AquaBounty Technologies, Inc. — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018; comparative periods ended June 30, 2017. AquaBounty develops and commercializes AquAdvantage Salmon, which had U.S. FDA approval and Canadian approvals. The company reported initial sales to Canada, while expanding production capacity in Indiana and Prince Edward Island.
Financial performance and liquidity
- Q2 revenue: $47,898, down 9% from $53,278. Product costs were $47,287, yielding gross profit of $611 and a gross margin of approximately 1.3%.
- Six-month revenue: $66,995, up 26% from $53,278. Product costs were $63,519, yielding gross profit of $3,476 and a gross margin of approximately 5.2%. Sales comprised AquAdvantage Salmon and non-transgenic salmon eggs and fry.
- Operating loss and net loss: Q2 operating loss was $2.785 million and net loss was $2.781 million, versus $2.087 million and $2.093 million, respectively, in Q2 2017. For the six months, operating loss was $5.228 million and net loss was $5.231 million, versus $4.136 million and $4.149 million in 2017. Six-month basic and diluted loss per share was $0.42, compared with $0.48.
- Expenses: Q2 general and administrative expense increased 92% to $1.828 million, primarily due to Indiana pre-production costs. Six-month R&D expense rose 12% to $1.859 million; six-month G&A rose 55% to $3.215 million. Lower sales and marketing expense partly offset these increases.
- Cash flow: Six-month operating cash use was $5.334 million, compared with $4.397 million in 2017; capital expenditures drove investing cash use of $3.017 million, down from $16.194 million. Financing provided $11.399 million, mainly from a January 2018 stock-and-warrant offering. Cash increased $3.026 million during the period to $3.519 million.
- Balance sheet: At June 30, cash and cash equivalents were $3.519 million; current assets were $4.110 million and current liabilities $1.227 million. Total debt was $2.991 million, including $58,377 current debt. Accumulated deficit was $113.763 million.
Material changes and business developments
- Quarterly revenue decreased year over year, while first-half revenue increased; management said sales would remain modest and infrequent until grow-out facilities are operational at full capacity.
- Six-month net loss widened by $1.082 million, primarily reflecting higher G&A and R&D spending. Management attributed the G&A increase mainly to Indiana facility pre-production activity and the R&D increase to staffing, supplies, facility activity at Rollo Bay, and field trials.
- The January 2018 offering generated $10.6 million net proceeds. By June 30, 3,692,307 shares had been issued in the offering and 249,824 shares issued through warrant exercises. The company had 12,848,376 common shares outstanding at June 30 and 3,996,329 outstanding warrants exercisable at $3.25 per share.
- Indiana’s facility was operational, with upgrades expected to continue through 2019. The Rollo Bay grow-out building was expected to be completed by year-end 2018 and the broodstock building during 2019. The company disclosed $1.1 million of additional Rollo Bay commitments and $0.4 million committed for Indiana upgrades.
Outlook, risks, and contingencies
- Liquidity warning: Management estimated that existing funds, assessed as of August 1, 2018, would be used by the end of December 2018, primarily because of increased working-capital needs. It expected to raise additional debt or equity and believed that doing so was probable, supporting continued going-concern accounting. If financing is delayed, management may slow, delay, or halt farm construction; failure to secure funds could prevent planned operations from continuing.
- Management anticipated R&D expense would increase as Rollo Bay development and regulatory work continued, while sales and marketing expense would remain relatively flat until production increased. It expected G&A expense to decrease after Indiana operations commenced.
- A lawsuit challenging the FDA’s authority and approval process for AquAdvantage Salmon remained in discovery. Plaintiffs allege the approval failed to address environmental and ecological risks, including possible escape and impacts on wild salmon. The filing does not quantify potential financial exposure.
- Other key risks include further regulatory approvals, commercial acceptance, production and distribution capability, financing needs, construction costs, and foreign-currency exposure. Management reported no material changes to previously disclosed risk factors and stated disclosure controls were effective.
Important facts for investors to verify
- Whether the company obtained sufficient financing after the stated cash runway through December 2018, and on what terms.
- Actual facility completion, operating capacity, production costs, and progress toward commercial-scale sales in Indiana and Rollo Bay.
- Subsequent AquAdvantage Salmon sales, customer acceptance, and regulatory developments in existing and potential markets.
- Developments and potential costs or consequences from the FDA approval lawsuit.
- Potential dilution from outstanding warrants and any further equity financing.