AquaBounty Technologies, Inc. — Q3 2020 Form 10-Q
Business context and reporting period
Unaudited results cover the three and nine months ended September 30, 2020. AquaBounty develops and commercializes land-based aquaculture, with AquAdvantage salmon as its lead product. The company had FDA approval for U.S. production and sale and Canadian approvals for production and sale. Reported product sales were still very small and included conventional Atlantic salmon, eggs and fry; the filing describes near-term sales as expected to remain modest and infrequent while farms and distribution are developed.
Financial results and position
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Product revenue | $67,763 | $0 | $77,466 | $140,371 |
| Operating loss | $3.61 million | $3.00 million | $10.21 million | $9.78 million |
| Net loss | $3.65 million | $3.02 million | $10.28 million | $9.81 million |
| Basic and diluted loss per share | $0.09 | $0.14 | $0.31 | $0.50 |
- Production costs were $1.36 million in Q3, up 60% year over year, and $3.24 million for the first nine months, up 22%. These costs include a $403,000 Q3 inventory valuation charge; the nine-month charge was $719,000, reflecting lower salmon prices and demand.
- Gross margin is not separately presented. Given minimal revenue relative to production costs, sales were not covering production spending.
- Cash and cash equivalents were $38.99 million at September 30, 2020, versus $2.80 million at December 31, 2019; an additional $500,000 was restricted cash. Total assets were $69.60 million and stockholders’ equity was $58.53 million.
- For the first nine months, operating cash use was $10.59 million and investing cash use was $1.55 million. Financing provided $48.84 million, including $44.24 million net stock proceeds and $4.22 million of debt proceeds.
- Total debt was $8.67 million, including $152,501 current debt; long-term debt, net of issuance costs, was $8.43 million. The new Indiana bank loan was $4.0 million at 5.375% initially, secured by subsidiary assets and a parent guarantee, and requires a $500,000 minimum bank cash balance.
Material changes versus comparable periods
- Q3 revenue rose from zero, while nine-month revenue fell 45%, primarily because 2019 included AquAdvantage salmon sales from the Panama demonstration farm; 2020 sales were conventional salmon, fry and eggs.
- Q3 net loss increased 21% year over year, and nine-month net loss increased 5%. Higher production costs and interest expense contributed; nine-month R&D expense declined 14%, partly due to lower field-trial costs after the Panama demonstration farm closed.
- Cash increased substantially, largely from two 2020 public offerings. The company issued 10.35 million shares in February and 12.65 million shares in August, with reported net proceeds of approximately $14.5 million and $29.7 million, respectively. Shares outstanding were 44.92 million at quarter-end, versus 21.64 million at year-end 2019.
- Debt increased from $4.60 million at year-end 2019 to $8.67 million, mainly reflecting the $4.0 million Indiana loan.
Outlook, risks and unusual items
- Management said cash, together with expected farm revenue, should fund requirements for at least 12 months from the filing date. The company continues to incur losses and negative operating cash flows and may need future equity, debt, government or other funding; management can reduce spending or delay projects. Additional equity could dilute shareholders.
- COVID-19 reduced food-service demand and Atlantic salmon market prices, adversely affecting revenue and inventory value. Farm operations had not been materially disrupted as of the filing, but the pandemic delayed the Indiana processing facility into Q4 2020; third-party processing was being used in the interim.
- Management expects modest near-term sales as production, customer relationships and distribution build. Production, marketing, R&D and legal costs may fluctuate or increase as operations expand. No numerical revenue or earnings guidance was provided.
- The FDA approval lawsuit remained pending after oral argument in August 2020. A ruling could affect commercialization; the filing says the court had previously held that FDA has authority to regulate bioengineered animals.
- Key risks include market acceptance and public opposition to bioengineered products, regulatory approvals for additional facilities and markets, commercial-scale production execution, dependence on third-party processing and distribution, farm disruption, COVID-19 effects, and access to capital. The company also reported potential influence by affiliates of its largest shareholder.
- In March 2020, a legal settlement generated approximately $1.0 million net proceeds, recorded as a reduction to the carrying value of acquired equipment. After quarter-end, a Canadian subsidiary was approved for a C$1.9 million, 0% loan for its broodstock facility. A special shareholder meeting was scheduled for November 19, 2020, to seek approval to increase authorized common shares from 50 million to 80 million.
Important facts for investors to verify
- Whether farm output, processing capacity and distribution can scale enough to generate meaningful revenue and improve unit economics.
- The continuing effects of salmon prices and demand on inventory valuation, sales and margins, and whether COVID-related delays persist.
- The outcome and potential commercial consequences of the FDA approval lawsuit, plus required approvals for future facilities and markets.
- Cash burn relative to the stated 12-month liquidity outlook, capital-project commitments, debt covenants and any need for further financing.
- Shareholder approval of the proposed increase in authorized shares and the resulting potential for future dilution.