AquaBounty Technologies, Inc. — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. The filing also reports unaudited fourth-quarter results. Amounts are in U.S. dollars unless noted.
Business context
AquaBounty is a biotechnology and aquaculture company developing and commercializing AquAdvantage Salmon, a bioengineered Atlantic salmon. It had FDA approval in the United States and food and feed approval in Canada, but an FDA Import Alert prevented imports of the product into the United States pending labeling guidance. The company was preparing production facilities in Indiana and Prince Edward Island (PEI), while making limited sales from Panama. It also has research programs in gene-edited tilapia and faster-growing trout.
Financial performance and position
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Product revenue | $84,518 | $53,278 |
| Product costs | $78,155 | $50,777 |
| Gross profit on product sales | $6,363 | $2,501 |
| Operating expenses | $10.45 million | $9.29 million |
| Operating loss | $10.37 million | $9.23 million |
| Net loss | $10.38 million | $9.26 million |
| Net loss attributable to common shareholders | $12.20 million | $9.26 million |
| Basic and diluted loss per share | $0.94 | $1.06 |
| Cash used in operating activities | $9.82 million | $9.10 million |
| Cash used in investing activities | $4.08 million | $19.05 million |
| Cash provided by financing activities | $16.45 million | $25.24 million |
| Cash and cash equivalents at year-end | $2.99 million | $493,000 |
| Total assets | $27.67 million | $23.73 million |
| Total debt reported | $3.59 million | $3.08 million |
| Stockholders’ equity | $23.23 million | $17.98 million |
Gross margin on product sales was approximately 7.5% in 2018; revenue remained very small relative to operating costs, so this is not a meaningful measure of the economics of scaled production. The $1.82 million deemed dividend from a warrant inducement increased the loss attributable to common shareholders and per-share loss, but was not an operating expense. Year-end cash and cash equivalents plus certificates of deposit were about $3.00 million. Reported debt includes a $2.11 million government grant repayable through royalties; interest-bearing debt was about $1.2 million and carried fixed rates.
Fourth-quarter 2018 revenue was $6,585, operating loss was $2.42 million, and net loss was $2.42 million. A further $1.82 million deemed dividend in the quarter brought loss attributable to common shareholders to approximately $4.25 million; quarterly loss per share was $0.30.
Material changes versus 2017
- Revenue increased 60%, from $53,278 to $84,518, reflecting sales of AquAdvantage Salmon and conventional salmon eggs and fry.
- Net loss widened by about 12%. General and administrative expense rose 31% to $6.62 million, driven by staffing, legal and board costs, and Indiana pre-production and startup costs.
- Research and development expense increased 3% to $3.46 million; sales and marketing expense fell 63% to $298,000.
- Cash increased from $493,000 to $2.99 million, supported by $16.45 million of financing, including a public offering and warrant exercises. The company issued additional shares, increasing dilution risk.
- Investing cash outflow declined substantially as Indiana and PEI facility spending continued at a slower pace than the prior year. Property, plant and equipment totaled $23.72 million net at year-end.
Outlook, risks and unusual items
- Going concern and financing: Management and the auditor stated that substantial doubt existed about the company’s ability to continue as a going concern. Management estimated available cash would fund planned operations only through the first half of 2019 and planned to seek debt or equity financing; success and terms were uncertain. Cost reductions or deferred capital spending were also possible.
- Commercialization outlook: Management expected modest revenue in 2019 and more significant revenue in 2020 as Indiana and PEI facilities began harvesting. The filing cites a first commercial harvest expectation in 2020; conventional salmon stocked in Indiana while the Import Alert remained in effect was expected to reach harvest in the second half of 2020.
- Regulatory and legal uncertainty: The FDA Import Alert’s lifting date was unknown, despite USDA’s December 2018 final bioengineered-food labeling rule. An NGO lawsuit challenging FDA’s approval remained in discovery. Each additional U.S. production site would require FDA and site-specific environmental approvals.
- Execution and market risks: The company had not demonstrated profitable commercial-scale production. Consumer acceptance of bioengineered salmon, required labeling, facility completion and operation, disease or broodstock losses, and regulatory approvals in additional markets could delay or limit revenue.
- Capital needs and related-party exposure: Further production capacity would require substantial investment; management estimated facility construction costs of about $17 million per 1,000 metric tons. Intrexon controlled a majority of voting shares and was entitled under the collaboration agreement to 16.66% of gross profits on covered products or 50% of sublicense revenue, plus reimbursement for certain services.
- Other notable items: The 2018 warrant exercise at a discounted price generated a $1.82 million deemed dividend. The company reported no off-balance-sheet arrangements. Management reported effective disclosure controls and internal control over financial reporting; the auditor did not provide an internal-control attestation.
Most important facts for investors to verify
- Whether the company raised sufficient capital after year-end to address the stated first-half 2019 funding shortfall, and the resulting dilution, debt terms, or other financing conditions.
- Whether and when the FDA Import Alert was lifted, and what labeling, import, and site-specific regulatory requirements applied.
- Whether Indiana and PEI construction, stocking, regulatory approvals, and first-harvest timelines remained on schedule, and whether production achieved commercial-scale yields and costs.
- Actual customer demand, sales volumes, pricing, and product margins as commercial sales expanded, including consumer and distributor acceptance of required labeling.
- Cash burn, remaining liquidity, debt and contractual obligations, and progress toward revenue sufficient to fund operations.