the uncertain fit of Stellar’s technology in the combined company, Company A’s lack of working capital and the proposed exchange ratio and earnout. The Stellar Board instructed management to continue to explore strategic transactions for the Stellar Board’s review, and suggested initiating a broad-based strategic process and engaging an investment banking firm to assist in identifying potential strategic partners. Later that day, Greenberg Traurig contacted Stout and reported that Stellar decided not to pursue the business combination any further.

 

On August 28, 2018, Company A provided a revised term sheet to Stellar management. Stellar determined that it was not substantially different from the previous draft and did not pursue additional discussions.

 

As a follow up to the August 22, 2018 meeting, on August 29, 2018, Company D met with Stellar’s management team at Stellar’s offices in Port Hueneme, California. The parties discussed current and potential future therapeutic uses for Stellar KLH. Company D provided an overview of its clinical studies and fundraising plans, including its potential interest in Stellar as a public company. The parties agreed to continue discussing strategic arrangements in mid-September 2018.

 

From September 4, 2018 to September 27, 2018, Stellar management met with financial advisory firms and investment banks and received three proposals for advisory services.

 

On September 20, 2019, the chief executive officers of Stellar and Company D spoke by phone. Company D indicated that its venture capital investors preferred that its company remain private at this time, and the parties mutually agreed to discontinue further discussions.

 

On September 24, 2018, Stellar contacted a strategic customer, Company E, to discuss Stellar’s interest in a strategic business combination. Following a broad ranging discussion, the parties agreed to evaluate the feasibility of a business combination. During the following week, the parties discussed via email and phones calls various transaction structures. On October 1, 2018, Company E reported that its board had approved the concept of a business combination in principle. The parties later agreed to meet in New York City to advance discussions.

 

On October 1, 2018, the Stellar Board held a regularly scheduled meeting at Stellar’s offices in Port Hueneme, California. Stellar management presented a comparison of possible strategic opportunities to increase shareholder value, including strategic options with a customer or other entity that has a need for Stellar’s KLH products and a non-strategic option focused on the value of the public entity rather than the KLH business. The Stellar Board engaged in a broad discussion of possible strategic alternatives and expressed strong preference for exploring a business combination that included the KLH business rather than focusing on the value of the public entity. The consensus among directors was to (1) engage an advisory firm, (2) give priority to exploring strategic options as soon as possible and (3) also explore non-strategic options.

 

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On October 3, 2018, Stellar retained H.C. Wainwright & Co., LLC (“H.C. Wainwright”) to assist it in identifying potential targets for a possible business combination transaction, to restart or advance past and current negotiations, and to provide financial and business analysis of prospective targets and advice on structuring. Stellar management selected H.C. Wainwright due to, among other reasons, its knowledge of Stellar and its industry and outstanding securityholders, its access to key decision makers at potential interested parties, the senior level attention it would receive from H.C. Wainwright and H.C. Wainwright’s sell side M&A experience. H.C. Wainwright had also acted as Stellar’s exclusive placement agent in connection with a public offering completed in May 2018.

 

Between October 3, 2018 and December 5, 2018, H.C. Wainwright and members of Stellar’s management identified and evaluated potential business combination candidates. In its outreach efforts, representatives of H.C. Wainwright contacted a broad set of companies that met certain criteria established by the Stellar Board, including companies that were believed to have a strategic fit with Stellar, private companies considering an initial public offering, and publicly traded foreign companies seeking a Nasdaq listing. Among the criteria used to identify and prioritize discussions with various potential candidates were: the strength of the target’s clinical programs and regulatory strategy, the expectation of near term milestones or news, the availability of adequate cash to fund operations and demonstrated support from institutional investors. H.C. Wainwright contacted a total of 18 companies. Company E, Company F (introduced to H.C. Wainwright by Stellar on October 25, 2018) and Edesa submitted proposals to Stellar by the December 6, 2018 deadline that Stellar established. H.C. Wainwright advised Stellar management and the Stellar Board that H.C. Wainwright had previously been engaged by Edesa with respect to a separate business combination process which had been terminated in October 2018. In addition, between December 6, 2018 and January 17, 2019, three additional companies contacted H.C. Wainwright. Although H.C. Wainwright conducted introductory discussions with these companies, none of them submitted a written proposal.

 

On October 12, 2018, Stellar’s Chief Executive Officer, counsel from Greenberg Traurig, a representative from H.C. Wainwright and representatives from Company E met at Greenberg Traurig’s offices in New York City. The parties engaged in a general discussion regarding a business combination, including potential structures, tax implications and regulatory considerations. Stellar and Company E agreed to have their respective legal teams and advisors evaluate potential deal structures in light of the complex legal and tax considerations contemplated.

 

On October 25, 2018, Stellar management held an introductory teleconference with representative of Company F, which was introduced to Stellar in the normal course of business as a potential customer or strategic partner. The parties shared publicly available information about their respective technologies and business plans. Company F said it was interested in pursuing a potential business combination and the parties agreed to negotiate a mutual non-disclosure agreement, which was executed on November 20, 2018. Stellar subsequently asked H.C. Wainwright to include Company F in its evaluation and recommendation process.

 

On November 6, 2018, the Stellar Board held a special telephonic meeting to discuss the strategic process. At the request of the Stellar Board, a representative from H.C. Wainwright presented information on H.C. Wainwright’s role in assessing, recommending and advising on the execution of a transaction under two of the Stellar Board’s preferred pathways: a strategic merger, or divestiture and business combination. The representative also provided an update on preliminary discussions with possible strategic parties. The Stellar Board had the opportunity to ask questions and provide guidance on timing expectations and the information it needed to assess strategic options.

 

On November 21, 2018, Edesa management contacted H.C. Wainwright to discuss H.C. Wainwright’s banking and advisory services. Among other topics, Edesa’s management expressed interest in potential opportunities for a business combination. H.C. Wainwright indicated that there may be an opportunity with an existing client and that they would provide a non-disclosure agreement from the client if Edesa was interested in further exploring a strategic transaction.

 

On November 26-27, 2018, representatives of Company E visited Stellar’s aquaculture facilities and offices in Port Hueneme, California to conduct due diligence and to continue discussions with Stellar’s management team regarding a business combination structured as a reverse triangular merger. The parties also held scientific discussions in the normal course of their business relationship related to the production and manufacturing of Stellar’s KLH products.

 

On November 27, 2018, Stellar and Edesa executed a mutual non-disclosure agreement.

 

On December 3, 2018, Edesa provided to Stellar a non-binding merger proposal valuing Stellar at $6.5 million, assuming the divestiture of Stellar’s operating assets and settlement of assets and liabilities, and $3 million cash on hand upon the completion of the merger. Edesa proposed a 10%/90% exchange ratio of the surviving company for Stellar and Edesa shareholders, respectively. The completion of the merger was not contingent on any financing, and Edesa represented that its planned clinical studies were adequately funded. The proposal further contemplated that following the execution of a letter of intent, the parties would work together to implement an appropriate transaction structure.

 

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On December 4, 2018, the chief executive officers of Stellar and Company F spoke by phone to discuss a potential business combination. The parties agreed to meet for dinner that evening in Malibu, California, where they discussed publicly available information, Company F’s technology and business model and various potential business arrangements. Company F subsequently said it planned to provide a letter of intent prior to Stellar’s Board meeting.

 

On December 5, 2018, Company E provided us a non-binding letter of intent contemplating a business combination structured as a contribution of substantially all Stellar assets (including cash) in exchange for Company E shares. These shares would be in the form of American Depository Receipt (“ADR”) Level 1 at a ratio of 4 to 5 ADRs for each Stellar Common Share, or approximately 21-24 million ADRs valuated at $5.1- $6.4 million. Company E’s business plan contemplated immediate financing to fund ongoing Stellar and Company E operations and later stage clinical studies.

 

On December 5, 2018, Company F provided Stellar a non-binding proposal for a business combination structured as a reverse triangular merger with a 10%/90% exchange ratio of the surviving company for Stellar and Company F shareholders, respectively. Company F’s proposal was contingent on it completing a $15 million equity financing round prior to or concurrent with the completion of the Exchange.

 

On December 6, 2018, the Stellar Board held a special meeting at Stellar offices in Port Hueneme, California, with several members participating telephonically, to review the strategic process conducted by H.C. Wainwright and Company management. Upon advice of legal counsel, Stellar directors Dr. Tessie Che and Paul Chun recused themselves from the meeting to avoid any potential conflicts of interest. A representative of H.C. Wainwright described the status of H.C. Wainwright’s discussions and outreach to various parties and summarized the terms of proposals received from Company E, Company F, and Edesa. Company B and Company C did not submit proposals. No potential transaction partner at this time had an interest in both the public company and the operating business except Company E. The Stellar Board engaged in an in-depth discussion and had the opportunity to ask questions regarding the parties and proposals, including, among other topics, the proposed terms, the status of clinical programs, potential need for KLH, institutional backing, and requirements for future financing. The Stellar Board provided guidance on timing expectations and instructed H.C. Wainwright and management to proceed with diligence with non-strategic parties interested in acquiring a public company, with the expectation that current operations might need to be divested or dissolved depending upon the outcome of further discussions. The Stellar Board designated a special committee of the Stellar Board – consisting of the following independent directors: Dr. Deborah F. Aghib, Dr. Charles Olson and Mayank Sampat (the “Stellar Special Committee”) – to assist H.C. Wainwright and Stellar management in assessing the viability of prospective counterparties for a strategic transaction, including conducting appropriate diligence, and to report to the full board its recommendations.

 

From December 6, 2018 to December 22, 2018 representatives from H.C. Wainwright and Stellar management held multiple calls with representatives from Company E, Company F and Edesa to revise their proposals based on directions and feedback from the Stellar Board and Stellar management team. Specifically, Company E was informed that Stellar did not believe ADRs would be an attractive substitution for Nasdaq-listed shares. Stellar management proposed that Company E acquire only Stellar’s operating entity for an upfront cash payment and future milestone payments, leaving the Canadian entity as a public shell company. On December 21, 2018, Stellar and Company E acknowledged that they were not able to reach mutually agreeable terms and discussions were discontinued by Company E. Separately, Stellar requested that Company F provide evidence of investor interest to confirm its ability to raise additional capital. Given the early stage of its pipeline, concerns about funding, a lack of support from institutional investors, and no clinical data to support the use of KLH with its product candidate, Stellar determined that Company F’s offer was too risky a strategy to pursue.

 

On December 21, 2018 and December 27, 2018, the Stellar Special Committee held teleconferences to discuss the status of negotiations with Company E, Company F and Edesa and due diligence findings to date. The Stellar Special Committee identified Edesa as a strong candidate due, in part, to its later stage clinical assets, cash on hand, experienced management team, and support from institutional investors. The Stellar Special Committee expressed their support for continuing discussions with Edesa. The Stellar Special Committee also asked Stellar management to seek additional proposals for a fairness opinion.

 

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On December 30, 2018, Edesa provided a revised non-binding letter of intent which reiterated the terms of its December 3, 2018 submission proposing a merger of Edesa and Stellar. The revised document also proposed timing for completing due diligence, Edesa’s evaluation of Stellar’s current operations and assets, and considerations for a potential $3 million financing following the close of the transaction. During the week of December 31, 2018, the Stellar Special Committee held multiple calls with Stellar management and representatives of H.C. Wainwright to review and discuss the revised non-binding letter of intent received from Edesa. The Stellar Special Committee members asked Stellar management and H.C. Wainwright to continue to negotiate a more favorable exchange ratio.

 

On January 7, 2019, during an industry conference in San Francisco, California, members of Stellar’s management team met with Edesa’s management team and a representative from H.C. Wainwright. Management of Stellar and Edesa shared information about their respective companies and technologies, clinical programs and future plans. The parties discussed the proposed terms of the letter of intent and agreed to move the due diligence process forward with the expectation of executing a letter of intent and negotiating a definitive agreement by February 2019.

 

From January 11, 2019 to January 18, 2019, members of the Stellar Special Committee held individual calls with a representative from H.C. Wainwright regarding the diligence process and ongoing negotiations regarding the terms of the letter of intent. The members of the Stellar Special Committee provided guidance to H.C. Wainwright on proposed terms as well as additional diligence requests. Also during this time, based on guidance provided by the Stellar Special Committee and Stellar management, a representative from H.C. Wainwright proposed to Edesa that the letter of intent be revised to include an upward or downward adjustment to the exchange ratio based on Stellar’s working capital balance as well as a lower working capital threshold to maintain the 10% exchange ratio for Stellar shareholders.

 

On January 17, 2019 and January 18, 2018, Edesa’s management team visited Stellar’s aquaculture facilities and offices in Port Hueneme, California to conduct due diligence. Edesa shared its interest in potentially maintaining Stellar’s core aquaculture operations and staff following the merger, subject to further due diligence and approval from the Edesa Board.

 

On January 18, 2019, a revised letter of intent was presented to Stellar and executed by the parties. The revised letter of intent included, among other additional terms, an upward or downward adjustment to the exchange ratio based on Stellar’s working capital balance, a lower working capital threshold to maintain the 10% exchange ratio for Stellar shareholders as well as the option for Edesa to maintain Stellar’s core aquaculture operations and intellectual property.

 

On January 22, 2019, February 1, 2019 and February 5, 2019, members of the Stellar Special Committee held teleconference calls with Edesa’s management and representatives to conduct additional due diligence on Edesa’s business, including its financial condition and plans, clinical programs and intellectual property.

 

On January 24, 2019, members of the Stellar Special Committee unanimously approved the engagement of Cassel Salpeter to provide an opinion to the Stellar Board as to the fairness, from a financial point of view, to Stellar of the exchange ratio in the transaction pursuant to the Exchange Agreement.

 

On January 25, 2019, Stellar’s counsel, Greenberg Traurig, delivered an initial draft of the Exchange Agreement to Edesa and its counsel. Edesa’s counsel provided Stellar its comments to the draft on February 7, 2019.

 

On February 7, 2019, the Stellar Board held a special telephonic meeting to receive an update on the strategic process. At the request of the Stellar Board, a representative of H.C. Wainwright participated in the meeting and updated the Stellar Board on discussions with the remaining potential targets. The H.C. Wainwright representative advised the Stellar Board that extensive discussions with Company E had not resulted in a feasible transaction structure, and that Company E had terminated discussions. The H.C. Wainwright representative advised the Stellar Board that other business combination partners interested in Stellar as a public company required substantial financing as a condition of the completion of the Exchange, or found Stellar’s cash balance too low. As a result, the H.C. Wainwright representative explained, Edesa had emerged as a viable candidate due to its clinical programs and market opportunity, funds available to support its current clinical programs, investor support and experienced management team. The Stellar Board had the opportunity to ask questions regarding these matters and the proposed terms of Edesa’s letter of intent.

 

From February 7, to March 1, 2019, Stellar’s and Edesa’s management teams and their respective legal counsel, Edesa’s auditors and representatives of H.C. Wainwright held a number of negotiations regarding the terms of the proposed Exchange Agreement.

 

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On February 17, 2019, the chief executive officers of Stellar and Edesa spoke by phone to discuss strategic alternatives regarding Stellar’s current operations, including the potential disposition of Stellar’s aquaculture operations.

 

On February 17, 2019, Stellar’s counsel delivered a revised draft of the Exchange Agreement to Edesa and its counsel.

 

On February 20, 2019, Stellar management; a member of the Stellar Special Committee; and a representative of H.C. Wainwright participated in a teleconference with Edesa management and a representative of MNP LLP, the auditors for Edesa, to review and discuss the status of the year-end audit of Edesa’s financial results.

 

Also on February 20, 2019, the management teams of Stellar and Edesa, and a representative of H.C. Wainwright spoke by telephone to discuss in more detail the potential disposition of certain of Stellar’s assets. Edesa agreed to a $200,000 addition to Stellar’s working capital calculation for assets expected to be sold or disposed of following completion of the Exchange, as well as an addition to Stellar’s working capital of 50% of certain operating expenses incurred by Stellar after April 30, 2019.

 

On February 22, 2019, the management teams of Stellar and Edesa, their respective legal counsels, and a representative of H.C. Wainwright, spoke by telephone to discuss outstanding items related to finalizing the Exchange Agreement, including post-closing adjustments to share issuances, the process for board appointments, termination provisions, strategic alternatives regarding Stellar’s current operations and due diligence items.

 

On February 26, 2019, Edesa’s counsel delivered a revised draft of the Exchange Agreement to Stellar and its counsel, and discussions continued among the parties primarily related to working capital calculations, post-closing adjustments and termination provisions.

 

 On February 27, 2019, a representative of H.C. Wainwright contacted the Edesa and Stellar management teams separately to seek to facilitate agreement on the remaining business items to be negotiated in the Exchange Agreement, with the expectation that the respective legal teams would discuss full comments to the February 26, 2019 draft the following day. That evening a representative of H.C. Wainwright circulated an intermediate markup draft of certain provisions of the Exchange Agreement for discussion by the management teams.

 

On February 28, 2019, the respective management teams of Edesa and Stellar held a teleconference to discuss working capital calculations, post-closing adjustments and termination provisions. Included in the discussion was a proposal to lower the termination fees proposed by Edesa in the February 26, 2019 draft from $1.1 million to: $250,000 for certain terminations as a result of a breach of one of the parties, $500,000 payable by Stellar to Edesa should Stellar shareholders not approve the Exchange, and $1.0 million payable by Stellar to Edesa if Stellar terminates the agreement to pursue a superior offer. In addition, Edesa’s Chief Executive Officer agreed to the revisions circulated the previous day related to superior offers and working capital. The parties also agreed to reduce to $100,000 from $200,000 the addition to Stellar’s working capital calculation for assets that are anticipated to be sold or disposed of following the completion of the Exchange.

 

Later, on February 28, 2019, Stellar’s counsel delivered a revised draft of the Exchange Agreement to Edesa and their counsel.

 

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On March 1, 2019, members of Stellar’s management teams, members of the Stellar Special Committee and a representative from H.C. Wainwright held a teleconference call with Edesa’s management and MNP regarding additional due diligence.

 

Also on March 1, 2019, following the due diligence call, Stellar management, members of the Stellar Special Committee and a representative from H.C. Wainwright discussed the status of negotiations. Later, on the morning of March 1, 2019, Edesa’s counsel circulated a revised draft of the Exchange Agreement.

 

Following receipt of a revised draft of the Exchange Agreement from Edesa’s counsel, on March 1, 2019, the Stellar Chief Executive Officer contacted the Edesa Chief Executive Officer. Following discussion, the parties agreed to simplify the termination provisions, including a $250,000 reduction in the termination fee payable by Stellar to Edesa should Stellar shareholders not approve the Exchange.

 

Later, on March 1, 2019, Edesa’s counsel circulated a revised draft of the Exchange Agreement. Following review and discussion with Stellar management, Stellar counsel and a representative of H.C. Wainwright, the Chief Executive Officer of Stellar contacted the Chief Executive Officer of Edesa to express his satisfaction with the proposed updates to the termination provisions. He further noted that Stellar counsel would shortly send a revised draft to Edesa management and its legal teams with final proposed updates.

 

Later, on March 1, 2019, Stellar’s counsel circulated a revised draft of the Exchange Agreement. The revision proposed an additional upward adjustment to the exchange ratio should Stellar’s working capital balance be over $4 million, and also included clarifications and updates to Edesa’s most recent draft to be discussed on a teleconference later that day.

 

Following receipt of the subsequent revised draft of the Exchange Agreement, on March 1, 2019, the Chief Executive Officer of Edesa contacted the Chief Executive Officer of Stellar to discuss Stellar’s proposed additional tier to the exchange ratio. Because of various add-backs and allowances to the working capital calculation that had already been negotiated since the January 18, 2019 letter of intent, they agreed that an additional tier to the exchange ratio would not be included. Following discussion, the parties agreed to direct their respective counsels to delete the proposed additional tier to the exchange ratio in the Exchange Agreement.

 

Later, on March 1, 2019, the Stellar and Edesa management teams, their respective legal representatives, and a representative from H.C. Wainwright held a teleconference to finalize the Exchange Agreement. Following a review of changes to the draft and discussion, the parties directed their respective legal counsels to finalize the outstanding terms of the Exchange Agreement.

 

On March 5, 2019, at a special telephonic meeting, the Stellar Board reviewed the strategic review process. Stellar’s management and representatives of H.C. Wainwright and Cassel Salpeter participated in the meeting, and H.C. Wainwright provided commentary on the strategic review process. At this meeting, a representative from Greenberg Traurig reviewed the terms of the proposed Exchange Agreement and other transaction agreements, including conditions to the completion of the Exchange, and the Stellar Board’s fiduciary duties implicated by a business combination transaction. In addition, representatives of Cassel Salpeter reviewed with the Stellar Board its financial analyses of Stellar, Edesa and the proposed transaction. Thereafter, at the request of the Stellar Board, Cassel Salpeter orally rendered its opinion to the Stellar Board (which was subsequently confirmed in writing by delivery of Cassel Salpeter’s written opinion addressed to the Stellar Board dated March 5, 2019), to the effect that and subject to the various assumptions, qualifications and limitations set forth in its opinion, as of that date, the Base Ratio in the transaction pursuant to the Exchange Agreement was fair from a financial point of view to Stellar. The Stellar Board engaged in extensive discussions relating to Edesa, its business and the terms of the proposed transaction. The Stellar Board voted to approve the Exchange Agreement, the Exchange, the issuance of Stellar Common Shares to the Edesa shareholders pursuant to the terms of the Exchange Agreement, the change of control of Stellar, and the other actions contemplated by the Exchange Agreement, subject to satisfactory resolution of certain outstanding terms.

 

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Between March 5, 2019 and March 7, 2019, the management teams of Stellar and Edesa, in consultation with their respective legal and financial representatives, finalized the outstanding terms of the Exchange Agreement.

 

On March 7, 2019, Stellar entered into the Exchange Agreement with Edesa. Before the opening of trading on the Nasdaq Stock Market on March 8, 2019, Stellar issued a press release with Edesa announcing the execution of the Exchange Agreement and filed a Current Report on Form 8-K disclosing, among other matters, the entry into the Exchange Agreement.

 

Historical Background of Edesa

 

Edesa Biotech Inc. is a biopharmaceutical company focused on acquiring, developing and commercializing clinical stage drugs for dermatological and gastrointestinal indications with clear unmet medical needs. Edesa’s lead product candidate, EB01, is a novel sPLA2 inhibitor for the topical treatment of chronic ACD. EB01 employs a novel mechanism of action and in two clinical studies has demonstrated statistically significant improvement of multiple symptoms in contact dermatitis patients. Edesa’s IND application for EB01 was accepted by the FDA in November 2018 and Edesa is planning on conducting a 160 patient Phase 2B clinical study evaluating EB01. Edesa expects the first patient to be enrolled in the Phase 2B clinical study evaluating EB01 by midyear.

 

Edesa also intends to expand the utility of its sPLA2 inhibitor technology, which forms the basis for EB01, across multiple indications, which could include acne or other inflammatory disorders. For example, “EB02” is a sPLA2 inhibitor formulated to treat hemorrhoids, and Edesa is planning to evaluate EB02 in a proof-of-concept study in the second half of 2019. In addition to EB01 and EB02, Edesa has licensed technology to treat other indications such as anal fissures, and is in discussions with third parties to expand its portfolio with assets to treat other serious skin and gastrointestinal conditions.

 

Reasons for the Exchange

 

The Stellar Board considered the following factors in reaching its conclusion to approve the Exchange and to recommend that the Stellar shareholders approve the issuance of Stellar Common Shares in the Exchange, all of which the Stellar Board viewed as supporting its decision to approve the business combination with Edesa:

 

·based in part on the scientific diligence and analysis of Edesa’s product pipeline and the potential market opportunity for its products by the Stellar Board and management, the Stellar Board believes that Edesa’s platform and potential product candidates have the potential to meet unmet medical needs and address an attractive market opportunity, thereby potentially enhancing value for the shareholders of the combined company and an opportunity for Stellar’s shareholders to participate in the potential growth of the combined company;

 

·the strategic process conducted by Stellar management with the assistance of H.C. Wainwright had succeeded in identifying potential merger candidates that would, in the Stellar Board’s opinion, have the potential to create the most value for Stellar’s shareholders;

 

·its review of the current plans of Edesa for developing EB01 to confirm the likelihood that the combined company would possess sufficient financial resources to allow the management team to focus on the continued development of EB01. The Stellar Board also considered the possibility that the combined company would be able to take advantage of the potential benefits resulting from the combination of the Stellar public company structure with the Edesa business to raise additional funds in the future;

 

·its consideration that the combined company will be led by an experienced senior management team and a board of directors with representation from each of the current boards of directors of Stellar and Edesa;

 

·its consideration of the financial analyses of Cassel Saltpeter, including Cassel Saltpeter’s opinion to the Stellar Board as to the fairness to Stellar, from a financial point of view and as of the date of the opinion, of the Base Ratio, as more fully described below under the caption “The Exchange — Opinion of Cassel Salpeter”; and

 

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  · its consideration of the current and historical financial condition, results of operations, business and prospects of Stellar as well as Stellar’s financial plan and prospects if Stellar were to remain an independent company and the potential impact on the trading price of Stellar Common Shares (which is not feasible to quantify numerically). The Stellar Board discussed Stellar’s current financial plan, including the risks associated with achieving and executing upon Stellar’s business plan, the fact that Stellar’s revenues have been insufficient to support its operations, the uncertainty of obtaining additional needed financing on favorable terms, the impact of general economic market trends on Stellar, as well as the general risks of market conditions that could reduce Stellar’s share price.

 

The Stellar Board also reviewed the terms of the Exchange and associated transactions, including:

 

  · the exchange ratio used to establish the number of Stellar Common Shares to be issued in the Exchange is fixed, subject to potential adjustment to account for the working capital balance of Stellar calculated on the day before the completion of the Exchange, based on the relative valuations of the companies, and thus the relative percentage ownership of Stellar shareholders and Edesa shareholders upon the completion of the Exchange is similarly fixed;

 

·the limited number and nature of the conditions to Edesa’s obligation to complete the Exchange and the limited risk of non-satisfaction of such conditions as well as the likelihood that the Exchange will be completed on a timely basis;

 

·the respective rights of, and limitations on, Stellar and Edesa under the Exchange Agreement to consider certain unsolicited acquisition proposals under certain circumstances should Stellar or Edesa receive an alternative proposal;

 

·the reasonableness of the potential termination fee of $1.0 million and related reimbursement of certain transaction fees and expenses of up to $250,000, which could become payable by Stellar if the Exchange Agreement is terminated in certain circumstances;

 

·the controls in the Exchange Agreement which would restrict what each of Stellar and Edesa could do between signing and completion of the Exchange Agreement without the consent of the other;

 

·the belief that the terms of the Exchange Agreement, including the parties’ representations, warranties and covenants, and the conditions to their respective obligations, are reasonable under the circumstances; and

 

·the possibility that, if it declined to enter into the Exchange Agreement, there may not be another opportunity for Stellar shareholders to receive a comparably valued transaction.

 

In the course of its deliberations, the Stellar Board also considered a variety of risks and other countervailing factors related to entering into the Exchange, including:

 

·the $1.0 million termination fee payable by Stellar upon the occurrence of certain events and the potential effect of such termination fee in deterring other potential acquirors from proposing an alternative transaction that may be more advantageous to Stellar shareholders;

 

·the substantial expenses to be incurred in connection with the Exchange;

 

·the possible volatility, at least in the short term, of the trading price of the Stellar Common Shares resulting from the Exchange Agreement announcement.

 

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·the risk that the Exchange might not be completed in a timely manner or at all and the potential adverse effect of the public announcement of the Exchange or on the delay or failure to complete the Exchange on the reputation of Stellar;

 

·the risk to the business of Stellar’s operations and financial results in the event that the Exchange is not completed, including the diminution of Stellar’s cash and potential difficulties of raising additional capital through the public or private sale of equity securities;

 

·the strategic direction of the combined company following the completion of the Exchange, which will be determined by the combined company’s board of directors, a majority of the initial members of which will be composed of members of the current Edesa board of directors; and

 

·various other risks associated with the combined company and the Exchange, including those described in the section entitled “Risk Factors” in this proxy statement.

 

The foregoing information and factors considered by the Stellar Board are not intended to be exhaustive but are believed to include all of the material factors considered by the Stellar Board. In view of the wide variety of factors considered in connection with its evaluation of the Exchange and the complexity of these matters, the Stellar Board did not find it useful, and did not attempt, to quantify, rank or otherwise assign relative weights to these factors. In considering the factors described above, individual members of the Stellar Board may have given different weight to different factors. The Stellar Board conducted an overall analysis of the factors described above, including thorough discussions with, and questioning of, the Stellar management team and the legal and financial advisors of Stellar, and considered the factors overall to be favorable to, and to support, its determination.

 

Opinion of Cassel Salpeter

 

On March 5, 2019, Cassel Salpeter, financial advisor to the Stellar Board, rendered its oral opinion to the Stellar Board (which was confirmed in writing by delivery of Cassel Salpeter’s written opinion dated such date), as to the fairness from a financial point of view, to Stellar of the Base Ratio in the Exchange pursuant to the Exchange Agreement.

 

The summary of Cassel Salpeter’s opinion in this proxy statement is qualified in its entirety by reference to the full text of the written opinion, which is included as Annex B to this proxy statement and sets forth the procedures followed, assumptions made, qualifications and limitations on the review undertaken and other matters considered by Cassel Salpeter in preparing its opinion. However, neither Cassel Salpeter’s written opinion nor the summary of its opinion and the related analyses set forth in this proxy statement are intended to be, and do not constitute, advice or a recommendation to any Stellar shareholder as to how such Stellar shareholders should act or vote with respect to any matter relating to the Exchange or otherwise.

 

The opinion was addressed to the Stellar Board for the use and benefit of the members of the Stellar Board (in their capacities as such) in connection with the Stellar Board’s evaluation of the Exchange. Cassel Salpeter’s opinion was just one of the several factors the Stellar Board took into account in making its determination to approve the Exchange, including those described elsewhere in this proxy statement.

 

Cassel Salpeter’s opinion only addressed whether, as of the date of the opinion, the Base Ratio in the Exchange pursuant to the Exchange Agreement was fair, from a financial point of view, to Stellar. It did not address any other terms, aspects, or implications of the Exchange or the Exchange Agreement, including, without limitation, (i) any term or aspect of the Exchange that is not susceptible to financial analysis, (ii) the fairness of the Exchange, or all or any portion of the Base Ratio, to any security holders of Stellar, Edesa or any other person or any creditors or other constituencies of Stellar, Edesa or any other person, (iii) the appropriate capital structure of Stellar or whether Stellar should be issuing debt or equity securities or a combination of both in the Exchange, (iv) the surrender of warrants to purchase Stellar Common Shares by holders who exercise the option to surrender such warrants in exchange for cash, nor (v) the fairness of the amount or nature, or any other aspect, of any compensation or consideration payable to or received by any officers, directors, or employees of any parties to the Exchange, or any class of such persons, relative to the Base Ratio in the Exchange pursuant to the Exchange Agreement or otherwise. Cassel Salpeter did not express any opinion as to what the value of Stellar Common Shares actually would be when issued in the Exchange or the prices at which Stellar Common Shares, Edesa shares or any other securities of Stellar or Edesa may trade, be purchased or sold at any time.

 

Cassel Salpeter’s opinion did not address the relative merits of the Exchange as compared to any alternative transaction or business strategy that might have existed for Stellar, or the merits of the underlying decision by the Stellar Board or Stellar to engage in or consummate the Exchange. The financial and other terms of the Exchange were determined pursuant to negotiations between the parties to the Exchange Agreement and were not determined by or pursuant to any recommendation from Cassel Salpeter. In addition, Cassel Salpeter was not authorized to, and did not, solicit indications of interest from third parties regarding a potential transaction involving Stellar.

 

Cassel Salpeter’s analysis and opinion were necessarily based upon market, economic, and other conditions, as they existed on, and could be evaluated as of the date of the opinion. Accordingly, although subsequent developments could arise that would otherwise affect its opinion, Cassel Salpeter did not assume any obligation to update, review, or reaffirm the opinion to the Stellar Board or any other person or otherwise to comment on or consider events occurring or coming to Cassel Salpeter’s attention after the date of the opinion.

  

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In arriving at its opinion, Cassel Salpeter made such reviews, analyses, and inquiries as Cassel Salpeter deemed necessary and appropriate under the circumstances. Among other things, Cassel Salpeter:

 

·Reviewed a draft, dated March 1, 2019, of the Exchange Agreement.
·Reviewed certain publicly available financial information and other data with respect to Stellar and Edesa that Cassel Salpeter deemed relevant.
·Reviewed certain other information and data with respect to Stellar and Edesa made available to Cassel Salpeter by Stellar and Edesa, including financial projections with respect to the future financial performance of Edesa prepared by management of Edesa (the “Edesa Projections”) and other internal financial information furnished to Cassel Salpeter by or on behalf of Stellar and Edesa.
·Considered and compared the financial and operating performance of Edesa with that of companies with publicly traded equity securities that Cassel Salpeter deemed relevant.
·Considered the publicly available financial terms of certain transactions that Cassel Salpeter deemed relevant.
·Considered Stellar’s adjusted net book value and the current and historical market prices and trading volume of the Stellar Common Shares.
·Discussed the business, operations and prospects of Stellar, Edesa and the Exchange with Stellar’s and Edesa’s management and certain of Stellar’s and Edesa’s representatives.
·Conducted such other analyses and inquiries, and considered such other information and factors as Cassel Salpeter deemed appropriate.

 

Cassel Salpeter noted that, for purposes of its opinion, it did not rely upon a review of financial projections with respect to the future financial performance of Stellar, because Stellar advised Cassel Salpeter that the financial projections with respect to Stellar previously prepared by the management of Stellar no longer reflected the best currently available estimates and judgments of such management with respect to Stellar’s future financial performance and therefore financial projections reflecting the best currently available estimates and judgments of the management of Stellar with respect to Stellar’s future financial performance were unavailable. In addition, Cassel Salpeter noted that, for purposes of its opinion, it did not rely upon a comparison of the financial and operating performance of Stellar with that of companies with publicly traded equity securities that Cassel Salpeter deemed relevant, because Cassel Salpeter did not identify companies with publicly traded securities that Cassel Salpeter deemed sufficiently similar to Stellar for such purposes. Accordingly, for purposes of its analysis and opinion Cassel Salpeter, with Stellar’s agreement, evaluated Stellar and the Stellar Common Shares based on Stellar’s implied adjusted net book value, which was calculated using information provided by or discussed with Stellar management, and recent trading prices of the Stellar Common Shares.

 

In arriving at its opinion, Cassel Salpeter, with Stellar’s consent, relied upon and assumed, without independently verifying, the accuracy and completeness of all of the financial and other information that was supplied or otherwise made available to Cassel Salpeter or available from public sources, and Cassel Salpeter further relied upon the assurances of Stellar’s and Edesa’s management that they were not aware of any facts or circumstances that would make any such information inaccurate or misleading. Cassel Salpeter also relied upon, without independent verification, the assessments of the management of Stellar and Edesa as to Stellar’s and Edesa’s existing and future technology, products, services and projects and the validity and marketability of, and risks associated with, such technology, products, services and projects (including, without limitation, the development, testing and marketing of such technology, products, services and projects; and the life of all relevant patents and other intellectual and other property rights associated with such technology, products, services and projects), and Cassel Salpeter assumed, at Stellar’s direction, that there would be no developments with respect to any such matters that would adversely affect its analyses or opinion. Cassel Salpeter is not a legal, tax, accounting, environmental, or regulatory advisor, and Cassel Salpeter did not express any views or opinions as to any legal, tax, accounting, environmental, or regulatory matters relating to Stellar, Edesa, the Exchange, or otherwise. Cassel Salpeter understood and assumed that Stellar had obtained or would obtain such advice as it deemed necessary or appropriate from qualified legal, tax, accounting, environmental, regulatory, and other professionals.

 

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With Stellar’s consent, Cassel Salpeter assumed that the Edesa Projections were reasonably prepared on a basis reflecting the best currently available estimates and judgments of the management of Edesa with respect to the future financial performance of Edesa. Cassel Salpeter assumed, at Stellar’s direction, that the Edesa Projections provided a reasonable basis upon which to analyze and evaluate Edesa and form an opinion. Cassel Salpeter expressed no view with respect to the Edesa Projections or the assumptions on which they were based. Cassel Salpeter did not evaluate the solvency or creditworthiness of Stellar, Edesa or any other party to the Exchange, the fair value of Stellar, Edesa or any of their respective assets or liabilities, or whether Stellar or Edesa or any other party to the Exchange is paying or receiving reasonably equivalent value in the Exchange under any applicable foreign, state, or federal laws relating to bankruptcy, insolvency, fraudulent transfer, or similar matters, nor did Cassel Salpeter evaluate, in any way, the ability of Stellar, Edesa or any other party to the Exchange to pay its obligations when they come due. Cassel Salpeter did not physically inspect Stellar’s or Edesa’s properties or facilities and did not make or obtain any evaluations or appraisals of Stellar’s or Edesa’s assets or liabilities (including any contingent, derivative, or off-balance-sheet assets and liabilities). Cassel Salpeter did not attempt to confirm whether Stellar and Edesa have good title to their respective assets. Cassel Salpeter’s role in reviewing any information was limited solely to performing such reviews as Cassel Salpeter deemed necessary to support its own advice and analysis and was not on behalf of the Stellar Board, Stellar, or any other party.

 

Cassel Salpeter assumed, with Stellar’s consent, that the Exchange would be consummated in a manner that complies in all respects with applicable foreign, federal, state, and local laws, rules, and regulations and that, in the course of obtaining any regulatory or third party consents, approvals, or agreements in connection with the Exchange, no delay, limitation, restriction, or condition would be imposed that would have an adverse effect on Stellar, Edesa or the Exchange. Cassel Salpeter also assumed, with Stellar’s consent, that the final executed form of the Exchange Agreement would not differ in any material respect from the draft Cassel Salpeter reviewed and that the Exchange would be consummated on the terms set forth in the Exchange Agreement, without waiver, modification, or amendment of any term, condition, or agreement thereof that would be material to its analyses or opinion. Without limitation to the foregoing, with Stellar’s consent, Cassel Salpeter further assumed that any adjustments to the Base Ratio in accordance with the Exchange Agreement or otherwise would not be material to its analysis or opinion, and Cassel Salpeter expressed no view or opinion with respect to any such adjustment. Cassel Salpeter also assumed that the representations and warranties of the parties to the Exchange Agreement contained therein were true and correct and that each such party would perform all of the covenants and agreements to be performed by it under the Exchange Agreement. Cassel Salpeter offered no opinion as to the contractual terms of the Exchange Agreement or the likelihood that the conditions to the completion of the Exchange set forth in the Exchange Agreement would be satisfied.

 

In connection with preparing its opinion, Cassel Salpeter performed a variety of financial analyses. The following is a summary of the material financial analyses performed by Cassel Salpeter in connection with the preparation of its opinion. It is not a complete description of all analyses underlying such opinion. The preparation of an opinion is a complex process involving various determinations as to the most appropriate and relevant methods of financial analysis and the application of those methods to the particular circumstances. As a consequence, neither Cassel Salpeter’s opinion nor the respective analyses underlying its opinion is readily susceptible to partial analysis or summary description. In arriving at its opinion, Cassel Salpeter assessed as a whole the results of all analyses undertaken by it with respect to the opinion. While it took into account the results of each analysis in reaching its overall conclusions, Cassel Salpeter did not make separate or quantifiable judgments regarding individual analyses and did not draw, in isolation, conclusions from or with regard to any individual analysis or factor. Therefore, Cassel Salpeter believes that the analyses underlying the opinion must be considered as a whole and that selecting portions of its analyses or the factors it considered, without considering all analyses and factors underlying the opinion collectively, could create a misleading or incomplete view of the analyses performed by Cassel Salpeter in preparing the opinion.

 

The implied valuation reference ranges indicated by Cassel Salpeter’s analyses are not necessarily indicative of actual values nor predictive of future results, which may be significantly more or less favorable than those suggested by such analyses. Much of the information used in, and accordingly the results of, Cassel Salpeter’s analyses are inherently subject to substantial uncertainty.

 

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The following summary of the material financial analyses performed by Cassel Salpeter in connection with the preparation of its opinion includes information presented in tabular format. The tables alone do not constitute a complete description of these analyses. Considering the data in the tables below without considering the full narrative description of the analyses, as well as the methodologies and assumptions underlying the analyses, could create a misleading or incomplete view of the financial analyses Cassel Salpeter performed.

 

Share prices for the selected companies used in the selected companies analysis described below were as of March 1, 2019. Estimates of future financial performance for Edesa were based on the Edesa Projections, and estimates of future financial performance for the selected companies listed below were based on publicly available research analyst estimates for those companies.

 

Financial Analysis of Stellar

 

For purposes of its analysis of Stellar, Cassel Salpeter, with Stellar’s agreement, evaluated Stellar based on Stellar’s implied adjusted net asset value and recent trading prices of the Stellar Common Shares.

 

Adjusted Net Asset Value. Cassel Salpeter reviewed Stellar management’s estimates of Stellar’s operating assets less operating liabilities, warrant liabilities, transaction expenses (after applicable expense sharing) and net equipment sales, and adjustments to those estimates prepared by or discussed with Stellar management, including adjustments for transaction expenses that would not be incurred absent the completion of the Exchange, adjustments for expense sharing and the value of Stellar as a public company. This analysis indicated an implied aggregate equity value of approximately $4,300,000 for Stellar.

 

Market Capitalization. Cassel Salpeter also reviewed Stellar’s one-month low and one-month high equity market capitalization. This review indicated an implied aggregate equity value reference range of approximately $5,700,000 to $6,800,000 for Stellar.

 

Financial Analysis of Edessa

 

Risk-Adjusted Net Present Value Analysis. Cassel Salpeter performed a risk-adjusted net present value analysis of Edesa by calculating the estimated net present value of the risk-adjusted free cash flows of Edesa based on the Edesa Projections. In performing this analysis, Cassel Salpeter applied discount rates ranging from 27.50% to 32.50% and terminal growth rates ranging from (2.50%) to 2.50%. This analysis indicated an implied aggregate equity value reference range of $56,400,000 to $88,400,000 for Edesa.

 

Selected Companies Analysis. Cassel Salpeter considered certain financial and operating data for Edesa and selected companies with publicly traded equity securities Cassel Salpeter deemed relevant. The financial and operating data reviewed included market value, total invested capital and estimated 2021 revenue. The selected companies with publicly traded equity securities and the resulting high, low, mean and median financial data were:

 

Companies with Estimated 2021E Revenue Greater than $50 million:

 

·Cassiopea S.p.A.

 

·Dermira, Inc.

 

·Aclaris Therapeutics, Inc.

 

·Paratek Pharmaceuticals, Inc.

 

·Foamix Pharmaceuticals Ltd.

 

·Melinta Therapeutics, Inc.

 

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Companies with Estimated 2021E Revenue Less than $50 million or Not Available:

 

·Verrica Pharmaceuticals Inc.

 

·Menlo Therapeutics Inc.

 

·Sol-Gel Technologies Ltd.

 

·Hoth Therapeutics, Inc.

 

·Sienna Biopharmaceuticals, Inc.

 

·Cipher Pharmaceuticals Inc.

 

·Novan, Inc.

 

·NovaBay Pharmaceuticals, Inc.

 

·Provectus Biopharmaceuticals, Inc.

 

·Realm Therapeutics Plc

 

(Dollars in Thousands)  Market
Value
   Total Invested
Capital
   2021E
Revenue
 
High  $404,111   $675,695   $216,549 
All Companies               
Mean   150,157    181,044    87,443 
Median   103,171    151,449    43,557 
Companies < $50 million 2021E Revenue or Not Available         
Mean   90,588    97,671    20,214 
Median   48,022    57,752    23,854 
Low   22,521    24,865    1,992 

 

The selected companies analysis indicated an implied aggregate equity value reference range of $52,000,000 to $63,500,000 for Edesa.

 

None of the selected companies have characteristics identical to Edesa. An analysis of selected publicly traded companies is not mathematical; rather it involves complex consideration and judgments concerning differences in financial and operating characteristics of the selected companies and other factors that could affect the public trading values of the companies reviewed.

 

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Selected Transactions Analysis. Cassel Salpeter considered the financial terms of the following business transactions Cassel Salpeter deemed relevant. The financial data reviewed included transaction value. The selected transactions and the resulting high, low, mean and median financial data were:

 

Date        
Announced   Closed   Target   Acquiror
15-Oct-18   30-Nov-18   Worldwide Rights to Rhofade Cream 1%   Aclaris Therapeutics
8-Aug-17   11-Aug-17   Krystal Biotech, Inc.   Sun Pharmaceutical Industries Ltd
16-Dec-16   20-Jan-17   Ziarco Group Ltd   Novartis AG
6-Dec-16   6-Dec-16   Creabilis SA   Sienna Biopharmaceuticals
21-Apr-16   21-Apr-16   Topokine Therapeutics, Inc.   Allergan PLC
7-Jan-16   6-Jan-16   Anterios, Inc.   Allergan PLC
13-Apr-15   13-Apr-15   Innocutis Medical LLC   Cipher Pharmaceuticals Inc.

 

(Dollars in Thousands)  Total Value   Up Front
Payment
   Contingent
Payment
 
High  $477,500   $325,000   $387,500 
Mean   222,285    108,166    126,167 
Median   150,000    72,250    53,250 
Low   43,997    43,997    - 

 

The selected transactions analysis indicated an implied aggregate equity value reference range of $44,000,000 to $72,300,000 for Edesa.

 

None of the target companies or transactions in the selected transactions have characteristics identical to Edesa or the Exchange. Accordingly, an analysis of selected business combinations is not mathematical; rather it involves complex considerations and judgments concerning differences in financial and operating characteristics of the target companies in the selected transactions and other factors that could affect the respective acquisition values of the transactions reviewed.

 

Selected Initial Public Offerings Analysis. Cassel Salpeter considered the financial terms of the following initial public offerings (“IPOs”) Cassel Salpeter deemed relevant. The financial data reviewed included gross offering amount, pre-money value and the gross offering amount relative to the post-offering equity value. The selected IPOs and the resulting high, low, mean and median financial data were:

 

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Date   Company
14-Jan-19   Hoth Therapeutics, Inc.
14-Jun-18   Verrica Pharmaceuticals, Inc.
23-May-18   Kiniksa Pharmaceuticals Ltd.
31-Jan-18   Sol-Gel Technologies Ltd.
24-Jan-18   Menlo Therapeutics, Inc.
19-Sep-17   Krystal Biotech, Inc.
26-Jul-17   Sienna Biopharmaceuticals, Inc.
25-Jan-17   AnaptysBio, Inc.
20-Sep-16   Novan, Inc.
6-Oct-15   Aclaris Therapeutics, Inc.
2-Oct-14   Dermira, Inc.
24-Sep-14   Vitae Pharmaceuticals, Inc.
17-Sep-14   Foamix Pharmaceuticals Ltd

 

(Dollars in Thousands)  Gross Offering
Amount
   Pre-Money
Value
   %Post Money
Equity Value
 
High  $152,600   $299,196    57.5%
Mean   71,423    148,895    32.8%
Median   65,000    140,821    31.2%
Low   7,000    34,909    13.5%

 

The selected IPOs analysis indicated an implied aggregate equity value reference range of $56,800,000 to $69,400,000 for Edesa.

 

None of the companies in the selected IPOs have characteristics identical to Edesa. Accordingly, an analysis of selected IPOs is not mathematical; rather it involves complex considerations and judgments concerning differences in financial and operating characteristics of the companies in the selected IPOs and other factors that could affect the respective values of the companies and IPOs reviewed.

 

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Base Ratio Analysis

 

Cassel Salpeter calculated implied Base Ratio reference ranges for the Exchange using the implied aggregate equity value reference range indicated for Stellar based on the adjusted net asset value analysis and review of Stellar’s market capitalization and the implied value reference ranges indicated for Edesa based on the risk-adjusted net asset value analysis, the selected companies analysis, the selected transactions analysis and the selected IPOs analysis. The implied Base Ratio reference ranges were 89.2% to 95.4% based on the risk-adjusted net asset value analysis, 88.4% to 93.7% based on the selected companies analysis, 86.6% to 94.4% based on the selected transactions analysis and 89.3% to 94.2% based on the selected IPOs analysis, as compared to, in each case, the Base Ratio provided in the Exchange pursuant to the Exchange Agreement of 90%.

 

Other Matters Relating to Cassel Salpeter’s Opinion

 

As part of its investment banking business, Cassel Salpeter regularly is engaged in the evaluation of businesses and their securities in connection with Exchange, acquisitions, corporate restructurings, private placements and other purposes. Cassel Salpeter is a recognized investment banking firm that has substantial experience in providing financial advice in connection with mergers, acquisitions, sales of companies, businesses and other assets and other transactions. Cassel Salpeter received a fee of $90,000 for rendering its opinion, no portion of which was contingent upon the completion of the Exchange. In addition, Stellar agreed to reimburse Cassel Salpeter for certain expenses incurred by it in connection with its engagement and to indemnify Cassel Salpeter and its related parties for certain liabilities that may arise out of its engagement or the rendering of its opinion. In accordance with Cassel Salpeter’s policies and procedures, a fairness committee of Cassel Salpeter was not required to, and did not, approve the issuance of Cassel Salpeter’s opinion.

 

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Interests of the Stellar Directors and Executive Officers in the Exchange

 

In considering the recommendation of Stellar’s Board with respect to the issuance of Stellar Common Shares in the Exchange, Stellar’s shareholders should be aware that members of the Stellar Board and executive officers of Stellar have interests in the Exchange that may be different from, or in addition to, your interests.

 

Positions with Combined Company Upon Completion of the Exchange

 

As further described below under the heading “Directors and Officer Positions Following the Exchange,” Kathi Niffenegger, the Chief Financial Officer and Corporate Secretary of Stellar, will retain the position of Chief Financial Officer in the combined company and enter into a new employment agreement, effective upon completion of the Exchange, and Frank R. Oakes, the President, Chief Executive Officer, and Chairman of Stellar, will remain as a director following the completion of the Exchange.

 

Treatment of Options

 

Upon completion of the Exchange, all outstanding options to purchase Stellar Common Shares will become immediately vested and exercisable. The table below sets forth the number of options held by the directors and executive officers of Stellar that will vest as a result of the Exchange, based on each individual’s unvested options as of March 25, 2019.

 

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Quantification of Outstanding Equity Awards for Executive Officers and Directors

 

Name   Number of Options to
Vest(1)
    Exercise Prices
of Options to Vest
 
Executive Officers                
Frank R. Oakes     1,904       5.88  
Kathi Niffenegger, CPA     1,666       5.88  
Gregory T. Baxter, Ph. D.     0          
                 
Non-Employee Directors                
Deborah F. Aghib, Ph.D.     595       1.25-6.51  
Tessie M. Che, Ph.D.     357       1.25-5.88  
Paul Chun     476       1.25-14.21  
David L. Hill, Ph.D.     357       1.25-5.88  
Charles V. Olson, D.Sc.     476       1.25-14.21  
Mayank D. Sampat     357       1.25-5.88  
Directors and Executive Officers as a group (9 persons)     6,188          

 

(1) The exercise prices of the options that will vest upon completion of the Exchange are greater than the market price of the Stellar Common Shares. and as a result, no market value has been ascribed to the options.

 

Indemnification of Directors and Officers

 

Prior to the completion of the Exchange, Stellar must obtain a fully-paid, irrevocable “tail” insurance policy naming the current officers and directors of Stellar as beneficiaries and maintain such policy for a period of six years following the completion of the Exchange. In addition, the members of the Stellar Board and Stellar’s executive officers will continue to be indemnified under existing indemnification agreements to the fullest extent permitted by law.

 

Director and Officer Positions Following the Exchange

 

Upon the completion of the Exchange, the Stellar Board is expected to initially have seven members which will be composed of four members proposed by Edesa, one proposed by Stellar and two “independent” directors as defined under Nasdaq corporate governance rules. Upon the completion of the Exchange, the other directors of Stellar will resign.

 

Upon the completion of the Exchange, the Stellar Board and its committees are expected to be composed of the individuals set forth in the table below. The directors shall serve until their successors are duly elected or appointed and qualified or their earlier death, resignation or removal.

 

  Directors   Audit
Committee
  Compensation
Committee
  Nominating
and
Corporate
Governance
Committee
Edesa Appointees Dr. Pardeep Nijhawan            
  Sean MacDonald   X   X   X
  Paul William Pay   X   X    
  Peter van der Velden           X
               
Stellar Appointees Frank R. Oakes            
               
Independent Appointees Lorin Johnson       X    
  Carlo Sistilli   X       X

 

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Immediately following the Exchange, the executive management team of Stellar is expected to be composed of:

 

Name

  Position with the
Combined Company
  Current Position
Dr. Pardeep Nijhawan   Chief Executive Officer   Chief Executive Officer, President and Secretary, Edesa
Dr. Michael Brooks   President   Vice President Corporate Development and Strategy, Edesa
Kathi Niffenegger, CPA   Chief Financial Officer   Chief Financial Officer and Corporate Secretary, Stellar

  

Form of the Exchange

 

Stellar and Edesa have entered into the Exchange Agreement. The Exchange Agreement contains the terms and conditions of the proposed business combination of Stellar and Edesa. Under the Exchange Agreement, Stellar will acquire the entire issued share capital of Edesa in exchange for newly-issued Stellar Common Shares, with Edesa becoming a wholly-owned subsidiary of Stellar.

 

The Exchange has been approved by the boards of directors of both Stellar and Edesa and is expected to close in the second quarter of 2019, subject to certain approvals of the shareholders of Stellar as well as other customary conditions. After the completion of the Exchange, Stellar will change its corporate name to “Edesa Biotech Inc.” as required by the Exchange Agreement.

 

Exchange Consideration

 

Upon completion of the Exchange, the Edesa shareholders will receive Stellar Common Shares in exchange for the outstanding capital shares of Edesa. Immediately following the completion of the Exchange, the Edesa shareholders and option holders are expected to own 90% of the aggregate number of the shares of the combined company on a fully diluted basis, and the Stellar shareholders are expected to own 10% of the aggregate number of shares of the combined company, on a fully diluted basis. The Base Ratio is subject to adjustment if Stellar’s working capital, calculated on the day before the completion of the Exchange, is more than $3 million or less than $2 million, resulting in a maximum exchange ratio of 88% (Edesa)/12% (Stellar) if working capital is $3.5 million or more, and a minimum exchange ratio of 92% (Edesa)/8% (Stellar) if working capital is less than $1,750,000.

 

The number of Stellar Common Shares issuable to the Edesa shareholders upon completion of the Exchange is subject to an amount of Holdback Shares to be determined by the parties five business days before the completion of the Exchange. The final number of Stellar Common Shares to be issued to the Edesa shareholders will be determined within 35 days after the completion of the Exchange. After the final calculation is complete, the Holdback Shares will be issued to the Edesa shareholders to the extent needed to meet the Base Ratio or Adjusted Ratio, as applicable. Please see “Exchange Agreement — Exchange Consideration” for further details.

 

Regulatory Approvals

 

Neither Stellar nor Edesa is required to make any filings or obtain any approvals or clearances from any antitrust regulatory authorities in the U.S. or other countries to complete the Exchange. In the U.S., Stellar must comply with applicable federal and state securities laws and Nasdaq rules and regulations in connection with the issuance of the Stellar Common Shares in connection with the Exchange, including the filing with the Securities and Exchange Commission, or SEC, of this proxy statement.

 

Material U.S. Federal and Canadian Income Tax Consequences of the Exchange

 

There are no material U.S. federal or Canadian income tax consequences to Stellar shareholders directly as a result of the issuance of Stellar Common Shares in the Exchange. The Exchange is expected to restrict the utility of Stellar’s net operating loss carryforwards and certain other tax attributes. For additional information, see Risk Factors - “Because the Exchange will result in an ownership change of Stellar for purposes of the Internal Revenue Code and is expected to result in an acquisition of control of Stellar for purposes of the Income Tax Act (Canada), Stellar’s pre-Exchange net operating loss carryforwards and certain other tax attributes will be subject to limitation.”

 

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Nasdaq Stock Market Listing

 

Prior to the completion of the Exchange, Stellar and Edesa intend to file an initial listing application with The Nasdaq Capital Market pursuant to Nasdaq Stock Market “change of control” rules. If such application is accepted, Stellar anticipates that the Stellar Common Shares will be listed on The Nasdaq Capital Market following the completion of the Exchange and will, subject to shareholder approval, trade under Stellar’s new name, “Edesa Biotech Inc.,” and new trading symbol, “EDSA.”

 

If necessary to obtain listing of the Stellar Common Shares on The Nasdaq Capital Market, Stellar may effect a reverse share split of the Stellar Common Shares in a ratio to be determined prior to the completion of the Exchange. Under Canadian law, prior shareholder approval of the reverse share split would not be required. The terms of any reverse share split have not yet been determined. Any reverse share split will reduce the number of Stellar Common Shares outstanding. See “Risk Factors - Risks Related to a Reverse Share Split.”

 

In addition, if necessary to obtain listing of the Stellar Common Shares on The Nasdaq Capital Market, or if otherwise desirable, Edesa may raise additional funds through the issuance of equity securities (or securities convertible into equity securities) of Edesa before the completion of the Exchange. The terms of any financing have not yet been determined. Any financing will not impact the aggregate number of Stellar Common Shares that are issued in the Exchange to the Edesa shareholders and option holders, or the exchange ratio.

 

Anticipated Accounting Treatment

 

The Exchange will be treated by Stellar as a reverse acquisition under the acquisition method of accounting in accordance with accounting principles generally accepted in the U.S. For accounting purposes, Edesa is considered to be acquiring Stellar in the Exchange.

 

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EXCHANGE AGREEMENT

 

The following is a summary of the material terms of the Exchange Agreement. A copy of the Exchange Agreement is attached as Annex A to this proxy statement and is incorporated by reference into this proxy statement. The Exchange Agreement has been attached to this proxy statement to provide you with information regarding its terms. It is not intended to provide any other factual information about Stellar or Edesa. The following description does not purport to be complete and is qualified in its entirety by reference to the Exchange Agreement. You should refer to the full text of the Exchange Agreement for details of the Exchange and the terms and conditions of the Exchange Agreement.

 

The Exchange Agreement contains representations and warranties that Stellar, Edesa and the Edesa shareholders have made to one another as of specific dates. These representations and warranties have been made for the benefit of the other parties to the Exchange Agreement and may be intended not as statements of fact but rather as a way of allocating the risk to one of the parties if those statements prove to be incorrect. In addition, the assertions embodied in the representations and warranties are qualified by information in confidential disclosure schedules exchanged by the parties in connection with signing the Exchange Agreement. While Stellar and Edesa do not believe that these disclosure schedules contain information required to be publicly disclosed under the applicable securities laws, other than information that has already been so disclosed, the disclosure schedules do contain information that modifies, qualifies and creates exceptions to the representations and warranties set forth in the attached Exchange Agreement. Accordingly, you should not rely on the representations and warranties as current characterizations of factual information about Stellar, Edesa or the Edesa shareholders, because they were made as of specific dates, may be intended merely as a risk allocation mechanism between Stellar, Edesa and the Edesa shareholders and are modified by the disclosure schedules.

 

General

 

Under the Exchange Agreement, Stellar will acquire the entire issued share capital of Edesa from the Edesa shareholders, with Edesa becoming a wholly-owned subsidiary of Stellar.

 

Exchange Consideration

 

The Edesa shareholders will receive Stellar’s Common Shares in exchange for the capital shares of Edesa. Immediately following the completion of the Exchange, the Edesa shareholders and option holders are expected to own 90% of the aggregate number of the shares of the combined company on a fully diluted basis, and the Stellar shareholders are expected to own 10% of the aggregate number of shares of the combined company, on a fully diluted basis. The Base Ratio is subject to adjustment if Stellar’s working capital, calculated on the day before the completion of the Exchange, is more than $3 million or less than $2 million, resulting in a maximum exchange ratio of 88% (Edesa)/12% (Stellar) if working capital is $3.5 million or more, and a minimum exchange ratio of 92 % (Edesa)/8% (Stellar) if working capital is less than $1,750,000.

 

The number of Stellar Common Shares issuable to the Edesa shareholders upon completion of the Exchange is subject to a holdback of an amount of Stellar Common Shares to be determined by the parties five business days before the completion of the Exchange. The final number of Stellar Common Shares to be issued to the Edesa shareholders will be determined within 35 days after the completion of the Exchange. After the final calculation is complete, the Holdback Shares will be issued to the Edesa shareholders to the extent needed to meet the Base Ratio or Adjusted Ratio, as applicable.

 

Upon completion of the Exchange, holders of warrants of Stellar to purchase 2,049,808 Stellar Common Shares will be offered cash for their warrants and all outstanding options to purchase approximately 47,000 Stellar Common Shares will become immediately vested and exercisable. The purpose of the Holdback Shares is to allow for any reduction in the number of Stellar Common Shares issuable to the Edesa shareholders and option holders if any Stellar warrant holders do not accept the cash offer for their outstanding warrants or if there are any other changes in the final working capital of Stellar, which could impact the exchange ratio.

 

For purposes of determining the Adjusted Ratio, Stellar’s working capital will be calculated as follows:

 

Stellar’s cash and cash equivalents and accounts receivables calculated on the day before the completion of the Exchange, and $100,000 attributable to the value of the equipment related to Stellar’s assets

 

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minus

 

  · Stellar’s current liabilities and indebtedness calculated on the day before the completion of the Exchange;

 

  · the amount required to be paid to the holders of Stellar warrants who exercise the option to surrender their Stellar warrants in exchange for cash pursuant to the terms of the warrants, which option is triggered by the completion of the Exchange;

 

  · Stellar’s transaction expenses;

 

plus

 

·expenses of Stellar incurred between April 1, 2019 and April 30, 2019 to a maximum of $60,000; and

 

  · 50% of all expenses of Stellar incurred between April 30, 2019 and the day before the completion of the Exchange.

 

Treatment of Edesa Options

 

Upon the closing of the Exchange, unexercised Edesa options will be exchanged or substituted for options to acquire Stellar Common Shares under the 2017 Incentive Compensation Plan (the “2017 Plan”) in a manner that is satisfactory to Edesa and Stellar. The Edesa options, warrants and other equity instruments will be treated in the same manner as the Edesa shares being transferred in the Exchange for the purpose of determining the number of Stellar Common Shares issuable pursuant to the new Stellar options.

 

Directors and Officers of Stellar Following the Exchange

 

The Exchange Agreement provides that Stellar will take all actions necessary, in consultation with the Edesa shareholders, to cause the Stellar Board, immediately after the completion of the Exchange, to consist of seven directors, with one member proposed by Stellar, four members proposed by Edesa and two “independent directors” as defined under Nasdaq corporate governance rules.

 

Additional information regarding the directors nominated by Stellar and Edesa pursuant to the foregoing provisions of the Exchange Agreement, as well as the executive officers of the combined company after the completion of the Exchange, is included on pages 134 - 141 of this proxy statement.

 

Conditions to the Completion of the Exchange

 

Each parties’ obligation to complete the Exchange is subject to the satisfaction or waiver, on or prior to the completion of the Exchange, of the following conditions:

 

·there being no governmental order of law enjoining or prohibiting the completion of the Exchange;

 

  · approval by the Stellar shareholders at the Annual Meeting of the issuance of the Stellar Common Shares to the Edesa shareholders in the Exchange;

 

·approval by Nasdaq of the listing of the common shares of the combined company; and

 

  · there being no legal action against any of Stellar, Edesa or the Edesa shareholders relating to the Exchange.

 

In addition, Stellar’s obligation to complete the Exchange is further subject to the satisfaction or waiver, on or prior to the completion of the Exchange, of the following conditions:

 

·the representations and warranties of Edesa with respect to organization, the authority to enter into the Exchange Agreement and the enforceability thereof, brokers and accountants must be true and correct in all material respects as of the closing date as if made on the closing date or, if such representations and warranties relate to matters as of an earlier date, then as of that earlier date;

 

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·the representations and warranties of the Edesa shareholders with respect to the authority to enter into the Exchange Agreement and the enforceability thereof, ownership of Edesa shares, investor status and investment intent, and brokers must be true and correct in all material respects as of the closing date as if made on the closing date or, if such representations and warranties relate to matters as of an earlier date, then as of that earlier date;

 

·the representations and warranties of Edesa with respect to capitalization must be true and correct as of the closing date as if made on the closing date;

 

·all other representations and warranties of Edesa and the Edesa shareholders, must be true and correct as of the closing date as if made on the closing date or, if such representations and warranties relate to matters as of an earlier date, then as of that earlier date, except where the failure of these representations and warranties to be true and correct, individually or in the aggregate, would not reasonably be expected to have an Edesa Material Adverse Effect, as described in the section “Exchange Agreement—Representations and Warranties”;

 

·Edesa and the Edesa shareholders must have complied, in all material respects, with all covenants in the Exchange Agreement required to be performed by them as of or before the completion of the Exchange;

 

·Edesa must have obtained all consents to the completion of the Exchange that are required to prevent a breach or default under any agreements to which Edesa or the Edesa shareholders are a party;

 

  · there must not have been any change that would have a Material Adverse Effect in the financial condition, business or operations of Edesa, as described in the section “Exchange Agreement—Representations and Warranties”; and

 

·Edesa and the Edesa shareholders must have delivered certain certificates, opinions and other documents required under the Exchange Agreement for the completion of the Exchange.

 

In addition, Edesa’s and the Edesa shareholders’ obligation to complete the Exchange is further subject to the satisfaction or waiver, on or prior to the completion of the Exchange, of the following conditions:

 

·the representations and warranties of Stellar with respect to organization, the authority to enter into the Exchange Agreement and the enforceability thereof, brokers and accountants must be true and correct in all material respects as of the closing date as if made on the closing date or, if such representations and warranties relate to matters as of an earlier date, then as of that earlier date;

 

·the representations and warranties of Stellar with respect to capitalization must be true and correct as of the closing date as if made on the closing date;

 

·all other representations and warranties of Stellar must be true and correct as of the closing date as if made on the closing date or, if such representations and warranties relate to matters as of an earlier date, then as of that earlier date, except where the failure of these representations and warranties to be true and correct, individually or in the aggregate, would not reasonably be expected to have a Stellar Material Adverse Effect, as described in the section “Exchange Agreement—Representations and Warranties”;

 

·Stellar must have complied, in all material respects, with all covenants in the Exchange Agreement required to be performed by them as of or before the completion of the Exchange other than the requirement to obtain shareholder approval of the issuance of Stellar Common Shares in the Exchange;

 

·Stellar must have obtained all consents to the completion of the Exchange that are required to prevent a breach or default under any agreements to which Stellar is a party;

 

·Stellar must have entered into a consulting or employment agreement with persons specified by Edesa and the current chief financial officer of Stellar must have entered into a new employment agreement with the combined company;

 

·Stellar must have delivered the written resignations of the executive officers of Stellar who are not continuing as executive officers of the combined company;

 

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·there must not have been any change that would have a Material Adverse Effect in the financial condition, business or operations of Stellar, as described in the section “Exchange Agreement—Representations and Warranties”;

 

·the Edesa shareholders must have received the Stellar Common Shares in the Exchange;

 

·

the outstanding Edesa options must have been amended to provide that following the completion of the Exchange, they will be exercisable for Stellar Common Shares;

 

·Stellar must have delivered certain certificates, opinions and other documents required under the Exchange Agreement for the completion of the Exchange; and

 

·Stellar’s estimated working capital must be equal to or greater than $1.5 million as of five business days before the completion of the Exchange.

 

Representations and Warranties

 

The Exchange Agreement contains customary representations and warranties for a transaction of this type relating to, among other things with respect to:

 

Stellar and Edesa

 

·corporate organization and qualification and similar corporate matters;

 

·authority to enter into the Exchange Agreement and related agreements and enforceability;

 

·the absence of violation or conflict with organizational documents and contracts;

 

·capitalization, including share capitalization;

 

·outstanding options, warrants and convertible securities;

 

·required third-party consents, approvals, notices and filings;

 

·financial statements;

 

·undisclosed liabilities;

 

·the status of tax filings and other tax implications;

 

·the absence of changes or events;

 

·real property and leaseholds;

 

·legal proceedings and orders;

 

·material contracts and the validity and absence of breach of such contracts;

 

·compliance with laws;

 

·intellectual property matters;

 

·environmental matters;

 

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·employee benefit matters and employment matters;

 

·regulatory matters;

 

·licenses and permits;

 

·insurance;

 

·approval of the Exchange Agreement by the board;

 

·material transactions or affiliations;

 

·brokers;

 

·compliance with the U.S. Foreign Corrupt Practices Act; Money Laundering Laws; Investment Company Act of 1940;

 

·registration rights;

 

·accountants; and

 

·disclosure.

 

Stellar

 

·Stellar’s SEC reports, including Stellar’s financial statements contained therein;

 

·authority to issue the Stellar Common Shares in the Exchange and restrictions on transfer;

 

·Sarbanes-Oxley and internal accounting controls;

 

·listing of the Stellar Common Shares on Nasdaq;

 

·Canadian securities filings; and

 

·The opinion of Stellar’s financial advisor, Cassel Salpeter.

 

Edesa shareholders:

 

·authority to enter into the Exchange Agreement and related agreements and enforceability;

 

·ownership of Edesa shares;

 

·governmental consents and the absence of violation or conflict with organizational documents and contracts;

 

·legal proceedings;

 

·exemption from registration under the Securities Act;

 

·investor status, investment intent and non-U.S. transactions;

 

·restrictions on transfer of the Stellar Common Shares;

 

·the appointment of a shareholders’ representative;

 

·taxes;

 

·brokers; and

 

·disclosure.

 

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The representations and warranties are, in many respects, qualified by materiality, knowledge or material adverse effect and other similar qualifications. For purposes of the Exchange Agreement, material adverse effect means any event, occurrence, fact, condition or change that is, or would reasonably be expected to become, individually or in the aggregate, materially adverse to (a) the business, results of operations, condition (financial or otherwise) or assets of Stellar, Edesa or the Edesa shareholders, or (b) the ability of Stellar, Edesa or the Edesa shareholders to complete the Exchange on a timely basis. However, none of the following shall be taken into account in determining whether there has been a material adverse effect:

 

·general economic or political conditions;

 

·any changes in financial or securities markets in general;

 

·acts of war (whether or not declared), armed hostilities or terrorism, or the escalation or worsening thereof;

 

·any changes in applicable laws or accounting rules, including GAAP;

 

·any action required or permitted by the Exchange Agreement; or

 

·the public announcement, pendency or completion of the Exchange.

 

However, if any of the first four items described in the above bullet points has a disproportionate adverse effect on Stellar or its subsidiaries or Edesa compared to other companies in the industries in which they operate, such items shall be taken into account in determining whether a material adverse effect has occurred.

 

The representations and warranties of Stellar and Edesa will not survive the completion of the Exchange. The warranties of the Edesa shareholders set forth in the Exchange Agreement will survive the completion of the Exchange and expire three years after the closing date of the Exchange.

 

No Solicitation

 

Each of Stellar and Edesa agree to certain restrictions on the possible solicitation of alternative offers for Stellar or Edesa. Each of Stellar and the Edesa shareholders agrees not to:

 

·solicit, initiate, encourage, or facilitate the making, submission or announcement of any Acquisition Proposal or Acquisition Inquiry (as defined below) or otherwise solicit, initiate, encourage or facilitate any action that could reasonably be expected to lead to an Acquisition Proposal or Acquisition Inquiry;

 

·provide any non-public information to any person in connection with an Acquisition Proposal or Acquisition Inquiry;

 

·engage in discussions or negotiations with any person with respect to any Acquisition Proposal;

 

·approve, endorse or recommend any Acquisition Proposal or Acquisition Inquiry; or

 

·enter into any letter of intent or similar document or any contract contemplating or providing for any Acquisition Transaction (as defined below) or Acquisition Proposal.

 

However, before obtaining Stellar shareholder approval, Stellar may furnish nonpublic information regarding Stellar and its subsidiaries to, and may enter into discussions with, any third party in response to an unsolicited written Acquisition Proposal if Stellar’s Board concludes, after consultation with its outside counsel and financial advisors, the Acquisition Proposal constitutes or is reasonably expected to result in a Superior Offer, as defined below, if:

 

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·neither Stellar nor any representative of Stellar has breached the no solicitation provisions of the Exchange Agreement described above;

 

·the Stellar Board concludes in good faith, after consultation with its outside legal counsel and financial advisors, that the failure to take such action is reasonably likely to be inconsistent with the fiduciary duties of the Stellar Board to the Stellar shareholders under applicable legal requirements;

 

·before furnishing any information or entering into discussions with such third party, Stellar gives Edesa four days prior written notice of the identity of the third party and provides Edesa all terms and conditions of such Acquisition Proposal or Acquisition Inquiry and of Stellar’s intention to furnish information to, or enter into discussions with, such third party;

 

· Stellar receives from the third party an executed confidentiality agreement containing provisions no less favorable to Stellar as those contained in the confidentiality agreement between Stellar and Edesa; and

 

·prior to or simultaneously with the furnishing of any information to such third party, Stellar furnishes or makes available the same information to Edesa, to the extent not previously furnished.

 

For purposes of the Exchange Agreement and this proxy statement,

 

“Acquisition Inquiry” means an inquiry, indication of interest or request for information that could reasonably be expected to lead to an Acquisition Proposal. 

 

“Acquisition Proposal” means any offer, proposal, inquiry or indication of interest relating to any Acquisition Transaction.

 

“Acquisition Transaction” means any transaction or series of transactions with any third party involving: (i) any merger, consolidation, amalgamation, share exchange, business combination, issuance of securities, acquisition of securities, reorganization, recapitalization, tender offer, exchange offer or other similar transaction; or (ii) any sale, lease, exchange, transfer, license, acquisition or disposition of any business or businesses or assets of such person.

 

“Superior Offer” means an unsolicited bona fide written Acquisition Proposal made by a third party after the date of the Exchange Agreement to acquire (whether pursuant to a merger, share exchange, business combination, amalgamation or otherwise) of (i) 75% or more of the outstanding shares of Stellar, or (ii) assets of Stellar representing more than 75% of the earnings power, net income or EBITDA attributable to the assets of Stellar and its subsidiaries on a consolidated basis, that the Stellar Board determines in good faith, after consultation with its outside legal and financial advisors, to be superior to the Exchange and:

 

·is reasonably capable of being completed without undue delay, in accordance with its terms, taking into account all financial, legal, regulatory and other aspects of such proposal and the person making such proposal; and

 

·in the case of a transaction involving cash consideration, includes a fully committed financing as at the date of any definitive agreement to be entered into by Stellar and not otherwise subject to any financing contingency.

 

The Board Recommendation; Company Adverse Recommendation Change

 

As described above, and subject to the provisions described below, the Stellar Board has made the recommendation that the Stellar shareholders vote “FOR” the proposal to approve the issuance of Stellar Common Shares in the Exchange.  The Exchange Agreement provides that the Stellar Board will not effect a change in its recommendation except as described below.

 

Prior to Stellar shareholder approval, the Stellar Board may not (with any action described in the following being referred to as a “Stellar change in recommendation”):

 

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·withdraw or modify the recommendation of the Stellar Board or publicly propose to do so;

 

·fail to publicly reaffirm the recommendation of the Board within three business days after Edesa requests in writing following any public announcement of, or Stellar’s receipt of, an Acquisition Proposal, not constituting a tender or exchange offer (which has not been publicly withdrawn); and

 

·fail to recommend against any Acquisition Proposal subject to Regulation 14D under the Exchange Act in a Solicitation/Recommendation Statement on Schedule 14D-9 within ten business days after the commencement of such Acquisition Proposal.

 

The Stellar Board may only effect a Stellar change in recommendation in response to an Acquisition Proposal that the Stellar Board has concluded in good faith (after consultation with its outside legal and financial advisors) is a Superior Offer if:

 

  · the Acquisition Proposal was not solicited in violation of the non-solicitation obligations under the Exchange Agreement described above;

 

·the Stellar Board has determined in good faith (after consultation with its outside legal and financial advisors) that such Acquisition Proposal is a Superior Offer;

 

  · the Stellar Board determined that, in light of such Superior Offer, the failure to effect a Stellar change in recommendation is reasonably likely to be inconsistent with its fiduciary duties under applicable law;

 

  · Stellar shall have provided prior written notice to Edesa and the Edesa shareholders at least four business days in advance to the effect that the Stellar Board has received an Acquisition Proposal that is not withdrawn and that the Stellar Board concludes in good faith constitutes a Superior Offer and, absent any revision to the terms and conditions of the Exchange Agreement, the Stellar Board has resolved to effect a Stellar change in recommendation or to terminate the Exchange Agreement, which notice shall specify the basis for such Stellar change in recommendation or termination; and

 

  · prior to effecting such Stellar change in recommendation or termination, Stellar and its representatives, during the four business day notice period describe above, has (i) negotiated with Edesa and its representatives in good faith (to the extent that Edesa desires to so negotiate) to amend the terms and conditions of the Exchange Agreement so that Edesa’s and the Edesa shareholder’s revised proposal is at least as favorable to Stellar and Stellar’s shareholders and the Superior Offer and (ii) considered in good faith any proposal by Edesa or the Edesa shareholders to amend the terms and conditions of the Exchange Agreement in a manner that would make Edesa’s or the Edesa shareholders’ modified proposal  at least as favorable to Stellar and Stellar’s shareholders and the Superior Offer.

 

Meeting of Stellar Shareholders

 

Stellar is obligated under the Exchange Agreement to call, give notice of and hold a meeting of its shareholders for the purposes of considering the issuance of shares of Stellar Common Shares pursuant to the Exchange Agreement such other matters as Stellar deems necessary and appropriate.

 

Covenants; Conduct of Business Pending the Exchange

 

Each of Stellar and Edesa have agreed in the Exchange Agreement, subject to exceptions and except as consented to by the other party, it will conduct their business prior to the completion of the Exchange in the ordinary course consistent with past practices, pay its taxes and use commercially reasonable efforts, consistent with past practices, to preserve its business organization and good will, including material assets and properties of the business and relations with customers, suppliers, licensors, licensees and distributors.

 

Stellar has agreed, except as otherwise contemplated by the Exchange Agreement and subject to exceptions, without the consent of Edesa, it will not, prior to the completion of the Exchange:

 

·buy, acquire, transfer, lease, license, sell or otherwise dispose of any of its assets, or permit any encumbrance to attach to or affect any of its assets;

 

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·fail to maintain all of its consents, permits or authorizations in full force and effect, except to the extent that the failure to do so would not have a Material Adverse Effect;

 

·make any general or specific increase in the remuneration of the employees, officers, directors, contractors and service agents of Stellar or its subsidiaries, or grant to them any additional benefits;

 

·implement any employee benefit plan;

 

·make any modification in its usual sales, accounting, management, collection or credit granting practices;

 

·make or rescind any express or deemed election or designation relating to taxes of Stellar or its subsidiaries or refile any tax return;

 

·effect any share split, share dividend, reverse share split, consolidation, recapitalization or similar change in the outstanding Stellar Common Shares; or

 

·issue or grant any shares or other securities (except upon the exercise of outstanding options or certain warrants) or any options, warrants, privileges or rights to acquire Stellar Common Shares.

 

Stellar and Edesa have each agreed, except as otherwise contemplated by the Exchange Agreement and subject to exceptions, without the consent of the other party, it will not, prior to the completion of the Exchange:

 

·amend its articles, by-laws, constating documents or other organizational documents; or

 

·enter into or amend any material contract or other instrument, except in the ordinary course of business involving the sale of goods or services,

 

Other Agreements

 

Each of the companies has agreed:

 

·that Stellar will prepare and file this proxy statement with the SEC and Edesa will cooperate with Stellar in the preparation of this proxy statement and to provide such information as may be reasonably required to comply with the SEC rules and regulations, including the provision of the Edesa financial statements;

 

·to carry on its business in substantially the same manner as before entering into the Exchange Agreement;

 

·to maintain and keep its properties in states of good repair and condition, except for depreciation due to ordinary wear and tear and damage due to casualty;

 

·to maintain insurance in full force and effect;

 

·to perform in all material respects all obligations under material contracts, leases and instruments relating to or affecting its assets, properties, and business;

 

·to use reasonable best efforts to maintain and preserve its business organization, to retain key employees, and to maintain its relationship with material suppliers and customers;

 

·to comply with and perform all obligations and duties imposed by all laws and governmental orders;

 

·not take any action that would interfere or be inconsistent with, or would materially delay, the Exchange;

 

·terminate any solicitation, encouragement, discussion or negotiation with or involving any third party relating to an Acquisition Proposal or an Acquisition Transaction;

 

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·that Stellar will use commercially reasonable efforts to cause the Stellar Common Shares to be issued to the Edesa shareholders in accordance with the Exchange Agreement to be approved for listing on Nasdaq, subject to official notice of issuance;

 

·that Stellar and Edesa will use reasonable commercial efforts to make such filings and take such actions necessary to obtain approval from Nasdaq to list the Stellar Common Shares on Nasdaq following the completion of the Exchange; and

 

· prior to the completion of the Exchange, Stellar will obtain a fully-paid irrevocable “tail” insurance policy naming the current officers and directors of Stellar as direct beneficiaries and the combined company will use its reasonable best efforts to maintain the D&O policy for a period of six years after the completion of the Exchange.

 

Termination

 

The Exchange Agreement may be terminated and the Exchange abandoned at any time prior to the completion of the Exchange in the following ways:

 

·by mutual written consent of the parties;

 

·by Edesa, if as of five business days before the completion of the Exchange, Stellar’s estimated working capital is less than $1.5 million;

 

  · by either company if any of the conditions to the completion of the Exchange have not been satisfied by June 28, 2019;

 

  · by one party if there is a breach or failure to perform the representations, warranties, covenants or other agreements given by the other at the signing of the Exchange Agreement resulting in a failure to satisfy the applicable closing conditions and the breach or failure is not capable of being cured or is not subsequently cured;

 

·by Edesa if the Stellar shareholder approval is not obtained or the shareholder meeting for obtaining Stellar shareholder approval has not been held by June 26, 2019;

 

·by Edesa, prior to obtaining Stellar shareholder approval, if the Stellar Board changes its recommendation in favor of approving the Exchange, fails to reaffirm its recommendation for the Exchange or, subject to certain conditions, does not recommend against or remains neutral with respect to a tender offer related to an Acquisition Proposal; and

 

·by Edesa or Stellar, prior to obtaining Stellar shareholder approval, if the Stellar Board authorizes Stellar to enter into an acquisition agreement for a Superior Offer.

 

Termination Fees, Expenses

 

In the event of a termination of the Exchange Agreement, certain termination fees may apply.

 

If Stellar terminates the Exchange Agreement due to a breach or failure of Edesa or the Edesa shareholders to perform their representations, warranties, covenants or other agreements in the Exchange Agreement resulting in a failure to satisfy the applicable closing conditions and which breach or failure is not capable of being cured or is not subsequently cured, Stellar is entitled to reimbursement of up to $250,000 in legal fees.

 

Edesa is entitled to reimbursement of up to $250,000 in legal fees if it terminates the Exchange Agreement due to:

 

·a breach or failure of Stellar to perform its representations, warranties, covenants or other agreements in the Exchange Agreement resulting in a failure to satisfy the applicable closing conditions and which breach or failure is not capable of being cured or is not subsequently cured;

 

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·Stellar’s failure to obtain Stellar shareholder approval or hold the shareholder meeting by June 26, 2019;

 

·Stellar’s estimated working capital being less than $1,500,000 as of five business days before the Closing; or

 

·prior to obtaining Stellar shareholder approval, the Stellar Board effects a Stellar change in recommendation.

 

If, prior to receiving Stellar shareholder approval, the Exchange Agreement is terminated because Stellar enters into an acquisition agreement for a Superior Offer, Stellar is obligated to pay a termination fee of $1,000,000 to Edesa.

 

If the Exchange Agreement is terminated by Edesa or the Edesa shareholders because Stellar breaches or fails to perform the representations, warranties, covenants or other agreements in the Exchange Agreement resulting in a failure to satisfy the applicable closing conditions and which breach or failure is not capable of being cured or is not subsequently cured, Edesa and the Edesa shareholders are entitled to a termination fee of $1,000,000, less any legal fees paid, in the following circumstances:

 

·an Acquisition Proposal or Acquisition Inquiry was communicated to the Stellar Board within six months prior to the date of the Exchange Agreement and an Acquisition Transaction is consummated with such person or an affiliate thereof within six months after the termination of the Exchange Agreement; or

 

·Stellar consummates an Acquisition Transaction with a Stellar shareholder or affiliate of Stellar within six months after termination of the Exchange Agreement.

 

Amendment

 

The Exchange Agreement may be amended by the parties thereto by written consent any time before the effective date of the Exchange.

 

Governing Law

 

The Exchange Agreement is governed by the laws of the Province of British Columbia, Canada.

 

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MATTERS BEING SUBMITTED TO A VOTE OF STELLAR SHAREHOLDERS

 

PROPOSAL NO. 1
APPROVAL OF THE ISSUANCE OF STELLAR COMMON SHARES IN THE EXCHANGE

 

At the Annual Meeting, holders of Stellar Common Shares will be asked to approve the issuance of Stellar Common Shares in the Exchange. Immediately following the completion of the Exchange, the Edesa shareholders and option holders are expected to own 90% of the aggregate number of the shares of the combined company on a fully diluted basis, and the Stellar shareholders are expected to own 10% of the aggregate number of shares of the combined company, on a fully diluted basis. This exchange ratio of 90% (Edesa)/10% (Stellar) (the “Base Ratio”) is subject to adjustment if Stellar’s working capital, calculated on the day before the completion of the Exchange, is more than $3 million or less than $2 million, resulting in a maximum exchange ratio of 88% (Edesa)/12% (Stellar) if working capital is $3.5 million or more, and a minimum exchange ratio of 92% (Edesa)/8% (Stellar) if working capital is less than $1,750,000.

 

The terms of, reasons for and other aspects of the Exchange Agreement, the Exchange and the issuance of Stellar Common Shares in the Exchange are described in detail in the other sections in this proxy statement.

 

Vote Required

 

The affirmative vote of the holders of a majority of the votes cast by holders present in person or represented by proxy at the Annual Meeting and entitled to vote is required for the approval of the issuance of Stellar Common Shares in the Exchange. With regard to this proposal, broker non-votes and shares which are entitled to vote but abstain from voting on a matter will be excluded from the vote and will have no effect on its outcome.

 

THE STELLAR BOARD RECOMMENDS THAT THE STELLAR SHAREHOLDERS VOTE “FOR” PROPOSAL NO. 1 TO APPROVE THE ISSUANCE OF STELLAR COMMON SHARES IN THE EXCHANGE.

 

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PROPOSAL NO. 2
ELECTION OF DIRECTORS

 

Nominees for Election of Directors

 

Each director is elected annually to serve until the next annual meeting of shareholders, or until his or her successor is duly elected. However, if Proposal No. 1 is approved by the Stellar shareholders and the Exchange is completed, the Stellar Board will be reconstituted in accordance with the terms of the Exchange Agreement. See the section entitled “Directors and Officers of the Combined Company” in this proxy statement. Upon the recommendation of the Nominating and Corporate Governance Committee, the Stellar Board has nominated Deborah F. Aghib, Tessie M. Che, Paul Chun, David L. Hill, Frank R. Oakes, Charles V. Olson and Mayank D. Sampat to hold office until the 2020 annual meeting of shareholders or until their respective successors have been duly elected and qualified. In the event that any of the nominees shall be unable or unwilling to serve as a director, the Stellar Board shall reserve discretionary authority to vote for a substitute or substitutes. The Board has no reason to believe that any of the nominees will be unable or unwilling to serve.

 

Information as to Stellar’s Board and Nominees

 

Name   Age   Position(s) Held   Director Since
Deborah F. Aghib, Ph.D. (1)(3)   60   Director   January 23, 2018
Tessie M. Che, Ph.D.   68   Director   September 25, 2013
Paul Chun (1)(3)   38   Director   December 8, 2016
David L. Hill, Ph.D. (2)(3)   68   Director   May 17, 2011
Frank R. Oakes   68   President, Chief Executive Officer and Chairman of Board of Directors   April 9, 2010
Charles V. Olson, D.Sc. (2)   61   Director   December 8, 2016
Mayank D. Sampat (1)(2)   63   Director   August 15, 2012

  

(1)Member of Audit Committee.

 

(2)Member of Compensation Committee.

 

(3)Member of Nominating and Corporate Governance Committee.

 

There are no arrangements between Stellar’s directors, and any other person pursuant to which its directors were nominated or elected for their positions. There are no family relationships between any of Stellar’s directors or executive officers. None of Stellar’s directors or executive officers have been involved, in the past ten years and in a manner material to an evaluation of such director’s or officer’s ability or integrity to serve as a director or executive officer, in any of those “Certain Legal Proceedings” more fully detailed in Item 401(f) of Regulation S-K, which include but are not limited to, bankruptcies, criminal convictions and an adjudication finding that an individual violated federal or state securities laws.

 

Biographies and Qualifications. The biographies of Stellar’s directors and certain information regarding each director’s experience, attributes, skills and/or qualifications that led to the conclusion that the director should be serving as a director of Stellar are as follows:

 

Deborah F. Aghib, Ph.D. has been a director of Stellar since January 2018. She has more than 25 years of executive experience for biotechnology and healthcare-related companies and organizations. She is currently a business development executive for CellPly S.r.L., a position she has held since August 2017. She also currently serves as an advisor to the boards and management of BrainDTech S.r.L (since January 2016), Sanipedia S.r.L (since October 2014) and Neuro-Zone S.r.L. (since January 2007). Previously, from February 2014 to September 2014, she was a private equity consultant for CRG LP, a healthcare-focused investment firm. From 2013 to 2014 she was Business Development and Strategy executive under a consulting arrangement for Theravance Inc. From February 2012 to December 2012, she served as Stellar’s chief business development executive under a consulting arrangement. From 2007 to 2012, she was the Vice President of Business Development and Strategy for Neuro-Zone. Since October 2015, Dr. Aghib has served on the Advisory Board of Open Common Consortium, a cloud computing and data commons infrastructure that supports cancer medical research from the University of Chicago. Dr. Aghib holds a Ph.D. in Molecular and Cellular Biology from the University of Milan and a Ph.D. in Human Genetics from the University of Pavia. Dr. Aghib has broad scientific knowledge and significant international experience in developing long-term strategies for business development, licensing and asset spinoffs for drug discovery, medical device and companion diagnostics companies.

 

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Tessie M. Che, Ph.D. has been a director of Stellar since September 2013. Dr. Che is currently General Manager and Chair of the board of directors of Amaran Biotechnology Inc., a privately-held biopharmaceuticals manufacturer based in Taiwan, a position she has held since 2012. She is also a director of OBI Pharma USA, a wholly-owned subsidiary of OBI Pharma, Inc., a publicly traded biotechnology corporation in Taiwan. From 1998 to 2011 she served as COO and Sr. V.P., Corporate Affairs of Optimer Pharmaceuticals Inc., a company she co-founded. At Optimer, Dr. Che guided the company’s CMC team to the successful registration and commercialization of DificidTM in the U.S., Canada and Europe. Prior to Optimer, Dr. Che’s experience includes 20 years in research, operations and management at global companies, including Exxon Mobil Corp., Aventis Pharmaceuticals Inc., and EniChem SpA. Dr. Che holds bachelor degrees in chemistry from Illinois State University and Fu-Jen Catholic University (Taiwan) and a PhD in physical-inorganic chemistry from Brandeis University. She has authored numerous scientific publications and holds over 20 U.S. patents. Dr. Che has extensive scientific, operational, manufacturing, quality assurance, product development and senior management experience in the pharmaceutical and biotechnology industries, as well as experience serving on a board of directors within Stellar’s industry.

 

Paul Chun has been a director of Stellar since December 2016 and serves as the chair of the Nominating and Corporate Governance Committee. He is a Managing Partner of Eldred Advisors LLC, a life sciences advisory firm he founded in May 2016. From November 2015 to April 2016, he served as Director of Strategy and Corporate Development at Kiromic, LLC. From May 2011 to October 2015, Mr. Chun served as a life sciences principal with Westwicke Partners, LLC, a capital markets advisory firm. During his tenure at Westwicke, he supported the capital markets and investor engagement objectives of private and public biopharma companies, including the support of multiple initial public offerings and other strategic transactions. Prior to Westwicke, he held various roles in investment research and corporate finance, including at Amgen, Inc., Tavistock Life Sciences and Goldman, Sachs & Co. He received his bachelors in biological sciences from Columbia University. Mr. Chun has broad experience in therapeutics development and commercialization, valuation, corporate development and finance.

 

David L. Hill, Ph.D. has been a director of Stellar since May 2011. Since January 2018 he has operated the California Central Coast IVF Laboratory, a healthcare company he founded in San Luis Obispo, California. He previously served as Scientific Director for the ART Reproductive Center, Beverly Hills, California, from December 1999 until December 2016. He is also an Assistant Clinical Professor in the Dept. of Obstetrics and Gynecology at the David Geffen School of Medicine, University of California, Los Angeles, and a Research Assistant IV at Cedars-Sinai Medical Center, Los Angeles, California. Dr. Hill received his Ph.D. in Biological Sciences from the Department of Pathobiology, School of Life Sciences, University of Connecticut and completed a Postdoctoral Fellowship at the Dana Farber Cancer Institute through an appointment by the Department of Physiology and Biophysics, Harvard Medical School, Boston, Massachusetts. Dr. Hill has extensive scientific and clinical research experience in Stellar’s industry.

 

Frank R. Oakes was appointed Stellar’s President and Chief Executive Officer and Chairman of Stellar’s Board in April 2010. Prior to that time, he served as founder and Chief Executive Officer of Stellar’s California subsidiary since 1999. He has more than 40 years of management experience in aquaculture including a decade as Chief Executive Officer of The Abalone Farm, Inc., during which he led the company through the R&D, capitalization, and commercialization phases of development to become the largest abalone producer in the U.S. Mr. Oakes is the inventor of Stellar’s patented method for non-lethal extraction of hemolymph from a live gastropod mollusk. He was the principal investigator on Stellar’s Small Business Innovation Research (SBIR) grant from the National Science Foundation and was principal investigator on Stellar’s Phase I and II SBIR grants from the NIH’s Center for Research Resources, and a California Technology Investment Partnership (CalTIP) grant from the Department of Commerce. Mr. Oakes has consulted and lectured for the aquaculture industry around the world. He received his Bachelor of Science degree from California State Polytechnic University, San Luis Obispo and is a graduate of the Los Angeles Regional Technology Alliance University’s management-training program. Mr. Oakes is a valuable member of Stellar’s Board due to his depth of operating, strategic, and senior management experience in Stellar’s industry, specifically as related to aquaculture. Additionally, Mr. Oakes holds an intimate knowledge of Stellar due to his longevity in the industry and with us.

 

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Charles V. Olson, D.Sc. has been a director of Stellar since December 2016 and a member of Stellar’s scientific advisory board since June 2014 and serves as the chair of the Compensation Committee. Since September 2017, he has served at Applied Molecular Transport Inc., as the Vice President of Biologics. He has also been a Principal Biotechnology Consultant for Compass Biotechnology LLC since 2006. Dr. Olson previously held senior and executive management positions at Anthera Pharmaceuticals Inc. from April 2010 to August 2017, NGM Biopharmaceuticals Inc., Coherus BioSciences Inc., Nexbio Inc., Cell Genesys, Inc., Biomarin Pharmaceuticals, Inc., and Onyx Pharmaceuticals, Inc. After graduate school, Dr. Olson was a Research Scientist at Kaiser Hospitals, followed by Scientist and Senior Scientist positions at Genentech and Bayer, respectively. He holds a B.A. in biology and chemistry from Westmont College, an M.A. in chemistry from the University of California at Santa Barbara and a D.Sc. in biochemistry. Dr. Olson has extensive scientific, manufacturing operations, process development, and senior management experience in the biopharmaceutical industry.

 

Mayank (Mike) D. Sampat has been a director of Stellar since August 2012 and serves as the chair of the Audit Committee. Mr. Sampat is an independent consultant providing business services to companies seeking expertise in financial planning and analysis, accounting and financial reporting, M&A transactions support and financial system implementation. Since October 2018, he has served as the Chief Financial Officer at Treatment Management Company, a healthcare provider focused on addiction recovery. He previously held the positions of controller at Precision Toxicology, LLC, a healthcare focused clinical laboratory specializing in providing quantitative drug testing, from February 2015 to May 2016, Zpower, LLC, an emerging manufacturer in the microbattery industry, from June 2012 to September 2014, and Imaging Advantage LLC from September 2010 to June 2012, and the position of Chief Financial Officer for Gamma Medica-Ideas, a supplier of imaging equipment to the medical industry, from September 2007 to June 2010. Mr. Sampat received a BBA in accounting from Bombay University and his MBA in Finance at Mercer University. Mr. Sampat is a seasoned finance and accounting executive, having worked with multiple companies ranging from startups to large Fortune 100 companies.

 

Vote Required

 

With regard to the election of directors, votes may be cast “FOR” or “WITHHOLD.” The affirmative vote of the holders of a plurality of votes cast by the holders of Stellar Common Shares, present in person or represented by proxy at the Annual Meeting and entitled to vote is required for the election of each of the nominees. With regard to this proposal, shares which are entitled to vote but abstain from voting on a matter will be excluded from the vote and will have no effect on its outcome.

 

THE STELLAR BOARD RECOMMENDS THAT THE STELLAR SHAREHOLDERS VOTE “FOR” THE ELECTION OF EACH OF THE DIRECTOR NOMINEES IDENTIFIED IN PROPOSAL NO. 2.

 

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stellar’s CORPORATE GOVERNANCE

 

Board Meetings

 

Stellar’s Board held 8 meetings in fiscal year 2018. As shown in the table below, each director attended at least 75% of the aggregate number of meetings of the Stellar Board held during the period for which such director served on Stellar’s Board. Stellar’s directors are encouraged, but not required, to attend annual meetings. All of Stellar’s directors attended its 2018 annual meeting of shareholders, and it is not expected that Stellar’s directors will attend this Annual Meeting. The table below details the attendance of Stellar Board members at director and committee meetings during the fiscal year ended September 30, 2018.

 

Name of Director   Board
(8 Meetings)
  Audit
(5 Meetings)
  Compensation
(4 Meetings)
  Nominating and Corporate Governance
(3 Meetings)
Deborah F. Aghib, Ph.D. (1)   5 of 6 attended   3 of 3 attended   N/A   1 of 1 attended
Tessie M. Che, Ph.D.   6 of 8 attended   N/A   N/A   N/A
Paul Chun (2)   8 of 8 attended   5 of 5 attended   4 of 4 attended   3 of 3 attended
David L. Hill, Ph.D.  (3)   7 of 8 attended   2 of 2 attended   4 of 4 attended   1 of 3 attended
Frank R. Oakes   8 of 8 attended   N/A   N/A   N/A
Charles V. Olson, D.Sc.   7 of 8 attended   N/A   3 of 4 attended   N/A
Mayank D. Sampat (4)   8 of 8 attended   5 of 5 attended   4 of 4 attended   2 of 2 attended

 

(1)Dr. Aghib was appointed to the Stellar Board on January 23, 2018 and appointed to the Audit and Nominating and Corporate governance committees on March 27, 2018.
(2)Mr. Chun was a member of the Compensation Committee through March 27, 2018.
(3)Dr. Hill was a member of the Audit Committee through March 27, 2018.
(4)Mr. Sampat was a member of the Nominating and Corporate Governance Committee through March 27, 2018.

 

Board Leadership Structure

 

Stellar’s Board does not have a formal policy with respect to the separation of the positions of Chief Executive Officer and Chairman of the Stellar Board. Since 2010, Frank R. Oakes has served as both Stellar’s Chief Executive Officer and Chairman. The Stellar Board has determined that, in light of his extensive experience in Stellar’s industry, familiarity with Stellar’s day-to-day operations, in-depth knowledge of the issues, opportunities and challenges facing Stellar, and strategic vision for its business, Mr. Oakes’ service as both its Chief Executive Officer and Chairman is appropriate to provide the authority and flexibility necessary for Mr. Oakes to lead Stellar.

 

Although Stellar believes that the combination of the Chief Executive Officer and Chairman roles is appropriate under the current circumstances, Stellar has not established this approach as a policy, and the Stellar Board may determine that it is more appropriate to separate the roles in the future.

 

Role of Board in Risk Oversight Process

 

Stellar’s Board is responsible for overseeing Stellar’s risk management and, either as a whole or through its committees, regularly discusses with management its major risk exposures, their potential impact on Stellar’s business and the steps Stellar takes to manage them. The risk oversight process includes receiving regular reports from committees of the Stellar Board and members of senior management to enable Stellar’s Board to understand Stellar’s risk identification, risk management and risk mitigation strategies with respect to areas of potential material risk, including operations, finance, legal, regulatory, strategic and reputational risk. The Audit Committee discusses with Stellar’s independent registered public accounting firm the major financial risk exposures and the steps management has taken to monitor and mitigate such exposures.

 

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Director Independence

 

The Stellar Board evaluates the independence of each nominee for election as a director of Stellar in accordance with the Nasdaq Listing Rules. Pursuant to these rules, a majority of Stellar’s Board must be “independent directors” within the meaning of the Nasdaq Listing Rules, and all directors who sit on its Audit Committee, Compensation Committee and Nominating and Corporate Governance Committee must also be independent directors.

 

The Nasdaq definition of “independence” includes a series of objective tests, such as the director or director nominee is not, and was not during the last three years, an employee of Stellar and has not received certain payments from, or engaged in various types of business dealings with, Stellar. In addition, as further required by the Nasdaq Listing Rules, the Stellar Board has made a subjective determination as to each independent director that no relationships exist which, in the opinion of the Stellar Board, would interfere with such individual’s exercise of independent judgment in carrying out his or her responsibilities as a director. In making these determinations, the Stellar Board reviewed and discussed information provided by the directors with regard to each director’s business and personal activities as they may relate to Stellar and its management.

 

As a result, the Stellar Board has affirmatively determined that Deborah F. Aghib, Paul Chun, David Hill, Charles Olson and Mayank Sampat are “independent directors.” This means that Stellar’s Board is composed of a majority of independent directors as required by Nasdaq. The Stellar Board has also affirmatively determined that all members of its Audit Committee, Compensation Committee, and Nominating and Corporate Governance Committee are independent directors.

 

Lead Director

 

On January 8, 2015, Stellar’s Board created the position of Lead Director. Stellar’s Board has yet to designate an existing or new director to serve as Stellar’s Lead Director. Pursuant to the charter of the Lead Director, the Lead Director shall be an independent, non-employee director designated by Stellar’s Board who shall serve in a lead capacity to coordinate the activities of the other independent directors, interface with and advise the Chairman of the Stellar Board, and perform such other duties as are specified in the charter or as Stellar’s Board may determine.

 

Code of Business Conduct and Ethics and Insider Trading Policy

 

Stellar’s Board has adopted a written Code of Business Conduct and Ethics applicable to all directors, officers and employees of Stellar. Copies of these policies are available on Stellar’s website at http://ir.stellarbiotechnologies.com and on SEDAR at www.sedar.com and will be provided in print without charge to any shareholder who submits a request in writing to Stellar Biotechnologies, Inc., Investor Relations, 332 E. Scott Street, Port Hueneme, California 93041. Any amendment to and waivers from the Code of Business Conduct and Ethics will be posted on Stellar’s website. The Code of Business Conduct and Ethics provides that any waiver thereof may be made only by the entire Stellar Board.

 

Information about Stellar’s Board Committees

 

Stellar’s Board has appointed an Audit Committee, a Compensation Committee and a Nominating and Corporate Governance Committee. The Stellar Board has adopted written charters for its Audit Committee, its Compensation Committee, and its Nominating and Corporate Governance Committee. Copies of these charters are available on Stellar’s website at http://ir.stellarbiotechnologies.com and on SEDAR at www.sedar.com and will be provided in print without charge to any shareholder who submits a request in writing to Stellar Biotechnologies, Inc., Investor Relations, 332 E. Scott Street, Port Hueneme, California 93041.

 

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Audit Committee

 

Composition of the Audit Committee

 

Stellar’s Audit Committee is composed of Deborah F. Aghib, Paul Chun, and Mayank Sampat (chairman). The Audit Committee held 5 meetings in fiscal 2018. Each of the members of the Audit Committee attended 100% of the meetings held by the Audit Committee during the time such directors served as a member of the committee. The purpose of the Audit Committee is to oversee Stellar’s accounting and financial reporting processes and the audits of its financial statements. In that regard, the Audit Committee assists the Stellar Board in monitoring: the integrity of Stellar’s financial statements; Stellar’s independent registered public accounting firm’s qualifications, independence, and performance; the performance of Stellar’s internal audit function, including Stellar’s system of internal controls, financial reporting, and disclosure controls; and Stellar’s compliance with legal and regulatory requirements. To fulfill this obligation and perform its duties, the Audit Committee maintains effective working relationships with the Stellar Board, management, and Stellar’s independent registered public accounting firm.

 

The Stellar Board has identified Mayank Sampat as its audit committee financial expert. Mr. Sampat is the Chairman of Stellar’s Audit Committee and has extensive financial experience. He received an MBA in Finance from Mercer University, and has served in several financial positions with other companies, including several years as Chief Financial Officer for a medical equipment manufacturer. All members of the Audit Committee are considered to be “independent” as that term is defined by the Exchange Act, the Nasdaq Listing Rules and Canadian NI 52-110. All members of the Audit Committee are “financially literate” as that term is defined in NI 52-110.

 

Relevant Education and Experience

 

A full description of the education and experience of the current members of the Audit Committee is available under the section entitled “Information as to Stellar’s Board and Nominees - Biographies and Qualifications” detailed above.

 

Audit Committee Oversight 

At no time since the commencement of Stellar’s most recently completed financial year was a recommendation of the Audit Committee to nominate or compensate an independent registered public accounting firm not adopted by the Stellar Board.

 

The Audit Committee reviews, approves and oversees any transaction between Stellar and any “related person” (as defined in Item 404 of Regulation S-K) and any other potential conflict of interest situations, on an ongoing basis. Under these policies and procedures, the Audit Committee is to be informed of transactions subject to review before their implementation. The procedures establish Stellar’s practices for obtaining and reporting information to the Audit Committee regarding such transactions on a periodic and an as-needed basis. The policy provides that such transactions are to be submitted for approval before they are initiated but also provides for ratification of such transactions. No director who is interested in a transaction may participate in the Audit Committee’s determinations as to the appropriateness of such transaction.

 

Assessments 

The Stellar Board monitors the adequacy of information given to directors, communication between the Stellar Board and management and the strategic direction and processes of the Stellar Board and committees.

 

Additional information regarding the audit committee is contained in Item 10 of the Annual Report and Stellar’s Annual Information Form for fiscal 2018 as filed on SEDAR.

 

Compensation Committee

 

Stellar’s Compensation Committee is composed of David Hill, Charles Olson (chair), and Mayank Sampat. The Compensation Committee held 4 meetings in fiscal 2018. Each of the members of the Compensation Committee attended at least 75% of the meetings held by the Compensation Committee during the time such directors served as a member of the committee. The purpose of the Compensation Committee is to discharge the Stellar Board’s responsibilities relating to compensation of Stellar’s Chief Executive Officer and Stellar’s other executive officers. More specifically, the Compensation Committee has the sole authority to determine the Chief Executive Officer’s compensation level based on an evaluation performed, at least annually, in light of the corporate goals and objectives applicable to the compensation of the Chief Executive Officer.

 

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The Compensation Committee has overall responsibility for approving and evaluating all of Stellar’s compensation plans, policies and programs as such plans, policies and programs affect other executive officers and all employees. The Compensation Committee also reviews Stellar’s incentive compensation arrangements to determine whether they encourage excessive risk-taking, reviews and discusses, at least annually, the relationship between risk management policies and practices and compensation, and evaluates compensation policies and practices that could mitigate any such risk.

 

All compensation decisions are made with consideration of the Compensation Committee’s guiding principles to provide competitive compensation for the purpose of attracting and retaining talented executives and employees and of motivating Stellar’s employees to achieve improved company performance, which ultimately benefits Stellar’s shareholders. The Compensation Committee has the sole authority to retain and terminate any advisors, including independent counsel, compensation consultants and other advisors to assist as needed, and has sole authority to approve the advisors’ fees, which will be paid by Stellar, and the other terms and conditions of their engagement. The Compensation Committee considers input and recommendations from Stellar’s Chief Executive Officer, who shall not be present during any committee deliberations with respect to his compensation, in connection with its review of Stellar’s compensation programs and its annual review of the performance of the other executive officers.

 

Nominating and Corporate Governance Committee

 

Stellar’s Nominating and Corporate Governance Committee is composed of Deborah F. Aghib, Paul Chun (chair), and David Hill. The Nominating and Corporate Governance Committee held 3 meetings in fiscal 2018. Each of the members of the Nominating and Corporate Governance Committee attended at least 75% of the meetings held by the Nominating and Corporate Governance Committee during the time such directors served as a member of the committee, except for David Hill. The purpose of the Nominating and Corporate Governance Committee is to identify individuals qualified to become Stellar Board members; recommend to the Stellar Board individuals to serve as directors; advise the Stellar Board with respect to Stellar Board composition, procedures and committees; develop, recommend to the Stellar Board and annually review a set of corporate governance principles applicable to Stellar; and oversee any related matters required by the federal securities laws and the Nasdaq continued listing requirements.

 

Process for Identifying and Evaluating Potential Director Nominees. The Nominating and Corporate Governance Committee will identify, evaluate and recommend candidates to become members of Stellar’s Board with the goal of creating a board that, as a whole, consists of individuals with various and relevant career experience, industry knowledge and experience, and financial expertise. It will consider persons identified by its members, management, shareholders, investment bankers and others for nomination to the Stellar Board. Candidates, whether identified by the Nominating and Corporate Governance Committee or proposed by shareholders, will be reviewed in the context of the current composition of Stellar’s Board, Stellar’s operating requirements and the long-term interests of Stellar’s shareholders. Although the Nominating and Corporate Governance Committee does not have a formal diversity policy concerning membership of the Stellar Board, it does consider diversity in its broadest sense when evaluating candidates, including persons diverse in gender, ethnicity, experience, and background.

 

Process for Stellar Shareholder Nominations. The Stellar Board has approved an advance notice policy, which was subsequently approved by Stellar’s shareholders at Stellar’s 2014 annual meeting of shareholders, that requires advance notice be given to Stellar in certain circumstances where nominations of persons for election to the Stellar Board are made by Stellar shareholders. Stellar shareholders who wish to recommend a candidate for election to the Stellar Board should send their letters to Stellar’s Corporate Secretary at 332 E. Scott Street, Port Hueneme, California 93041.

 

In the case of an annual meeting of shareholders, notice to Stellar must be made not less than 30 days nor more than 65 days prior to the date of the annual meeting. However, in the event that the annual meeting is to be held on a date that is less than 40 days after the date on which the first public announcement of the date of the annual meeting was made, notice may be made not later than the close of business on the tenth day following such public announcement.

 

In the case of a special meeting of shareholders (which is not also an annual meeting), notice to Stellar must be made not later than the close of business on the fifteenth day following the day on which the first public announcement of the date of the special meeting was made.

  

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Each of the nominees up for election at the Annual Meeting was recommended to the Stellar Board by the Nominating and Corporate Governance Committee.

 

Stellar Shareholder Communications with the Stellar Board

 

If you wish to communicate with the Stellar Board, you may send your communication in writing to Stellar’s Corporate Secretary at Stellar’s executive offices located at 332 E. Scott Street, Port Hueneme, California 93041. Please include your name and address in the written communication and indicate whether you are a shareholder. Stellar’s Corporate Secretary will review any communication received from a shareholder, and all material communications from shareholders will be forwarded to the appropriate director or directors or committee of the Stellar Board based on the subject matter.

 

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Stellar’s Executive Officers

 

Set forth below is certain information with respect to the names, ages, and positions of Stellar’s executive officers as of the date of this proxy statement. Biographical information pertaining to Mr. Oakes, who is a director and an executive officer, may be found in the above section entitled “Information as to Stellar’s Board and Nominees.” The executive officers serve at the pleasure of the Stellar Board. However, if Proposal No. 1 is approved by the Stellar shareholders and the Exchange is completed, the executive officers of Stellar will be revised in accordance with the terms of the Exchange Agreement. See the section entitled “Directors and Officers of the Combined Company” in this proxy statement.

 

Name   Age   Position(s) Held   Date of Appointment
Frank R. Oakes   68   President, Chief Executive Officer and Chairman of the Board   April 9, 2010
Kathi Niffenegger, CPA   61   Chief Financial Officer and Corporate Secretary   November 1, 2013
Gregory T. Baxter, Ph.D. (1)   59   Executive Vice President of Corporate Development   December 1, 2016

 

  

(1) As previously announced on March 8, 2019, on March 7, 2019 Dr. Baxter notified Stellar of his decision to retire as Executive Vice President of Corporate Development, effective March 22, 2019.

 

Kathi Niffenegger, CPA was appointed Chief Financial Officer in November 2013 and Corporate Secretary in June 2013. She initially joined Stellar in May 2012 as Controller, after previously serving as its outside Certified Public Accountant for more than 12 years. Ms. Niffenegger has more than 30 years of experience in accounting and finance in a range of industries. She held positions of increasing responsibility in the audit division of Glenn Burdette CPAs from 1988 to 2012 and served most recently as technical partner. She obtained CFO experience at Martin Aviation, and began her career at Peat, Marwick, Mitchell & Co. (now KPMG LLP). Ms. Niffenegger has held leadership roles for audits of manufacturing, aquaculture, pharmaceutical and governmental grant clients, and developed specific expertise in cost accounting systems and internal controls. Ms. Niffenegger holds a B.S. degree in Business Administration, Accounting from California State University, Long Beach and is a member of the American Institute of Certified Public Accountants (AICPA).

 

Gregory T. Baxter, Ph.D. joined Stellar’s executive management team in December 2016 following his service on Stellar’s Board, which he joined in August 2012. Dr. Baxter has served as an executive and scientist for several biotechnology corporations and foundations. Since 2001, Dr. Baxter has been a Senior Scientist in the Department of Clinical Drug Development for CCS Associates Inc., a scientific research consulting firm specializing in technical and support services for clinical research, design strategies for preclinical studies, chemical information sciences and research and development support for translational science. His prior experience includes serving as Program Director for the National Science Foundation (NSF) Division of Industrial Innovation and Partnerships, Founder and CSO of Hurel Corporation, Founder and CEO of Aegen Biosciences and Research Scientist for Molecular Device Corporation. He also serves as Adjunct Associate Professor at Cornell University in the College of Chemical Engineering and on the Founders Board of Stanford University’s StartX Med Program. Dr. Baxter received his B.A. and Ph.D. in Biochemistry/Molecular Biology from University of California, Santa Barbara.

 

Executive Compensation for Stellar

 

As an emerging growth company under SEC rules and the JOBS Act and a smaller reporting company under SEC rules, Stellar may provide scaled disclosure in Item 402 paragraphs (m) through (r). Stellar’s proxy disclosure has been prepared to comply with those U.S. requirements and the Canadian proxy disclosure requirements in Form 51-102F6.

 

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Named Executive Officers 

 

For the purposes of this proxy statement, a named executive officer (“NEO”) of Stellar means each of the following individuals:

 

  (i) All individuals serving as Stellar’s principal executive officer or acting in a similar capacity during the last completed fiscal year (“PEO”), regardless of compensation level;

  

(ii)Stellar’s two most highly compensated executive officers other than the PEO who were serving as executive officers at the end of the last completed fiscal year; and

 

(iii)Up to two additional individuals for whom disclosure would have been provided under (ii) above but for the fact that the individual was not serving as an executive officer of Stellar at the end of the last completed fiscal year.

 

Stellar’s named executive officers for its fiscal year ended September 30, 2018 were Frank R. Oakes, CEO, President and Chairman of the Board; Kathi Niffenegger, CPA, CFO and Corporate Secretary; and Gregory T. Baxter, Ph.D., Executive Vice President of Corporate Development.

 

STELLAR’S EXECUTIVE COMPENSATION

 

The following table sets forth information regarding the compensation awarded to, earned by or paid to the named executive officers during the fiscal year ended September 30, 2018.

 

Summary Compensation Table

 

 

Name and Principal Position

  Fiscal Year     Salary ($)     Bonus ($)     Stock Awards
($)(1)
    Option
Awards
($)(2)
    All Other
Compensation
($)
    Total ($)  
Frank R. Oakes     2018       264,813       50,000       -       32,443       28,297 (4)     343,110  
President, Chief Executive Officer and Chairman of the Board     2017       257,100     $ 25,000     $ 296,969 (3)   $     $ 23,669     $ 602,738  
Kathi Niffenegger, CPA     2018       208,637       60,512       -       28,387       19,039 (5)     288,188  
Chief Financial Officer and Corporate Secretary     2017       202,560       20,000       -       19,744       18,526       260,830  
Gregory T. Baxter, Ph.D.     2018       152,438       -       -       24,332       17,179 (6)     169,617  
Executive Vice President of Corporate Development(7)     2017       157,372       500       -       15,605       18,406     191,883  

 

  

  (1) The amounts shown in this column represent the aggregate grant date fair value of the share awards based on the closing price on Nasdaq, not the actual amounts paid to or realized by the named executive officer during the covered fiscal year.  It differs from the amounts recorded in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification 718, which were based on the share value at the inception of the performance share plan in April 2010 expensed over the estimated vesting period ended August 31, 2012.  The vesting requirements of these awards are set forth in Note 8 to Stellar’s audited consolidated financial statements for the year ended September 30, 2018 included in the Annual Report.

 

  (2) The amounts shown in this column represent the aggregate grant date fair value of the share option awards computed in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification 718, not the actual amounts paid to or realized by the named executive officers during the covered fiscal year. The assumptions used in determining grant date fair value of these awards are set forth in Note 8 to Stellar’s audited consolidated financial statements for the year ended September 30, 2018 included in the Annual Report.

  

(3)33,670 shares were issued under Stellar’s Performance Share Plan.

 

(4)Represents (i) $20,197 in health insurance and (ii) $8,100 in 401(k) Company contributions.

 

(5)Represents (i) $12,962 in health insurance and (ii) $6,077 in 401(k) Company contributions.

 

(6)Represents (i) $12,679 in health insurance and (ii) $4,500 in 401(k) Company contributions.

 

  (7) Dr. Baxter’s employment with Stellar began December 1, 2016.  On March 7, 2019 Dr. Baxter notified Stellar of his decision to retire as Executive Vice President of Corporate Development, effective March 22, 2019. Dr. Baxter was a director of Stellar from August 15, 2012 until December 1, 2016. Other compensation includes $1,050 in director fees in fiscal 2017.

 

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Employment Agreements

 

Stellar does not have employment agreements currently in effect with any of Stellar’s named executive officers. Like Stellar’s other employees, Stellar’s executives are eligible for annual salary increases and discretionary equity grants.

 

Outstanding Equity Awards at 2018 Fiscal Year-End

 

The following table summarizes the equity awards made to Stellar’s named executive officers that were outstanding at September 30, 2018.

   Option Awards  
Name  Award grant
date
  Number of
securities
underlying
unexercised
options (#)
exercisable
   Number of
securities
underlying
unexercised
options (#)
unexercisable
(1)
   Option
exercise
prices ($)
   Option
expiration
date
 
Frank R. Oakes  4/13/12   5,366    - $  CDN29.40    4/13/19 
   3/12/18   1,905    3,809(2)   US5.88    3/12/25 
Kathi Niffenegger, CPA  6/18/12   1,286    -    CDN20.30    6/18/19 
   12/19/12   714    -    CDN17.50    12/19/19 
   5/14/13   1,286    -    CDN40.60    5/14/20 
   11/1/13   1,429    -    US128.10    11/1/20 
   11/12/14   1,286    -    CDN106.40    11/12/21 
   12/22/15   1,429    -    US50.68    12/22/22 
   12/20/16   1,429    -    US14.21    12/20/23 
   3/12/18   1,667    3,333(3)   US5.88    3/12/25 
Gregory T. Baxter, Ph.D.  8/16/12   1,000    -    CDN25.90    8/16/19 
   11/12/14   179    -    CDN106.40    11/12/21 
   3/28/17   476    953(4)   US11.20    3/28/24 
   3/12/18   1,429    2,857(5)   US5.88    3/12/25 

 

(1)Stellar’s options vesting policy is described in the Outstanding Equity Awards Narrative Disclosure section.

 

(2)The options for past service will vest 1,905 at 3/12/19 and 1,904 at 9/12/19.

 

(3)The options for past service will vest 1,667 at 3/12/19 and 1,666 at 9/12/19.

 

(4)The options for future service will vest 476 at 3/28/19 and 477 at 3/28/20.

 

(5)The options for past service will vest 1,429 at 3/12/19 and 1,428 at 9/12/19.

 

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Outstanding Equity Awards Narrative Disclosure

 

Incentive Compensation Plan 

 

Stellar adopted the 2017 Plan administered by the Stellar Board, which amended and restated the 2013 fixed share option plan (the “2013 Plan”). Options, restricted shares and restricted share units are eligible for grant under the 2017 Plan. The number of shares available for issuance under the 2017 Plan is 228,143, including shares available for the exercise of outstanding options under the 2013 Plan. The purpose of the 2017 Plan is to advance the interests of Stellar by encouraging equity participation through the acquisition of Stellar Common Shares. The Stellar Board is responsible for the general administration of the 2017 Plan and the proper execution of its provisions, its interpretation and the determination of all questions arising thereunder. Specifically, the Stellar Board has the power to, among other things:

 

·Allot Stellar Common Shares for issuance in connection with the exercise of options;

 

·grant options, restricted shares or restricted share units;

 

·amend, suspend, terminate or discontinue the plan; and

 

·delegate all or a portion of its administrative powers as it may determine to one or more committees.

 

Options, restricted shares or restricted share units may be awarded to Stellar’s directors, officers, employees and consultants.

 

Options to purchase 70,498 Stellar Common Shares at prices ranging from CDN$17.50 to CDN$130.90 and $5.88 to $128.10 are outstanding at September 30, 2018. No restricted shares or restricted share units have been granted as of September 30, 2018.

 

Options granted during fiscal 2018 to employees and consultants under the 2017 Plan totaled 28,902 options to purchase Stellar Common Shares, at exercise prices ranging from $5.88 to $6.51.

 

Options Vesting Policy 

 

Options granted for past service are subject to the following vesting schedule: (a) one-third of the option shall vest on the date of grant; (b) one-third of the option shall vest 12 months from the date of grant; and (c) the remaining one-third of the option shall vest 18 months from the date of grant. Options granted for future service are subject to the following vesting schedule: (x) one-third shall vest at 12 months from the date of grant, (y) one-third shall vest at 24 months from the date of grant and (z) one-third shall vest at 36 months from the date of grant.

 

Retirement Benefits

 

Stellar has established a 401(k) plan to provide retirement benefits to eligible executive officers and employees. Employees may enter the plan after they have been employed by Stellar for at least three consecutive months. Under the plan, Stellar contributes a flat non-elective contribution of 3% of eligible compensation for each plan participant at the end of the calendar year. Any Company contributions Stellar made to the plan for Stellar’s named executive officers are reflected in the “All Other Compensation” column of the Summary Compensation Table above.

 

Other than the funds contributed under Stellar’s 401(k) plan, no other funds were set aside or accrued by Stellar during fiscal 2018 or 2017 to provide pension, retirement or similar benefits for Stellar’s named executive officers.

 

STELLAR’S DIRECTOR COMPENSATION

 

The following table sets forth information regarding the compensation of Stellar’s non-employee directors for the fiscal year ended September 30, 2018.

 

 

Name

  Fees Earned or
Paid in Cash
($)
   Option
Awards
($) (1)
   All Other
Compensation
($)
   Total  ($) 
Deborah F. Aghib, Ph.D.  $5,850   $4,267(2)  $-   $10,117 
Tessie M. Che, Ph.D.   4,450    2,028(3)   -    6,478 
Paul Chun   8,300    2,028(3)   -    10,328 
David L. Hill, Ph.D.   6,200    2,028(3)   -    8,228 
Daniel E. Morse, Ph.D.   1,700    2,028(3)   -    3,728 
Charles V. Olson, D.Sc.   6,200    2,028(3)   4,025(4)   12,253 
Mayank D. Sampat   9,700    2,028(3)   -    11,728 

 

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  (1) The amounts shown in this column represent the aggregate grant date fair value of the share option awards computed in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification 718, not the actual amounts paid to or realized by the directors during the fiscal year. The assumptions used in determining grant date fair value of these awards are set forth in Note 8 to Stellar’s audited consolidated financial statements for the year ended September 30, 2018 included in the Annual Report.

  

(2)The option awards were issued under Stellar’s 2017 Plan, with 357 options for future service vesting in thirds beginning January 2019 and 357 options for past service vesting in thirds beginning March 2018. See footnote 5 below for Outstanding Equity Awards at Fiscal Year-End.

 

(3)The option awards were issued under Stellar’s 2017 Plan for past service, with 357 options vesting in thirds beginning March 2018. See footnote 5 below for Outstanding Equity Awards at Fiscal Year-End.

 

(4)Represents (i) $2,625 in consultant fees and (ii) $1,400 for service as member of Stellar’s Scientific Advisory Board.

 

(5)Outstanding Equity Awards at 2018 Fiscal Year-End

 

The following table summarizes the equity awards made to Stellar’s directors that were outstanding at September 30, 2018.

 

 

Name

  Outstanding 
Options (#)
 
Deborah F. Aghib, Ph.D.   714 
Tessie M. Che, Ph.D.   2,071 
Paul Chun   1,071 
David L. Hill, Ph.D.   2,142 
Daniel E. Morse, Ph.D.   3,149 
Charles V. Olson, D.Sc.   1,250 
Mayank D. Sampat   2,071 

  

Non-Employee Director Compensation Policy

 

Pursuant to Stellar’s non-employee director compensation policy, non-employee directors receive $1,000 for each Stellar Board meeting attended in person and $350 for each Stellar Board meeting attended by telephone. Members of Stellar Board committees also receive $350 for each committee meeting attended. Non-executive directors may also receive share option awards at the discretion of the Stellar Board.

 

Non-Employee Directors on Stellar’s Scientific Advisory Board

 

Dr. Morse (through September 28, 2018) and Dr. Olson are members of Stellar’s Scientific Advisory Board. As compensation for their services, the members of Stellar’s Scientific Advisory Board receive certain advisory fees and expense reimbursements. Amounts for their services as members of Stellar Scientific Advisory Board are reflected in the Director Compensation table above.

 

Compensation Committee Interlocks and Insider Participation

 

The members of Stellar’s Compensation Committee during the fiscal year ended September 30, 2018 were Paul Chun (through March 27, 2018), David Hill (chairman through March 27, 2018), Charles Olson (chairman beginning March 27, 2018) and Mayank Sampat.

 

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None of the individuals who served as a member of the Compensation Committee during fiscal 2018 was at any time during fiscal 2018 an officer or employee of Stellar.

 

Securities Authorized for Issuance Under Equity Compensation Plans

 

Equity Compensation Plan Information

 

The following table provides certain information as of September 30, 2018 about the Stellar Common Shares that may be issued under Stellar’s equity compensation plans, which consists of Stellar’s 2017 Plan:

 

 

Plan category

  Number of securities 
to be issued upon 
exercise of 
outstanding options, 
warrants and rights
   Weighted-average 
exercise price of 
outstanding options, 
warrants and rights
   Number of securities 
remaining available for 
future issuance under 
equity compensation plans 
(excluding securities 
reflected in column (a))
 
    (a)    (b)    (c) 
Equity compensation plans approved by security holders   70,498   $25.42    157,645 
Equity compensation plans not approved by security holders   N/A    N/A    N/A 
Total   70,498   $25.42    157,645 

 

STELLAR’S CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

 

There are no relationships or related transactions between Stellar and any of its officers, directors, five-percent security holders or their families that require disclosure in this Proxy Statement under Item 404(a) of Regulation S-K, except as follows:

 

Stellar has entered into indemnification agreements with each of Stellar’s executive officers and directors. Such indemnification agreements require Stellar to indemnify these individuals to the fullest extent permitted by law.

 

Policies and Procedures for Review of Related Party Transactions

 

The Audit Committee reviews, approves and oversees any transaction between Stellar and any “related person” (as defined in Item 404 of Regulation S-K) and any other potential conflict of interest situations, on an ongoing basis. Under these policies and procedures, the Audit Committee is to be informed of transactions subject to review before their implementation. The procedures establish Stellar’s practices for obtaining and reporting information to the Audit Committee regarding such transactions on a periodic and an as-needed basis. The policy provides that such transactions are to be submitted for approval before they are initiated but also provides for ratification of such transactions. No director who is interested in a transaction may participate in the Audit Committee’s determinations as to the appropriateness of such transaction.

 

Section 16(a) Beneficial Ownership Reporting Compliance

 

Section 16(a) of the Exchange Act requires that Stellar’s directors, executive officers, and greater-than-10% shareholders file reports with the SEC on their initial beneficial ownership of the Stellar Common Shares and any subsequent changes. To Stellar’s knowledge, based solely on a review of copies of such reports furnished to Stellar by Stellar’s officers and directors during the fiscal year ended September 30, 2018, Stellar believes that all such filings met all applicable Section 16(a) requirements, except that due to an administrative error, one late Form 4, reporting four late transactions, was filed on March 14, 2018 for Daniel E. Morse, Ph.D., a former member of the Stellar Board.

 

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STELLAR’S SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 

 

The following tables set forth certain information as of March 25, 2019, with respect to the beneficial ownership of the Stellar Common Shares by: (1) all of Stellar’s directors; (2) Stellar’s named executive officers listed in the Summary Compensation Table; (3) all of Stellar’s current directors and executive officers as a group; and (4) each person known by Stellar to beneficially own more than 5% of the outstanding Stellar Common Shares.

 

Stellar has determined beneficial ownership in accordance with the rules of the SEC. Except as indicated by the footnotes below, Stellar believes, based on the information furnished to us, that the persons and entities named in the table below have sole voting and investment power with respect to all Stellar Common Shares that they beneficially own, subject to applicable community property laws.

 

Stellar Common Shares subject to options or warrants currently exercisable or exercisable within 60 days of March 25, 2019, are deemed outstanding for computing the share ownership and percentage of the person holding such options and warrants, but are not deemed outstanding for computing the percentage of any other person. The percentage ownership of the Stellar Common Shares of each person or entity named in the following table is based on 5,330,715 Stellar Common Shares outstanding as of March 25, 2019.

 

Directors and Officers

 

Name and Address of Beneficial Owner (1)  Amount and
Nature of Beneficial
Ownership
   Percent of Shares
Beneficially
Owned
 
Frank R. Oakes   57,100(2)   1.1%
Kathi Niffenegger, CPA   12,193(3)   * 
Gregory T. Baxter, Ph.D.   4,513(4)   * 
Deborah F. Aghib, Ph.D.   476(5)   * 
Tessie M. Che, Ph.D.   2,071(6)   * 
Paul Chun   952(7)   * 
David L. Hill, Ph.D.   2,428(8)   * 
Charles V. Olson, D.Sc.   1,131(9)   * 
Mayank D. Sampat   2,071(10)   * 
           
All directors and executive officers as a group (9 persons)   82,935(11)   1.5%

 

* Percentage of shares beneficially owned does not exceed one percent.

 

(1)Unless otherwise indicated, the address of each beneficial owner is c/o Stellar Biotechnologies, Inc., 332 E. Scott Street, Port Hueneme, California 93041.

 

  (2) This amount includes (i) 9,176 shares issuable upon the exercise of options currently exercisable or exercisable within 60 days of March 25, 2019; and excludes (ii) 910 common shares issuable upon the exercise of outstanding options currently exercisable or exercisable within 60 days of March 25, 2019 which are held by Mr. Oakes’ spouse who has sole voting and dispositive power over the securities, and as to which Mr. Oakes disclaims beneficial ownership. Mr. Oakes does not have the power to vote or dispose of, or to direct the voting or disposition of, the shares held by his spouse, or with respect to any shares acquired under her outstanding options.

 

  (3) Represents 12,193 shares issuable upon the exercise of options currently exercisable or exercisable within 60 days of March 25, 2019.

 

  (4) Represents 4,513 shares issuable upon the exercise of options currently exercisable or exercisable within 60 days of March 25, 2019.

 

  (5) Represents 476 shares issuable upon the exercise of options currently exercisable or exercisable within 60 days of March 25, 2019.

 

  (6) Represents 2,071 shares issuable upon the exercise of options currently exercisable or exercisable within 60 days of March 25, 2019.

  

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  (7) Represents 952 shares issuable upon the exercise of options currently exercisable or exercisable within 60 days of March 25, 2019.

 

  (8) This amount includes 2,142 shares issuable upon the exercise of options currently exercisable or exercisable within 60 days of March 25, 2019.

 

  (9) Represents 1,131 shares issuable upon the exercise of options currently exercisable or exercisable within 60 days of March 25, 2019.

 

  (10) Represents 2,071 shares issuable upon the exercise of options currently exercisable or exercisable within 60 days of March 25, 2019.

 

  (11) This amount includes 34,725 shares issuable upon the exercise of options currently exercisable or exercisable within 60 days of March 25, 2019.

   

Shareholders Known by Us to Own 5% or More of Our Common Shares

 

Name and Address of Beneficial Owner  Amount
and
Nature of
Beneficial
Ownership
   Percent of
Shares
Beneficially
Owned
 
Intracoastal Capital, LLC (1)
245 Palm Trail
Delray Beach, FL 33483
   494,300    8.49%

 

(1) Voting and investment power over the shares held by Intracoastal Capital, LLC (“Intracoastal”) is exercised by the co-managers of Intracoastal, Mitchell P. Kopin and Daniel P. Asher. Such amount includes (a) 390,000 Stellar Common Shares issuable upon exercise of a Series A Warrant which contains a blocker provision under which the holder thereof does not have the right to exercise the warrant to the extent that such exercise would result in beneficial ownership by the holder thereof, together with the holder’s affiliates, and any other person or entity acting as a group together with the holder or any of the holder’s affiliates, of more than 9.99% of the Stellar Common Shares and (b) 104,300 Stellar Common Shares issuable upon exercise of a Common Warrant which contains a blocker provision under which the holder thereof does not have the right to exercise the warrant to the extent that such exercise would result in beneficial ownership by the holder thereof, together with the holder’s affiliates, and any other person or entity acting as a group together with the holder or any of the holder’s affiliates, of more than 4.99% of the Stellar Common Shares.

  

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AUDIT COMMITTEE REPORT

 

This Audit Committee Report shall not be deemed to be “soliciting material” or to be filed with the SEC or subject to Regulation 14A or 14C under the Exchange Act, or to the liabilities of Section 18 of the Exchange Act. Notwithstanding anything to the contrary set forth in any of Stellar’s previous filings under the Securities Act of 1933, as amended (the Securities Act), or the Exchange Act that might incorporate future filings, including this proxy statement, in whole or in part, this report shall not be incorporated by reference into any such filings.

 

The Audit Committee reviews Stellar’s financial reporting process on behalf of the Stellar Board. Management has the primary responsibility for the financial statements and the reporting process. Stellar’s independent registered public accounting firm is responsible for expressing an opinion on the conformity of Stellar’s audited financial statements to accounting principles generally accepted in the United States.

 

In this context, the Audit Committee has reviewed and discussed Stellar’s audited financial statements with management and the independent registered public accounting firm. The Audit Committee has discussed with Moss Adams LLP the matters required to be discussed by Auditing Standard No. 1301 (Communication with Audit Committees) as adopted by the Public Company Accounting Oversight Board (the PCAOB). In addition, the Audit Committee has received the written disclosures and letter from Moss Adams LLP required by the applicable requirements of the PCAOB regarding the communications with the Audit Committee concerning independence, and has discussed with Moss Adams LLP that firm’s independence.

 

In reliance on the reviews and discussions referred to above, the Audit Committee recommended to the Stellar Board that Stellar’s audited financial statements be included in Stellar’s Annual Report on Form 10-K for the year ended September 30, 2018, for filing with the SEC.

 

The foregoing report has been furnished by the members of the Audit Committee.

 

Mayank D. Sampat, Chairman
Deborah F. Aghib
Paul Chun

  

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PROPOSAL NO. 3
APPOINTMENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

The Audit Committee has appointed Moss Adams LLP to serve as Stellar’s independent registered public accounting firm for the year ending September 30, 2019, and the Stellar Board has ratified such appointment. The Stellar Board has directed that a resolution to appoint Moss Adams LLP as Stellar’s independent registered public accounting firm until the close of the 2020 annual meeting of shareholders, be presented to Stellar shareholders for approval at the Annual Meeting.

 

Representatives of Moss Adams LLP are expected to be at the Annual Meeting, will have an opportunity to make a statement if they so desire and will be available to respond to appropriate questions

 

Independent Registered Public Accounting Firm Fees and Services

 

The following table shows the aggregate fees paid or accrued for audit and other services provided for the years ended September 30, 2018 and 2017 rendered by Moss Adams LLP.

 

Type of Service

  Fiscal Year 2018   Fiscal Year 2017 
Audit Fees  $235,000   $190,000 
Audit-Related Fees        
Tax Fees        
All Other Fees        
Total  $235,000   $190,000 

 

Audit Fees consisted of fees incurred for professional services rendered for audits of the years ended September 30, 2018 and 2017 and include procedures related to registrations and offerings.

 

Pre-Approval Policies and Procedures

 

The Audit Committee is directly responsible for the appointment, compensation and oversight of Stellar independent registered public accounting firm. It has established procedures for the receipt, retention, and treatment of complaints received by Stellar regarding accounting, internal accounting controls, or auditing matters, and the confidential, anonymous submission by Stellar employees of concerns regarding questionable accounting or auditing matters. The Audit Committee also has the authority and the funding to engage independent counsel and other outside advisors.

 

The Audit Committee pre-approves all audit and permissible non-audit services provided by the independent registered public accounting firm. These services may include audit services, audit-related services, tax services and other services. Pre-approval is generally provided for up to one year, and any pre-approval is detailed as to the particular service or category of services and is generally subject to an amount or range of estimated fees. All proposed engagements of the independent registered public accounting firm for audit and permitted non-audit services are submitted to the Audit Committee for approval prior to the beginning of any such services. Stellar’s independent registered public accounting firm is required to periodically report to the Audit Committee regarding the extent of services provided by the independent registered public accounting firm in accordance with the pre-approval, and the fees for the services performed to date. The Audit Committee may also pre-approve particular services on a case-by-case basis. The Audit Committee pre-approved 100% of the audit services performed by Stellar’s independent registered public accounting firm for the fiscal year ended September 30, 2018.

 

Changes In and Disagreements with Accountants on Accounting and Financial Disclosure

 

None.

 

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Vote Required

 

The affirmative vote of the holders of a majority of votes cast in person or represented by proxy and entitled to vote at the Annual Meeting is required to appoint Moss Adams LLP as Stellar’s independent registered public accounting firm until the close of the 2020 annual meeting of shareholders. With regard to this proposal, shares which are entitled to vote but abstain from voting on a matter will be excluded from the vote and will have no effect on its outcome.

 

THE STELLAR BOARD RECOMMENDS THAT THE STELLAR SHAREHOLDERS VOTE “FOR” PROPOSAL NO. 3 TO APPOINT THE INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM .

 

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PROPOSAL NO. 4
ADJOURNMENT PROPOSAL

 

Stellar is asking you to approve a proposal to approve one or more adjournments of the Annual Meeting to a later date or dates, if necessary, to solicit additional proxies if, at the time of the Annual Meeting, there are insufficient votes to approve the issuance of Stellar Common Shares in the Exchange (Proposal No. 1).

 

If the Stellar shareholders approve the adjournment proposal, Stellar could adjourn the Annual Meeting and any adjourned session of the Annual Meeting and use the additional time to solicit additional proxies, including the solicitation of proxies from Stellar shareholders that have previously returned properly executed proxies voting against the issuance of Stellar Common Shares in the Exchange. Among other things, approval of the adjournment proposal could mean that, even if Stellar had received proxies representing a sufficient number of votes against the proposal to approve the issuance of Stellar Common Shares in the Exchange, such that the proposal would be defeated, Stellar could adjourn the Annual Meeting without a vote and seek to convince the holders of Stellar Common Shares to change their votes to votes in favor of the issuance of Stellar Common Shares in the Exchange.

 

If the Annual Meeting is adjourned, shareholders who have already submitted their proxies will be able to revoke them at any time before such proxies are voted at the Annual Meeting, as adjourned. If the adjournment is for more than 30 days, a notice of the adjourned meeting shall be given to each shareholder of record entitled to vote at the meeting.

 

Vote Required

 

The affirmative vote of the holders of a majority of the Stellar Common Shares cast in person or represented by proxy and entitled to vote at the Annual Meeting is required to adjourn the meeting (whether or not a quorum is present). Abstentions and broker non-votes will not affect the outcome of this Proposal No. 4.

 

THE STELLAR BOARD RECOMMENDS THAT THE STELLAR SHAREHOLDERS VOTE “FOR” PROPOSAL NO. 4 TO APPROVE THE ADJOURNMENT PROPOSAL.

 

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STELLAR’S BUSINESS

 

For a description of Stellar’s business, please refer to the section titled “Business” set forth in the Annual Report, which section is incorporated by reference herein.

 

EDESA’S BUSINESS

 

Overview

 

Edesa Biotech Inc., incorporated in 2015 under the laws of the Province of Ontario, Canada, is a biopharmaceutical company focused on acquiring, developing and commercializing clinical stage drugs for dermatological and gastrointestinal indications with clear unmet medical needs. Edesa’s lead product candidate, referred to as “EB01,” is a novel sPLA2 inhibitor for the topical treatment of chronic ACD. EB01 employs a novel mechanism of action and in two clinical studies has demonstrated statistically significant improvement of multiple symptoms in contact dermatitis patients. Edesa’s IND application for EB01 was accepted by the FDA in November 2018 and Edesa is in the early stages of conducting a 160 patient Phase 2B clinical study evaluating EB01. Edesa expects the first patient to be enrolled in the Phase 2B clinical study by midyear.

 

Edesa also intends to expand the utility of its sPLA2 inhibitor technology, which forms the basis for EB01, across multiple indications, which could include acne or other inflammatory disorders. For example, “EB02” is a sPLA2 inhibitor formulated to treat hemorrhoids, and Edesa is planning to evaluate EB02 in a proof-of-concept study in the second half of 2019. In addition to EB01 and EB02, Edesa has licensed technology to treat other indications such as anal fissures, and is in discussions with third parties to expand its portfolio with assets to treat other serious skin and gastrointestinal conditions.

 

Competitive Strengths

 

Edesa believes that it possesses several competitive strengths that position it to become a leading biopharmaceutical company focused on inflammatory diseases, including:

 

  · Novel pipeline addressing large underserved markets. Edesa’s product candidates are novel clinical-stage compounds that have significant scientific rationale for effectiveness. By initially targeting markets that have significant unmet medical needs, Edesa believes that it can drive adoption of new products and improve the company’s competitive position. For example, Edesa believes that the novel, non-steroidal mode of action of its lead product candidate, EB01, will be an appealing alternative for managing the chronic symptoms of ACD.

 

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  · Intellectual property protection and market exclusivity. Edesa has opportunities to develop its competitive position through patents, trade secrets, technical know-how and continuing technological innovation. Edesa has exclusive license rights in its target indications to multiple patents and pending patent applications in the United States and in various foreign jurisdictions. In addition to patent protection, Edesa intends to utilize trade secrets and market exclusivity afforded to a New Chemical Entity, where applicable, to enhance or maintain its competitive position.

 

·Experienced management and drug development capabilities. Edesa’s leadership team possesses core capabilities in dermatology, gastrointestinal medicine, drug development and commercialization, chemistry, manufacturing and controls, public company management and finance. Edesa’s founder, Chief Executive Officer, President and Secretary, Dr. Pardeep Nijhawan, MD, FRCPC, AGAF, is a board-certified Gastroenterologist and Hepatologist with a successful track record of building life science businesses, including Medical Futures, Inc., which he sold to Tribute Pharmaceuticals in 2015. In addition to Edesa’s internal capabilities, Edesa has also established a network of key opinion leaders, contract research organizations, contract manufacturing organizations and consultants. As a result, Edesa is well positioned to efficiently develop novel dermatological and gastrointestinal treatments.

 

Edesa’s Business Strategy

 

Edesa’s business strategy is to develop and commercialize innovative drug products that address unmet medical needs for large, underserved markets with limited competition. Key elements of Edesa’s strategy include:

 

 

  · Establish EB01 as the leading treatment for chronic ACD. Edesa’s primary goal is to obtain regulatory approval for EB01 and commercialize EB01 for use in the treatment of ACD. Based on promising clinical trial results in which patients treated with EB01 experienced significant improvements of their symptoms with minimal side effects, Edesa subsequently initiated a Phase 2B clinical study evaluating EB01 in 2019. Edesa expects the first patient to be enrolled in the Phase 2B clinical study by midyear.

 

  · Selectively targeting additional indications within the areas of dermatology and gastroenterology. In addition to Edesa’s ACD program, Edesa plans to efficiently generate proof-of-concept data for other programs where the inhibition of sPLA2 may have a therapeutic benefit. For example, EB02, a therapeutic expansion of EB01, is indicated for hemorrhoids, and Edesa is currently planning to evaluate this formulation in a proof-of-concept study in the second half of 2019. Edesa also believes there are indications such as acne where the inhibition of sPLA2 activity may result in clinical benefit to patients.

 

·In-license promising product candidates. Edesa is applying its cost-effective development approach to advance and expand its pipeline. Edesa’s current product candidates are in-licensed from academic institutions or other pharmaceutical companies, and Edesa plans to continue to evaluate and in-license assets that can drive long-term growth potential. Edesa does not currently intend to invest significant capital in basic research, which can be expensive and time-consuming.

 

·Capture the full commercial potential of Edesa’s product candidates. If Edesa’s product candidates are successfully developed and approved, Edesa may build commercial infrastructure capable of directly marketing the products in North America and potentially other major geographies of strategic interest. Edesa also plans to evaluate strategic licensing arrangements with pharmaceutical companies for the commercialization of Edesa’s drugs, where applicable, such as in territories where a partner may contribute additional resources, infrastructure and expertise.

  

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Allergic Contact Dermatitis

 

ACD is a common, potentially debilitating condition that can affect patients’ quality of life and is caused by an allergen interacting with skin. ACD is characterized by inflammation, erythema, pruritus, and blistering of the skin and skin inflammation can vary from mild irritation and redness to open sores, depending on the type of irritant, the body part affected, and the degree of sensitivity. ACD may be exacerbated with scratching, leading to a worsening of the disease and ACD can become chronic if not treated or if the causative allergen is not removed. ACD usually occurs on areas of the body that have been directly exposed to the environment with a high prevalence on the hands and face. Common allergens associated with ACD include plants, metals (especially nickel in jewelry), dye (hair colorants), adhesives, and various fragrances or perfumes. Many patients are exposed to their allergen in the workplace, which often results in patients leaving work to go on long-term disability. The disease is common in occupations that involve repeated hand washing or repeated exposure of the skin to water, food materials, and other irritants. High-risk occupations include cleaning, healthcare, food preparation, and hairdressing.

 

Contact dermatitis can be either irritant contact dermatitis or ACD. According to published literature, contact dermatitis is one of the most common occupational health illnesses in the United States, which has been estimated to cost approximately $2 billion annually, as a result of lost work, reduced productivity, medical care and disability payments. Based on published literature and U.S. insurance claims data, Edesa estimates that there are more than 13.2 million people in the United States with contact dermatitis, with between 20% and 60% of all cases of contact dermatitis diagnosed as ACD. Edesa believes EB01 will primarily benefit those who have chronic ACD, which based on its research, represents approximately 1.2 million patient candidates for EB01 in the United States alone.

 

In ACD, during the initial contact with the offending allergen, the immune system is sensitized. Upon subsequent contact, a cell-mediated allergic response is carried out at the point of contact between the skin and the allergen. More specifically, ACD involves an exogenous substance binding a cell surface protein to form a hapten that is recognized as a foreign antigen by the immune system. Haptens are known to signal through toll-like receptors (TLRs), a family of receptors involved in the innate immune system recognizing pathogens, leading to the induction of pro-inflammatory cytokines such as interleukin (IL)-1β. EB01 has been shown in preclinical studies to inhibit the production of pro-inflammatory cytokines induced via toll-like receptor signaling (IL-1β, IL-6, IL-8, MIP-1α, and TNFα), suggesting EB01 may address the underlying disease mechanism of ACD.

 

Diagnosis of ACD is typically based upon the appearance of the skin and the history of exposure to an allergen. Currently, patch testing is the standard for identifying the allergen causing the reaction; however, it is a lengthy procedure that only identifies the offending allergen approximately 50% of the time according to Edesa’s internal research. ACD can become chronic if the causative allergen is not removed or otherwise treated.

 

Generally, dermatologists view chronic ACD from both a duration and recurrence lens, considering how often and how long symptoms persist. Chronic disease affects patients over a prolonged period (greater than six months or even years) that have either frequent intermittent exposure or continuous exposure. Since inflammation in ACD is driven by external exposure to an allergen, the severity of ACD does not necessarily correlate with body surface area, as is often the case with other dermatological diseases.

 

The current mainstay of treatment is to identify and remove exposure to the allergen. However, in approximately 70% of cases, the allergen exposure cannot be eliminated, which leads to ACD becoming chronic in nature. Edesa’s research also suggests that approximately 40% of chronic patients are consistently exposed to the allergen in question and the most common reasons for this are that the allergen cannot be identified, or the allergen is present in the patient’s workplace. Edesa believes that its product candidate, EB01, could be successful in treating patients where the allergen cannot be removed or identified and thus address a significant unmet medical need.

  

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Current Treatments for Contact Dermatitis

 

To Edesa’s knowledge, there are no treatment options specifically indicated for ACD. As such, physicians must utilize agents approved for other dermatology conditions. Topical corticosteroids (“TCs”) are the most commonly used therapeutic intervention for ACD but are, according to Edesa’s internal research, able to manage disease symptoms in only about 45% of patients. TCs also have well-known side-effects including skin thinning, stretch marks, acne, testicular atrophy, nosebleeds, stinging, burning and dryness. Other treatments for ACD include topical calcineurin inhibitors (“TCIs”). However, they are less efficacious than TCs and have an FDA “black box warning” for risk of malignancies. Systemic corticosteroids can be used for acute control of severe cases of ACD but have safety concerns including hypothalamic-pituitary-adrenal axis suppression, growth suppression and loss of bone-density, thereby limiting the utility of steroids for treating chronic disease. The last resort for patients is systemic immunomodulators which have a series of “black box warnings” and associated safety issues. Systemic therapies also need to be tapered off each time the physician wants to patch test allergens to identify the source of a patient’s ACD.

 

A summary of the treatment algorithm for ACD is presented below.

 

 

 

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Product Candidates

 

The sPLA2 enzyme family plays a key role in initiating inflammation associated with many diseases. Edesa believes that targeting the sPLA2 enzyme family with enzyme inhibitors will have a superior anti-inflammatory therapeutic effect because the inflammatory process will be inhibited at its inception rather than after inflammation has occurred. Edesa’s lead product candidate, EB01, is a novel sPLA2 inhibitor for the topical treatment of chronic ACD. EB01 has demonstrated anti-inflammatory activity in a variety of in vitro and in vivo preclinical pharmacology models. In addition, EB01 has demonstrated efficacy for the treatment of ACD in two previous clinical trials, as further described below under the heading “Clinical Data.”

 

Edesa’s IND and clinical trial application (“CTA”) for EB01 have been accepted by both the FDA and Health Canada (“HC”), respectively. Edesa is in the early stages of conducting a double-blind, dose-ranging vehicle-controlled adaptive design clinical trial to evaluate the safety and efficacy of EB01 in a population with moderate to severe ACD with a body surface area of less than 10%. This innovative trial design allows for enrollment up to 160 patients into a four-week double-blind period with blinded interim analysis after enrollment of an initial cohort of patients treated with either 2% EB01 or placebo. The interim analysis will inform the final number of study subjects, but also has a provision to terminate the study if the conditional probability indicates a successful result is unlikely. While the latter scenario is undesirable, terminating the study at the interim analysis would allow Edesa to preserve a significant amount of capital to deploy on its other programs. Edesa anticipates completing the initial blinded portion of this Phase 2B clinical trial by year-end 2019 with final results in mid-to-late 2020.

 

EB02 is Edesa’s second product candidate based on its sPLA2 inhibitor technology designed for use in hemorrhoids. Hemorrhoids, which are characterized by the inflammation and swelling of veins around the anus or lower rectum, can cause bleeding, itching, pain and difficulty defecating. As reported by the National Institute of Diabetes and Digestive Kidney Diseases, hemorrhoids affect approximately 12.5 million adults in the USA. Despite such a high prevalence, Edesa is not aware of any FDA-approved prescription drugs for the treatment of hemorrhoids in the USA. While there are commonly used prescription and over the counter (“OTC”) products for hemorrhoids, such as Anusol, Preparation H and some herbal preparations, none has been formally approved by the FDA because they entered the market prior to 1962. Most of these treatments provide only temporary relief from the symptoms of hemorrhoids and do not address the cause of hemorrhoids. These treatments’ mechanism of action is either general, such as steroids, or unknown, in the case of herbal remedies, and Edesa is not aware of any reports published in medical journals on the efficacy or safety of any product currently marketed in the USA for the treatment of hemorrhoids.

 

Edesa plans on evaluating EB02 in a proof of concept trial to aid in the design of subsequent clinical studies needed for approval. In addition to EB01 and EB02, Edesa also intends to expand the utility of its sPLA2inhibitor technology across multiple indications, which could include acne or other inflammatory disorders. Edesa has licensed technology to treat other indications such as anal fissures and is in discussions with third parties to expand its portfolio with assets to treat other serious skin and gastrointestinal conditions.

 

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Development of Edesa’s Clinical Pipeline for its Product Candidates

 

Select Pre-clinical Results

 

A variety of in vitro and in vivo pre-clinical pharmacology models were used to assess EB01’s anti-inflammatory activity. Using a model for hapten signaling indicative of ACD, lipopolysaccharide-stimulated peripheral blood mononuclear cells were treated with EB01 and shown to inhibit pro-inflammatory cytokines including IL-1β, IL-6, IL-8, MIP-1α, and TNFα at the protein and mRNA expression levels. Additionally, the safety of EB01 has been established in several Good Laboratory Practice (“GLP”) toxicology studies, including an 8-week study involving topical application of 2.0% EB01 cream to minipigs and a 6-week continuous infusion study in rats. Overall, EB01 was well-tolerated and systemic exposure was negligible (below the limit of detection). No genotoxicity has been demonstrated in bacterial reverse mutation and micronucleus testing.

 

Clinical Data

 

Clinical experience with EB01 includes five clinical studies involving a total of 176 subjects. No serious adverse reactions were encountered throughout these clinical studies. Under IND, healthy volunteers were treated with EB01 under occlusion. EB01 was classified as a weak sensitizer by maximization assay (Grade 1) and is, therefore, considered safe to use under any conditions. EB01 has demonstrated efficacy for the treatment of ACD in two separate clinical trials. Both studies were double-blind, vehicle-controlled bilateral comparison studies to assess the safety, tolerability, and efficacy of EB01 cream applied twice daily for the treatment of ACD of the hand and forearm as determined by the physician’s visual assessment (“PVA”). The PVA is a composite endpoint, which grades each symptom of the disease (dryness, scaling, redness, pruritus, and fissures) scored from 0 (none) to 3 (severe), with a maximum severity score of 15. A diagnosis of ACD was confirmed by a positive patch test deemed to be clinically relevant by the investigator.

 

The first study (n = 11) was a double-blind, placebo-controlled clinical study to assess the safety and efficacy of topical 1.0% EB01 cream for the treatment of ACD. Subjects selected for inclusion had bilateral ACD. Prior to randomization, subjects were patch tested. Patch tests were applied to the upper part of each subjects’ back for 2 days and were read on Days 2 and 4. Only “++” reactions were considered clinically relevant and positive for the study. The study was bilateral in design with one lesion treated with 1.0% EB01 cream twice daily, while a comparable lesion was treated with placebo cream. Disease severity was assessed before treatment (Day 0) and at Day 30 by the investigator using the PVA. For each individual patient, the change in disease score in the drug-treated hand was compared to that in the placebo-treated hand, thus making the latter an internal control for each patient. The mean change from baseline for 1.0% EB01 cream treated lesions was 69.9%, compared to 36.5% in the placebo cream lesions (p = 0.0024). No serious adverse events were reported.

 

A second, larger (n = 30) bilateral study was conducted to assess 2.0% EB01 cream applied twice daily for 21 consecutive days in connection with the treatment of ACD. To be included in the study, patients had to have bilateral ACD with a PVA score of at least 10 on each side, with no more than a 1-point difference between lesions. At Day 21, EB01-treated lesions had a mean improvement from baseline of 58%, compared to 24% for those treated with placebo cream (p < 0.001).

 

 

 

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Improvements were seen for each of the individual PVA parameters graded (dryness, scaling, redness, pruritus, and fissures), indicating that each aspect contributed to the overall effect of the treatment (as shown in Table 1 below). Efficacy of the 2.0% EB01 cream was maintained through Day 42 (21-days after ending treatment) with a 49% decrease in total PVA score for 2.0% EB01 cream-treated hands, compared to 15% in the vehicle-treated hands (p < 0.001).

 

Table 1. Percent Change from Baseline to Day 21 — Comparison between treatment groups using Paired T-test/Wilcoxon Rank Sum Test  (n = 30)

 

Endpoint     EB01   Vehicle   P-Value 
Total Physicians Visual Assessment  Mean % Change from Baseline   -56%   -24%   <0.001 
Scaling*  Mean % Change from Baseline   -48%   -20%   <0.001 
Redness*  Mean % Change from Baseline   -47%   -20%   <0.001 
Pruritis*  Mean % Change from Baseline   -63%   -25%   <0.001 
Fissures*  Mean % Change from Baseline   -81%   -46%   <0.001 
Dryness*  Mean % Change from Baseline   -45%   -15%   <0.001 

 

* Data are not normally distributed — P-Values result from Wilcoxon Rank Sum test.

 

Edesa conducted a pre-IND meeting with the FDA to discuss its IND and Phase 2B study design. Edesa’s IND was accepted by the FDA and Edesa is in the early stages of conducting an adaptive design 160-patient dose ranging Phase 2B study in patients with moderate to severe chronic ACD.

 

Intellectual Property

 

As further described below, Edesa has an exclusive license from Yissum Research Development Company, the technology transfer company of the Hebrew University of Jerusalem Ltd. (“Yissum”), for patents and patent applications that cover its product candidates EB01 and EB02 in the United States, Canada, Australia and various countries in Europe. Method of use patents, for which Edesa holds an inbound license from Yissum, have been issued for use in dermatologic and gastrointestinal conditions and infections that will expire in 2024. Edesa expects to seek patent life extension in the United States related to time under its IND, which could add another three to five years of protection. Additional patents subject to the license agreement have been filed by Yissum which Edesa believes, if issued, could potentially block generic substitution until after 2033.

 

Edesa also relies on trade secrets, know-how, continuing technological innovation and other in-licensing opportunities to develop and maintain its proprietary position. In the event Edesa is successful in commercializing a new drug candidate, Edesa would be eligible for regulatory exclusivity, in addition to exclusivity rights granted through patent protection. Edesa would be eligible for five years of regulatory exclusivity after approval in the United States, eight years of regulatory exclusivity in Canada and ten years of regulatory exclusivity in the European Union.

 

Edesa expects patents and other proprietary intellectual property rights to be an essential element of its business. Edesa’s intention is to seek to protect its proprietary positions by, among other methods, filing U.S. and foreign patent applications related to its proprietary technology, inventions, and improvements. Edesa’s success will depend, in part, on its ability to obtain and maintain proprietary protection for its product candidates, technology, and know-how, to operate without infringing on the proprietary rights of others, and to prevent others from infringing Edesa’s proprietary rights.

 

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Material License

 

License Agreement with Yissum

 

On June 29, 2016, Edesa entered into an exclusive license agreement with Yissum to obtain exclusive rights to certain know-how, patents and data relating to a pharmaceutical product. Edesa will use the exclusive rights to develop the product for therapeutic, prophylactic and diagnostic uses in topical dermal applications and anorectal applications. Unless earlier terminated, the term of the license agreement shall expire on a country by country basis on the later of (1) the date of expiry of the last valid licensed patent in such country; (2) the date of expiry of any period of exclusivity granted to a product by a regulatory authority in such country or (3) the date that is fifteen (15) years after the first commercial sale of a product.

 

Under the license agreement, Edesa is committed to payments of various amounts to Yissum upon meeting certain milestones outlined in the license agreement up to an aggregate amount of $18,600,000.

 

Upon divestiture of substantially all of the assets of Edesa, Edesa is obligated to pay Yissum a percentage of the valuation of the licensed technology sold as determined by an external objective expert.

 

Edesa also has a commitment to pay Yissum a royalty based on net sales of the product in countries where Edesa, or an affiliate, directly commercializes the product and a percentage of sublicensing revenue received by Edesa and its affiliates in the countries where the company does not directly commercialize the product.

 

Edesa has undertaken, at its own expense, to use its commercially reasonable efforts to develop the licensed products under the license agreement and to be responsible for the preparation, filing prosecution and maintenance of all patents relating to the licensed technology. The intellectual property rights of the licensed technology are, and will remain, owned by Yissum. Any application for registration of a patent will be registered exclusively to the title of Yissum, is subject to the approval of Yissum and will be made at Edesa’s expense.

 

Subject to certain exceptions, Edesa has undertaken to indemnify Yissum against any liability, including product liability, damage, loss or expense derived from the use, development, manufacture, marketing, sale or sublicensing of the licensed product and technology.

 

If Edesa defaults or fails to perform any of the terms, covenants, provisions or its obligations under the license agreement, Yissum has the option to terminate the license agreement, subject to providing Edesa an opportunity to cure such default.

 

Manufacturing, Marketing, and Sale of Edesa’s Drugs

 

Edesa relies on third-parties for the synthesis, formulation, and manufacturing, including optimization, technology transfers and scaling up of clinical scale quantities of all of its product candidates. Edesa believes that this strategy will enable it to direct operational and financial resources to the development of its product candidates rather than diverting resources to establishing manufacturing infrastructure. Edesa’s arrangements with its manufacturers are subject to industry-standard terms and conditions and manufacturing is performed on an as-needed basis. Edesa believes there is sufficient manufacturing capacity with its current manufacturers, as well as others, to service its current and future product needs. Edesa does not have current plans to establish laboratories or manufacturing facilities for significant clinical production.

 

Synthetic drugs, such as those being developed by Edesa, are based on a chemical manufacturing process that requires raw materials, such as various solvents, sugars, fats and polymers. There are many suppliers of raw materials for these products and, in recent years, no material changes have occurred with respect to the prices of these raw materials that are required for the research, development and manufacturing of the drugs Edesa is developing.

  

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Because Edesa is focused on the discovery and development of drugs, Edesa does not have any marketing or distribution capabilities, nor is it at a stage where it would have any customers.

 

If Edesa receives marketing approval in the United States, Canada or Europe for EB01 to treat ACD or approval of any other product candidate, Edesa plans to build the capabilities to commercialize the product candidate for the approved indication(s) in the applicable region with Edesa’s own focused, specialized sales force. Outside of the United States and Canada, Edesa plans to selectively utilize collaboration, distribution or other marketing arrangements with third parties to commercialize its product candidates. Also, Edesa intends to selectively seek licensing, collaboration or similar arrangements to assist it in furthering the development or commercialization of product candidates, such as EB01, targeting large primary care markets that must be served by large sales and marketing organizations.

 

Competition

 

The development and commercialization of new drugs is highly competitive. Edesa will face competition with respect to all product candidates it may develop or commercialize in the future from pharmaceutical and biotechnology companies worldwide. The key factors affecting the success of any approved product will be its efficacy, safety profile, drug interactions, method of administration, pricing, reimbursement and level of promotional activity relative to those of competing drugs. If approved, Edesa would expect EB01 to potentially compete with approved TCs, TCIs, and with product candidates currently under development.

 

Many of Edesa’s potential competitors have substantially greater financial, technical, and personnel resources than Edesa. In addition, many of these competitors have significantly greater commercial infrastructure. Edesa’s ability to compete successfully will depend largely on its ability to leverage its collective experience in drug discovery, development and commercialization to:

 

·discover and develop medicines that are differentiated from other products in the market;
·obtain patent and/or proprietary protection for its medicines and technologies;
·obtain required regulatory approvals;
·obtain a commercial partner;
·commercialize its drugs, if approved; and
·attract and retain high-quality research, development and commercial personnel.

 

Edesa is aware of a limited number of products in development for treatment of ACD and based on Edesa’s knowledge at this time, EB01 appears to be the most advanced product in development to treat this condition. Brickell Biotech has indicated that it expects its next proof of concept trial to be completed in 2021. Leo Pharma A/S, a Danish pharmaceutical company, is developing a product for hand eczema, a broader dermatological condition than ACD.

 

Organizational Structure

 

Edesa is organized under the laws of the Province of Ontario, Canada and does not have any subsidiaries.

 

Employees

 

As of February 7, 2019, Edesa had six full-time employees: three employees are engaged in research and development, and three employees are engaged in management, administration and finance. All employees are located in Canada. None of its employees are members of any labor unions.

 

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Government Regulation

 

Since Edesa does not have the ability to independently conduct clinical trials for its product candidates, Edesa relies on third-parties, such as contract research organizations, medical institutions, and clinical investigators, to perform this function. Edesa’s reliance on these third-parties for clinical development activities reduces its control over these activities. Although Edesa has entered into agreements with these third-parties, it continues to be responsible for confirming that each of its clinical trials are conducted in accordance with its general investigational plan and protocol. Moreover, the FDA will require Edesa to comply with regulations and standards, commonly referred to as good clinical practices, for conducting, recording and reporting the results of clinical trials to assure that the data and the reported results are credible and accurate and that the trial participants are adequately protected. Edesa’s reliance on third-parties does not relieve it of these responsibilities and requirements. To date, Edesa believes its contract research organizations and other similar entities with which it is working have performed their obligations in material compliance with their agreements with Edesa. However, if these third parties do not successfully carry out their contractual duties or meet expected deadlines, Edesa may be required to replace them.

 

Edesa plans to seek approvals for its product candidates in the United States from the FDA and in Canada from HC. Therefore, Edesa currently is, and may in the future be, subject to a variety of national and regional regulations governing clinical trials and commercial sales and distribution of its products, if any. Edesa currently has an FDA approved IND and HC approved CTA to test EB01 on patients. Edesa’s Phase 2B study protocol has been approved by a central Institutional Review Board (“IRB”). An IRB is a committee that has been formally designated to approve, monitor, and review biomedical and behavioral research involving humans.

 

United States

 

The FDA and comparable regulatory agencies in foreign, state, and local jurisdictions impose substantial requirements upon the clinical development, manufacturing, marketing and distribution of drugs. These agencies and other applicable federal, state and local entities regulate research and development activities and the testing, manufacture, quality control, safety, effectiveness, labeling, storage, record keeping, approval, advertising and promotion of Edesa’s product candidates and commercialized drugs.

 

In the United States, the FDA regulates drugs under the Federal Food, Drug and Cosmetic Act (21 U.S.C. ch. 9 § 301 et seq) and implementing regulations. The process required by the FDA before Edesa’s product candidates may be marketed in the United States generally involves the following:

 

·completion of extensive pre-clinical laboratory tests, animal studies and formulation studies, performed in accordance with the FDA’s good laboratory practice, or GLP, regulations and other applicable requirements;
·submission to the FDA of an IND which must become effective before clinical trials may begin;
·performance of adequate and well-controlled clinical trials to establish the safety and efficacy of the product candidate for each proposed indication;
·submission of a New Drug Application, NDA, to the FDA;
·satisfactory completion of an FDA pre-approval inspection of the manufacturing facilities at which the product is produced to assess compliance with current good manufacturing practice, or cGMP, regulations;
·FDA review and approval of the NDA prior to any commercial marketing, sale or shipment of the drug; and
·regulation of commercial marketing and sale of drugs.

 

The testing and review processes require substantial time, effort and financial resources, and Edesa cannot be certain that any approvals for its product candidates will be granted on a timely basis, if at all. Pre-clinical tests include laboratory evaluation of product chemistry, formulation and stability, as well as studies to evaluate toxicity in animals. The results of pre-clinical tests, together with manufacturing information and analytical data, are submitted as part of an IND to the FDA. The IND automatically becomes effective 30-days after receipt by the FDA, unless the FDA, within the 30-day time frame, raises concerns and/or questions about the conduct of the clinical trial, including concerns that human research subjects will be exposed to unreasonable health risks. In such a case, the IND sponsor and the FDA must resolve any outstanding concerns before the clinical trial can begin. A separate submission to an existing IND must also be made for each successive clinical trial conducted during product development. Further, an independent IRB for each medical center proposing to conduct the clinical trial must review and approve the plan for any clinical trial before it commences at that center and it must monitor the clinical trial until completed. The FDA, the IRB or the clinical trial sponsor may suspend a clinical trial at any time on various grounds, including a finding that the subjects or patients are being exposed to an unacceptable health risk. Clinical testing also must satisfy extensive good clinical practice regulations for informed consent.

 

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Clinical Trials

 

For purposes of an NDA submission and approval, clinical trials are typically conducted in the following three sequential phases, which may overlap:

 

·Phase 1:  The clinical trials are initially conducted in a limited population to test the product candidate for safety, dose tolerance, absorption, metabolism, distribution and excretion in healthy humans or, on occasion, in patients, such as cancer patients. Phase 1 clinical trials can be designed to evaluate the impact of the product candidate in combination with currently approved drugs.

 

·Phase 2:   These clinical trials are generally conducted in a limited patient population to identify possible adverse effects and safety risks, to determine the efficacy of the product candidate for specific targeted indications and to determine dose tolerance and optimal dosage. Multiple Phase 2 clinical trials may be conducted by the sponsor to obtain information prior to beginning a larger and more expensive Phase 3 clinical trial.

 

·Phase 3:   These clinical trials are commonly referred to as pivotal clinical trials. If the Phase 2 clinical trials demonstrate that a dose range of the product candidate is effective and has an acceptable safety profile, Phase 3 clinical trials are then undertaken in large patient populations to further evaluate dosage, to provide substantial evidence of clinical efficacy and to further test for safety in an expanded and diverse patient population at multiple, geographically dispersed clinical trial sites.

 

In some cases, the FDA may conditionally approve an NDA for a product candidate on the sponsor’s agreement to conduct additional clinical trials to further assess the drug’s safety and effectiveness after NDA approval.

 

New Drug Application

 

The results of product candidate development, pre-clinical testing and clinical trials are submitted to the FDA as part of an NDA. The NDA also must contain extensive manufacturing information. Once the submission has been accepted for filing, by law the FDA has 180-days to review the application and respond to the applicant. The review process is often significantly extended by FDA requests for additional information or clarification. The FDA may refer the NDA to an advisory committee for review, evaluation and recommendation as to whether the application should be approved. The FDA is not bound by the recommendation of an advisory committee, but it generally follows such recommendations. The FDA may deny approval of an NDA if the applicable regulatory criteria are not satisfied, or it may require additional clinical data. Even if such data are submitted, the FDA may ultimately decide that the NDA does not satisfy the criteria for approval. Data from clinical trials are not always conclusive and the FDA may interpret data differently than Edesa or its collaborators do. Once issued, the FDA may withdraw a drug approval if ongoing regulatory requirements are not met or if safety problems occur after the drug reaches the market. In addi