UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 20-F

[]

¨

REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

[ X]

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

For the fiscal year endedAugust 31, 20122013

OR

[      ]

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

For the transition period from ____________ to __________

OR

[      ]

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

Date of event requiring this shell company report ………………………………

Stellar Biotechnologies, Inc.

(Exact name of Registrant as specified in its charter)

British Columbia, Canada

(Jurisdiction of incorporation or organization)

332 E. Scott Street, Port Hueneme, CA 93041

 (Address(Address of principal executive offices)

Securities to be registered pursuant to Section 12(b) of the Act:

None

Securities to be registered pursuant to Section 12(g) of the Act:

Common Shares, without par value

(Title of Class)

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None

Indicate the number of outstanding shares of each of the Company’s classes of capital or common stock as of the close of the period covered by the annual report.45,413,56157,946,160 Common Shares

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes ___     ¨No_X_  x

If this report is an annual or a transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of theSecurities Exchange Act of 1934. Yes__¨ No_X_x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 12 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past ninety days.

Yes_X_xNo_ _¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer __                                             ¨Accelerated filer  __¨ Non-accelerated filer Xx

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

U.S. GAAP [ X ]

International Financial Reporting Standards as issued

Other [   ]

by the International Accounting Standards Board [ X ]

Indicate by check mark which financial statement item the registrant has elected to follow:

Item 17_X_¨Item 18 ___x

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes___¨ No_X_xN/A__¨

Under the Jumpstart Our Business Startups Act of 2012 (the "JOBS Act"), Stellar is classified as an "Emerging Growth Company". Under the JOBS Act, Emerging Growth Companies are exempt from certain reporting requirements, including the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act. Under this exemption, the company’sCompany’s auditor will not be required to attest to and report on management’s assessment of the company’s internal controls over financial reporting during a five-year transition period. The Company is also exempt from certain other requirements, including the requirement to adopt certain new or revised accounting standards until such time as those standards would apply to private companies. The Company will remain an Emerging Growth Company for up to five years, although it will lose that status earlier if revenues exceed US$1 billion, or if the Company issues more than US$1 billion in non-convertible debt in a three year period, or if the market value of the common stock held by non-affiliates exceeds US$700 million.

Page 2 of 131

Index to Exhibits on Page 9690

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Stellar Biotechnologies Inc.

Form 20-F Annual Report

Table of Contents

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INTRODUCTION

Stellar Biotechnologies, Inc. (or(“Stellar” or the “Company”) was incorporated on June 12, 2007 in Canada under theCanada Business Corporations Act under the name China Growth Capital Inc. The Company was originally classified as a Capital Pool Corporation ("CPC") and changed its name to CAG Capital Inc. ("CAG") on April 15, 2008 and was classified as a Capital Pool Company ("CPC") when it was listed on the TSX Venture Exchange on August 29, 2008. On November 25, 2009, the Company was continued into British Columbia under theBritish Columbia Business Corporations Act. On April 7, 2010, the Company changed its name to Stellar Biotechnologies Inc. and subsequently completed its qualifying transaction through a reverse merger transaction with Stellar Biotechnologies Inc. ("Stellar CA"), a corporation incorporated under the laws of the State of California on September 9, 1999. Our principal offices are located at 332 East Scott Street, Port Hueneme, CA, USA 93041. Our telephone number is (805) 488-2800.

BUSINESS OF STELLAR BIOTECHNOLOGIES INC.

Stellar BiotechnologiesThe Company is a biotechnology research and production company involvedengaged in the productionresearch, development, manufacture and marketingcommercialization of Keyhole Limpet Hemocyanin ("KLH") as well as the development of new technologyand related to the cultureproducts and production of KLH and subunit KLH ("suKLH"), a more refined product from KLH primarily used in human vaccines. Stellar extracts the KLH from limpets raised in its own aquaculture facilities and manufactures and sells the pharmaceutical grade KLH and suKLH to third parties for use in the development of vaccines and diagnostic products.technologies.

KLH is a potently immunogenic (i.e.high molecular weight (HMW), immune-stimulating protein widely used in immunological applications, both as an active pharmaceutical ingredient (API) in certain immune therapies (such as for the treatment of cancer, infectious diseases and immune disorders) and as a substance that induces anfinished product for testing immune response) high-molecular-weight protein produced from California giant keyhole limpets (Megathura crenulata), a large saltwater molluskstatus in patients and research settings.

KLH is refined from the California coasthemolymph of a relatively scarce ocean mollusk, the Giant Keyhole Limpet (Megathura crenulata). KLH has a long history of safe use in a wide variety of clinical and research applications.

The KLH products produced by the only speciesCompany are not unique as ingredients for pharmaceutical use and there is competition with other companies in the production and sale of its type. KLH operates as a carrier moleculeproducts for vaccine antigens (substances that promote the generation of antibodies) against cancers and infectious agents. pharmaceutical use.

The combination of an antigen against specific tumor cell-types, conjugated to the Immunogenic ("IMG") KLH molecule, is the basis for a proven strategy for a new class of drugs known as therapeutic vaccines. Potent yet proven safe in humans, KLH is a critical component of several important therapeutic vaccines including vaccines for lymphoma, bladder, breast, colon, and other cancers.

StellarCompany currently has only limited revenue from commercial sales of its KLH products. Commercial sales are highly dependent upon the rate of development and clinical trials of active immunotherapies, therapeutic vaccines and other therapeutic drugs that utilize thepharmaceutical products, being developed by other companies, in which Company's KLH products by third-party customers.are utilized. The advancement of these vaccinesthird-party pharmaceutical technologies is dependent upon many factors, including available capital, clinical trial recruitment, and regulatory review, and revenue from these customers is highly variable.

FINANCIAL AND OTHER INFORMATION

In this Annual Report, unless otherwise specified, all dollar amounts are expressed in United States Dollars.

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FORWARD-LOOKING STATEMENTS

CertainThis Annual Report contains forward-looking statements in this document constituteand information (collectively “forward-looking statements”.) within the meaning of U.S. and Canadian securities laws. Some, but not all, forward-looking statements can be identified by the use of words such as “anticipate,” “believe,” “plan,” “estimate,” “expect,” andor “intend,” or statements that an action or event “may,” “might,“will,” “would,” “could,” “should,” or “will” be taken or“might” occur, or other similar expressions. Although the Company has attempted to identify important factors that could cause actual results to differ materially from expected results, such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Registrant,Company, or other future events, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factorsrisks and uncertainties include, among others, the following risks:availability of funds and resources to pursue our research and development projects, the risks associated with outstanding litigation, if any, risks associated with product development;successful and timely completion of clinical studies in which our products are utilized, the needdegree of market acceptance for additional financing;our products or for other companies’ products in which our products are components, the ability of the Company to take advantage of business opportunities in the pharmaceutical industry, the ability of the Company to protect its intellectual property, uncertainties and risks related to carrying on business in foreign countries; environmental liability claims and insurance;regulatory processes, the volatility of our common share price, the effect of competition, reliance on key personnel; the potential for conflicts of interest among certain officers, directors or promoterspersonnel, and general changes in economic conditions. The forward-looking statements in this Annual Report are made as of the Registrant with certain other projects;date of this discussion and are subject to change after such date.

Except as required by law, the absence of dividends; currency fluctuations; competition; dilution; the volatility of the Registrant’s common share price and volume; and tax consequencesCompany does not undertake any obligation to U.S. Shareholders. We are obligated to keep our information current andpublicly update or revise any forward-looking statements becausemade or incorporated in this Annual Report, whether as a result of new information, future events or otherwise. To the extent that any statements made in this document contain information that is not historical, these statements are considered forward-looking. The cautionary statements made in this report should be read as applying to forward-looking statements wherever they appear in this report.

PartPART I

Item 1. Identity of Directors, Senior Management and Advisors

Not Applicable

Item 2. Offer Statistics and Expected Timetable

Not Applicable

Item 3. Key Information

As used within this Annual Report, the terms “Stellar”, “the Company”, “Issuer”, and “Registrant” refer collectively to Stellar Biotechnologies, Inc., its predecessors, subsidiaries and affiliates.subsidiary.

SELECTED FINANCIAL DATAA. Selected Financial Data

The selected financial data of the Company for the Years Ended August 31, 2013, 2012 and 2011, respectively, are derived from the financial statements of the Company which have been audited by D+H Group LLP, Chartered Accountants, as indicated in its auditor'sauditors’ report which is included elsewhere in this Annual Report. The financial data for the Years Ended August 31, 2010 and 2009 are derived from the financial statements of the Company, which have also been audited by D+H Group LLP, but are not included herein.

The Company has not declared any dividends on its common shares since incorporation and does not anticipate that it will do so in the foreseeable future. The present policy of the Company is to retain future earnings, if any, for use in its operations and the expansion of its business.

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Table No. 11a is derived from the financial statements of the Company, which have been prepared in accordance with International Financial Reporting Standards for the fiscal years ended August 31, 2013, 2012 and 2011. The auditor conducted its audits in accordance with Canadian generally accepted auditing standards, and the standards of the Public Company Accounting Oversight Board (United States).

Table No. 11a

Selected Financial Data

(US$ in 000, except per share data)

IFRS

In this Annual Report, unless otherwise specified, all dollar amounts are expressed

Table No. 1b is derived from the financial statements of the Company, which have been prepared in United States Dollars ($).  accordance with Canadian Generally Accepted Accounting Standards (GAAP) and included a reconciliation note to US GAAP for the fiscal years ended August 31, 2010 and 2009. The Company adopted IFRS effective September 1, 2010. Therefore, the information in Table No. 1b is not comparable with the information for fiscal years ended August 31, 2013, 2012 and 2011.

Table No. 1b

Selected Financial Data

(US$ in 000, except per share data)

Canadian GAAP

B. Statement of Capitalization and Indebtedness

Not Applicable

C. Reasons for the Offer and Use of Proceeds

Not Applicable

D. Risk Factors

An investment in the Common Shares of the Company must be considered speculative due to the nature of the Company’s business and the present stage of research and development. In particular, the following risk factors apply:

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Risks Relating to the Operations of the Company

Research and Developmentdevelopment of drugs and medical products can be costly and require years of research and development activities.

The Company is expending substantial resources on research and development of its products and aquaculture technology. MuchMany of the Company’s products and technology istechnologies are at the development stage, and may never be commercially successful. The Company’s future success will be in part dependent upon the Company’s ability to successfully develop its products, the ability to obtain the required regulatory approvals, the protection of its processes and products, and commercial acceptance of its products.

The Company may not achieve its projected development goals in the timeframes it announces and expects.

The Company has established certain developmental goals, and made public statements regarding the anticipated timing of meeting its objectives. The timing of these events may be affected by various factors, including financial limitations, progress and timing of third-party developmental activities, delays or failures of regulatory approvals and clinical trials, and delays and failures in increasing KLH aquaculture and production. Any inability to meet its projected goals could have a negative effect on the Company’s operations and financial position.

The Company may be unable to achieve certain milestones associated with external partnerships.

Certain of the Company’s agreements entered into the past and that may be entered into the future with third parties include certain milestones the Company must meet in order to obtain payments and continue the partnership agreements. If the Company were unable to achieve these milestones, it would have a negative effect on the Company’s operations and financial condition. Additionally, it would likely curtail future development programs, which would also have a negative effect on the Company’s operations.

The Company depends on third parties for its manufacturing operations.

The Company is currently dependent upon a small number of contractors and locations for its manufacturing capacity. The Company does not currently have backup manufacturing capacity for some of its key products. If the Company is unable to retain its current contractors, or is unable to obtain new contractors to provide manufacturing services, it will have a negative effect on the Company’s operations. These contract manufacturers provide services to many biotechnology and research companies, and such third party contractors may not provide theacceptable quality, quantity or costs required by the Company. In addition, they may not be able to provide the services required on a schedule acceptable to the Company. These issues may result in the Company being unable to manufacture its products in the required quantities or at an acceptable cost, which would have a negative effect on the Company’s financial condition.

The Company has been and expects to be significantly dependent on collaborative and supply agreements for the development and sales of the Company’s products.

In conducting the Company’s research and development and commercialization activities, the Company currently relies, and expects to continue to rely, on numerous collaborative and supply agreements with third parties such as contract research organizations, commercial partners, universities, governmental agencies and not-for-profit organizations for both strategic and financial resources. Key among these agreements are the Amaran Biotechnology collaboration agreement and two Neovacs supply agreements. The termination of these relationships, or failure to perform by the Company or the Company’s partners (who are subject to regulatory, competitive and other risks) under their applicable agreements or arrangements with the Company, or the Company’s failure to secure additional agreements for the Company’s product candidates, would substantially disrupt or delay the Company’s research and development and commercialization activities, including anticipated clinical trials and commercial sales. Any such loss would likely increase the Company’s expenses and materially harm the Company’s business, financial condition and results of operation.

Rapid technological change could make the Company’s products obsolete.

New developments in products, methods or technology may negatively affect the development and sale of some or all of the products utilizing the Company’s products and technology, and may render them obsolete. New product development and/or modification is costly, requires significant research and development time and expense, and may not necessarily result in the successful commercialization of any new product. If the Company is unable to enhance and improve its products, or to develop and introduce new products that incorporate new technologies that achieve market acceptance, it may have a negative effect on the Company’s operations and financial position.

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Protection of Patentspatents and Proprietary Rights isproprietary rights are limited.

The Company’s success will depend in part on its ability to protect its proprietary rights and technologies. The Company relies upon a combination of contractual arrangements, licenses, patents, trade secrets and know-how to protect its proprietary technology and rights. These measures may not apply or may afford only limited protection. The Company may not have adequate remedies for any infringement or funds to take action against those infringing, or that its trade secrets will not otherwise become known or independently developed by competitors. There can be no assurance that any current or future patents licensed by or applied for by the Company will be upheld, if challenged, or that the protections afforded will not be circumvented by others.The patent positions of biotechnology and pharmaceutical companies, which involve licensing agreements, are frequently uncertain and involve complex legal and factual questions. In addition, the coverage claimed in a patent application can be significantly reduced before the patent is issued. Consequently, the Company’s patents, patent applications and licensed rights may not provide protection against competitive technologies or may be held invalid if challenged or could be circumvented.If the Company enters litigation in regards to its business or to protect or enforce its patents, it may involve substantial expenditures and require significant management attention, even if the Company ultimately prevails. If the Company is unable to protect its intellectual property rights, it may result in the loss of valuable technologies and undermine its competitive position, which would have a negative effect on the Company’s operations and financial position.

The Company competes with other companies in KLH production and manufacturing.

The Company competes with other companies in the production and sale of KLH and suKLHproducts for pharmaceutical use. The KLH and suKLHproducts produced by the Company are not unique as ingredients for pharmaceutical use from that produced by other companies. ManySome of these other companies, both public and private, have greater financial and personnel resources than the company,Company, and have greater sales and marketing experience in the industry than the Company. If they are able to produce and sell KLH and suKLHproducts for less than the Company, it will have a negative effect on the Company's ability to operate successfully and will have a negative effect on the Company's operations and financial position.

The Company is subject to substantial government regulation.

The Company is subject to various laws, regulations, regulatory actions and court decisions at the local, State and Federal level in the United States and other countries. Failure to obtain regulatory approvals or delays in obtaining regulatory approvals by the Company, its collaborators, customers, vendors or service providers will adversely affect the development or marketing of its products and services. Changes in the regulatory environment could adversely affect the ability of the Company to attain its corporate objectives and obligations. Any new government regulation that affects biotechnology companies or relate specifically to the Company’s processes and products may increase the Company’s costs and price of its systems. These regulations may have a negative effect on the Company’s operations and financial condition.

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The Company's customers face uncertainties related to regulatory approval.

A primary market for the Company's KLH products is for the use in the commercial manufacture and sale of vaccines.active immunotherapies. The therapeutic drug industry is subject to significant government regulation, and many of the products developed by the Company's customers that utilize Stellar'sthe Company’s KLH are not yet approved for commercial sale. Before regulatory approvals for the commercial sale of any products is granted, a drug must be demonstrated through preclinical testing and clinical trials to be safe and effective for their intended use in humans. The process to determine safety and efficacy, including clinical trials, is expensive and prolonged. The time necessary to complete these processes and trials and submit applications for the regulatory approvals is difficult to predict and is subject to numerous factors, and these trials may not be successful. Larger or later stage clinical trials may not produce the same results as earlier trials. Successful results in clinical trials may not result in regulatory approval, due to certain factors including unacceptable side effects or safety issues.Even if regulatory approval is granted for any drug or product that utilizes the Company's products, it will be subject to ongoing regulatory requirements, which include registration, manufacturing, labeling, advertising and promotion, packaging, distribution, record keeping and reporting, and storage. Manufacturing facilities are subject to continual review and inspection, and failure to meet these regulatory requirements can interrupt delay, or shut down these facilities. Previously unknown problems may result in regulatory restrictions on such products, including withdrawal from the marketplace.Delays in obtaining regulatory approvals for products from third party customers which use the Company's products, or failure to obtain or maintain regulatory approvals altogether, would have a negative effect on market demand for the Company's products, and have a negative effect on the Company's operations and financial condition.

Even if the Company obtains marketing approval, its products will be subject to ongoing regulatory review.

If the Company or its partnerscustomers receive regulatory approval to market any product, they will be subject to ongoing regulatory requirements, which include registration, manufacturing, labeling, advertising and promotion, packaging, distribution, record keeping and reporting, and storage. Manufacturing facilities, both those operated by the Company and its vendors, are subject to continual review and inspection, and failure to meet these regulatory requirements can interrupt delay, or shut down these facilities. Previously unknown problems with the Company's products, or products produced by others which utilize the Company's products, may result in regulatory restrictions on such products, including withdrawal from the marketplace. These factors could have a negative effect on the Company's operations and financial condition.

The Company may not be able to manufacture its products in commercial quantities, which would prevent it from marketing its products.

Currently, the production of KLH by the Company is limited, and itthe Company has not been determined if it is economiceconomical to manufacture KLH and related products on a large scale. The Company contracts with third-party vendors for the manufacture of its products, and may be unable to establish and maintain relationships with qualified manufacturers in order to produce sufficient supplies of its finished products. If the Company were unable to produce economicthe requested quantities of its products, it would have a negative effect on the Company's operations and financial condition.

The Company may not be able to meet demand for KLH from either wildocean harvest or internally raised sourcessources.

The Company is dependent upon a supply of California giant keyhole limpets (Megathura crenulata)(Megathura crenulata) for KLH production. The range of keyhole limpets in the wild is limited, and due to the lack of a regulated harvest, the wild stocks ofM. crenulata are believed to be declining. If the wild stocks are depleted, and the Company's hatchery and aquaculture operations are unable to produce sufficient supplies of captiveM. crenulata to meet demand, it would have a negative effect on the Company's operations and financial condition.

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The Company has limited marketing, sales and distribution experience.

The Company and its personnel have limited experience in the marketing, sales and distribution of KLH-based therapeutic or diagnostic products. The Company may not be able to establish its marketing, sales and distribution capabilities itself, or establish agreements with its collaborators, licensees or third parties to successfully perform these tasks. If the Company contracts or makes arrangements with third parties for the sales and marketing of its products, Company revenues will be dependent on the efforts of these third parties, whose efforts may not be successful. If the Company markets any of its products directly, it must either internally develop or acquire a marketing and sales force, which would require substantial resources and management attention.

The Company’s products, if approved, may fail to achieve market acceptance.

If the Company or its customers is successful in developing its products, or products produced by others which utilize the Company's products, and receives the required approvals from the applicable regulatory authorities, itssuch products may not achieve market acceptance. The Company’s and its customers’ current and intended products will compete with a number of drugs and other products currently available in the marketplace, as well as other products currently under development from other pharmaceutical companies. The market acceptance of any of the Company’s products, or products produced by others which utilize the Company's products, will depend on a number of factors, including the demonstration and establishment of the efficacy and safety, as well as their advantages over other alternative products.

The Company is subject to the risk of product liability claims, for which it may not have, or be able to obtain, adequate insurance coverage.

The Drugdrug industry is subject to product liability claims in the event of adverse effects, even in respect to products that have received regulatory approval for commercial sale. Such claims might be made directly by consumers, healthcare providers or by pharmaceutical companies, or others selling or utilizing the Company's products. Although the Company currently maintains liability insurance of up to $2 million for its products, it may not be able to obtain or maintain sufficient and affordable insurance coverage for all claims that may occur. Any product liability claims would require management attention and related costs, and would have a negative effect on the Company's operations and financial condition.

The Company’s products may not obtain adequate reimbursement from third party payers and the Company’s products and formulations may be limited if new restrictive legislation is adopted.

The continuing efforts of government and insurance companies, health maintenance organizations and other payers of healthcare costs to contain or reduce costs of health care may affect the Company’s future revenues and profitability, and the future revenues and profitability of the Company’s potential customers, suppliers and collaborative partners and the availability of capital. While we cannot predict whether any such legislative or regulatory proposals will be adopted, the announcement or adoption of such proposals and related laws, rules and regulations could materially harm the Company’s business, financial conditions, results of operations or stock price. Moreover, the passage of the Patient Protection and Affordable Care Act in 2010, and efforts to amend or repeal such law, has created significant uncertainty relating to the scope of government regulation of healthcare and related legal and regulatory requirements, which could have an adverse impact on sales of the Company’s products,or products produced by others which utilize the Company's products.

The Company may face environmental risks related to handling regulated substances.

The Company’s and the Company’s partners’ research and clinical development activities, as well as the manufacture of materials and products, are subject to federal, state and local laws, rules, regulations and policies governing the use, generation, manufacture, storage, air emission, effluent discharge, handling and disposal of certain materials, biological specimens and wastes. The Company may be required to incur significant costs to comply with environmental and health and safety regulations in the future. The Company’s research and clinical development, as well as the activities of the Company’s manufacturing and commercial partners, both now and in the future, may involve the controlled use of hazardous materials, including but not limited to certain hazardous chemicals. The Company cannot completely eliminate the risk of accidental contamination or injury from these materials. In the event of such an occurrence, the Company could be held liable for any damages that result and any such liability could exceed the Company’s resources.

Risks Relating to the Financing of the Company

Management included a "Going Concern" note in the financial statements.

Management has included “going concern” disclosure as described in Note 1 of the Company's Consolidated Financial Statements for the year ended August 31, 2012. Without raising additional financial resources or achieving profitable operations, there is substantial doubt about the ability of the Company to continue as a going concern. If the Company is unable to meet these necessary requirements, it will not be able to fulfill its business plan and be forced to reduce certain operations or cease operations altogether.

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The Company has a history of net losses and limited cash flow to sustain operations.

The Company currently has limited revenue from product sales, and anticipates its planned research and development expenditures, as well as its general and administrative expenses, will be greater than its revenues for the foreseeable future. The Company has incurred net losses of ($14,886,513) in fiscal 2013, ($5,196,696) in fiscal 2012 and ($3,597,279) in fiscal 2011, and as of August 31, 20122013 has an accumulated deficit of ($10,317,513)25,204,026) since inception. The Company has paid no dividends on its shares since incorporation and does not anticipate doing so in the foreseeable future. The Company has historically relied upon the sale of common shares to help fund its operations and meet its obligations. Any future additional equity financing would cause dilution to current stockholders. If the Company does not have sufficient capital for its operations, management would be forced to reduce or discontinue its activities, which would have a negative effect on the Company’s operations and financial condition.

The Company willmay require additional financing which could result in substantial dilution to existing shareholdersshareholders.

The Company anticipates that it willmay require additional funds to meet its anticipatedfuture obligations, for fiscal 2013, which willwould likely require the sale of additional common shares in order to raise funds required to meet its budgeted expenditures and obligations. Management currently estimates that the Company's operations, including research and development, capital expenditures and general and administrative expenses, will require approximately $3$4.3 million perfor the upcoming fiscal year. Management believes that the Company currently has enough capital to sustain operations for at least the next 12 months. The Company believes its cash and cash equivalents at August 31, 2013, and the $12 million gross proceeds raised during the September 2013 private placement are sufficient to meet estimated working capital requirements and fund planned operations for at least the next twelve months. Notwithstanding the above, the Company may decide to expand operations, undertake strategic acquisitions or determine some other business need. In such case, the Company would then seek financing for such events. This may occur in the next 6 to 18 months. The Company’s ongoing research and development activities aremay be dependent upon the Company’s ability to obtain the required funds, which is expected to include the sale of common shares, as well as possible debt financings, joint-ventures,joint ventures, or other means. Such sources of financing may not be available on acceptable terms, if at all. Failure to obtain such financing may result in delay or indefinite postponement of research and development of the Company’s current and any future products. Any transaction involving the issuance of previously authorized but unissued shares of common stock,shares, or securities convertible into common stock,shares, could result in dilution, possibly substantial, to present and prospective holders of common stock.shares. These financings may be on terms less favorable to the Company than those obtained previously.

Risks Relating to an Investment in the Securities of the Company

The Company has a dependence upon key management employees, the loss or absence of which could have a negative effect on the Company’s operationsoperations.

The Company strongly depends on the business and technical expertise of its management and key personnel, including President and Chief Executive Officer Frank Oakes, Chief Operating Officer Catherine Brisson, Chief Financial Officer Scott Davis,Kathi Niffenegger, and Executive Vice-President Darrell Brookstein.Chief Technology Officer Herbert Chow. There is little possibility that this dependence will decrease in the near term. The Company only has "at-will" employment agreements with its key management employees and they are free to leave their employment with the Company at any time. As the Company’s operations expand, additional general management resources will be required. The Company may not be able to attract and retain additional qualified personnel and this would have a negative effect on the Company’s operations.

- 11 -Risks Relating to an Investment in the Securities of the Company

The market for the Company’s common stockshares has been subject to volume and price volatility whichthat could negatively affect a shareholder’s ability to buy or sell the Company’s sharesshares.

The market for the common shares of the Company may be highly volatile for reasons both related to the performance of the Company or events pertaining to the biopharmaceutical industry, as well as factors unrelated to the Company or its industry. During the fiscal year ended August 31, 2012,2013, the price of Stellar'sthe Company’s common shares on the TSX Venture Exchange ranged from a high of CDN $0.69$1.74 to a low of CDN $0.25.$0.19. The Company’s common shares can be expected to be subject to volatility in both price and volume arising from market expectations, announcements and press releases regarding the Company’s business, and changes in estimates and evaluations by securities analysts or other events or factors. In recent years the securities markets in the United States and Canada have experienced a high level of price and volume volatility, and the market price of securities of many companies, particularly small-capitalization companies such as the Company, have experienced wide fluctuations that have not necessarily been related to the operations, performances, underlying asset values, or prospects of such companies. For these reasons, the price of the Company’s common shares can also be expected to be subject to volatility resulting from purely market forces over which the Company will have no control. Further, despite the existence of a market for trading the Company’s common shares, in Canada, stockholders of the Company may be unable to sell significant quantities of common shares in the public trading markets without a significant reduction in the price of the stock.

The Company could be deemed a passive foreign investment company, which could have negative consequences for U.S. investorsinvestors.

The Company could be classified as a Passive Foreign Investment Company (“PFIC”) under the United States tax code. If the Company is declared a PFIC, then owners of the Company’s Common Stockcommon shares who are U.S. taxpayers generally will be required to treat any so-called "excess distribution" received on its common shares, or any gain realized upon a disposition of common shares, as ordinary income and to pay an interest charge on a portion of such distribution or gain, unless the taxpayer makes a qualified electing fund ("QEF") election or a mark-to-market election with respect to the Company’s shares. A U.S. taxpayer who makes a QEF election generally must report on a current basis its share of the Company’s net capital gain and ordinary earnings for any year in which the Company is classified as a PFIC, whether or not the Company distributes any amounts to its shareholders.

Broker-Dealers may be discouraged from effectingIf penny stock regulations impose restrictions on the marketability of the Company’s common shares, the ability of Broker Dealers to effect transactions in ourthe Company’s common shares because they are considered "Penny Stocks" and are subjectcould be impaired.

The SEC has adopted regulations that generally define a ‘‘penny stock’’ to the Penny Stock Rules

Rules 15g-1 through 15g-9 promulgated under the Securities Exchange Act of 1934, as amended, impose sales practice and disclosure requirements on FINRA broker-dealers who make a market in "a penny stock".  A penny stock generally includes anybe an equity security that has a market price of less than $5.00 per share that is not registered on certain national securities exchanges or quoted on the NASDAQ system. The additional sales practice and disclosure requirements imposed upon broker-dealers may discourage broker-dealers from effecting transactions in our shares, which could severely limit the market liquidity of the shares and impede the sale of our shares in the secondary market.

Under the penny stock regulations, a broker-dealer selling penny stock to anyone other than an established customer or "accredited investor" (generally, an individual with net worth in excess of US$1,000,000 or an annual income exceeding US$200,000exercise price of less than $5.00 per share, subject to certain exceptions. Exceptions include equity securities issued by an issuer that has (i) net tangible assets of at least $2 million, if such issuer has been in each of the last twocontinuous operation for more than three years, or US$300,000 together with his(ii) net tangible assets of at least $5 million, if such issuer has been in continuous operation for less than three years, or her spouse) must make a special suitability determination(iii) average revenue of at least $6 million for the purchaser and must receivepreceding three years. Unless an exception is available, the purchaser's written consent to the transaction prior to sale, unless the broker-dealer or the transaction is otherwise exempt.

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In addition, the penny stock regulations require, the broker-dealer to deliver,that prior to any transaction involving a penny stock, a risk disclosure schedule prepared bymust be delivered to the US Securities and Exchange Commission relating tobuyer explaining the penny stock market unless the broker-dealer or the transaction is otherwise exempt.  A broker-dealer is also required to disclose commissions payableand its risks.

According to the broker-dealerSEC, the market for penny stocks has suffered in recent years from patterns of fraud and abuse. Such patterns include:

The Company is requiredaware of the abuses that have occurred in the penny stock market. The Company is not in a position to send monthly statements disclosing recent price informationdictate the behavior of the market or of broker-dealers who participate in the market. The Company will strive within the confines of practical limitations to prevent such abuses with respect to the penny stock held in a customer's account and information with respect to the limited market in penny stocks.Company’s common shares.

As a “Foreign Private Issuer”, the Company is exempt from the Section 14 Proxy Rules and Section 16 of the 1934 Securities ActAct.

The submission of proxy and annual meeting of shareholder information (prepared to Canadian standards) on Form 6-K may result in shareholders having less complete and timely data. In addition, the Company's officers, directors and principal shareholders are exempt from the short-swing insider disclosure and profit recovery provisions of Section 16 of the Exchange Act. The exemption from Section 16 rules regarding sales of common shares by insiders may result in shareholders having less data.

Item 4. Information on the Company

DESCRIPTION OF BUSINESS

Introduction

Stellar's operations and executive office isStellar Biotechnologies, Inc. (the “Company” or “Stellar”) was incorporated in Canada on June 12, 2007, under the name China Growth Capital, Inc. The Company’s principal offices are located at:

at 332 East Scott Street,

Port Hueneme, CA, 93041USA 93041. The Company’s telephone number is (805) 488-2800.

Telephone: (805) 488-2147

Facsimile: (805) 488-1278

E-Mail:foakes@stellarbiotech.comordbrookstein@stellarbiotech.com

Website:www.stellarbiotechnologies.com/

The Contact person in Port Hueneme is Frank Oakes, President and CEO, or Darrell Brookstein, Executive Vice-President, Development & Finance.

TheOn April 15, 2008, the Company also maintains a Canadian Regulatory Address located at:

1868 King George Blvd.

South Surrey, British Columbia, Canada

V4A 5A1

Telephone: (604) 306-8854

Facsimile: (604) 535-4454

Thechanged its name to CAG Capital Inc. (“CAG”). On August 29, 2008, the Company currently leases its executive offices in Port Hueneme for a term expiring in June 2014, with an option to extend for a further two years. The Company also leases three buildings in the Port Hueneme Aquaculture Business Park from the Port Hueneme Surplus Property Authority under sublease agreements that expire in September 2015 with an option to extend the lease for an additional five years.

The Company's common shares tradebegan trading on the TSX Venture Exchange under the symbol "KLH".

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The authorized share capital of the Company consists of an unlimited number common shares. As of August 31, 2012, the end of the most recent fiscal year, there were 45,413,561 common shares issued and outstanding.  As of December 17, 2012, there were 49,413,561 common shares issued and outstanding.

Corporate Background

Stellar Biotechnologies, Inc. (or the “Company”) was incorporated on June 12, 2007 in Canada under theCanada Business Corporations Act under the name China Growth Capital Inc. The Company was originally classified“CAG” as a Capital Pool Corporation ("CPC"Company (“CPC”) and changed its name to CAG Capital Inc. ("CAG") on April 15, 2008.. On November 25, 2009, the Company was continued into British Columbia under theBritish Columbia Business Corporations Act.  Columbia.

On April 7, 2010, the Company changed its name to Stellar Biotechnologies, Inc. and subsequentlyon April 12, 2010 completed its qualifying transaction through a reverse merger transaction with Stellar Biotechnologies, Inc. ("Stellar CA"), a private corporation incorporated under the laws of the State of California on September 9, 1999.

The Company presently has one wholly-owned subsidiary, Stellar Biotechnologies Inc. ("Stellar CA"), a corporation incorporated under the laws of the State of California on September 9, 1999.

Currently, the Company operates as a biotechnology research and production company involvedCA was engaged in the productionresearch, development and marketingcommercialization of Keyhole Limpet Hemocyanin ("KLH"(“KLH”) as well as the development of new technology related to the culture and production of KLH and subunit KLH ("suKLH") formulations.

History and Development of the Business

The Company was originally incorporated as a Capital Pool Company (“CPC”) under the policies of the TSX Venture Exchange ("TSX-V"), and began trading on the TSX-V on August 29, 2008 under the symbol "CAG".

Under the TSX Venture Exchange’s Policy 2.4, a company with only minimal working capital is allowed to list on the Exchange for the purposes of negotiating an acquisition of, or the participation in, assets or businesses. Such companies are classified as a “Capital Pool Company”, or “CPC” and are governed by a specific set of rules and regulations.  The sole purpose of a CPC is to identify and evaluate existing businesses or assets for possible acquisition which, if acquired, would provide the company with a full listing on the TSX-V. The only business a CPC is allowed to conduct prior to its Initial Public Offering and listing on the TSX-V is to prepare for its offering. This typically consists of raising a limited amount of seed capital, establishing a management team and board of directors, as well as hiring professionals to assist in the offering, including an auditor, legal counsel, and an agent for the Offering. Once the IPO is completed, the company will use the net proceeds to seek and finance a business in order to complete its “Qualifying Transaction” (“QT”). Once a suitable asset or business has been identified, the CPC will attempt to negotiate an acquisition or participation in the asset or business. The management of the CPC will negotiate with the targeted acquisition regarding acquisition terms. The Board of Directors of the CPC will examine proposed acquisitions on the basis of business fundamentals before approving any proposed transaction.

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From the date of listing on the TSX-V, the CPC has 24 months to complete its QT. If the CPC had not completed its QT in that timeframe, the CPC’s shares would be suspended from trading, and possibly face delisting, until such time as a QT has been approved and completed. The CPC may use cash, secured or unsecured debt, the issuance of securities, or a combination thereof, in order to finance its acquisition as its QT. Any QT is subject to approval by the majority of the minority shareholders of the CPC, approval from the TSX-V, and sponsorship of a TSX-V member firm. Trading in the CPC stock will initially be halted from trading before the announcement of a pending QT. The stock will remain halted until the Exchange has completed any preliminary background investigations into the proposed transaction and a sponsor firm has been retained.

All securities which will be held by Principals of the proposed post-QT issuer are required to be held in escrow. Shares will be released from escrow subject to a formula prescribed in the CPC Escrow Agreement which is subject to approval by the TSX-V. Once the QT is complete, the company will resume trading on the TSX-V under its new name and symbol.

On April 12, 2010, the Company completed its qualifying transaction through the reverse merger with Stellar Biotechnologies Inc. ("Stellar CA"), a corporation incorporated under the laws of the State of California on September 9, 1999. Prior to its merger with Stellar CA, the Company had no operations except its search for a suitable business for its QT. Stellar CA was a private California-based biotechnology research and production company specializing in production of Keyhole Limpet Hemocyanin protein products for biomedical applications. Under the terms of the qualifying transaction merger agreement between Stellar and Stellar CA, the Company issued 10,000,000 payment shares, at a deemed price of $0.28CDN$0.28 per share, to the Stellar CA shareholders for a 100% interest in Stellar CA. There was a dissenting shareholder of Stellar CA who did not exchange his shares for 1,661,241 shares of the Company. Therefore,In addition, the Company purchased those1,661,241 shares from one shareholder for $124,600 or(or approximately $0.075 per share,share) in order to cancel and return themthose shares to treasury.

In additionThe qualifying transaction merger agreement also provided for 10,000,000 common shares (“Performance Shares”) to the 10,000,000 payment shares issued pursuant to the reverse merger with Stellar CA, a further 10,000,000 performance shares were allotted for issuance to key individuals upon achievement of certain milestones in the development of the business. The purpose of the Plan was to encourage the development of the Company's products and business by distributing sharesbe distributed to key management, employees, and consultants upon the meetingachievement of certain milestones. These milestones are:

1.

Completion of method development for commercial-scale manufacture of IMG KLH with applicable good GMP as a pharmaceutical intermediate, evidenced by completion of three GMP lots meeting all quality and product release specifications required for stability studies and process validation;

2.

Compilation and regulatory submittal of all required CMC data compiled in CTD format and evidenced by filing as a DMF with(“Performance Share Plan”). All milestones have been achieved. Information on the USFDA; and

3.

Completion of preclinical toxicity and immunogenicity testing of IMG KLH and Subunit KLH in rodent and non-rodent species as evidenced by acceptance by study protocols and completion reports available to support customer United States FDA and EMEA filings.

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As each milestone is met as determined by the Company's Board of Directors, one-thirdstatus of the Performance Shares will be released toShare Plan is provided elsewhere in this Annual Report; specifically in “Results of Operations” for the Plan members. In JanuaryYears Ended August 31, 2013, 2012 and August 31, 2011, it was determined that the successful completion of preclinical toxicity and immunogenicity testing of Stellar KLH/IMGin “Item 6. Directors, Senior Management and Subunit KLH in rodent and non-rodent species completed the milestone number 3 above. Therefore, the first one-third of theEmployees; Compensation; Performance Shares totaling 3,333,335 common shares were issued to the Plan members on January 31, 2011. On August 27, 2012, it was determined that the final two milestones had been met and the Board authorized the issuance of 1,313,130 Performance Shares to non-director employees and consultants who contributed to the achievement of the milestone. The issuance of the allotted Performance Shares to directors was deferred by the Board and will be discussed at a later date.Share Plan.”

The transaction withCompany currently has one wholly-owned subsidiary, Stellar CA has been treated for accounting purposes as a recapitalization, withBiotechnologies, Inc. Stellar CA ascontinues to operate in the purchaserbiotechnology sector and parent company.

Stellar CA was incorporated underis engaged in the laws of California in September 1999 for the productionresearch, development, manufacture and commercialization of KLH. Frank Oakes, president of Stellar CA, invented the process for non-lethal hemolymph extraction from Keyhole Limpets,KLH and filed for a US patent (PCT/US2002.012121) on April 18, 2002. Additional patents for the process have been issued in Canada (CA2,444,809), Europe (EP1389123)related products and the United States (US 6,852,338). The US and all related international patents were assigned to the Company by Mr. Oakes under an agreement dated August 6, 2002.technologies.

On September 9, 2010, the Company announced that it had filed for patent protection for its inventions related to its native immunogenic ("IMG") KLH technology platform and immune status monitoring product portfolio. Patent claims include pharmaceutical grade compositions of matter, processes for manufacture and methods of use in a wide range of therapies.

On September 13, 2010, the Company announced an important milestone with the Company's collaboration with Bayer Innovation GmbH ("BIG") had been reached. The development of Bayer's personalized idiotype vaccine for the treatment of Non-Hodgkin's Lymphoma, for which the Company supplies KLH, had entered Phase I clinical trials. Stellar received a milestone payment from BIG, and the parties expanded their development agreement. In December 2010, Stellar acquired an exclusive, irrevocable worldwide sub-licensable and royalty-free license to the technology developed through the collaborative agreement between the Company and BIG. The license included a carve-out by BIG to use the technology in the non-Hodgkin Lymphoma vaccine under development, but Stellar may exclusively commercialize the technology in other fields.

On September 30, 2010, the Company announced that it had received payment of $288,000 for a filled order of KLH/SUBUNIT from French biotechnology company Neovacs SA for its Phase IIa human trials of its KLH-based vaccine for rheumatoid arthritis, and its upcoming Phase I trial for Lupus.

In November 2010, the Company was awarded two grants under the Therapeutic Discovery Project Program administered by the United States Internal Revenue Service for a total grant award of $488,985. The grants provide supplemental funding for the company's diagnostic development of KLH/IMG platforms.

In January 2011, preclinical toxicity and immunogenicity testing of KLH/IMG and Subunit KLH were completed on non-rodent species. These early tests support new product ideas established by the Company, including possible development of new products for the Company's products, such as standardized, preclinical immunotoxicity diagnostic products.

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In August 2011, the Company entered into a marketing and sales agreement with SAFC, a unit of Sigma Aldrich. Under the agreement, Stellar will produce KLH commercial intermediate and SAFC will sell, distribute and market high molecular weight keyhole limpet hemocyanin ("HMW KLH") for applications in therapeutic vaccines. The lead purchase order under the agreement was received in September 2011.

In August 2011, the National Science Foundation ("NSF") granted Stellar a Phase IIB SBIR award as a two-year extension to the Company's current SBIR Grant. The new award totals $498,560, and will allow full implementation of commercial scale aquaculture systems for KLH production, and development and deployment of a validated KLH-based immunogenicity assay.

In October 2011, the Company and Life Diagnostics, Inc. entered into an exclusive manufacturing and supply agreement. Stellar will supply Life Diagnostics KLH for the development and manufacturing of Stellar-brand KLH test kits for the detection of anti-KLH antibodies for use in the immunotoxicity and immunology research markets. The sale of the KLH ELISA Test Kits was launched in April 2012. The product launch includes six different kits which are designed for the rapid quantitative measure of anti-KLH antibodies in serum or plasma samples.

In December 2011, the Company announced the completion of a major expansion of its keyhole limpet hatchery factory in Port Hueneme. The new facility has a spawning capacity of 2 million larvae and is designed to produce 50,000 juvenile limpets per year for Stellar to support the increased demand for KLH products.

In April 2012, the Company entered into an agreement with the University of Guelph in Ontario, Canada,filed U.S. provisional patent applications for the exclusive option to license technology for the development of a vaccine candidate against Clostridium difficile infection ("CDI"), which is a major cause of serious infection, including death, in hospitalized patients.

The Board of Directors adopted a Shareholder Rights Plan (the "Rights Plan") on December 13, 2011. The Rights Plan has been approved by the TSX Venture Exchange and was ratified by the shareholders at the Annual General and Special Meeting held on January 17, 2012.

Revenues in fiscal 2011 came from the sale of 760 mg of KLH plus payments due under a supply agreement.    The Company’s plans to expand KLH production capacity are based on the Company’s customers’ forecasts for KLH requirements during vaccine commercialization and the Company’s commitment to meet its customers’ future forecasted KLH requirements. The aquaculture production cycle to raise mature limpets for KLH production from fertilized eggs is approximately 5 years.  The plan to incrementally increase KLH production to meet anticipated multi-kilogram customer requirements during vaccine commercialization requires a five year plan in which hatchery production of juvenile limpets is initiated years ahead of anticipated market demand. The initial phase of the plan is to produce a sufficient quantity of juvenile limpets to meet an anticipated 20 kg market demand for KLH 5-7 years in the future.

KLH Site™ was launched in April 2012. The website is sponsored by the Company and is the first web site dedicated to scientific and clinical information on the use of Keyhole Limpet Hemocyanin protein. It provides a knowledge base for KLH information, including links to biomedical literature and clinical studies, news of KLH-enhanced vaccine development, and details of KLH biochemistry and manufacture.

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The Company filed with the US Patent and Trademark Office additional US Letters Patent Applications in October and December 2012. In October, the applications were filed that covered certain proprietary KLH manufacturing controls, KLH formulations, and kits used toin immunotoxicology and immune status testing. In December,November 2012, the Company submitted thefiled a U.S. provisional patent application for new innovations related to KLH technology, including claims for pharmaceutical grade compositions of matter, advanced manufacturing processes and methods of use in a wide range of therapies.

In January 2013, the Company’s common shares began trading in the United States on the OTCQB Marketplace under the symbol “SBOTF.”

In January 2013, the Company announced that it had developed the capability to support the complete life cycle of the Giant Keyhole Limpet (Megathura crenulata), the scarce marine mollusk that is the only source for KLH protein. The Company now maintains multiple generations of the animals in its land-based aquaculture facility.

In February 2013, the Company filed a provisional patent application with the U.S. Patent and Trademark Office for new innovations related to Stellar’s KLH-based combinatorial adjuvant technology. The application included claims for pharmaceutical grade adjuvant compositions, manufacturing processes and uses in a wide range of immunotherapies and therapeutic vaccines.

In March 2013, the Company submitted to the U.S. Food and Drug Administration (FDA) Center for Biologics Evaluation and Research (CBER), a Type II Drug Substance Master File for its subunit KLH. This was a new Master File for the Company, an addition to the Master Files the Company previously filed and maintains at the FDA for certain of its KLH protein products. Additional information on the Company’s Master Files is provided in Item 4, Business Overview, Government Regulations.

In July 2013, the Company acquired the exclusive, worldwide license to patented technology for the development of human immunotherapies against Clostridium difficile infection (“C. diff”) from the University of Guelph, Ontario, Canada. The C. diff license gives the Company exclusive rights to develop, manufacture, and sell human active immunotherapies to treat C. diff infection that derive from certain technology covered by University of Guelph patents. The license also includes human diagnostic applications. In October 2013, the Company announced that positive results from a preclinical study related to this program.

In September 2013, the Company completed the closing of a private placement financing raising total gross proceeds of $12,000,000 (the “Private Placement”). In connection with the Private Placement, the Company issued a total of 11,428,570 units (the “Units”). Each Unit, sold for $1.05, comprised one share of the Company’s common shares and one half of a share purchase warrant. Each whole warrant entitles the holder to purchase one additional share of the Company’s common shares at a purchase price of $1.35 for a period of three years from the warrant issuance date. The Private Placement included a $5,000,000 investment by Amaran Biotechnology, Inc., a privately-held Taiwan biopharmaceuticals manufacturer.

In December 2013, the Company announced the issuance of two patents, in the United States and in China, covering the Company’s active immunotherapy technology for the treatment of Clostridium difficile, as licensed from the University of Guelph. The two patents describe certain novel cell surface polysaccharides and their chemical structures with broad claims covering antigen and active immunotherapies compositions for the treatment, prevention and diagnosis of C. diff infection. 

In December 2013, the Company entered into a collaboration agreement with Amaran Biotechnology, Inc. to develop and evaluate methods for the manufacture of OBI-822 active immunotherapy using the Company’s GMP grade Keyhole Limpet Hemocyanin (“KLH”). The primary purpose of the alliance is to develop and evaluate methods for the manufacture of OBI-822 active immunotherapy using the Company’s GMP grade KLH. OBI-822, the lead immunotherapy product of OBI Pharma, Inc., is manufactured by Amaran and currently in Phase II/III clinical trials in the U.S., Taiwan, South Korea, India and Hong Kong, for the treatment of metastatic breast cancer.

The Company’s common shares are traded on the Canadian TSX Venture Exchange under the ticker symbol "KLH" and quoted on the U.S. OTCQB Marketplace under the ticker symbol “SBOTF.”

The authorized share capital of the Company consists of an unlimited number of common shares. As of August 31, 2013, the end of the most recent fiscal year, there were 57,946,160 common shares issued and outstanding. As of December 20, 2013, there were 75,865,031 common shares issued and outstanding.

The Company’s executive office and principal place of operations is:

332 East Scott Street

Port Hueneme, CA 93041

Telephone: (805) 488-2800

Facsimile: (805) 488-2889

E-Mail:InvestorRelations@stellarbiotech.com

Website:www.stellarbiotechnologies.com/

Principal contact persons for the Company are:

Frank Oakes, President and CEO

Mark A. McPartland, Vice-President of Corporate Development and Communications.

The Company also maintains a Canadian Regulatory Address at:

401 – 1231 Barclay Street

Vancouver, British Columbia, Canada

V6E 1H5

Capital Expenditures

The Company's capital expenditures, which primarily consist of scientific, manufacturing, and aquaculture equipment, for the previous three fiscal years is as follows:

An expansion of the Company's keyhole limpet hatchery facility in Port Hueneme was completed in fiscal 2011. The expansion incorporates recent advances in aquaculture technology developed by the Company with grant support from the NSF. The expansion is designed to produce up to two million larvae which, based on the expected attrition rate of marine gastropod mollusks in land-based aquaculture systems, is expected to produceyield approximately 50,000 mature adultfour-year-old limpets per year. The Company's aquaculture system incorporates a modular design that can accommodate incremental increases in capacity as KLH demand increases. Funds for the aquaculture expansion were provided by the NSF Phase IIB SBIR award of $498,560 and the remainder provided by the Company's working capital. Currently, the Company's production capacity is 1,500 grams per year. The Company currently has liveM. crenulata inventory sufficient to increase KLH production volume by approximately 3,000 grams per year. The Company anticipates scaling up its production through the addition of the required equipment and personnel as demand warrants using funds received from the September 2013 private placement. Based on the current hatchery production, aquaculture infrastructure in place, and space available in the Company's facilities, the Company has future production capacity of in excess of 20,000 grams of KLH annually, which will require an increase in limpet husbandry facilities, KLH extraction equipment, and staffing. The Company anticipates scaling up itsthat such increases in production capacity could be substantially financed through the addition of the required equipmentleveraging KLH supply contracts and personal as demand warrants. Funds for the aquaculture expansion were provided by the NSF Phase IIB SBIR award of $498,560 and the remainder provided by the Company's working capital.customer agreements.

Business Overview

Stellar Biotechnologies, Inc. was formed through a reverse merger transaction with Stellar Biotechnologies Inc. ("Stellar CA"), a corporation incorporated under the laws of the State of California on September 9, 1999. Stellar is a biotechnology research and production company involvedengaged in the productionresearch, development, manufacture and marketingcommercialization of Keyhole Limpet Hemocyanin ("KLH") as well asand related products and technologies.

The Company’s goal is to serve the development of new technology relatedgrowing demand for this essential molecule in immunotherapeutic and immunodiagnostic markets.

Immunotherapy involves using the body’s own immune system to target and attack disease. Immunodiagnostics involves assessing the culturebody’s immune status in relation to drug, disease or environmental effects. The Company’s KLH products and production of KLH and subunit KLH ("suKLH") formulations. Stellar istechnologies can be used to stimulate the only company dedicated solely to developing and commercializing KLH.immune system in these applications.

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KLH formulations vary in selling price based on the level of purification, regulatory requirements met and final packaging configuration.  For crude bulk KLH formulations the Company sells cGMP-grade KLH at >80% purity for further processing under supply agreement commitments at $5,000/gram.  For KLH at >95% purity produced under cGMP for vaccine conjugation in bulk quantities the Company’s supply agreement pricing is $40,000-$50,000/gram quantity dependant.  For KLH at >95% purity produced under cGMP vialed in final single-dose form the Company’s retail pricing ranges above $200/milligram ($200,000+/gram).

KLH is a potently immunogenic (i.e.high molecular weight (HMW), a substance that inducesimmune-stimulating protein widely used in immunological applications, both as an active pharmaceutical ingredient (API) in certain research for immune response) high-molecular-weight protein. It operatestherapies, including the treatment of cancer, infectious diseases and immune disorders, and as a carrier moleculefinished product for vaccine antigens (substances that promotetesting immune status in patients and research settings.

KLH is refined from the generationhemolymph of antibodies) against cancers and infectious agents. The combination of an antigen against specific tumor cell-types, conjugateda relatively scarce ocean mollusk, the Giant Keyhole Limpet (Megathura crenulata), which is native only to the Immunogenic ("IMG")rocky Pacific Ocean waters off California and Baja. The Company has considerable intellectual property related to KLH molecule, ismanufacture and the basis for a proven strategy for a new classspecialized systems required to sustain commercial-scale colonies of drugs known as therapeutic vaccines. Potent yet proven safe in humans, demand for KLH has drivenGiant Keyhole Limpet.

The Company refers to its proprietary technology and products by the development of KLH-based therapeutic vaccines for a wide variety of serious chronic diseases which are currently being developed and in clinical trials by over a dozen biopharmaceutical companies.brand “Stellar KLH™”

The Company’s goalsCompany sells Stellar KLH™ products for preclinical and objectives areclinical applications such as HMW and subunit protein in various grades, formulations and configurations, as well as certain preclinical in vitro diagnostic kits. The Company primarily sells its products directly to execute its business strategy which includes:biotechnology and pharmaceutical companies, academic institutions, and clinical research organizations.

1.

Produce, maintain and develop keyhole limpets through key intellectual property (“IP”).  

2.

Continuously advance key IP to extract, purify and formulate KLH profitably, while increasing the number and maintaining the good health of the essential source animals.  

3.

Market and sell the Company’s formulations of KLH and use consistent efforts to expand markets, promote the use of KLH within the academic, research, pharmaceutical, biotech and medical diagnostic markets.  

4.

Alone and in partnership with others, develop and sell as many proprietary KLH-based products as possible for the medical diagnostic and therapeutic markets.

KLH has historically been produced from California giant keyhole limpets (Megathura crenulata) harvested from the rare wild populations in the coastal waters of the Pacific Ocean from central California to the northern Baja Peninsula, Mexico. Stellar has developed a dedicated aquaculture technology and captive hatchery-reared populations of M. crenulata for sustainable vaccine-grade KLH production. Through its leased facilities in Port Hueneme, California, the Company operates aquaculture, laboratory and production facilities to raiseM. crenulata, and extract and purify the KLH proteinsprotein utilizing sophisticated andCompany-developed proprietary aquaculture methods and a patented non-lethal hemolymph extraction process. The Company contracts with specialized contract manufacturing organizations ("CMO's") and contract research organizations ("CRO's) for certain steps of cGMP processing and quality control testing.

Stellar has supply agreementsThe Company believes it is the leader in place to provide vaccine-gradesustainable manufacture of GMP-grade KLH. We base this belief on our expanding intellectual property, achievements in aquaculture science, KLH with two vaccine developersproduction capacity, and is currently negotiating with other potential customers. In May 2011,KLH sustainable manufacturing know-how.

By providing a source for scaleable, controlled production of the keyhole limpet through the Company’s aquaculture operational achievements, rather than relying solely on a scarce wild resource, the Company entered intois positioning itself to be the only company capable of supplying GMP-grade KLH in commercial quantities that can meet anticipated long-term demand within the pharmaceutical industry.

The Company recently acquired exclusive, worldwide license from the University of Guelph to certain patented KLH-complementary immunotherapy technology for the treatment and diagnosis of Clostridium difficile infection (C. diff). This technology acquisition represents a marketing and sales agreement with SAFC, a business unit of Sigma-Aldrich. Stellar will produce and provide KLH commercial intermediate to SAFC who will sell, distribute and market cGMP-grade HMW (high molecular weight keyhole limpet hemocyanin) KLHsignificant strategic expansion for use in therapeutic vaccines. In October 2011, the Company and Life Diagnostics, Inc.will provide a proprietary platform for the Company’s first active immunotherapy development program.

To date, the Company has primarily funded operations by the issuance of common shares, exercise of warrants, government grant revenues, and income from commercial supply contracts and KLH product sales.

The Company has entered into an exclusive manufacturingvarious supply and supply agreement. Stellar will supply Life Diagnostics KLHcollaborative agreements for the development, manufacture or supply of Stellar KLH™ products or technology. Information regarding these arrangements is provided under Item 4., Business Overview, Products and manufacturing of Stellar-brand KLH test kits for the detection of anti-KLH antibodies for use in the immunotoxicity and immunology research markets. The test kits were launched to market in April 2012.under Agreements.

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Keyhole Limpet and KLH Background

The Giant Keyhole Limpet is a large saltwater mollusk that lives in a limited range of the coastal areas of the eastern Pacific Ocean from central California to the northern Baja Peninsula, Mexico. Its shell can be up to 5 inches in length, but the body of mature limpets will often extend beyond the shell. Its diet is primarily seaweed and other vegetation. The Giant Keyhole Limpet is the only species of its type. Although never harvested by humans for food, it has been harvested in order to extract Company’s strategic objectives are:

Stellar KLH™ Technology

Keyhole Limpet Hemocyanin ("KLH"), a high-molecular weight protein in high demand from the biopharmaceutical industry. There is currently no regulated fishery of wild limpets to protect the limited population, and wild stocks are being depleted.

KLH is a potenthigh-molecular-weight, immunogenic high-molecular-weight protein, which is a substance that naturally induces an immune response.  KLH is a highly effective T-cell dependent carrier protein that induces MHC Class I and Class II-restricted immune responses via antigen presenting cells. KLH has a long history (40+ years) of safe use in humans and in a wide variety of research applications.

KLH is widely used in immunological applications, both as an active pharmaceutical ingredient (API) in certain immune therapies and as a finished product for testing immune system status in patients and research settings.

As an API, KLH is an effective and safe carrier molecule for conjugation to vaccine antigens that are used to promote the generation of antibody and cell-mediated immune responses against targeted indications such as cancer, infectious diseases, rheumatoid arthritis, Alzheimer’s disease, and immune disorders. However, many subunit vaccine antigens require a carrier molecule or adjuvant in order to be effective. The combination of an antigen against specific pathogenic targets (e.g. tumors, microbials, over-expressed proteins), conjugated to the immunogenic KLH molecule, is the basis for a promising new class of drugs known as active immunotherapies or therapeutic vaccines.

Examples of KLH-based active immunotherapies and therapeutic vaccines in development in the U.S. and internationally: TNFα Kinoid therapeutic vaccine for rheumatoid arthritis & Crohn's disease, IFNα Kinoid therapeutic vaccine for systemic lupus erythematosus, autologous vaccine for lymphoma, Globo-H-KLH immunotherapy for metastatic breast cancer, MUC-2-KLH vaccine for prostate cancer, and therapeutic vaccines for various other cancers and disorders.

KLH also has diagnostic applications as a finished product.  It is derivedextensively used by pharmaceutical companies and researchers as a safe, immune-stimulating antigen in drug screening, drug immunotoxicology and assessment of immune status. For example, KLH is a standard immunogen in T-Cell Dependent Antibody Response (TDAR), a functional assay used to assess an antibody response. TDAR with KLH is widely recognized as a standard test for monitoring the effects of drugs on the immune system.

KLH is refined from the hemolymph of a relatively scarce ocean mollusk, the Giant Keyhole Limpet (Megathura crenulata).Megathura crenulata is native only to a limited range of the rocky Pacific Ocean waters off California and Baja.  Its natural habitat is the shallow depths below low tide line.

The large size and complexity of the KLH molecule make it unsuitable for synthetic production; therefore it must be purified from its natural source, hemolymph extracted from the Giant Keyhole Limpet, which is rare and believed to be diminishing in population due, in part, to the lack of fishery regulations.

KLH is refined from the limpet's hemolymph, a fluid in the mollusk circulatory system. Hemolymph contains hemocyanin, a copper-based protein whichthat serves as the animal's oxygen transport molecule to its cells. Unlike iron-based hemoglobin, which serves as the oxygen transport molecule in humans and other vertebrates and turns red when oxygenated, hemocyanin turns blue when oxygenated. Keyhole Limpet Hemocyanin is an ideal carrier molecule for vaccine antigens (substances that promote the generation of antibody and cell-mediated immune responses) against cancers and infectious agents. The combination of an antigen against specific tumor cell-types, conjugated to the immunogenic KLH molecule, is the basis for a proven strategy for a new class of drugs known as therapeutic vaccines. KLH is potent yet safe in humans. Due to its exceptional size and unusual construction, KLH cannot be easily synthesized, and is more efficiently and cost-effectively prepared by purification from the hemolymph of the limpet.

Current Operations

Stellar specializes in the production of KLH protein purified from the hemolymph of the California giant keyhole limpet. Stellar produces its own supply of keyhole limpets through its own aquaculture operations and extracts the KLH protein using its own patented, non-harmful methods. The KLH is then purified utilizing the Company's proprietary methods. Currently, the Company's commercial operations are conducted at its own aquaculture production facility and hatchery, a controlled environment aquaculture laboratory, and a clean room manufacturing facility. Stellar currently produces KLH from limpets raised in the Company's own hatchery or harvested wild from the fishery under California Department of Fish and Game license. In the future, as a sustainable supply of limpets grown to maturity in the Company's aquaculture facility come on line for production, wild sources will be less necessary to meet demand. The Company currently offers several KLH products to the pharmaceutical and research industries, including its own branded ELISA test kits, and is also developing new uses for its KLH.

The Company's operations are centered in several buildings and 37,000 square foot oceanfront leasehold facility within the Port Hueneme Aquaculture Business Park. The facility includes Stellar's corporate offices, as well as its aquaculture, laboratory and manufacturing operations.

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Aquaculture

The Company's aquaculture operations are located on the Pacific Ocean within the Port Hueneme Harbor District, and were specially developed in the 1990's, with advice from Stellar CA's founders, for production and research on gastropod mollusks. The facility has been in near continuous operation since that time. The specialized aquaculture systems were designed and built to specifically support scalable commercial production of California giant keyhole limpets for pharmaceutical KLH uses with a fully permitted seawater supply system, recirculating seawater supply systems, environmental controls and regulated seawater return to the ocean. The site also contains a fabrication shop for production of specialized equipment and culture apparatus.

At present, the limpets used by the Company are derived from either its own aquaculture production facility or are harvested from the wild fishery under license from the State of California Department of Fish and Game. The culture cycle for commercially useful limpets is 4 to 5 years from the fertilized egg to the adult animal, with multiple complex larval and juvenile stages. Mature limpets can be extracted for KLH several times per year and, if properly maintained, the average extracted quantity of KLH per year per limpet is predictable and useful to create production targets that optimize the use of the physical plant.

Stellar's aquaculture operations are believed to be the world's only dedicated hatchery and captive reared giant keyhole limpet facility for KLH production. It utilizes proprietary methods for the reliable control of spawning, larval development, metamorphosis and grow-out of the limpets. All proprietary technologies for aquaculture production were developed by the Company and are protected as trade secrets. The production process includes feeding regimens and the recirculation of seawater optimized for limpet health and growth. Each closed recirculating system is equipped with temperature controlled seawater distribution, filtration and treatment equipment. The facility currently has 18 production tanks plus 400 individual limpet production modules in two independent closed recirculating aquaculture production systems after a recent major expansion which incorporated significant advances in technology developed by the Company with support from monetary grants from the National Science Foundation. These advancements include methods for the control of the limpet reproductive cycle and systems for intensive propagation of the complex larval stages.

Current limpet inventory in the Company's aquaculture facilities is approximately 1,000 limpets for production, with a further 3,000 limpets held in reserve to accommodate increases in demand and natural attrition. The natural attrition rate in its production inventory is estimated at approximately 15% per year, and process related attrition is estimated at 5% a year. To support its current mature limpet inventory, the Company requires approximately 200 mature limpets per year, obtained either through the Company's hatchery operations or through the wild fishery. The actual life expectancy of a mature limpet has yet to be determined experimentally, and no natural history data is available. From internal data the Company estimates the productive life of a commercial limpet to be approximately 10 years.

In addition to the expansion of the Stellar's Port Hueneme aquaculture facility, the Company has negotiated a term sheet with a regional aquaculture producer for additional culture capacity to both increase hatchery production and to geographically diversify some of its keyhole limpet population. Studies required by the California Department of Fish and Wildlife to certify the Port Hueneme hatchery facility for transport and stocking of limpets throughout California are now underway. The contracted expansion will allow for additional limpet production sooner than at the Port Hueneme facility alone.

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KLH Uses

Mature limpets can be extracted for KLH several times per year as the hemolymph is extracted in a sterile, non-harmful manner utilizing the Company's patented methods. Once extracted, the hemolymph is processed through the Company's proprietary methods which are protected as trade secrets. The Company contracts with specialized contract manufacturing organizations and contract research organizations for certain steps of current good manufacturing practice ("cGMP") and quality control testing.

KLH is a highly potent T-cell dependent immunostimulatory protein and adjuvant. The molecule has an extensive history of safe and effective use in humans for vaccine development and immunological research. As an essential carrier protein for synthetic conjugate vaccines, KLH has proven to be superior at conferring antigenicity to a wide variety of molecular conjugates and has enabled a broad array of new vaccines and active immunotherapies. The benefits of KLH include:

·

Potent immune system stimulant. KLH generates potent immune responses, from both the humoral (antibody) and cellular arms of the immune system, to virtually any molecule conjugated to it, and it recruits vigorous “T-cell help” for poorly immunogenic antigens such as polysaccharides.

·

Anti-tumor immune responses. KLH can break the immune system’s tolerance to “self antigens,” thus allowing the body to mount an effective immune response against its own tumors. This ability to break immune tolerance may be extended to virtually any molecule in the body, enabling the development of vaccines with the potential to treat the growing list of diseases for which specific therapeutic targets have been identified.

·

Ease of conjugation. A variety of conjugation chemistries can be used to couple virtually any carbohydrate, protein, or lipid molecule to KLH to produce an immunogenic conjugate.

·

High conjugation densities. KLH’s large molecular weight and its many available conjugation sites allow the molecule to carry high densities of single or multivalent vaccine antigens. High-density KLH conjugates are effective at cross-linking antigen receptors on B-cells, thus inducing B-cell activation and antibody production.

·

Clinical efficacy and safety. KLH has an outstanding safety record in humans, documented by thousands of clinical trial immunizations. No significant adverse side effects have been reported for KLH in human trials.

KLH also has diagnostic uses. It is widely used by pharmaceutical companies and researchers as a safe, immune-stimulating antigen in drug screening, drug toxicology and assessment of immune status. The benefits of KLH in diagnostic applications include:

·

Antibody Generation - KLH is an effective carrier protein for poorly antigenic molecules in most species.

·

Immune Response Testing - KLH is widely used as a neoantigen to assess functional primary immune response and immunocompetence in clinical settings involving immunosuppression such as transplantation and HIV infection. KLH is also used to monitor immune responses in patients receiving therapeutic cancer vaccines and other immunotherapies.

·

Immunotoxicology - KLH immunization and ELISA testing of antibody response for immunotoxicity testing of new drugs. KLH's advantages include ease of use, greater reliability, and better standardization relative to SRBC assays.

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Company Products and Development

The Company currently offers four KLH products as well as its own branded KLH ELISA Test Kits.

The three KLH products are:

·

partially purified bulk KLH, sold as a pharmaceutical intermediate (ASP KLH);

·

purified cGMP-grade subunit KLH (suKLH), sold for vaccine conjugation;

·

purified cGMP-grade high molecular weight KLH (HMWKLH); and

·

non-GMP grade suKLH, sold as a research regent.

The cGMP suKLH formulation is supported by an FDA Drug Master File ("DMF"), which is an FDA regulatory file available for reference by the Company's pharmaceutical customers. The DMF is not required by law or FDA regulation and is submitted solely at the discretion of the holder. A DMF is used to provide confidential detailed information about facilities, processes, and/or articles used in the manufacture, processing, packaging and storage of products. The purpose of creating the DMF is to allow another party to reference important material about the product. Since the preparation of the original DMF, the Company has significantly improved its KLH manufacturing methods over the method previously developed under the collaborative agreement with Bayer. The Company intends in early 2013 to amend its DMF under the Center for Biologic Evaluation & Research at the FDA to reflect the newly optimized manufacturing methods and products.

The Company has considerable intellectual property related to KLH manufacture and the environmental protection of the Giant Keyhole Limpet including, but not limited to, specialized aquaculture systems and technologies; spawning, selection and maintenance ofMegathura crenulata; non-lethal KLH protein extraction methods; and the processing, purification and production of KLH formulations.

Stellar KLH™ Products

Stellar currently has only limited revenue from commercial sales of its Stellar KLH™ products. Commercial sales are highly dependent upon the rate of development and clinical trials of the active immunotherapies and other technologies being developed by third-party customers, which utilize the Company's products. The advancement and commercial success of these third-party products is dependent upon many factors, including available capital, trial recruitment, and regulatory review, and revenue from these customers is highly variable, but does not have seasonality.

Revenues from the sale of Stellar KLH™ products were $76,055 in fiscal 2013, $131,825 in fiscal 2012, and $18,988 in fiscal 2011. Contract revenues were $60,000 in fiscal 2013, $60,000 in fiscal 2012 and $60,000 in fiscal 2011. The geographic breakdown in fiscal 2013 was 84% Europe, 12% US, 3% South America and 1% Canada; fiscal 2013 was 42% Europe and 58% US; and fiscal 2011 was 88% Europe and 12% US.

Stellar primarily markets and distributes its products directly to biotechnology and pharmaceutical companies, academic institutions, and clinical research organizations. The geographic markets of the Company’s potential customers are equally spread across Europe, US and Asia.

The Company’s Stellar KLH™ products include HMW and subunit KLH protein in various grades, formulations and configurations, as well as certain preclinical in vitro diagnostic kits. Products offered, and target applications, include:

Selling prices for KLH protein vary ($5,000/gram – $200,000/gram) depending on purity, grade, preparation, and packaging configuration.

Development, Supply, Collaborative and License Agreements

The Company has entered into a number of agreements that are important to the Company’s profitability, development programs, and strategic position, both in the present and future. Entering into such agreements is part of our strategic approach, not a prediction of success. These agreements may take various forms including, but not limited to, supply agreements, development agreements, collaboration agreements, and license agreements; whereby the Company provides its KLH products and technologies in exchange for fees, revenues, or royalties. The Company may also filedenter into agreements by which we obtain products, technologies, or services from suppliers or collaborators. However, we cannot make any assurances as to whether any agreements we have entered into, or will execute in the future, will produce significant revenue or gross profit in any timeframe, if at all. 

Supply agreements generally involve a DMFcustomer’s commitment to purchase the Company’s KLH for use as an ingredient in the customer’s own immunotherapy products or as a finished product in their development programs. Development and collaboration agreements allow the Company and the collaborator to work jointly or independently, utilizing the Company’s products or technology to improve manufacturing processes or develop KLH-complementary products. License agreements provide an avenue for the cGMP HMW KLH under #026358 withCompany to in-license intellectual property for use in the CEDER division ofCompany’s manufacturing or for further research and development by the FDA.Company. The Company will refilemay also out-license its DMF's for both suKLHKLH products or technology to pharmaceutical developers or suppliers.

These agreements may involve the use of our KLH in research and HMW KLH with the CEBER Division of the FDA in 2013 as a biologic products.

development, preclinical studies, clinical testing, or post-market commercialization stages. To date, the Company’s KLH has been used in research and development, preclinical, and clinical phases but has not yet been used in any post-market commercialized setting.

The Company’s significant agreements are described below.

Under the terms of two 2008 agreements, the Company has supply contracts with two pharmaceutical companies towill supply KLH for use in vaccines.

·

Bayer Innovation GmbH ("BIG") has been using Stellar's KLH for BIG's development of vaccines for treatment of non-Hodgkin Lymphoma.

·

products to Neovacs SA of Paris, France for use in development and manufacture of active immunotherapies. Neovacs has been using Stellar's KLHthree Kinoid therapeutic vaccine drugs in clinical trials which use Stellar KLH™ as the critical carrier in several vaccine trials, including rheumatoid arthritis, Crohn'smolecule: Neovacs’ IFNα-K drug for Lupus, TNF-K drug for Crohn’s disease, and Lupus.TNF-K drug for Rheumatoid Arthritis.  Neovacs’ Kinoid drugs are immunotherapies that utilize Stellar KLH™ to stimulate an antibody response to the targeted cytokine. The supply agreement also provides for Neovacs to pay for a dedicated colony of limpets, which has provided contract revenue of $60,000 annually to the Company.

Under the terms of a December 2010 research collaboration agreement, Bayer Innovation GmbH (“Bayer”) accessed the Company's information on Stellar KLH™, including manufacturing methods and analytical data, in order to demonstrate the feasibility of improving process yields. When the research collaboration agreement terminated in August 2011, Stellar acquired an exclusive, worldwide sub-licensable and royalty-free license to the technology developed under collaboration between the Company and Bayer for the improved production method. The license included a carve-out by Bayer to use the technology in the non-Hodgkin Lymphoma active immunotherapies under development, but Stellar may exclusively commercialize the technology in other fields. The Company paid Bayer $200,000 for the licensing rights in 2011, which are jointly owned by both the Company and Bayer.

In August 2011, the Company entered into a marketing and sales agreement with SAFC, a unit of Sigma Aldrich.Sigma-Aldrich. Under the agreement, Stellar will producethe Company produced KLH commercial intermediate and SAFC will sell, distributesold, distributed and market high molecular weight keyhole limpet hemocyanin ("marketed cGMP-grade HMW KLH")KLH for applications in therapeutic vaccines. Stellar will supplyactive immunotherapies. The Company supplied all aquaculture-derived KLH intermediate andrequired for production of SAFC cGMP KLH will manufactureformulations. SAFC manufactured HMW KLH under cGMP conditions. SAFC willconditions and also provideprovided cGMP clinical and commercial manufacturing of bioconjugation services to support the development and manufacture of conjugate vaccines. The lead purchase orderCompany had sales under thethis agreement of $100,000 during fiscal 2012. The agreement was received in September 2011.active until June 2013 when it expired without extension.

The Company currently maintains a production inventory of qualified M. crenulata sufficient for an annual minimum crude KLH production capacity of 1,500 grams/yr with a projected maximum of 2,000 g/yr with double shift labor schedules.  This capacity is considered sufficient to meet the Company’s obligations under supply agreements with current customers, under which the Company has agreed to maintain capacity to meet customers non-binding rolling forecasts, with surplus capacity to support business development activities.  The Company also maintains a M. crenulata live animal inventory sufficient to increase KLH production volume by an additional 3,000 grams/yr through an increase in aquaculture tank capacity and production scheduling or manufacturing capacity..

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The quantity of crude KLH produced in fiscal 2011 was approximately 340 grams for commercial sales, contract obligations, product development and research. The Company sold 0.76 grams of KLH in various formulations in the last fiscal year.

The hold-time assigned to crude KLH starting material produced by the Company is 90 days, based on the in-process hold established in the Master Batch Record for the product.   Crude KLH starting material is normally produced “just in time” to fill customer orders or to meet the Company’s requirements for production of fully purified KLH formulations.  Stability studies on the Company’s purified suKLH (KLH 20MV) support a shelf life of 36 months and stability studies are currently on-going for the Company’s HMW KLH (KLH 01NV).

It is anticipated that the Company could produce and hold in inventory sufficient quantities of KLH to meet future demand for KLH, once shelf life is established for each KLH formulation.

Development

Stellar is continuing development of new products for its KLH formulations, including new proprietary KLH-based products as possible for the medical diagnostic and therapeutic markets. This work is being conducted both by the Company alone and in conjunction with development partners.

Stellar has been providing Bayer Innovation GmbH ("BIG") with KLH for BIG's development of vaccines for treatment of non-Hodgkin Lymphoma. In December 2010, Stellar acquired an exclusive, irrevocable worldwide sub-licensable and royalty-free license to the technology developed through the collaborative agreement between the Company and BIG. The license included a carve-out by BIG to use the technology in the non-Hodgkin Lymphoma vaccine under development, but Stellar may exclusively commercialize the technology in other fields. Stellar paid BIG $200,000 for the licensing rights, which will be jointly owned by both Stellar and BIG.

In May 2011, the Company completed a pre-investigational Device Exemption (pre-IDE) meeting with the United States Food and Drug Administration (FDA) Office of In Vitro Diagnostic Device Evaluation and Safety, Center for Devices and Radiological Health to discuss the Company's proposed anti-KLH assay. The FDA assisted Stellar in identifying and defining its strategy to complete the clinical development and regulatory pathway for the anti-KLH in vitro diagnostic device. The FDA encouraged Stellar to consider additional clinical investigation plans that may distinguish the clinical correlation of the assay results with measures of patient immune response.

In November 2010, the Company began developing a standardized immunotoxicity diagnostic test for the pre-clinical market. The product is intended to be an Enzyme-linked immunosorbent assay ("ELISA") test kit for biochemistry assays using Stellar IMG/KLH. These diagnostic tests comprise two levels of test suites. Pre-clinical tests are designed in use in animals, including mice, rats and non-human primates, and are commonly used in the testing of drugs prior to the clinical testing of drugs in humans. These products do not require regulatory approval. Diagnostic products for use in human testing can be segregated into products for use asin-vitro diagnostics, which are for use in the testing of serum outside the human body, andin-vivo diagnostics, which are testing inside the body.In-vivo diagnostic kits do require FDA and regulatory approval, but the Company has not yet begun development of anyin-vivo products.

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In October 2011, the Company and Life Diagnostics, Inc. entered into an exclusive manufacturing and supply agreement for these diagnostic kits. Stellar supplieswith Life Diagnostics, KLH forInc., a leader in the developmentmanufacture and manufacturingsale of Stellar-brand ELISA KLHtest kits. Under the agreement, Life utilized Stellar KLH™ to develop and manufacture Stellar KLH™ brand ELISA test kits for the detection of anti-KLH antibodies, for use in thepreclinical immunotoxicity and immunology research markets. The ELISA Test Kits wereA line of six test kits was launched to market in April 2012, and includes six different kits to measure either IgG or IgM antibodies in a range of preclinical models. The kits are the first anti-KLH ELISA's made with the Company's proprietary Stellar KLH Protein. During fiscal 2012,2012. To date, sales have been limited.

In July 2013, the Company completed its first GMP manufactured lotacquired the exclusive, worldwide license to patented technology for the development of high molecular weight KLH 01NVhuman immunotherapies against Clostridium difficile infection (“C. diff”) from the University of Guelph, Ontario, Canada. The C. diff License gives the Company exclusive rights to develop, manufacture, and sell human immunotherapies to treat C. diff infection that derive from technology covered by Guelph patents. The License also includes human diagnostic applications. The agreement covers a family of international patents and patent applications related to the cell-wall polysaccharide of C. diff named PSII. The Company is currently selling this product for immune response testing,active in research related to these immunotherapies as well as offering itdescribed in combination with the Stellar KLH ELISA Test Kits.next section.

In April 2012,December 2013, the Company entered into ana collaboration agreement with Amaran Biotechnology, Inc., a privately-held Taiwan biopharmaceuticals manufacturer and large shareholder of the Company. Amaran designs, develops, and manufactures active immunotherapies such as OBI-822, the lead immunotherapy product of OBI Pharma, Inc.

The primary purpose of the alliance is to develop and evaluate methods for the manufacture of the OBI-822 active immunotherapy using the Company’s GMP grade KLH. OBI-822 is currently being evaluated for the treatment of metastatic breast cancer in international Phase II/III clinical trials in the United States, Taiwan, South Korea, India and Hong Kong. Under the agreement, the Company will be responsible for the production and delivery of GMP grade KLH for evaluation as a carrier molecule in OBI-822 active immunotherapy.  The Company will also be responsible for method development, product formulation, and process qualification for certain KLH reference standards.  Amaran will be responsible for development objectives and product specifications.  The agreement provides for Amaran to pay to the Company fees for certain expenses and costs associated with the development program.  Subject to certain conditions and timing, the collaboration also provides for the companies to negotiate a commercial supply agreement for Stellar KLH™ in the future.

Research and Development

The Company is actively involved in research and development of KLH products and technology, both alone and in collaboration with development partners.

In addition to the Company’s internal research and development (such as new KLH formulations and configurations), and the development activities related to the agreements described in this report, the Company is continually engaged in development and evaluation projects with a number of biopharmaceutical companies, such as for the evaluation of Stellar KLH™ in both therapeutic and diagnostic applications. These research projects are conducted under mutual non-disclosure agreements between the Company and interested parties.

The Company believes that recent collaborations, such as the newly acquired C. diff program and the collaboration agreement with Amaran, may provide for significant strategic, revenue and clinical opportunities for the Company’s future business.

Clostridium difficile Active Immunotherapy Development Program

In July 2013, the Companyacquired the exclusive, worldwide license to patented technology for the development of human immunotherapies againstClostridium difficileinfection (“C. diff”) from the University of Guelph, (Ontario, Canada)Ontario, Canada. (“Guelph”) (C. diff License”).

This technology acquisition represents a significant strategic expansion for the Company and will provide a proprietary platform for the Company’s first active immunotherapy development program. Although the Company’s current business/profitability is not dependent on this patent, the C. diff development program relies on the validity of a vaccine candidate against this patent to secure its competitive advantage in this business niche.

Clostridium difficile is a major and growing cause of mortality and morbidity in hospitalized patients. C. diff is a bacteria which causes diarrhea and abdominal pain and is spread person to person. It is commonly found in the intestine and infections can be life-threatening for those taking antibiotics or who have serious pre-existing health issues. The incidence of C. diff infections is at a record high in the U.S. with more than 330,000 cases reported annually.  Related hospitalizations have tripled in the last decade and deaths related to C. diff increased 400% in recent years.  The cost of C. diff related treatment in the U.S. and Europe is estimated at more than $7 billion annually.

The C. diff License gives the Company exclusive rights to develop, manufacture and sell human active immunotherapies to treat C. diff infection ("CDI"). Underthat derive from technology covered by Guelph patents.  The C. diff License also includes human diagnostic applications.  Specifically, the agreement covers a family of international patents and patent applications related to the University grantedcell-wall polysaccharide of C. diff named PSII. The Company’s active immunotherapy technology for C. diff targets cell-surface antigens expressed across many strains of C. diff bacteria.  The Company’s approach combines selected polysaccharides of C. diff conjugated to Stellar KLH as carrier and adjuvant. A PSII-KLH conjugate vaccine may develop into a next-generation active immunotherapy treatment for this formidable disease. Although the Company’s current business/profitability is not dependent on this patent, the C. diff development program relies on the validity of this patent to secure its competitive advantage in this business niche.

The C. diff License agreement provides for license fees of $25,000 during the year ended August 31, 2013, $200,000 in 2014 and $20,000 annually thereafter, creditable against royalties due, if any. Royalties are payable for a mid-single digit percentage of related net sales, if any. License fees are also payable for a low-double digit percentage of related non-royalty sublicensing revenue, if any. The Company reimbursed past patent filing costs of approximately $50,000 during the year ended August 31, 2013, and will reimburse future patent prosecution costs. The license agreement does not have a fixed term or termination provisions.  

Within 30 days of the effective date of the agreement and upon TSX Venture Exchange approval, the Company issued to Guelph 371,200 common shares and 278,400 non-transferable share purchase warrants.  Each warrant provided Guelph the right to purchase one common share on or before January 23, 2015, at a purchase price of CDN$1.25 per share. 

The C. diff License agreement provides for milestone payments totaling $63,045,000 upon achievement of various financing, development and sales targets. No milestones were met during the year ended August 31, 2013, and there can be no assurance that the milestones will be met in the future.

The C. diff License was granted pursuant to an agreement executed in April 2012 whereby the Company obtained the exclusive option to license the technology from Guelph. During the option period, the Company and Guelph scientists conducted preclinical studies demonstrating that conjugate vaccines combining PSII technology with the Company’s KLH protein as adjuvant can protect against primary and secondary C. diff infection. Additional preclinical research is underway.

In April 2013, the Company announced publication of a patent pendingpeer-review article on the Company’s C. diff technology in the journal Expert Review of Vaccines (April 2013, Vol. 12, No.4). The paper titled “Carbohydrate-based Clostridium difficile Vaccines” was co-authored by scientists from the Company and Guelph. The article described biochemical characteristics of C. diff that support the Company’s carbohydrate-based immunotherapies approach to potential C. diff treatment.

In October 2013, the Company announced that positive results from a preclinical study of the Company’s KLH-conjugate active immunotherapeutic vaccine were presented in an oral presentation at the 8th International Conference on the Molecular Biology and Pathogenesis of the Clostridia (ClostPath 8) held in Australia and also in a poster at the 7th Vaccine and ISV Congress held in Spain. The study described the design of a PSII-KLH immunotherapeutic vaccine and its evaluation in a murine model of C. diff infection. In the study, preliminary data demonstrated that vaccination with a PSII-KLH conjugate vaccine was effective in conferring protective immunity against C. diff infection, by improving survival in vaccinated mice compared to unvaccinated controls.  The study results suggest that the Company’s PSII-KLH active immunotherapy technology shows promise as an effective approach to treating C. diff.

The C. diff program is currently in preclinical development. The development of new therapies is subject to stringent regulatory requirements, long timelines and expensive research and development. The Company anticipates that the C. diff program will require significant funding resources.

Collaboration with Amaran on Development of OBI-822 Active Immunotherapy

In December 2013, the Company entered into a collaboration agreement with Amaran Biotechnology, Inc., a privately-held Taiwan biopharmaceuticals manufacturer and large shareholder of the Company. Amaran designs, develops, and manufactures active immunotherapies such as OBI-822, the lead immunotherapy product of OBI Pharma, Inc.

The primary purpose of the alliance is to develop and evaluate methods for a CDI vaccine. CDIthe manufacture of the OBI-822 active immunotherapy using the Company’s GMP grade KLH.

OBI-822 is a typenew generation of bacteria normally presentactive immunotherapy combining Globo-H, a carbohydrate antigen frequently expressed by cancer cells, together with KLH as the immune-stimulating carrier molecule.  An active immunotherapy uses a patient’s own immune system to recognize and mount an attack against the targeted tumor cells. 

OBI-822 is currently being evaluated for the treatment of metastatic breast cancer in international Phase II/III clinical trials in the intestine, but which can overgrowUnited States, Taiwan, South Korea, India and Hong Kong.  OBI-822 is in Phase III in Taiwan and Phase II in the U.S., South Korea, India and Hong Kong. It is also being evaluated for the treatment of ovarian cancer in an investigator-initiated Phase 1/2 clinical trial in Taiwan.

Under the terms of the agreement, the Company will be responsible for the production and delivery of GMP grade KLH for evaluation as a result of antibiotic use. CDI causes severe diarrheacarrier molecule in OBI-822 active immunotherapy.  The Company will also be responsible for method development, product formulation, and life-threatening intestinal conditions such as colitis. It is a major cause of illnessprocess qualification for certain KLH reference standards.  Amaran will be responsible for development objectives and mortality in hospitalized patients,product specifications. 

The agreement provides for Amaran to pay to the Company fees for certain expenses and costs associated with the incidence of CDI at record highs with 336,000 cases reporteddevelopment program.  Subject to certain conditions and timing, the collaboration also provides for the companies to negotiate a commercial supply agreement for Stellar KLH™ in 2009. This agreement is an example of the Company's strategy to acquire promising vaccine candidates as well as other infectious disease targets that may work in conjunction with the Company's own KLH platform.future.

Stellar has also begun to actively explore multiple avenues of co-involvement with large biopharmaceutical companies. The Company has now entered into mutual non-disclosure agreements with 7 large biopharma companies, all of which have contacted Stellar seeking information on KLH supplies and the Company's KLH expertise. Many contacted the Company through the KLH information website (http://www.klhsite.com) which was launched by Stellar in March 2012 as a web-based resource to assist researchers and Stellar customers in accessing information to support regulatory filings and expanded use of KLH.Royalty Agreement

Royalties and License Agreements

In August 2002, the Company entered into a royalty agreement with Frank Oakes, the Company’s current Stellar President and CEO. Under the agreement, Mr. Oakes agreed to assign certain patent rights to the Company in exchange for 5% of gross receipts in excess of $500,000 annually from products using this invention. The Company's current operations utilize this invention. To date, the Company had paid no royalties under the agreement.

Under a license agreement with Bayer Innovation GmbH ("BIG"), Stellar acquired an exclusive, irrevocable worldwide sub-licensableIntellectual Property and royalty-free licensePatents

The Company holds important intellectual property related to KLH development and manufacture and to the environmental protection of the Giant Keyhole Limpet including, but not limited to, patents, patent applications and trade secrets related to specialized aquaculture systems and technologies; spawning, selection and maintenance ofMegathura crenulata; non-lethal KLH protein extraction methods; and the processing, purification and production of KLH formulations. This intellectual property is key to the Company’s belief that it will be the only company capable of sustainably manufacturing KLH to meet future pharmaceutical industry demands. The Company’s patents provide competitive advantage and assure freedom to operate in this highly specialized field and trade secret manufacturing technology developed through the collaborative agreement between the Company and BIG. The license includedprovide a carve-out by BIG to use the technology in the non-Hodgkin Lymphoma vaccine under development, but Stellar may exclusively commercialize the technology in other fields. Stellar paid BIG $200,000basis for the licensing rights, which will be jointed owned by both Stellar and BIG.continuity of future operations independent from patented technologies.

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Patents

The Company currently holds 6 patents in 5 countries.

4 of the patents allare related to its non-lethal hemocyanin extraction methods. These patents, including their country and expiry date, are:

US6,852,338

United States

January 15, 2023

CA2,444,809

Canada

April 18, 2022

European Patent Office publication of EP02731,401 are registered in:

FR1,389,123

France

April 18, 2022

DE60230260.9

Germany

April 18, 2022

The United State'sStates patent covers a two-step method for obtaining hemolymph from a live gastropod mollusk. It was originally granted to Frank Oakes, the Company's CEO, who assigned the patent to the Company under an agreement dated August 14, 2002. The foreign patents received in Canada and Europe are relatives of the original United States patent.

2 of the patents relate to the Company’s active immunotherapy technology for the treatment ofClostridium difficile infection (“C. diff”). These patents, including their country and expiry date, are:

The two C. diff patents describe certain novel cell surface polysaccharides and their chemical structures with broad claims covering antigen and vaccine compositions for the treatment, prevention and diagnosis of C. diff infection.  

The Company has also filed four Provisional Patent Applications in the United States. Under United States patent law, a Provisional Application filed with the United States Patent and Trademark Office is a means to establish an early effective filing date for a later filed patent application. It also allows the term "Patent Pending" to be applied in connection with the description of the invention. A provisional application has a pendency lasting 12 months from the date the provisional application is filed. This 12-month period cannot be extended. Therefore, an applicant that files a provisional application must file a corresponding non-provisional application for a patent in order to benefit from the earlier filing of the provisional application. Provisional applications are only valid in the United States. The Company may allow certain provisional patent applications to expire and important intellectual property will be captured in new provisional patent applications.

The companyCompany filed a provisional application on August 24, 2010 for native KLH technology for compositions containing native KLH, production methods for making native KLH, and methods and kits for testing immune status using native KLH. This provisional application was allowed to expire on August 24, 2011 and a new, updated provisional application was filed on the same day. That provisional application expired on August 24, 2012, and a further updated application was filed on September 6, 2012. The current provisional application is scheduled to expireexpired on September 5, 2013.

On March 8, 2012, the Company filed a provisional application forClostridium difficile ("C. difficile") technology. The application covers vaccine compositions forC. difficile, production methods for making C. difficile vaccines, and methods for vaccinating patients to induce immunity toC. difficile. The provisional application is scheduled to expire on March 7, 2013.

On April 18, 2012, the Company filed a provisional application that covers Hemocyanin composition and the methods for their preparation and uses as invented by Dr. Sundsmo. The provisional application is scheduled to expire on April 17, 2013.

On August 23, 2012, the Company filed a provisional application directed to protecting certain proprietary KLH manufacturing controls, KLH formulations, and kits used in immunotoxicology and immune status testing which were invented by Drs. Chow, Sundsmo and Sagermann. The provisional application is scheduled to expire on August 22, 2013.

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On November 8, 2012, the Company filed a provisional application for new innovations related to the Company's KLH technology. This application includes claims for pharmaceutical grade compositions of matter, advanced manufacturing processes, and methods of use in a wide range of therapies. The provisional application is scheduled to expireexpired on November 7, 2013.

Certain of the Company's proprietary operational methods are protected as trade secrets.

Government Regulations

The Company’s operations are subject to regulation at the local, State and Federal levels.levels by a number of regulatory agencies including, but not limited to, US Food and Drug Administration, US Environmental Protection Agency, US Fish and Wildlife Service, US Secretary of the Navy, California Regional Water Quality Control Board, California Department of Fish and Wildlife, California Coastal Commission, California Air Pollution Control Board, County of Ventura, and City of Port Hueneme. These regulations include the Company’s aquaculture and harvesting activities, as well as production operations, site development, and drug research, development and sales.

New drug development

The research, development, marketing and sale of drugs is highly regulated and designed to demonstrate the safety and efficacy of pharmaceutical products. These regulations are administered primarily on the national level in the United States, Canada and internationally, and vary by jurisdiction. These regulatory requirements are a significant factor in determining if a drug can be developed and sold successfully and economically.

In order to receive approval for a new drug or vaccine,active immunotherapies, a Company must demonstrate to the applicable regulatory authority that the drug is safe and effective. This process requires successful pre-clinical laboratory testing, and then animal and human clinical trials, before application for approval is made to the regulatory authorities.made. In addition, the Company must submit details of each phase of testing to the appropriate regulatory authorities in order to receive approval to continue to the next phase.

After the successful completion of the laboratory testing and animal studies, human testing is conducted in three phases. Phase I is conducted on a small number of human subjects and is designed to test the safety of the drug, as well as access the drug's effects on the body.drug. Phase II uses human subjects with the targeted disease or condition in order to establish efficacy and optimal dosages, as well as related safety information. Phase III trials have similar goals to Phase II trials, but are typically conducted on a much larger number of subjects and are also intended to compare the drug against current treatments.

After completion of the Phase III trials, application for marketing approval is submitted to the regulatory authorities. The application will include the results of all the testing and human trials, as well as information regarding processing, manufacturing and packaging. If approved, the drug is then authorized for sale.

Currently, none of the Company has noCompany’s commercialized products either those currently for sale or in development, that are subject to approval as a drug by any regulatory authority. However, many of the Company's current customers are utilizing the Company's productStellar KLH™ products in the development of pharmaceuticals that are subject to the regulatory process anddescribed above. These customers’ drugs will require regulatory approval before they can be sold commercially. The approval process is typically long and expensive. Clinical trials may not be successful and such products may not receive regulatory approval.Delays or the inability to obtain regulatory approvals for products from third party customers that use the Company's products will have a direct effect on the demand for the Company's products.

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The Company’s aquaculture operations are subject to laws and regulations covering clean water and waste discharge, as well as licenses for the harvesting of wild keyhole limpets for its operations. Currently,

In March 2013, the Company submitted to the U.S. Food and Drug Administration (FDA) Center for Biologics Evaluation and Research (CBER), a Type II Drug Substance Master File for its subunit KLH. A Master File is conducting certain studies requireda confidential, detailed dossier kept on file at the FDA that contains the proprietary information on the manufacture and safety of a drug component. The Company’s Master Files are intended to support the regulatory approval process for customers’ products that use the Company’s KLH. These files allow the Company to control access to its manufacturing data while supporting customers’ needs to reference that data as part of their active immunotherapies product regulatory applications. This may help expedite regulatory processes for future drug products and clinical trials utilizing the Company’s KLH protein.

The Company currently has one wholly-owned subsidiary, Stellar Biotechnologies, Inc., a corporation incorporated under the laws of the State of California on September 9, 1999.

The Company currently leases its executive offices in Port Hueneme for a term expiring in June 2014, with an option to extend for a further two years. The Company also leases three buildings in the Port Hueneme Aquaculture Business Park from the Port Hueneme Surplus Property Authority under sublease agreements that expire in September 2015 with an option to extend the lease for an additional five years.

The Company's aquaculture operations are land-based and encompass several buildings and 37,000 square foot oceanfront leasehold facility within the Port Hueneme Aquaculture Business Park, located on the Pacific Ocean within the Port Hueneme Harbor District. This facility includes aquaculture, laboratory and manufacturing operations.

The Company’s aquaculture program is the culmination of decades of specialized development by the Company across a range of disciplines. It is also the cornerstone of the Company’s environmental commitment to protecting the Giant Keyhole Limpet (Megathura crenulata).The Company’s aquaculture operations are subject to regulation by the California Department of Fish and GameWildlife and the California Regional Water Quality Control Board. These agencies impose regulations that restrict any activity that could pose a potential risk to certify the Port HuenemeCalifornia marine environment including, but not limited to seawater waste discharge limitations specified in the Company’s National Pollution Discharge Elimination Systems (NPDES) permit. The Company has operated in compliance with all environmental regulations imposed by these agencies since inception of its subsidiary in 1999 but violations of the limitations and restrictions imposed by these agencies, if not remedied in a timely manner could jeopardize the Company’s operating permits and the continued utilization of it’s assets.

The Company’s aquaculture operations were specially developed in the 1990's for production and research on gastropod mollusks. The facility has been in near continuous operation since that time. The specialized aquaculture systems were designed and built to support large colonies of multiple generations of California giant keyhole limpets for the purpose of scalable commercial production of KLH for use in the pharmaceutical and immunology research industries. The Company’s aquaculture facility includes, among other specialized infrastructure, a fully permitted seawater supply system, recirculating seawater supply systems, environmental controls and regulated seawater return to the ocean. The site also contains a fabrication shop for production of equipment and culture apparatus.

The Company utilizes proprietary methods for the control of spawning, larval development, metamorphosis and grow-out of the limpets. All proprietary technologies for aquaculture production were developed by the Company and are protected as trade secrets.

In December 2011, the Company announced the completion of a major expansion of its keyhole limpet hatchery facility. The new facility has a spawning capacity of 2 million larvae and is designed to produce 50,000 four-year-old limpets per year to support the increased industry demand for KLH products.

In January 2013, the Company announced its achievement of an industry milestone in aquaculture science. The Company developed the capability to support the complete life cycle of the Giant Keyhole Limpet (Megathura crenulata), the scarce marine mollusk that is the only source for KLH protein. The Company’s aquaculture program now includes multiple generations of the Giant Keyhole Limpet, grown entirely within its own land-based facility. Limpets used by the Company can be derived from either its own aquaculture production facility or harvested from the wild fishery under license from the State of California Department of Fish and Wildlife.

The Company believes that its aquaculture accomplishments set an unprecedented benchmark for KLH manufacturing and represent competitive advantages for the Company. The Company believes that it now has the only demonstrated aquaculture system with multiple generations of the Giant Keyhole Limpet spawned, grown and sustained within a land-based facility, for transportthe purpose of commercial KLH production. Other KLH suppliers are reliant on scarce, wild populations of limpets. We base these beliefs on our intellectual property, achievements in aquaculture science, KLH production capacity, KLH sustainable manufacturing know-how, and stockingCalifornia industry survey data. These achievements will allow the Company to supply commercial quantities of GMP grade KLH that can meet anticipated long-term demand, while ensuring survival of a wild species.

The production process includes feeding regimens and the recirculation of seawater optimized for limpet health and growth. Each closed recirculating system is equipped with temperature controlled seawater distribution, filtration and treatment equipment. The Company’s facility currently includes 18 production tanks plus 400 individual limpet production modules in two independent closed recirculating aquaculture production systems after a recent major expansion which incorporated significant advances in technology developed by the Company with support from monetary grants from the National Science Foundation. These advancements include methods for the control of the limpet reproductive cycle and systems for intensive propagation of the complex larval stages.

The aquaculture production cycle (to raise mature for KLH production from fertilized eggs) is 5 years, with multiple complex larval and juvenile stages. Mature limpets throughoutcan be extracted for KLH several times per year and, if properly maintained, the stateaverage extracted quantity of California,KLH per year per limpet is predictable and useful in estimating targets for production planning and optimizing the use of the physical plant. The hemolymph is extracted in a sterile, non-harmful manner utilizing the Company's patented methods. Once extracted, the hemolymph is processed through the Company's proprietary methods, which are protected as trade secrets. The Company contracts with specialized contract manufacturing organizations (CMO’s) and contract research organizations (CRO’s) for certain steps of current good manufacturing practice ("cGMP") and quality control testing.

Current limpet inventory in the Company's aquaculture facilities is approximately 1,000 limpets for production, with a further 3,000 limpets held in reserve to accommodate increases in demand and natural attrition. The natural attrition rate in production inventory is estimated at approximately 15% per year, and process related attrition is estimated at 5% a year. To support its current mature limpet inventory, the Company requires approximately 200 mature limpets per year, obtained either through the Company's hatchery operations or through the wild fishery. The actual life expectancy of a mature limpet has yet to be determined experimentally, and no natural history data is available. From internal data the Company estimates the productive life of a commercial limpet to be approximately 10 years.

Given sufficient funding to continue scale-up, Stellar’s projected production capacity is 4-5 kilograms per year within the next four years, and up to 20 kilograms per year a few years after that, depending on customers’ requirements and our ability to execute supply commitments.

The Company currently maintains a production inventory of qualifiedMegathura crenulata sufficient for an annual minimum KLH pharmaceutical intermediate production capacity of 1,500 grams/year, with a projected maximum of 2,000 grams/year with double shift labor schedules. KLH starting pharmaceutical intermediate is normally produced “just in time” to fill customer orders or to meet the Company’s requirements for production of fully purified KLH formulations. This capacity is considered sufficient to meet the Company’s obligations under supply agreements with current customers, under which the Company will usehas agreed to geographically diversifymaintain capacity to meet customers’ non-binding rolling forecasts, with surplus capacity to support business development activities. The Company also maintains aMegathura crenulata live animal inventory sufficient to increase KLH production volume by an additional 3,000 grams/year through an increase in aquaculture tank capacity and production scheduling or manufacturing capacity.

The quantity of KLH pharmaceutical intermediate produced in fiscal 2013 was approximately 46 grams for product development and research. The Company sold approximately 0.34 grams of KLH in various formulations from prior years production. The quantity produced in 2012 was 161 grams for commercial sales, contract obligations, product development and research and 20.5 grams of KLH in various formulations were sold, including a portion from prior years’ production. The quantity produced in 2011 was approximately 340 grams for commercial sales, contract obligations, product development and research. The Company sold 0.76 grams of KLH in various formulations in that fiscal year.

The hold-time assigned to KLH pharmaceutical intermediate produced by the Company is 90 days, based on the in-process hold established in the Master Batch Record for the product. Stability studies on the Company’s purified suKLH (KLH 20MV) support a shelf life of 36 months and stability studies are currently on-going for the Company’s HMW KLH (KLH 01NV).

It is anticipated that the Company could produce and hold in inventory sufficient quantities of KLH to meet future demand for KLH, once shelf life is established for each KLH formulation.

The Company’s plans to expand KLH production capacity are based on the Company’s customers’ forecasts for KLH requirements during active immunotherapies commercialization and the Company’s commitment to meet its customers’ future forecasted KLH requirements. The aquaculture production cycle (to raise mature for KLH production from fertilized eggs) is 5 years. The plan to incrementally increase KLH production to meet anticipated multi-kilogram customer requirements during active immunotherapies commercialization requires a five year plan in which hatchery operationsproduction of juvenile (1 year) limpets is initiated years ahead of anticipated market demand. The initial phase of the plan is to produce a sufficient quantity of juvenile limpets to meet an anticipated 20 kg market demand for KLH 5-7 years in the future. It is anticipated that such expansion would require additional facilities.capital expenditures of approximately $1-2 million and would likely be financed by leveraging KLH supply contracts and customer agreements.

Item 5. Operating and Financial Review and Prospects

Overview

The Company's financial statements are stated in United States Dollars and are prepared in accordance with International Financial Reporting Standards ("IFRS").

The Company has since inception primarily financed its activities through the issuance of equity as well as through government grant programs and limited commercial sales of its products. Subsequent to the end of the most recent fiscal year ended August 31, 2013 and through December 20, 2013, the Company closed a private placement of 11,428,570 units (consisting of one common share and one half common share purchase warrant) for gross proceeds of $12,000,000, and also received CDN$4,118,352 from the exercise of options and warrants. The Company anticipates having to raise additionalbelieves its cash and cash equivalents at August 31, 2013, the funds by equity issuance inreceived from exercise of options and warrants, and the next several years as current revenue is not$12 million gross proceeds raised during the September 2013 private placement are sufficient to meet estimated working capital requirements and fund planned operations for at least the Company's anticipated research, capital and administrative expenditures. The timing ofnext twelve months. Notwithstanding the above, the Company may decide to expand operations, undertake strategic acquisitions or determine some other business need. In such offerings is dependent uponcase, the success ofCompany would then seek financing for such events. This may occur within the Company’s exploration programs as well as the general economic climate.next 6 to 18 months.

Grants

StellarThe Company has historically financed a portion of its operations through the receipt of monetary grants made available through programs funded and administered by various United States Government departments. The grants offer non-dilutive funding for research and development for projects that align directly with the Company's strategic goals.

These grants are intended to foster and promote research and innovation in important scientific and technological projects. The awards have various program funding periods. Phase I funding is typically for a period of six months, after which companies may apply for Phase II funding for an additional 24 months.

In the most recent three fiscal years, the Company has receivedrecognized the following grant funding:funding through its subsidiary:

·

National Science Foundation (NSF) Small Business Innovation Research ("SBIR") grant through the Technology Enhancement for Commercial Partnerships ("TECR") program. The initial $99,000 award was granted in December 2010, and was supplemented with a Phase IIB award of $499,000 awarded in August 2011 for an additional 24 months. The project is entitled "Megathura Crenulata Post Larval Culture - Bottleneck for a Valuable Medical Resource". The purpose of the project is to allow for the full implementation of the commercial scale aquaculture systems for KLH production and development of a validated KLH-based immunogenicity assay.

·

2 grants under the Therapeutic Discovery Project Program administered by Internal Revenue Service awarded in November 2010. The grants are entitled "Diagnostic Immune Status Monitoring in Patients with Immunodeficiency" and "Enabling ICH-S8 Immunotoxicity Testing with Keyhole Limpet Hemocyanin". The grants together totaled $488,985 and will be used to provide supplemental funding for the Company's diagnostic development and Stellar KLH/IMG platforms.

The Company intends to fileapply for a total of $300,000 in new grants during fiscal 2014.

A. Results of Operations

The greatest impact on the comparison of consolidated statements of loss and comprehensive loss is from fluctuations in change in fair value of warrant liability. As a result of having exercise prices denominated in a currency other than the Company’s functional currency, the Company’s warrants with Canadian dollar exercise prices meet the definition of derivatives and are therefore classified as derivative liabilities measured at fair value with noncash adjustments to fair value recognized through the consolidated statements of loss and comprehensive loss. Fair values are based on Black-Scholes option pricing model. The losses and gains in each year are a reflection of the Company’s share price fluctuations with increases in share prices causing greater warrant liability and a resulting loss on fair value of warrant liability, while decreases in share prices cause a resulting gain on fair value of warrant liability. Changes in fair value of warrant liability have no impact on cash flow. If the warrants are exercised, the warrant liability is reclassified to share capital. If the warrants expire, the decrease in warrant liability offsets the changes in fair value.

Year Ended August 31, 2013

During the year ended August 31, 2013, the Company acquired the exclusive, worldwide license from the University of Guelph for the development of immunotherapies against Clostridium difficile infection, which was based upon the exclusive option agreement entered into during fiscal 2012. A new Type II Master File for its subunit KLH was submitted to the FDA in March 2013. Provisional patent applications were filed for inventions related to KLH manufacturing controls, KLH formulations, test kits, and KLH-based combinatorial adjuvant technology during the year. The Company’s common stock began trading on the OTCQB Marketplace in the United States in January 2013.

The Loss and Comprehensive Loss for the year was ($14,886,513), or ($0.29) per share, compared to the Loss and Comprehensive Loss of ($5,196,696), or ($0.12) per share, for the fiscal year ended August 31, 2012. The higher loss in the current year was primarily due to a large change in the fair value of warrant liability.

Revenue for the year totaled $545,469 compared to revenue of $286,054 in the prior year. Revenue included commercial sales of $76,055 compared to $131,825. The decline was largely due to a single large sale of KLH in fiscal 2012. Grant revenue rose to $409,414 from $94,229 due to timing of grant activities and completion of NSF Phase II/IIB in fiscal 2013. Contract income of $60,000 was the same in both periods. Costs of production, aquaculture and grants increased to $576,528 from $436,401. Cost of production and aquaculture declined to $167,114 from $342,358, while grant costs increased to $409,414 from $94,043 due to the timing of grant activities and the completion of a NSF Phase II/IIB grant in the current year.

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TRANSITION TO INTERNATIONAL FINANCIAL REPORTING STANDARDS ("IFRS")

For all periods up to and including August 31, 2011, the Company prepared its financial statements in accordance with Canadian GAAP. The financial statementsExpenses for the year ended August 31, 2012 are the first annual financial statements the Company has prepared2013 declined to $3,647,400 from $6,372,333 incurred in accordance with IFRS, as detailed in the accounting policies described in Note 2 to the Company's consolidated financial statements. In preparing these financial statements, the Company's opening statement of financial position was prepared as at September 1, 2011, the Company's date of transition to IFRS.

IFRS 1 First-time Adoption of International Financial Reporting Standards sets forth guidance for the initial adoption of IFRS. Under IFRS 1 the standards are applied retrospectively at the transitional statement of financial position date, with all adjustments to assets and liabilities taken to deficit unless certain exemptions are applied. Subject to certain transition elections disclosed in Note 16 to the consolidated financial statements, the Company has consistently applied the same accounting policies in its opening IFRS statement of financial position at September 1, 2011, and throughout all periods presented, as if these policies had always been in effect.

The following tables detail the principal adjustments made by the Company in restating its Canadian GAAP consolidated statements of financial position as at September 1, 2011, and its previously published Canadian GAAP financial statements for the year ended August 31, 2011. The transition adjustments2012. During the current year, management made efforts to temporarily reduce operating costs until addition financing was received, which resulted in the significant decline in overall operating expenses. Large changes in expenses occurred in salaries, wages and benefits, which declined to $709,319 from $1,152,320 due to voluntary salary reductions and reductions in the number of personnel. Research and development was $1,445,616 compared to $1,825,585 due to the Statementstiming of Financial Positionresearch and Statementsdevelopment activity, particularly outside contracts. Legal, consulting and professional services fell to $321,785 from $602,865 as the Company reduced expenses through reductions in outside contracted services. Share-based payments were $627,025, which was a decline of $1,289,506 from the $1,916,531 recorded in fiscal 2012. The decline was related to the timing of the granting of stock options in fiscal 2013, and the share-based payments under the performance share program vesting during fiscal 2012. General and administration expenses declined to $585,434 from $801,259 as a result of management’s efforts to reduce operating costs. Allocation of expenses to grant costs was ($166,612) compared to ($38,371), with the increase related to the higher grant expenditures in the current year.

Other income was ($11,207,254) in fiscal 2013 compared to $1,326,784 in fiscal 2012. The largest change occurred in change in fair value of warrant liability, which increased to ($11,116,402) from $1,206,812. Because the Company completed equity offerings in prior periods that included warrants denominated in Canadian dollars, the warrants are classified as derivatives and are measured at fair value based on Black-Scholes pricing models. Adjustments to fair value are recognized in the Statement of Loss and Comprehensive Loss. The loss in the current year is a reflection of the Company’s share price increasing from August 31, 2012 to August 31, 2013. Foreign exchange in fiscal 2013 was a loss of $95,842 compared to income of $10,091 in fiscal 2013. The change was due to unfavorable exchange rates in the current year. Loss have resultedrecovery was $Nil in reclassification of various amounts onfiscal 2013 compared to $105,000 in fiscal 2012 as the Statement of Cash Flows; however, as there have been no changes to the net cash flows, no reconciliations have been preparedCompany received a settlement for the Statementsvalue of Cash Flows.

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The September 1, 2010 Canadian GAAP balance sheet hasKLH which had been reconcileddamaged by a vendor. Interest income was largely unchanged at $4,990 compared to IFRS as follows:

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

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

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Results of Operations$4,881.

Year Ended August 31, 2012

During the year ended August 31, 2012, the Company announced it had received it first purchase order from Sigma-Aldrich under their marketing agreement and entered into an agreement with Life Diagnostics for the manufacture of Stellarthe Company brand KLH ELISA test kits for the detection of anti-KLH antibodies. These test kits were launched to market in April 2012. The Company also entered into an agreement with the University of Guelph under which the University has granted Stellarthe Company an exclusive option to license a patent pending technology for the development of a vaccinean immunotherapeutic candidate against CDI, a major cause of infection and mortality in hospitalized patients.

During the year ended August 31, 2011, the Company received payment for a filled order of KLH from Neovacs SA for its vaccinesactive immunotherapies for use in human trials for rheumatoid arthritis and lupus, and received a milestone payment from BIGBayer for the vaccineimmunotherapies for Non-Hodgkin's Lymphoma. StellarThe Company also acquired an exclusive license to the technology developed in the collaborative agreement with BIG.Bayer. The Company also received a two-year extension to the Company's SBIR Grant totaling $498,560, an additional NSF Grant for $99,000, and two grants under the IRS Therapeutic Discovery Project Program for a total grant award of $488,985.

Due to delays in the clinical trials scheduled to be conducted by several of the Company's customers, anticipated revenues from KLH sales under existing supply contracts were not realized during the year ended August 31, 2012. However, Stellarthe Company was awarded a Phase IIB SBIR grant from the National Science Foundation totaling $498,560 over two years which will allow full implementation of commercial scale aquaculture systems for KLH production and development and deployment of a validated KLH-based immunogenicity assay.

The Loss and Comprehensive Loss for the year2012 was ($5,196,696), or ($0.12) per share, compared to the Loss and Comprehensive Loss of ($3,597,279), or ($0.09) per share, for the fiscal year ended August 31, 2011. The higher loss in the current year was primarily due to lower revenue and higher expenses, including salaries and research and development.

Revenue for the period2012 totaled $286,054 compared to revenue of $697,187 in the prior year. Revenue included commercial sales of $131,825, which rose from $18,988 in 2011, due to a large sale of KLH during the current year. Grant revenue declined to $94,229 from $618,199 due to several non-recurring IRS grants received in the prior year. Contract income of $60,000 was the same in both periods. Costs of production, aquaculture and grants decreased to $436,401 from $1,009,083 due to the lower revenue and grants received.

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Expenses for the year ended August 31,in 2012 increased to $6,372,333 from the $4,519,650 incurred in the year ended August 31, 2011. Large changes in expenses occurred in salaries, wages and benefits, which rose to $1,152,320 in 2012 from $797,263 in 2011 as there was an increase in the number of employees to support the Company's new programs as well as salary increases granted by the Board of Directors; Research and development increased to $1,825,585 in 2012 from $825,887 in 2011 due to an increase in research, including a pre-clinical study for the proof of concept for the CDIC. diff program with the University of Gulph;Guelph; Legal, consulting and professional services rose to $602,865 in 2012 from $363,753 in 2011 due to increased business development and corporate development activities performed by outside consultants. Share-based payments increased to $1,916,531 in 2012 from $1,738,709 in 2011, with much of the increase related to the measurement of vested performance shares. General and Administrative rose to $801,259 in 2012 from $747,883 in 2011 due to the Company's higher level of corporate activity in the current2012 fiscal year.

Other income rose to $1,326,784 in 2012 from $1,235,067.$1,235,067 in 2011. Loss recovery was $105,000 compared to $Nil in the prior year. The Company received a settlement for the value of KLH whichthat had been damaged by a vendor. Foreign exchange gain rose to $10,091 from $3,333 due to favorable US-Canadian exchange rates; Change in fair value of warrant liability totaled $1,206,812 in 2012 compared to $1,220,437 in the prior year. Because the Company completed equity offerings in prior periods that included warrants denominated in Canadian dollars, the warrants are classified as derivatives and are measured at fair value based on Black-Scholes pricing models. Adjustments to fair value are recognized in the Statement of Loss and Comprehensive Loss. The gain in both prior years was caused by share prices decreasing from August 31, 2011 to August 31, 2012 and from August 31, 2010 to August 31, 2011, respectively. Interest income declined to $4,881 in 2012 from $11,297 due to a lower balance of interest bearing cash and cash equivalents during the current year.

B. Liquidity and Capital Resources

The Company’s working capital position at August 31, 20122013 was $486,019,$4,225,714, including cash and cash equivalents of $998,998.$7,859,889. Management believes the current working capital, as well as anticipated revenue,including funds raised through a private placement of units (common shares and warrants) and the exercise of warrants and options subsequent to the year-end, is not sufficient to meet the Company's present requirements, including all contractual obligations and anticipated research and development expenditures in Fiscal 2013.fiscal 2014. The Company anticipatesexpects to finance its future public or privateexpenditures and obligations through revenues from commercial sales, contract income, grant revenues, and sales of its common stock.shares. The timing of such offerings is dependent upon several factors, including the success of the Company’s operational plans as well as the general economic climate and market conditions. There are no restrictions on the ability of the Company’s subsidiary to transfer funds to the Company.

Subsequent to the fiscal 20122013 year-end, the Company has completed twoa private placementsplacement of its common shares.

Under the first private placement, theThe Company sold 4,000,000 common shareissued 11,428,570 units at a purchase price of CDN $0.25 per unit for total gross proceeds of CDN $1,000,000.$12,000,000. Each unit consistsconsisted of one common share and one transferrableone-half of a share purchase warrant, with each full warrant entitlingexercisable into one additional common share at a price of $1.35 for a period of three years from the issuance date of the warrants. The private placement consisted of two closing; a brokered portion sold to institutional and accredited investors totaling $5,000,000 (4,761,903 units) (the “Brokered Offering”) and a non-brokered portion totaling $7,000,000 (6,666,667 units (the “Non-brokered Offering”). The non-brokered offering included a $5,000,000 investment by Amaran Biotechnology, Inc. a privately-held Taiwan biopharmaceuticals manufacturer. Newport Coast Securities, Inc., an SEC registered broker-dealer and FINRA member firm, served as exclusive placement agent on behalf of the Company and received commissions totaling $346,325 and 333,333 placement agent warrants (the “Agent Warrants”). Each Agent warrant entitles the holder to purchase one additional share of Stellar’s common share on or before October 25, 2015shares at a purchase price of CDN $0.40 per share. The Company paid$1.05 for a finder's fee to Global Market Development LLC consistingperiod of CDN $50,000 in cash and a non-transferrable option exercisable into 400,000 units inthree years from the capitalissuance date of the CompanyAgent Warrants. No finders’ fees or commissions were paid on or before October 25, 2015 at a price of CDN $0.25 per unit, with each unit having the same terms as the units issuedNon-brokered Offering. The securities sold in the private placement.placement were not registered under the Securities Act of 1933, as amended, or State securities laws and were sold in reliance upon exemptions from registration requirements.

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Under the second private placement, the Company sold 1,998,400 common share units at a purchase price of CDN $0.25 per unit for gross proceeds of CDN $499,600. Each unit consists of one common share and one transferable share purchase warrant, with each warrant entitling the holder to purchase one additional common share on or before January 4, 2016 at a purchase price of CDN $0.40 per share. The Company paid finder's fees to Global Market Development LLC and Antaeus Capital, Inc. consisting of an aggregate of CDN $24,300 cash and non-transferrable options exercisable into 97,200 units in the capital of the Company on or before January 4, 2016 at a price of CDN $0.25 per unit, with each unit having the same terms as the units issued in the private placement.

The Company has historically financed its operations through revenue, including grant income, as well as through the issuance of common shares. The following sales and issuances of common stockshares have been completed in the last 53 fiscal years.years and in fiscal 2014 through December 20, 2013.

Table No. 2

Common Share Issuances

All Figures in US Dollars unless otherwise noted

(1) $491,408 deemed value less $195,014 allocated to fair value of warrants for 278,400 non-transferrable share purchase warrants issued to acquire license.

Fiscal Year Ended August 31, 2013

As of August 31, 2013, the Company's working capital position was $4,225,714 compared to working capital of $486,019 as of August 31, 2012.

During the year, operating activities used cash of ($2,924,965). Items not affecting cash included amortization and depreciation of $124,833; share-based payments related to the issuance of stock options of $627,025; unrealized foreign exchange loss of $31.271; change in fair value of warrant liability of $11,116,402 due to adjustment to fair value of warrants previously issued; and fair value of shares and warrants issued for research license of $491,408. Changes in non-cash working capital items include an increase in amounts receivable of ($256,638) related to grants; increase in deferred financing costs related to the private placement of units completed after the fiscal year used cash of ($62,027); increase in prepaid expenses used cash of ($2,658); increase in accounts payable and accrued liabilities of $19,409; and decrease in deferred revenue of ($127,477) related to the timing of work performed under grants for which cash had been received in the prior year but earned in the current year.

Financing activities provided cash of $9,730,826. Proceeds from exercise of warrants and options provided cash of $1,582,739; share subscription proceeds provided cash of $8,271,549, including $5,000,000 received in advance of the September private placement closing; share issuance costs used cash of ($125,062); and payment of deposits provided cash of $1,600. Investing activities used cash of ($9,541), with the entire amount used for the acquisition of property, plant and equipment. Effect of exchange rate changes on cash and cash equivalents was $64,571.

During the year 2013, a total of 12,532,599 common shares were issued:

The Company's cash and cash equivalents totaled $7,859,889 as at August 31, 2013 compared to cash and cash equivalents of $998,998 at August 31, 2012 an increase of $6,860,891 during the year.

Fiscal Year Ended August 31, 2012

As of August 31, 2012, the Company's working capital position was $486,019 compared to working capital of $4,061,980 as of August 31, 2011. During the year, operating activities used cash of ($3,947,814). Items not affecting cash included amortization and depreciation of $112,144; Share-basedshare-based payments of $1,916,531 related to the issuance of stock options and performance shares; Changechange in fair value of warrant liability of $1,206,812)($1,206,812), which was due to adjustment to fair-value tofair value of warrants previously issued; and unrealized foreign exchange gain of ($12,539). Changes in non-cash working capital items include a decrease in accounts receivable of $32,188; a decrease in prepaid expenses of $4,376; an increase in accounts payable and accrued liabilities of $275,517; and an increase in deferred revenue of $127,477 due to the timing of work performed under grants for which cash hashad been received but not yet been received.earned.

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Financing activities provided cash of $877,210, with the entire amount provided by proceeds from the exercise of options and warrants. Investing Activitiesactivities used cash of ($78,338), with the entire amount used for the acquisition of property, plant and equipment. Effect of exchange rate changes on cash and cash equivalents also provided cash of $2,448.

During the year 2012, a total of 3,801,730 common shares were issued:

·

1,313,130 common shares were issued to non-director individuals pursuant to the Company's Performance Share Plan.

·

2,318,600 common shares were issued pursuant to the exercise of warrants for proceeds of $830,716.

·

170,000 common shares were issued pursuant to the exercise of options for proceeds of $46,494.

The Company's cash and cash equivalents totaled $998,998 at August 31, 2012 compared to cash and cash equivalents of $4,145,492 as of August 31, 2011, a decrease of $3,146,494 during the year.

Fiscal Year Ended August 31, 2011

As of August 31, 2011, the Company's working capital position was $4,061,980 compared to working capital of $2,174,121 as of September 1, 2010. During the year, operating activities used cash of ($2,617,768). Items not affecting cash included amortization and depreciation of $87,325; share-based payments of $1,738,709 related to the issuance of stock options and performance shares; change in fair value of warrant liability of ($1,220,437), which was due to adjustment to fair-value tofair value of warrants previously issued; and unrealized foreign exchange gain of ($4,559). Changes in non-cash working capital items include a decrease in accounts receivable of $532,807 related to grants, increase in prepaid expenses of ($13,664), and decrease in accounts payable and accrued liabilities of ($140,670).

Financing activities provided cash of $5,068,520. Proceeds from the exercise of warrants provided cash of $784,858, share subscription proceeds provided cash of $4,729,524, while share issuance costs used cash of ($312,103). The repurchase of dissenting shareholder shares used cash of ($125,025) as the Company repurchased 1,661,241 common shares from a shareholder of Stellar CA in order to cancel them and return them to treasury. Payment of deposits used cash of ($8,734).

Investing Activities used cash of ($309,782), with the entire amount used for the acquisition of property, plant and equipment. Effect of exchange rate changes on cash and cash equivalents provided cash of $1,226.

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During the year 2011, a total of 14,695,140 common shares were issued:

·

In September 2010, the Company completed the private placement of 3,000,000 units at a price of CDN$0.35 for gross proceeds of $1,002,497 (CDN$1,050,000). Each unit consists of one common share and one-half of a share purchase warrant, with each full warrant exercisable into one common share at a price of CDN$0.50 on or before March 28, 2012. In addition, agent's options to acquire 210,000 units were issued on the same terms of the private placement and are exercisable at a price of CDN$0.35 on or before March 28, 2012. Share issuance costs of $96,958 were paid in relation to the placement.

·

In November 2010, the Company completed the private placement of 6,213,000 units at a price of CDN$0.60 per unit for gross proceeds of $3,695,784 (CDN$3,727,800). Each unit consists of one common share and one share purchase warrant. Each warrant is exercisable into one common share at a price of CDN$0.90 on or before November 14, 2011, and at CDN$1.15 per share if exercised from November 15, 2011 until on or before November 14, 2012. In addition, agent's options to acquire 345,600 units were issued under the same terms as the private placement and are exercisable at CDN$0.60 on or before November 14, 2012. Share issuance costs of $215,145 were paid in relation to the placement.

·

3,333,335 common shares were issued to officers, directors and employees pursuant to the Company's Performance Share Plan.

·

2,148,805 common shares were issued pursuant to the exercise of warrants for proceeds of $784,858.

The Company's cash and cash equivalents totaled $4,145,492 at August 31, 2011 compared to cash and cash equivalents of $2,003,296 as of September 1, 2010, an increase of $2,142,196 during the year.

CriticalBasis of Presentation, Significant Accounting Policies and Estimates

Management is required to make judgments, estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period.  On a regular basis, management evaluates its estimates and assumptions. The estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form that basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.  Actual results may differ from these estimates under different assumptions or conditions.

The audited financial statements for the periods ended August 31, 2013, 2012, and 2011 are prepared in accordance with International Financial Reporting Standards ("IFRS"). The Company's criticalbasis of presentation, significant accounting policies and estimates under IFRS are given below.

Basis of Presentation

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

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

These consolidated financial statements include estimates which, by their nature, are uncertain. The impacts of such estimates are pervasive throughout the consolidated financial statements, and may require accounting adjustments based on future occurrences.  Revisions to accounting estimates are recognized in the period in which the estimate is revised and future periods if the revision affects both current and future periods. These estimates are based on historical experience, current and future economic conditions and other factors, including expectations of future events that are believed to be reasonable under the circumstances.

Principles of Consolidation

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

Critical JudgementsJudgments and Sources of Estimation Uncertainty

The preparation of financial statements in conformity with IFRS requires management to make certain estimates, judgementsjudgments and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the consolidated financial statements and the reported amounts of revenues and expenses during the reported periods. Actual outcomes could differ from these estimates. These consolidated financial statements include estimates which, by their nature, are uncertain. The impacts of such estimates are pervasive throughout the consolidated financial statements, and may require accounting adjustments based on future periods if the revision affects both current and future periods. These estimates are based on historical experience, current and future economic conditions and other factors, including expectations of future events that are believed to be reasonable under the circumstances.

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Critical JudgementsJudgments

The following are critical judgementsjudgments that management has made in the process of applying accounting policies and that have the most significant effect on the amounts recognized in the consolidated financial statements:

1)

The determination of categories of financial assets and financial liabilities has been identified as an accounting policy which involves judgements or assessments made by management.

2)

Management is required to assess the functional currency of each entity of the Company.  In concluding that the US dollar is the functional currency of the parent and its subsidiary, management considered the currency that mainly influences the cost of providing goods and services in each jurisdiction in which the Company operates.  The Company also considered secondary indicators including the currency in which funds from financing activities are denominated and the currency in which funds are retained. 

3)

Management is required to assess impairment in respect of licensing rights and property, plant and equipment.  The triggering events are defined in IAS 36.  In making the assessment, management is required to make judgements about whether there is any indication that an asset may be impaired.  Management has determined that there were no indications of impairment and as such, no impairment estimates were performed.

4)

Research is recognized as an expense when incurred but development costs may be capitalized as intangible assets if certain conditions are met as described in IAS 38Intangible Assets.   Management is required to make judgements about whether the activities are in the research or development phase and judgements about the existence of a market for the output of the intangible asset.  Management performed an assessment of separately acquired development costs of a new product and determined that the Company cannot yet demonstrate the future economic benefits in order to capitalize and defer these development costs.  All other research and development costs were assessed by management as being in the research phase and were expensed.

Estimation Uncertainty

The following are key assumptions concerning the future and other key sources of estimation uncertainty that have a significant risk of resulting in a material adjustment to the carrying amount of assets and liabilities within the next fiscal year:

1)

Warrants issued with exercise prices denominated in a currency other than the Company’s functional currency meet the definition of derivatives and are therefore classified as derivative liabilities measured at fair value with adjustments to fair value recognized through the consolidated statements of loss and comprehensive loss. The fair value of the warrants is estimated using the Black-Scholes option pricing model at the end of each reporting period. Such estimates are subject to change each period and the differences will affect the warrant liability provision in the period in which the estimate is made.

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2)

Provisions for income taxes are made using the best estimate of the amount expected to be paid based on a qualitative assessment of all relevant factors.  The Company reviews the adequacy of these provisions at the end of the reporting period.  However, it is possible that at some future date an additional  liability or a decrease in tax benefits could result from audits by taxing authorities. Where the final outcome of these tax-related matters is different from the amounts that were originally recorded, such differences will affect the tax provisions in the period in which such determination is made.

3)

Depreciation and amortization expenses are allocated based on assumed asset lives and depreciation/amortization rates.  Should the asset life or depreciation/amortization rate differ from the initial estimate, an adjustment would be made in the consolidated statements of loss and comprehensive loss.   

Cash and Cash Equivalents

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

Property, Plant and Equipment

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

Maintenance and repairs are charged to operations as incurred.

Impairment of Long-Lived Assets

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

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

Financial Instruments

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

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

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

Held-to-maturity (“HTM”)

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

Loans and receivables

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

Available for sale (“AFS”)

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

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The Company has classified its financial assets as follows:

·

Cash and cash equivalents are classified as FVTPL.

·

Amounts receivable are classified as loans and receivables.

Financial liabilities

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

Fair value through profit or loss (“FVTPL”)

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

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

Other financial liabilities

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

The Company has classified its financial liabilities as follows:

·

Accounts payable is classified as other financial liabilities.

·

Warrant liability is classified as FVTPL.

Impairment of financial assets

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

For all financial assets objective evidence of impairment could include:

·

significant financial difficulty of the issuer or counterparty; or

·

default or delinquency in interest or principal payments; or

·

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

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Revenue Recognition

Commercial Sales

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

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

Grants

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

Contract income

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

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

Research and Development

The Company is involved in research and development. Research costs, including materials and salaries of employees directly involved in research efforts, are expensed as incurred. Development costs are expensed in the period incurred, unless they meet criteria for technical, market and financial feasibility, in which case they are deferred and amortized over the estimated life of related products. Research and development expenses are shown as a separate line item on the consolidated statements of loss and comprehensive loss. As at August 31, 2012,2013, the Company had no deferred development costs.

Equity Financing

The Company engages in equity financing transactions to obtain the funds necessary to continue operations and perform research and development activities. These equity financing transactions may involve issuance of common shares or units. Units typically comprise a certain number of common shares and share purchase warrants. Depending on the terms and conditions of each equity financing transaction, the warrants are exercisable into additional common shares at a price prior to expiry as stipulated by the terms of the transaction. The Company adopted a residual value method with respect to the measurement of common shares and share purchase warrants issued as private placement units. The fair value of the common shares issued in the private placements is determined by the closing quoted bid price on the price reservation date, if applicable, or the announcement date. The balance, if any, is allocated to the attached share purchase warrants.

Share-Based Payments

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

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

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

Foreign Exchange

Items included in the financial statements of the Company’s subsidiary are measured using the currency of the primary economic environment in which the entity operates (the “functional currency”). The functional currency of the parent and its subsidiary is the US dollar.

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

Income Taxes

Income tax expense comprises current and deferred tax. Income tax is recognized in profit or loss except to the extent that it relates to items recognized directly in equity. Current tax expense is the expected tax payable on taxable income for the year, using tax rates enacted or substantively enacted at year end,year-end, adjusted for amendments to tax payable with regards to previous years.

Deferred tax is recorded using the liability method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Temporary differences are not provided for relating to goodwill not deductible for tax purposes, the initial recognition of assets and liabilities that affect neither accounting nor taxable loss, and differences relating to investments in subsidiaries to the extent that they will be probably not reverse in the foreseeable future. The amount of deferred tax provided is based on the expected manner of realization or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantively enacted at the statement of financial position date.

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

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Loss Per Share

Basic earnings (loss) per share is calculated by dividing income available to common shareholders by the weighted average number of common shares outstanding during the period.

The computation of diluted loss per share assumes the conversion, exercise or contingent issuance of securities only when such conversion, exercise or issuance would have a dilutive effect on loss per share. The dilutive effect of convertible securities is reflected in diluted earnings per share by application of the “if converted” method. The dilutive effect of outstanding options and warrants and their equivalents is reflected in diluted earnings per share by application of the treasury stock method.

New Accounting Standards, Amendments and Interpretations Issued but Not Yet Adopted

Beginning with the quarter ended November 30, 2011, the company prepares it financial statements using accounting policies consistent with the International Financial Reporting Standards ("IFRS") as issued by the International Accounting Standards Board (“IASB”)A number of new standards, amendments to standards and Interpretations issued by the International Financial Reporting Interpretations Committee (“IFRIC”) andinterpretations are effective in accordance with International Accounting Standard (“IAS”) 34, Interim Financial Reporting.

future years. The Company has reviewed new and revised IFRS accounting pronouncements that have been issued but aredoes not yet effective. The Company has not early adoptedexpect to adopt any of these standards and is currently evaluating the impact, if any, thatbefore their effective dates. The following new standards have not been applied in preparing these standards might have on itsconsolidated financial statements.statements:

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

IFRS 10 -Consolidated Financial Statements. IFRS 10 defines a single conceptestablishes principles for the presentation and preparation of control as the determining factor in whether an entity should be included within the consolidated financial statements of a parent company. The standard provides additional guidance to assist in the determination of control where this is difficult to assess.when an entity controls one or more other entities. IFRS 10 is effective for annual periods beginning on or after January 1, 2013. Earlier application is permitted, provided IFRS 11, IFRS 12 and IAS 28 (as amended in 2011) are applied at the same time.permitted. This standard supersedes IAS 27Consolidated and Separate Financial Statements and SIC-12Consolidated – Special Purpose Entities.

IFRS 11 -Joint Arrangements. IFRS 11 focuses on the rights and obligations of an arrangement rather than its legal form, as is currently the case. The standard distinguishes betweenestablishes principles for financial reporting by parties to a joint operations, where the joint operator accounts for the assets, liabilities, revenues, and expenses relating to its involvement, and joint ventures, which must be accounted for using the equity method.arrangement. IFRS 11 is effective for annual periods beginning on or after January 1, 2013. Earlier application is permitted, if IFRS 10, IFRS 12, and consequential amendments to IAS 28Investments in Associates and Joint Venturesare applied at the same time.permitted. This standard supersedes IAS 31Interest in Joint Ventures and SIC-13Jointly Controlled Entities – Non-Monetary Contributions by VenturesVenturers.

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

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

IAS 1 -Financial Statement Presentationamendment.The amendmentsCompany continues to IAS 1 require entities to separate items presented in other comprehensive income (“OCI”) into two groups, basedevaluate the impact of these standards on whether or not they may be recycled to profit or loss in the future. Items that will not be recycled will be presented separately from items that may be recycled in the future. Entities that choose to present OCI items before tax will be required to show the amountits accounting policies and consolidated financial statements. The extent of tax related to the two groups separately.

IAS 12 –Income Taxes amendment.  The amendment to IAS 12 addresses an issue that arises when entities apply the measurement principle in IAS 12 to temporary differences relating to investment properties that are measured at fair value.  The amendment incorporates some guidance from and supersedes SIC-21Income Taxes – Recovery of Revalued Non-Depreciable Assets. The amendment to IAS 12 is effective for annual periods beginning on or after January 1, 2012.

Amendments to Other Standards.There have been amendments to existing standards, including IFRS 7 – Financial Instruments: Disclosure, IAS 27 –Separate Financial Statements, andIAS 28 –Investments in Associates and Joint Ventureseffective January 1, 2013 and IAS 32 –Financial Instruments: Presentation effective January 1, 2014.  IFRS 7 amendments require disclosure about the effects of offsettingthe new accounting standards on the consolidated financial assets and financial liabilities and related arrangements on an entity’s financial position.  IAS 27 amendments address accounting for subsidiaries, jointly controlled entities and associates in non-consolidated financial statements.  IAS 28statements has not been amended to include joint ventures in its scope and to address the changes in IFRS 10 – 13.  IAS 32 amendments address inconsistencies when applying the offsetting requirements.determined.

Capital Expenditures

The Company has budgeted $5,000$660,000 for capital expenditures for fiscal 2013.2014 for operations and aquaculture facilities improvements, capacity expansion and research equipment using funds received from the September 2013 private placement.

C. Research and Development

The Company's core business is developing and commercializing Keyhole Limpet Hemocyanin ("KLH") for use in medical and research products. The Company currently conducts research and development activities related to the aquaculture of keyhole limpets as well aslimpet, the extraction and purification of KLH.KLH, and related products and technologies.

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Research costs, including materials and salaries of employees directly involved in research efforts, are expensed as incurred. Development costs are expensed in the period incurred, unless they meet criteria to technical, market and financial feasibility, in which case they are deferred and amortized over the estimated life of related products. Research and development expenses are shown as a separate line item on the consolidated statements of income (loss), comprehensive income (loss), and deficit. As at August 31, 2012,2013, and 2011,2012, the Company had no deferred development costs.

The following table includes the Company's research and development costs for each of the most recent three fiscal years:

The Company hadhas budgeted approximately $800,000$2.2 million for research and development in fiscal 2013.2014.

D. Trend Information

The Company knows of no trends, uncertainties, demands, commitments or events that are reasonably likely to have a material effect on the Company’s operations or financial condition.

E. Off-Balance Sheet Arrangements

The Company has no Off-Balance Sheet Arrangements.

F.Tabular Disclosure of Contractual Obligations

The Company leases three buildings and facilities in Port Hueneme, California under sublease agreements with the Port Hueneme Surplus Property Authority. On September 1, 2010,Authority through October 31, 2015. At that time the Company exercised itshas the option to extend the three buildings and facilities sublease agreement.lease for another five years. The monthly base rents total $7,071 for a term of 5 yearsbeginning November 1, 2010 with rents adjusted by the Consumer Price Index every November 1st. The Company also leases office facilities through June 30, 2014.2014 with the option to extend the term for an additional two years. Rent is $5,126 per month beginning July 1, 2011 with 3% cost of living increases per year.

The Company also has purchase order commitments for contract manufacturing organizations.contracts and consultants.

Table No. 3

Contractual Obligations

As of August 31, 20122013

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Item 6. Directors, Senior Management and Employees

A. Directors and Senior Management

Table No. 4 lists as of December 17, 2012,20, 2013, the names of the Directors of the Company. The Directors have served in their respective capacities since their election and/or appointment and will serve until the next Annual General Meeting or until a successor is duly elected, unless the office is vacated in accordance with the Articles/By-LawsArticles of the Company. All Directors are residents and citizens of the United States. Each director was reelected at the annual general and special meeting of shareholders held on January 17, 2012,February 12, 2013, or appointed after the meeting of shareholders, and each director's term will expire at the next annual general meeting of shareholders scheduled to be held on February 12, 2013.13, 2014.

Table No. 4

Directors