AquaBounty Technologies, Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. AquaBounty develops and commercializes land-based aquaculture, with AquAdvantage Salmon as its lead product. The product has U.S. and Canadian approvals. The company expects sales to remain modest and infrequent until its Indiana and Rollo Bay farms are in full production, targeted for mid-2020.
Financial performance
| Metric | Three months ended June 30, 2019 | Six months ended June 30, 2019 |
|---|---|---|
| Product revenue | $42,486 (down 13% year over year) | $140,371 (up 109%) |
| Product costs | $38,992 | $120,605 |
| Gross profit and margin | $3,494; 8.2% | $19,766; 14.1% |
| Operating loss | $4.02 million | $6.78 million |
| Net loss | $4.03 million, versus $2.78 million | $6.79 million, versus $5.23 million |
| Net loss per share | $0.19 | $0.37 |
| Operating cash used | Not separately provided for the quarter | $5.21 million, versus $5.33 million |
Q2 general and administrative expense rose 70% to $3.11 million, primarily reflecting personnel and CEO-related stock compensation, regulatory legal fees, travel, and Indiana start-up capacity costs. Six-month R&D expense fell 21% to $1.48 million, while G&A increased 60% to $5.14 million. The filing does not report a conventional operating margin; the six-month operating loss was approximately 48 times revenue.
Cash, debt, and capital
- Cash and cash equivalents were $10.40 million at June 30, 2019, compared with $2.99 million at December 31, 2018. Current assets were $11.29 million and current liabilities $2.18 million.
- Six-month investing cash use was $0.92 million, mainly for Indiana renovations and Rollo Bay construction. Financing provided $13.52 million, including $12.40 million net equity proceeds and $0.90 million of debt proceeds.
- Total debt was $4.63 million, including $0.14 million current debt; long-term lease obligations were $0.38 million. Cash exceeded reported debt by about $5.77 million, before lease obligations.
- Stock offerings and warrant exercises increased shares outstanding to 21.60 million at June 30, from 15.10 million at year-end. The company reported $6.97 million of accumulated deficit added during the first half.
Changes, outlook, and risks
- Despite substantial year-over-year first-half revenue growth, Q2 revenue declined and losses widened. Management attributes modest revenue to the pre-production stage.
- Management says available funds are sufficient for cash requirements for the next 12 months from the filing date, but expects to need additional capital thereafter and plans to pursue equity, debt, partnerships, or other financing. It may reduce spending or delay capital expenditures; estimates could prove wrong and cash could be used sooner. Further equity financing may dilute shareholders.
- Rollo Bay construction in process was $6.6 million, with an additional $685,000 committed. Management expects spending on working capital and raising initial fish batches at both farms. Full production and more significant revenue are not assured.
- The 2018 annual report cited substantial doubt about going concern; management says its mitigation plan was implemented and current cash covers the next 12 months, but further financing remains necessary for subsequent needs.
- A lawsuit challenging FDA authority and approval of AquAdvantage Salmon is proceeding to substantive briefing after discovery. Plaintiffs seek, among other relief, vacatur of the approval; an adverse outcome could delay or restrict U.S. sales. The company says it believes the suit lacks merit.
- Other material risks include uncertain additional regulatory approvals, commercial acceptance and profitable production, construction and operating costs, and potential changes in bioengineered-food regulation. Panama site operations ceased in May 2019 after approval of the Indiana and Rollo Bay farms.
- Intrexon and related entities were reported to control approximately 42% of outstanding shares, giving them significant influence over board and shareholder matters. The former CEO retired June 30; related option acceleration and modification contributed $134,258 of first-half share-based compensation.
Most important facts for investors to verify
- Whether Indiana and Rollo Bay reach planned production and harvest milestones around mid-2020, and at what cost.
- Cash use, remaining construction commitments, and timing and terms of additional financing.
- Progress and potential impact of the FDA approval litigation and any further regulatory requirements.
- Revenue quality and whether product sales can expand with acceptable margins and market acceptance.
- Share dilution and governance implications of future financings and Intrexon-related ownership.