10-K 1 aqb10k-2018x12x31.htm 10-K

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2018
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________ to ________________
Commission file number: 001-36426

AquaBounty Technologies, Inc.
(Exact name of the registrant as specified in its charter)

Delaware | 04-3156167
(State or other jurisdiction of incorporation or organization) | (I.R.S. employer identification no.)

2 Mill & Main Place, Suite 395
Maynard, Massachusetts 01754
(978) 648-6000
(Address and telephone number of the registrant’s principal executive offices)
Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934 (the “Exchange Act”):

Title of each class | Name of exchange on which registered
Common Stock, par value $0.001 per share | The NASDAQ Stock Market LLC

Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act of 1933.
Yes ☐ No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.
Yes ☐ No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act 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 90 days.
Yes x No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or such shorter period that the registrant was required to submit such files).
Yes x No ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐ Accelerated filer ☐ Non-accelerated filer x Smaller reporting company ☐ Emerging growth company x
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No x
At June 30, 2018, the aggregate market value of the 4,360,695 shares of common stock held by non-affiliates of the registrant was approximately $14.5 million. At March 6, 2019, the registrant had 15,275,398 shares of common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s Proxy Statement for its Annual Meeting of Shareholders to be held on April 30, 2019 (the “2019 Proxy Statement”), are incorporated by reference into Part III of this Annual Report on Form 10-K.

ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2018
Table of Contents
PART I |  | Page
Item 1. | Business | 1
Item 1A. | Risk Factors | 11
Item 1B. | Unresolved Staff Comments | 21
Item 2. | Properties | 21
Item 3. | Legal Proceedings | 21
Item 4. | Mine Safety Disclosures | 21
PART II |  |
Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities | 22
Item 6. | Selected Financial Data | 23
Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 24
Item 7A. | Quantitative and Qualitative Disclosures About Market Risk | 30
Item 8. | Financial Statements and Supplementary Data | 30
Item 9. | Changes In and Disagreements With Accountants on Accounting and Financial Disclosure | 30
Item 9A. | Controls and Procedures | 30
Item 9B. | Other Information | 31
PART III |  |
Item 10. | Directors, Executive Officers and Corporate Governance | 32
Item 11. | Executive Compensation | 32
Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | 32
Item 13. | Certain Relationships and Related Transactions, and Director Independence | 32
Item 14. | Principal Accounting Fees and Services | 32
PART IV |  |
Item 15. | Exhibits and Financial Statement Schedules | 33
Item 16. | Form 10-K Summary | 35
SIGNATURES | 36

Cautionary Note Regarding Forward-Looking Statements
This Annual Report on Form 10-K, particularly the sections titled “Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business,” contains forward looking statements. All statements other than present and historical facts and conditions contained in this 10-K, including statements regarding our future results of operations and financial positions, business strategy, plans, and objectives for future operations, are forward-looking statements. When used in this 10-K, the words “anticipate,” “believe,” “can,” “could,” “estimate,” “expect,” “intend,” “is designed to,” “may,” “might,” “plan,” “potential,” “predict,” “objective,” “should,” or the negative of these and similar expressions identify forward-looking statements. These forward-looking statements include statements that are not historical facts, including statements regarding management’s expectations for future financial and operational performance and operating expenditures, expected growth, and business outlook; the nature of and progress toward our commercialization plan; the future introduction of our products to consumers; the countries in which we may obtain regulatory approval and the progress toward such approvals; any continued backing by our majority shareholder, Intrexon Corporation (“Intrexon”); the volume of eggs or fish we may be able to produce; the timeline for our production of saleable fish; the expected advantages of land-based systems over sea cage production; the validity and impact of legal actions; the potential for lifting of the FDA Import Alert and the issuance of labeling guidance; the completion of renovations at our new hatchery facility and the construction of a pilot-scale grow-out unit; and the establishment of a larger-scale grow-out facility.
We have based these forward-looking statements on our current expectations, assumptions, estimates, and projections. While we believe these expectations, assumptions, estimates, and projections are reasonable, such forward-looking statements are only predictions and involve known and unknown risks, uncertainties, and other factors, many of which are outside of our control, which could cause our actual results, performance, or achievements to differ materially from any results, performance, or achievements expressed or implied by such forward-looking statements. Forward-looking statements in this 10-K include, but are not limited to, statements about:

• | the anticipated benefits and characteristics of our AquAdvantage Salmon product;

• | The implementation and likelihood of achieving the business plan, future revenue, and operating results;

• | developments concerning our research projects;

• | our expectations regarding our ability to successfully enter new markets or develop additional products;

• | our competitive position and developments and projections relating to our competitors and our industry;

• | expectations regarding anticipated operating results;

• | our cash position and ability to raise additional capital to finance our activities;

• | our ability to protect our intellectual property and other proprietary rights and technologies;

• | the impact of and our ability to adapt to changes in laws or regulations and policies;

• | the ability to secure any necessary regulatory approvals to commercialize any products;

• | the rate and degree of market acceptance of any products developed through the application of bioengineering, including bioengineered fish;

• | our ability to retain and recruit key personnel;

• | the success of any of our future acquisitions or investments;

• | our expectations regarding the time during which we will be an emerging growth company under the Jumpstart Our Business Startups Act (the “JOBS Act”); and

• | our estimates regarding expenses, future revenue, capital requirements, and needs for additional financing.

We caution you that the foregoing list may not contain all of the risks to which the forward-looking statements made in this 10-K are subject. We may not actually achieve the plans, intentions, or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions, and expectations disclosed in the forward-looking statements we make. We have included important factors in the cautionary statements included, particularly in the section titled “Risk Factors,” that could cause actual results or events to differ materially from the forward-looking statements that we make. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures, or investments that we may make.
Given these risks and uncertainties, you are cautioned not to place undue reliance on such forward-looking statements. These forward-looking statements are made only as of the date of this 10-K. We do not undertake and specifically decline any obligation to update any such statements or to publicly announce the results of any revisions to any such statements to reflect future events or developments unless required by federal securities law. New risks emerge from time to time, and it is not possible for us to predict all such risks.
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Where You Can Find More Information
We file with the Securities and Exchange Commission (the “SEC”) periodic reports and other information, including our Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports. The SEC maintains an internet site at www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file, as we do, electronically with the SEC.
All of these documents are available free of charge on our website, www.aquabounty.com, and will be provided free of charge to any shareholders requesting a copy by writing to: Corporate Secretary, AquaBounty Technologies, Inc., 2 Mill & Main Place, Suite 395, Maynard Massachusetts 01754, Telephone: (978) 648-6000. We use our website as a channel for routine distribution of important information, including news releases, analyst presentations, and financial information. In addition, our website allows investors and other interested persons to sign up to automatically receive e-mail alerts when we post news releases and financial information on our website. The information contained on, or accessible from, our website or in any other report or document we file with or furnish to the SEC is intended to be inactive textual references only, and is not incorporated by reference into this Annual Report on Form 10-K.
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Part I
Item 1. Business
Overview
AquaBounty Technologies, Inc., a Delaware corporation, was formed on December 17, 1991. Unless otherwise noted or indicated by the context, the terms “AquaBounty,” “the Company,” “we,” “us,” and “our” refer to AquaBounty Technologies, Inc., together with its consolidated subsidiaries. Headquartered in Maynard, Massachusetts, we are a biotechnology company focused on enhancing productivity and sustainability in the fast-growing aquaculture market. Our principal place of business is located at 2 Mill & Main Place, Suite 395, Maynard, Massachusetts 01754, and our telephone number at that location is (978) 648-6000.
On January 19, 2017, our common stock began trading on the Nasdaq Capital Market under the symbol “AQB.” Prior to our listing on the Nasdaq Capital Market, we were listed in 2006 on the Alternative Investment Market (“AIM”), the London Stock Exchange’s international market for smaller growing companies, initially under the symbol “ABTX” and, commencing in 2014, under the symbol “ABTU.” For the period from January 19, 2017, to May 31, 2017, we were dual listed on both the Nasdaq Capital Market and AIM. Effective June 1, 2017, we voluntarily delisted our common stock from AIM.
We use bioengineering and other technical innovations to improve the productivity and sustainability of fish stocks to help the aquaculture industry meet growing consumer demand. Since 2008, we have been focused on the regulatory approval of our AquAdvantage Salmon product, culminating with the approval of our New Animal Drug Application (“NADA”) by the U.S. Food and Drug Administration (“FDA”) on November 19, 2015, for the production, sale, and consumption of AquAdvantage Salmon in the United States.
On May 19, 2016, we received approval from Health Canada, the department of the government of Canada with responsibility for national public health, for the production, sale, and consumption of AquAdvantage Salmon as a novel food and feed in Canada. Previously, we had received approval from Environment Canada, the agency of the government of Canada with responsibility for regulating environmental policies and issues, which decided that AquAdvantage Salmon was not harmful to the environment or human health when produced in contained facilities. Consequently, we have received approvals for our product from what we believe are two of the most respected and rigorous regulatory agencies in the world.
We believe that receipt of FDA approval for AquAdvantage Salmon not only represents a major milestone for us, but is also a significant pioneering development in introducing bioengineered animals into the food chain. Although bioengineered crops have been accepted by consumers in the United States and South America for some time, AquAdvantage Salmon is the first bioengineered animal to be approved for human consumption. We intend to deploy AquAdvantage Salmon in land-based, contained, freshwater recirculating aquaculture systems (“RAS”), a technology which would allow inland fish farms to be established close to major demand centers in a profitable and environmentally sustainable manner. The technology underlying AquAdvantage Salmon offers the potential to improve the profitability of RAS facilities and thus reintroduce salmon aquaculture in the United States, which imported more than $3.1 billion of Atlantic salmon in 2017 according to the U.S. Department of Commerce (the “DOC”).
See “—Our Product” for more information on AquAdvantage Salmon and “—Regulatory Environment” for more information on our completed NADA process with the FDA.
Presently, our AquAdvantage Salmon cannot be imported into the United States due to an Import Alert that was implemented by the FDA due to a provision that was added to the 2019 Appropriations bill requiring labeling guidance for our product. Though the Import Alert could be lifted at any time, we have no knowledge of when this might occur. In the interim, we have taken the steps of introducing conventional Atlantic salmon into our Indiana facility for grow-out and our first crop will reach harvest in the second half of 2020. For more information, see “Risk Factors - Risks Relating to Our Business - We may become subject to increasing regulation, changes in existing regulations, and review of existing regulatory decisions.”
We have incurred significant losses since our inception. We expect to continue to incur significant losses for the foreseeable future, and we may never achieve or maintain profitability. We made our first sales of AquAdvantage Salmon from our farm site in Panama in 2017 and expect modest revenues during 2019, with more significant revenues in 2020 once our facilities in Indiana and on Prince Edward Island commence harvesting. For the fiscal years ended December 31, 2018, 2017, and 2016, we experienced net losses of $10.4 million, $9.3 million, and $8.5 million, respectively. At December 31, 2018, we had limited capital to fund operations. This raises substantial doubt of our ability to continue as a going concern.
Management is pursuing several paths to revenue generation that follow different timelines, including production of our fish at our existing farm sites, purchase or construction of additional production facilities in North America, and licensing or partnership arrangements. Additionally, management is pursuing regulatory approval for AquAdvantage Salmon in Brazil, Argentina, China, Israel, and Chile.
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The Aquaculture Industry
Aquaculture is the farming of aquatic organisms such as fish, shellfish, crustaceans, and aquatic plants. It involves cultivating freshwater or saltwater species under controlled conditions, as an alternative to the commercial harvesting of wild species of aquatic organisms. According to Research and Markets, an industry research organization, the global aquaculture market was valued at $176.5 billion in 2017 and is expected to grow at an annual rate of 4.5% to reach a market size of $219.4 billion by the year 2022. We believe that the aquaculture industry, and in particular salmon farming, is poised for significant additional growth in the coming years as the global population expands.
Salmon Farming
Atlantic salmon farming is a major industry in the cold-water countries of the northern and southern hemispheres. According to the United Nations Food and Agriculture Organization (“FAO”), Atlantic salmon aquaculture production volume grew by approximately 5.9% annually between 2000 and 2016, while production value grew by approximately 10.7% annually over the same period. Total production volume of farmed Atlantic salmon during 2016 was 2.2 million metric tons with a value of $14.4 billion.
Worldwide Atlantic Salmon Production Value by Country (in $000)

Country | 2011 | 2012 | 2013 | 2014 | 2015 | 2016
Canada | $ | 613,908 |  | $ | 635,118 |  | $ | 600,132 |  | $ | 509,919 |  | $ | 522,767 |  | $ | 771,172 |
United States | 104,132 |  | 76,987 |  | 104,706 |  | 76,186 |  | 76,186 |  | 67,653 |
Chile | 2,223,175 |  | 2,489,994 |  | 3,667,851 |  | 5,065,448 |  | 3,772,985 |  | 4,151,355 |
United Kingdom | 944,542 |  | 821,806 |  | 1,061,846 |  | 1,185,413 |  | 976,041 |  | 1,035,323 |
Ireland | 101,987 |  | 97,181 |  | 74,510 |  | 76,558 |  | 99,644 |  | 115,574 |
Norway | 4,807,128 |  | 4,808,541 |  | 6,455,114 |  | 6,637,569 |  | 5,510,660 |  | 7,157,341 |
Faroe Islands | 413,999 |  | 485,359 |  | 495,725 |  | 565,632 |  | 439,904 |  | 454,383 |
Australia | 439,054 |  | 529,851 |  | 497,523 |  | 486,928 |  | 471,400 |  | 531,362 |
All other | 30,567 |  | 43,555 |  | 106,825 |  | 100,033 |  | 63,544 |  | 103,874 |
WW Value ($000) | $ | 9,678,492 |  | $ | 9,988,392 |  | $ | 13,064,232 |  | $ | 14,703,686 |  | $ | 11,933,131 |  | $ | 14,388,037 |

© FAO - Fisheries and Aquaculture Information and Statistics Service - 1/18/2019
Pricing
According to the DOC, which tracks the volume and value of Atlantic salmon imports into the United States, from 2011 to 2017 the average wholesale price of Atlantic salmon imported into the country increased from $3.81 per pound ($8.39/kilogram) to $4.75 per pound ($10.47/kilogram).
The daily spot (farm-gate or wholesale market) price for Atlantic salmon is very volatile due to the species’ long production cycle, which typically ranges between two and three years, and its short shelf life, which typically ranges between two and three weeks. Farmed salmon is typically sold as fresh and thus must be consumed within this timeframe. Consequently, the available supply is very inelastic over the short term, while demand can be very elastic due to price, season, or market size.
Major Producers
The global Atlantic salmon farming industry includes several very large companies with operations in each of the major producing countries. Consolidation has been evident in the past few years as producers attempt to gain competitive cost advantages while overcoming the regulatory challenges associated with developing new marine farm sites. Major market producers, and their primary country of operation, include the following companies: Marine Harvest (Norway), Leroy Seafood Group ASA (Norway), Cermaq ASA (Norway), SalMar ASA (Norway), Empresas AquaChile S.A. (Chile), and Cooke Aquaculture Inc. (Canada). Additionally, a new set of competitors utilizing RAS technology have begun to enter the market, including Atlantic Sapphire and Whole Oceans.
U.S. Atlantic Salmon Market
According to the DOC, in 2017 the United States imported a record 660 million pounds (299 thousand metric tons) of Atlantic salmon with an aggregate market value of approximately $3.13 billion, or $4.75 per pound. The DOC also reported that over 71% of the total quantity of Atlantic salmon imports into the United States in 2017 originated from Chile and Canada. The Atlantic salmon farming industry in the United States contracted significantly beginning in the 1990s in the face of environmental concerns and lower costs of production from foreign sources, notably Chile. According to the FAO, a total of only 36 million pounds of farmed Atlantic salmon was produced in the United States in 2016, representing only 5.5% of the total farmed Atlantic salmon supplied.
Despite intensive public consumer education campaigns promoting its health benefits, seafood consumption in the United States still lags behind other protein sources and trails consumption in overseas markets. According to the U.S. Department of Agriculture (USDA), during the period from 2007 to 2017, annual seafood consumption in the United States ranged between 14 and 16 pounds per capita, significantly behind consumption of chicken (80 to 92 pounds), beef (54 to 67 pounds), and pork (45 to 50 pounds). In
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comparison, according to SeaFood Business magazine, average seafood consumption throughout Europe was 48.5 pounds per capita in 2012.
Perception of Bioengineered Atlantic Salmon
Though Atlantic salmon is the second-most-consumed seafood in the United States, activist groups opposing the bioengineering of food have pressured a number of retail food outlets and grocery chains to publicly state that they will not carry bioengineered Atlantic salmon. To date, large wholesalers have not followed the example of these retailers, and we believe that there will be sufficient demand from smaller retailers, wholesalers, and institutional seafood buyers to absorb our projected production. We believe that FDA approval reinforces the message that AquAdvantage Salmon is a safe and nutritious seafood product that is equivalent to conventional farmed Atlantic salmon. This belief is based in part on the results of a 2014 survey released by the International Food Information Council, titled “Consumer Perceptions of Food Technology,” which indicated that 59% of consumers are “somewhat” or “very” likely to buy bioengineered seafood if the FDA deems it safe.
There are surveys that have been cited by various non-governmental organizations (“NGOs”) that indicate that consumers are reluctant to purchase bioengineered food and that they would like to see labeling in order to avoid it. Consumer acceptance could also be adversely affected if AquAdvantage Salmon were found or believed to grow to a larger final size than conventional Atlantic salmon. In addition, our regulatory burdens could also increase. Internally generated data has shown that, although AquAdvantage Salmon exhibit an accelerated growth rate in early development stages, they do not grow to a larger end size than conventional Atlantic salmon. In response to these perceptions, we plan to educate consumers on the benefits of AquAdvantage Salmon versus conventional Atlantic salmon, including 25% better feed conversion (meaning less feed is needed to produce the same harvest), a lower carbon footprint due to local production, reduced impact on the environment and reduced exposure of the fish to environmental toxins due to use of land-based aquaculture systems, and reduced reliance on chemotherapeutics due to improved biosecurity.
Atlantic Salmon Disease Impact
An area of concern with current Atlantic salmon farming production is the environmental impact and the cost of disease management associated with those operations. Salmon farming systems, particularly conventional, open sea-cage systems, are vulnerable to disease introduction and transmission, primarily from the marine environment or adjacent culture systems. The economic impact of disease to these production systems can be significant, as farmers must incur the cost of preventative measures, such as vaccines and antibiotics and then, if infected, the cost of lost or reduced harvests.
The most prevalent disease and health management issues are infectious salmon anemia (“ISA”) and sea lice. ISA is a viral disease in Atlantic salmon, and outbreaks have occurred in virtually every major salmon farming geography since 1984, including a major event in Chile in 2008 that impacted the country’s production for three years. There is currently no effective treatment for the disease, and the salmon farming industry relies on vaccines and health management practices to mitigate its impact. Though primarily occurring in traditional sea-cage farming environments, ISA can also be introduced into populations that are in land-based, self-contained facilities. In November 2009, certain fish from our land-based hatchery on Prince Edward Island tested positive for ISA. In response, we notified the Canadian Department of Fisheries and Oceans (“DFO”) following discovery of the virus, which was diagnosed as a strain with low pathogenicity and of unknown origin. We conducted an extensive screening program of all fish in the facility, destroying any fish that tested positive for ISA.
Subsequent tests conducted by DFO of fish in the facility began in March 2010 and indicated that the virus had been eliminated from the facility. We enacted improvements in biosecurity and facility operation, and the facility regained its disease-free status from DFO after four consecutive tests indicated no presence of the virus. The fish health status of the facility continues to be monitored by the Canadian Food Inspection Agency. The facility has not had any reportable disease outbreaks since the isolated incident in 2009.
Sea lice are marine parasites that occur naturally and attach to the skin of Atlantic salmon. Though a few lice on a large salmon present no problem, the presence of significant numbers can adversely impact the health and aesthetic appearance of the fish. The cost of managing sea lice in sea-cage farming environments can be significant.
The closed, contained, land-based production systems, using technology referred to as recirculating aquaculture systems (“RAS”), proposed for the grow-out of AquAdvantage Salmon, are less susceptible, though not immune, to the same disease-related pressures because this type of culture system is isolated from the environment. RAS facilities employ sophisticated water treatment technology including the use of ozone, salt treatment, and ultraviolet radiation to kill potential bacterial, fungal, or viral pathogens that might enter the system. In addition, incoming water is similarly filtered and treated prior to entering the system, and water quality is regularly measured as part of the standard procedures. The fish in RAS facilities are generally not vaccinated against typical fish diseases, and no antibiotics, pesticides, or pharmacological agents are typically required. RAS facilities employ effective biosecurity to prevent disease by reducing or eliminating the introduction of pathogens and continuously treating the water to assure optimal fish health. RAS production will allow the AquAdvantage Salmon to be raised in optimized conditions with total control of the water coming in and going out of the system, while recirculating greater than 95% of the water used.
In contrast, sea cage, or conventional aquaculture fish, are housed in large cages in coastal waterways exposed to currents which can bring a variety of pathogens in contact with the farmed salmon. The presence of pathogens in an uncontrolled environment is a universally accepted fact in human and animal health. The presence of disease agents in these uncontrolled water currents could result
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in infection and spread of infection within the captive population. The risks and outcomes of conventional, open sea-cage systems are well established, and are often evidenced by outbreaks of a variety of bacterial and viral diseases as well as water fouling and contamination due to algal blooms and similar events. Furthermore, the use of antibiotics, vaccines, and other pharmacological agents is similarly well documented in conventional systems, presenting a risk to the environment and also to the consumers of treated fish.
Further, stocking RAS facilities with disease-free eggs results in a much higher degree of biosecurity and protection from disease. We expect that production and economic losses due to disease will be significantly less in the closed, land-based culture systems proposed for the production of AquAdvantage Salmon, because of greater control over environmental conditions and superior biosecurity than in traditional Atlantic salmon production systems.
Restrictions on Atlantic Salmon Farming
Environmental concerns have led certain states to impose legislative and regulatory restrictions or bans on the farming of Atlantic salmon. This could reduce the number of potential sites available to us for production farms in the United States. Nevertheless, we expect that many states will offer excellent potential sites for AquAdvantage Salmon production systems.
Our Products
Our first product, AquAdvantage Salmon, is a bioengineered Atlantic salmon that can grow to marketable size in about half the time of conventional farmed Atlantic salmon. By placing a second copy of the salmon growth hormone gene under the control of an alternative genetic promoter (gene switch) from the ocean pout, an edible marine fish, more consistent levels of growth hormone are released, which accelerates the early stages of the salmon’s development. By accelerating growth in the early stages of rearing, these fish can reach a marketable size sooner. In the case of Atlantic salmon, this can reduce farming time from 28 to 36 months to 18 to 20 months.
This accelerated growth has several advantages, both economic and environmental. The faster life cycle, from birth to harvesting, of AquAdvantage Salmon as compared to conventional salmon will allow it to be produced more economically in contained inland systems. Although this requires greater capital investment than sea cage production, we believe that the higher cost will be offset by more efficient growth, 25% better feed conversion, reduced exposure to environmental threats, and more effective control of disease. In addition, with a facility located nearer to major food markets, we believe there will be savings on transportation of the harvested stock, a reduced carbon footprint, and an improved ability to get fresh product to market faster.
We are developing two additional products at this time—a bioengineered rainbow trout that contains a similar genetic construct as the AquAdvantage Salmon and can grow to market size faster than a conventional trout and a gene-edited line of tilapia that we developed jointly with Intrexon, which exhibits improvement in fillet yield, growth, and feed conversion efficiency. Both of these products will have economic and environmental advantages over their conventional counterparts.
Plan of Operation
Our core business is to develop and market superior products to improve productivity and sustainability in aquaculture. Our first product is the AquAdvantage Salmon, which received FDA and Health Canada approval as the first bioengineered animal for human consumption as food. Our business plan contemplates that we will initially establish two production facilities to prove the economic benefit and consumer acceptance for our product. We have constructed a 250-metric-ton production unit in Rollo Bay, Prince Edward Island, which will be stocked with AquAdvantage Salmon in the first half of 2019. We have also acquired an existing facility in Albany, Indiana, which has been upgraded to increase its annual production capacity to 1200 metric tons and has been initially stocked with conventional Atlantic salmon while we await the lifting of the Import Alert on AquAdvantage Salmon. Both facilities will be operational in 2019 with a first harvest of commercial production expected in 2020.
We also intend to explore additional channels to commercialize the product. Such efforts may involve producing AquAdvantage Salmon eggs for commercial production, licensing the technology to salmon growers, or partnering with other companies to grow out the salmon in additional land-based facilities either in North America or other salmon consuming geographies.
In order to scale up our egg production capabilities, we have begun construction on a new broodstock facility at our farm site in Rollo Bay. Once completed and at full capacity, this facility will be capable of producing sufficient fertilized AquAdvantage Salmon eggs to satisfy our requirements for at least the next five years.
We intend to continue investing in research and development. We anticipate that our research and development expenditures will increase as we continue to develop our other AquAdvantage fish products and initiate new research projects under the Exclusive Channel Collaboration Agreement that we entered into in February 2013 with Intrexon Corporation (the “ECC”). See the section of this 10-K titled “Certain Relationships and Related Party Transactions-Exclusive Channel Collaboration Agreement.” The timeline for development projects will depend on many factors, but could extend beyond ten to fifteen years, taking into account the time needed for development, regulatory approval, and pre-marketing activities.
Any additions to headcount in our research and production activities will depend on the number of development activities we undertake and the success of our commercialization efforts for AquAdvantage Salmon. We expect to increase our headcount in administration at our corporate headquarters as we commercialize our product.
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Our Markets
With regulatory approvals in the United States and Canada, we plan to market AquAdvantage Salmon throughout both countries. In addition, we intend to focus on those significant fish farming markets where we believe we will have success in gaining further regulatory approvals and consumer acceptance. We currently expect to market AquAdvantage Salmon in the United States and Canada, as well as Panama, Argentina, Brazil, China, Israel, and Chile following receipt of required regulatory approval in the respective jurisdictions.
If we pursue a commercial strategy to sell AquAdvantage Salmon eggs, we expect the cost of production for each AquAdvantage Salmon egg will be higher than the industry norm, but will fall significantly once production volume increases. While no pricing structure has been set, we believe that the cost savings associated with AquAdvantage Salmon resulting from the ability to spread fixed costs over a greater number of fish and reduced grow-out time will allow AquAdvantage Salmon eggs to sell at a premium to standard Atlantic salmon eggs.
If we pursue a commercial strategy to grow out AquAdvantage Salmon in our own land-based facilities, we expect our production costs to be lower than traditional salmon farming due to the faster growth rate and 25% better feed conversion rate of our fish, along with lower relative transportation costs to market.
The salmon distribution system in the United States is complex and varied. Participants include fishermen, fish farmers, processors, importers, secondary processors, broadline distributors, specialty seafood distributors, brokers, traders, and many different kinds of retail and food service companies. Salmon distribution channels are evolving, with fewer and larger distributors handling an increasing share of total volume and an increasing share of salmon being sold directly by large fish-farming companies and large wild salmon processors to large retail and food service chains. We expect that harvested AquAdvantage Salmon will be sold into this distribution network.
Regulatory Environment
United States Regulation of Bioengineered Products
The bioengineering of food using the tools of modern biotechnology is regulated in the United States by two government organizations, the USDA for bioengineered plants and the FDA for bioengineered animals.
The regulatory system for bioengineered plants is based upon the Coordinated Framework, issued by the Office of Science and Technology Policy in 1986 and regulated by the USDA’s Bureau of Regulatory Services and Animal and Plant Health Inspection Services under the Federal Plant Pest Act. Certain bioengineered plants are regulated under the Federal Insecticide, Fungicide, and Rodenticide Act by the Environmental Protection Agency (“EPA”). The USDA and the Environmental Protection Agency are also required to determine the environmental impact of a proposed application under the National Environmental Policy Act (“NEPA”). The process for plants is essentially one of issuing test permits and data dossiers for the product’s proposed use, followed by a process of de-regulation or approval if the application is found to be acceptable under the applicable regulations.
The regulatory process for food and animal feed is also based upon the Coordinated Framework, but the enabling legislation is the Federal Food, Drug, and Cosmetic Act, along with NEPA. In the case of animals for food or materials for feed, the FDA process is a pre-approval review followed by an approval if the application is acceptable under the relevant legislation.
We opened an Investigational New Animal Drug file for AquAdvantage Salmon with the FDA in 1995. At that time, there was no defined regulatory framework for the regulation of bioengineered animals. There were, however, certain studies that were generally acknowledged to be necessary for an eventual approval process. We commenced work on those studies and began a phased submission of studies to the FDA that ultimately was responsive to each technical section of the NADA. These technical sections require submission of studies relating to molecular characterization of the construct; molecular characterization of AquAdvantage Salmon lineage; phenotypic characterization of AquAdvantage Salmon; a genotypic and phenotypic durability plan; support for environmental, food, and feed safety; and claim validation. The FDA’s phased review process, which included a cycle of study conduct, submission, review, and acceptance, continued over the period from 1995 to 2010. Following this process, the FDA concluded that AquAdvantage Salmon “is as safe as food from conventional salmon, and that there is a reasonable certainty of no harm from consumption of food” from AquAdvantage Salmon.
In September 2010, the FDA held a public meeting of its Veterinary Medicine Advisory Committee (the “VMAC”) to review the FDA’s findings regarding AquAdvantage Salmon. The VMAC, which was disbanded in September 2013, was a group of independent experts charged with providing scientific advice to the FDA on animal drug and food issues. The VMAC had no authoritative power regarding the approval of the NADA but was convened to listen to the results of the FDA review process and to provide an outside opinion on the FDA’s conclusions. At the public meeting, the FDA posed four questions to the VMAC relating to the safety and effectiveness of AquAdvantage Salmon, including safety to the animal, safety of consumption, safety to the environment, and effectiveness of the growth gene. The Chairman’s Report of the VMAC relating to the public meeting stated that (1) the VMAC found no evidence to conclude that the gene construct was unsafe to the animal; (2) a large number of the test results studied by the VMAC established similarities and equivalence between AquAdvantage Salmon and conventional Atlantic salmon and that the levels of growth hormone contained in AquAdvantage Salmon did not appear to be biologically relevant from a food safety
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standpoint, although the VMAC noted that it could not conclude from the data submitted that AquAdvantage Salmon would be more or less allergenic than conventional Atlantic salmon; (3) the multitude of barriers to escape of AquAdvantage Salmon at both our Prince Edward Island and Panama facilities were extensive, mitigating the potential environmental impact of escape; and (4) there was evidence to support our claim that AquAdvantage Salmon grows faster than conventional Atlantic salmon. The VMAC did not vote or make a recommendation on whether to approve the NADA, and certain members of the panel recommended additional monitoring to determine whether the growing conditions could cause health abnormalities. While the FDA is not bound by the VMAC’s recommendations or opinions, the VMAC did not dispute the FDA’s conclusions that AquAdvantage Salmon is safe for human consumption.
On December 26, 2012, the FDA published its Environmental Assessment (“EA”) and its preliminary Finding of No Significant Impact (“FONSI”) determinations for AquAdvantage Salmon, confirming that an approval of the pending NADA would not have an adverse effect on the environment. The FDA opened up a 60-day period for public comment on the EA and preliminary FONSI. On February 14, 2013, the FDA extended the period for public comment by an additional 60 days, and that period expired April 26, 2013.
In July 2014, we submitted to the FDA revised label and package insert information, which updated label and package insert information that we initially submitted to the FDA in April 2011. The submission of revised label and package insert information was in response to a June 2014 request from the FDA to revise and update the initial submission. Under the NADA review process, we were required to submit to the FDA from time to time information responsive to an “all other information” portion of the NADA, which requires the submission of information, not included in any of the technical sections, that comes to our attention and is pertinent to an evaluation of the safety or effectiveness of AquAdvantage Salmon. We submitted our last supplement to the “all other information” portion of the NADA on July 15, 2015, and the FDA formally acknowledged its acceptance of this submission on November 18, 2015.
On November 19, 2015, the FDA finalized the FONSI on the EA and issued an approval letter for the NADA for AquAdvantage Salmon. This approval was published in the Federal Register on November 24, 2015. In conjunction with the approval, the FDA issued a guidance document on the voluntary labeling of food derived from Atlantic salmon that has or has not been bioengineered. That document was intended to assist those manufacturers who wish to voluntarily make the distinction on the labeling of their food products.
Following the FDA approval, in April 2016, a coalition of NGOs sued the FDA for their approval of AquAdvantage Salmon. The NGOs claim that the FDA failed to analyze and prevent risks to wild salmon and the environment. Among other things, the claimants are seeking a judgment that the FDA decision to approve AquAdvantage Salmon is not authorized by the Federal Food, Drug and Cosmetic Act (“FFDCA”); that an injunction be issued requiring the FDA to withdraw its assertion of jurisdiction over bioengineered animals; that the FDA decision to approve AquAdvantage Salmon and its EA and FONSI be declared in violation of the FFDCA; and that the decision to approve the AquAdvantage Salmon NADA be vacated. Although we believe that these claims lack merit, this legal action is ongoing and is currently in the discovery phase.
In January 2016, the U.S. Congress passed the 2016 Omnibus Appropriations Act (“Appropriations Act”), which was signed into law. The Appropriations Act contained an amendment that directed the FDA to issue final guidance for labeling of AquAdvantage Salmon as a bioengineered product, despite the absence of any bioengineered product labeling requirement in the FDA’s NADA approval. Current FDA policy does not require labeling for method of production if there is no material difference compared with its conventional counterpart, and the FDA arrived at the decision that AquAdvantage Salmon is as safe to eat, and as nutritious, as any conventional Atlantic salmon. However, given this directive, the FDA issued an Import Alert on AquAdvantage Salmon and stated that a temporary hold was being implemented to comply with language in the Appropriations Act. However, while the language in the Appropriations Act remains in effect, the United States Congress passed the National Sea Grant College Program Reauthorization in July 2016, which contained the National Bioengineered Food Disclosure Standard, or the Labeling Act, which in turn provides for the establishment of a national standard for package labeling for foods containing bioengineered ingredients. On December 21, 2018, the USDA issued its final rule for such labeling, and AquAdvantage Salmon must be labeled in accordance with this rule. We believe that the FDA will consider the USDA final rule as an impetus to issue final labeling guidance and therefore release AquAdvantage Salmon from the Import Alert. At this time, however, there can be no certainty as to when or if the Import Alert will be lifted.
In addition to FDA approval of the NADA for AquAdvantage Salmon, our operating sites in the United States and Panama and on Prince Edward Island, as well as those we plan to build or purchase in the future, must be registered with, and periodically inspected by, the FDA as drug manufacturing establishments. Drug manufacturing establishments that supply FDA-regulated products for use in the United States must comply with the product’s conditions for approval, whether located in the United States or in a foreign country. Each of our operating sites in Indiana, Panama, and Fortune, Prince Edward Island, is currently registered with the FDA, and the FDA has performed inspections and site visits at each of those facilities. Our Rollo Bay, Prince Edward Island, site will require FDA inspection and registration as a drug manufacturing establishment.
With the FDA approval of our NADA, we must continue to comply with FDA requirements not only for manufacturing, but also for labeling, advertising, record keeping, and reporting to the FDA of adverse events and other information. We will also need to comply
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with USDA labeling requirements. Failure to comply with these requirements could subject us to administrative or judicial enforcement actions, including but not limited to product seizures, injunctions, civil penalties, criminal prosecution, refusals to approve new products, or withdrawal of existing approvals, as well as increased product liability exposure.
Other Regulatory Approvals
In February 2012, we filed a Novel Food application for AquAdvantage Salmon with Health Canada. In conjunction with this application, we filed to register AquAdvantage Salmon as a Novel Feed with the Canadian Food Inspection Agency, a prerequisite for a Novel Food approval. Health Canada and the Canadian Food Inspection Agency reviewed our data submission on the safety of AquAdvantage Salmon as a food and feed, respectively. On May 19, 2016, Health Canada concluded that AquAdvantage Salmon does not raise concerns related to food safety. Health Canada also noted in its opinion that fillets derived from AquAdvantage Salmon are as safe and nutritious as fillets from currently available farmed Atlantic salmon.
In April 2013, we filed a New Substances Notification for AquAdvantage Salmon with Environment Canada. On November 25, 2013, Environment Canada concluded that AquAdvantage Salmon is not harmful to the environment or human health when produced in contained facilities. This ruling, which was subject to a judicial review brought about by certain environmental groups on administrative procedural grounds, recognized that our Canadian hatchery, which produces sterile, all-female eggs, was no longer solely a research facility but could produce eggs on a commercial scale without harm to the environment or human health. In December 2015, the Federal Court in Canada ruled that the Ministers of Environment and Health decision to allow production of AquAdvantage Salmon in Canada for commercial use was “reasonable and made in the manner prescribed by the Canadian Environmental Protection Act.” Accordingly, the court dismissed the entire application brought before it by the Ecology Action Centre and Living Oceans Society. This ruling was appealed by those organizations, but the Canadian Federal Court of Appeal dismissed the appeal on October 21, 2016.
We are required to comply with regulatory and permitting requirements in Panama, where we operate a demonstration farm for AquAdvantage Salmon. In November 2010, we received authority from Autoridad Nacional del Ambiente (“ANAM”), the Panamanian environmental regulator, to operate our facility in Panama. In March 2012, we were notified by ANAM that we had failed to comply with specified permitting, inspection, reporting, and other regulatory requirements in connection with the construction and operation of the facility. We initiated a program to remedy the deficiencies, and the issues were formally resolved in August 2014. We paid a fine of $9,500 in connection with the resolution of these issues, and the matter is now closed. We currently have all regulatory approvals necessary to operate our demonstration farm in Panama and we have obtained, and are in compliance in all material respects with, all permits necessary to operate that facility. We have moved forward with an application for the commercial production, sale, and consumption of AquAdvantage Salmon in Panama. This application process is new, and we do not have information on when, or if, the application will be approved. However, in June 2017, we received approval from the National Biosafety Commission in Panama for the production, harvest, and export of AquAdvantage Salmon.
We also received approval from regulators to conduct field trials for AquAdvantage Salmon in Argentina and Brazil. The Argentinian trial has successfully completed, and we are pursuing approval of the production and sale of AquAdvantage Salmon in that country; the Brazilian trial is currently on-going. We intend to initiate additional regulatory filings outside the United States in selected markets that offer a clear regulatory path and market opportunity.
In December 2018, Argentina’s National Advisory Commission on Agricultural Biotechnology (CONABIA) determined that a gene-edited line of tilapia we developed jointly with Intrexon is exempt from regulation as a bioengineered product and may be sold in accordance with the requirements applicable to conventional tilapia. This line of tilapia enables more sustainable production through improvements in fillet yield, growth, and feed conversion efficiency, enabling the tilapia to grow to market weight in less time, while also consuming less feed than conventional varieties. We are pursuing commercial opportunities based on this development.
Grow-out of AquAdvantage Salmon in the United States will require compliance with environmental regulations and local site permitting statutes. In addition, every production site for AquAdvantage Salmon in the United States will require approval by the FDA of both a Supplemental NADA and a site-specific EA, as well as compliance with local permitting requirements for construction of grow-out facilities. We expect that we will incur costs to comply with these environmental and regulatory requirements, which could take several years to complete for each production site. We are currently unable to estimate these costs, but they may be significant.
Raw Materials
We previously sourced the unfertilized eggs that we use for internal research and trials of our AquAdvantage Salmon eggs from a Canadian supplier. After our FDA approval, we purchased a salmon farm near our hatchery on Prince Edward Island to maintain our own source of unfertilized eggs. We are currently constructing a broodstock facility on this site, which, when completed and at full capacity, will provide sufficient fertilized AquAdvantage Salmon eggs to satisfy our production requirements for at least the next five years.
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Intellectual Property
The AquAdvantage fish program is based upon a single, specific molecular modification in fish that results in more rapid growth in early development. This enables shorter production cycles and increased efficiency of production. Prior to February 2014, we were a party to a license agreement with Genesis Group, Inc., an affiliate of Memorial University of Newfoundland (“Genesis”), and an affiliate of the Hospital for Sick Children of Toronto (“HSC”) related to our bioengineered fish program. Under the terms of this agreement, we were required to make an annual royalty payment of $25 thousand or revenue-based royalty payments equal to five percent of any gross revenues generated from products that utilize the technology covered under the license agreement. No revenue-based royalty payments were made under this agreement. The patent for the licensed technology, which had been issued in certain salmon producing countries, expired in August 2013. In February 2014, we entered into a new license agreement with Genesis and HSC that replaced the prior license agreement. Under the new agreement, we hold a global, perpetual, royalty-free, fully paid, sub-licensable, assignable, non-exclusive right to the technology covering bioengineered salmonid fish that express endogenous growth hormone under the control of a protein gene promoter from an edible fish. In consideration for this license, we agreed to pay to Genesis a one-time payment of $140 thousand, which amount was paid on March 6, 2014, but no additional patents are contemplated under this agreement. Despite the expiration of the patent for the licensed technology, we believe that the degree of know-how in the molecular modification process and the regulatory timescales associated with approval of bioengineered fish would present significant barriers to competition.
We rely on a combination of patent, trademark, and trade secret laws in the United States and applicable foreign jurisdictions, as well as confidentiality procedures and contractual provisions, to protect our proprietary technology, processes, and brand. In December 2015, we were granted a U.S. patent for our molecular sterility system, which renders sterile the progeny of any female fish carrying a defined maternal sterility gene. While the technology described in the sterility system patent is not currently used nor required under any of our current regulatory approvals, the technology may be desirable in the future to obtain or maintain regulatory approvals.
Patents for this technology have been granted regarding our rights to use certain technologies under the ECC with Intrexon. For more information, see the section of this 10-K titled “Certain Relationships and Related Party Transactions-Exclusive Channel Collaboration Agreement.”
For information regarding our rights to use certain technologies under the ECC with Intrexon, see “—Research and Development.”
Seasonality
Atlantic salmon spawn once per year, so there is a natural seasonality of three to five months in the production of Atlantic salmon eggs for commercial use. This natural seasonality can be lengthened through the use of photoperiod techniques to make Atlantic salmon eggs available year-round, and we are currently capable of producing AquAdvantage Salmon eggs year-round on a limited basis. However, with the establishment of our new broodstock facility at our Rollo Bay farm site on Prince Edward Island, we expect that we will be able to produce sufficient AquAdvantage Salmon eggs year-round to satisfy all of our production needs over the next five years.
Competition
There are four major commercial salmonid breeding companies that market proprietary lines of Atlantic salmon eggs, as well as many small producers of salmonid eggs. Additionally, many of the largest Atlantic salmon producers maintain their own egg production capabilities. We do not believe, however, that we have a direct competitor for bioengineered, growth-enhanced Atlantic salmon eggs.
The industry and market for farmed Atlantic salmon is dominated by a group of large, multinational corporations with entrenched distribution channels, as discussed in the section of this 10-K titled “Business-The Aquaculture Industry-Major Producers.” We will compete against large, global Atlantic salmon farming companies when we sell our AquAdvantage Salmon in the market. We will also compete against new companies utilizing RAS technology to grow their salmon. We believe the faster growth and better feed efficiency of our fish will provide us with a cost advantage versus these competitors.
Research and Development
As of December 31, 2018, we had twenty employees dedicated to research and development. Our primary research and development operations are located in our owned hatchery on Prince Edward Island. In addition, we contract some research activities to the Center for Aquaculture Technologies, Inc., our former research group, which was spun-off and sold to Tethys in 2012.
In February 2013, we entered into the ECC with Intrexon pursuant to which we are permitted to use Intrexon’s UltraVector® and other technology platforms to develop and commercialize additional bioengineered traits in finfish for human consumption. The ECC grants us a worldwide license to use certain patents and other intellectual property of Intrexon in connection with the research, development, use, importing, manufacture, sale, and offer for sale of products involving DNA administered to finfish for human consumption. This license is exclusive with respect to any development, selling, offering for sale, or other commercialization of developed products, and otherwise is non-exclusive. Under the ECC and subject to certain exceptions, we are responsible for, among
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other things, the performance of the program, including development, commercialization, and certain aspects of manufacturing developed products. Among other things, Intrexon is responsible for the costs of establishing manufacturing capabilities and facilities for the bulk manufacture of certain products developed under the program; certain other aspects of manufacturing; costs of discovery-stage research with respect to platform improvements; and costs of filing, prosecution, and maintenance of Intrexon’s patents. We agreed to pay Intrexon, on a quarterly basis, 16.66% of the gross profits calculated for each developed product. We also agreed to pay Intrexon 50% of the quarterly revenue obtained from a sublicensee in the event of a sublicensing arrangement. In addition, we agreed to reimburse Intrexon for the costs of certain services provided by Intrexon.
Since its execution in February 2013, we and Intrexon have commenced development on two projects under the ECC. The first project, which commenced in June 2013, is a research effort to determine the effectiveness of utilizing precise genome engineering technology to produce desirable features in a finfish. This project has led to a gene-edited line of tilapia that exhibits improvement in fillet yield, growth, and feed conversion efficiency. The second project, which commenced in September 2013, is a research effort to determine if the use of germ cells to perform gene modification is effective in reducing the time required to develop new traits in finfish. If these technology-enabling projects prove to be successful, they will allow us to add additional beneficial traits to AquAdvantage Salmon.
In addition to the projects being undertaken under the ECC, we are exploring the potential development of a range of additional products, including a second generation of AquAdvantage Salmon to ensure 100% sterility, a line of AquAdvantage Trout that grows faster than conventional rainbow trout, molecular sterility systems to provide an improved means of sterility for farmed fish, and improved methods for generating bioengineered fish.
Our research and development expenditures are directly tied to the number of projects that we choose to undertake. We expect to increase our development efforts as we commence additional projects either in-house or under our ECC with Intrexon. We expect that these projects could result in an increase in our research and development expenditures in the range of 5% to 10% per year.
Employees
As of December 31, 2018, we had thirty-nine employees. None of our employees are represented by a labor union, and we consider our employee relations to be good.
Recent Events
Our common stock was listed on AIM, the London Stock Exchange’s international market for smaller growing companies, from 2006 through May 31, 2017, initially under the symbol “ABTX” and, commencing in 2014, under the symbol “ABTU.” On January 19, 2017, our common stock began “regular way” trading on the Nasdaq Capital Market, and, effective June 1, 2017, we voluntarily delisted our common stock from AIM.
On January 18, 2017, we sold 2,421,073 shares of our common stock to Intrexon, our controlling shareholder, for proceeds of approximately $25 million. Following the closing of this sale, Intrexon distributed 1,776,557 shares of our common stock that it held prior to the closing via a share dividend to its shareholders.
On January 17, 2018, we completed a public offering of 3,692,307 shares of our common stock and 4,246,153 warrants for net proceeds of approximately $10.6 million. Intrexon participated in this offering, purchasing 1,538,461 shares of our common stock and warrants for $5 million.
During the period of March 23, 2018, to June 26, 2018, 249,824 Common Shares were issued through the conversion of outstanding warrants at a price of $3.25. Proceeds to the Company totaled $0.8 million.
On October 24, 2018, 2,250,461 Common Shares were issued through the exercise of outstanding warrants at a discounted price of $2.00. Net proceeds to the Company were $4.3 million. Intrexon participated in the exercise, converting warrants for 1,538,461 Common Shares, resulting in gross proceeds of $3.1 million.
Management is evaluating several paths to revenue generation that follow different timelines, including production of our fish at our existing farm sites in Panama, Indiana, Rollo Bay, and additional facilities in North America; sale of AquAdvantage Salmon eggs to Atlantic salmon farmers; and partnerships or licensing agreements. Depending on which path or combination of paths is chosen, we expect only modest revenues during 2019, with more significant revenues once our Indiana and Rollo Bay facilities begin harvesting in 2020.
Emerging Growth Company Status
We are an “emerging growth company,” as defined in Section 2(a) of the Securities Act, as amended by the Jumpstart Our Business Startups Act (the “JOBS Act”) enacted on April 5, 2012. For as long as we are an “emerging growth company,” we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies.” These include, but are not limited to, not being required to comply with the auditor attestation requirements in the assessment of our internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”); an exemption from the adoption of new or revised financial accounting standards until they would
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apply to private companies; an exemption from compliance with any new requirements adopted by the Public Company Accounting Oversight Board (the “PCAOB”) that require mandatory audit firm rotation or a supplement to the auditors’ report in which the auditor would be required to provide additional information about the audit and the financial statements of the issuer; reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements; and exemptions from the requirements of holding advisory “say-on-pay” votes on executive compensation and shareholder advisory votes on golden parachute compensation not previously approved.
Section 107 of the JOBS Act provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to take advantage of this extended transition period. Our financial statements may therefore not be comparable to those of companies that comply with such new or revised accounting standards. Section 107 of the JOBS Act provides that our decision not to opt out of the extended transition period for complying with new or revised accounting standards is irrevocable.
We may take advantage of these exemptions for up to five years or such earlier time that we are no longer an emerging growth company. We would cease to be an emerging growth company upon the earliest to occur of (1) the last day of the fiscal year in which we have more than $1.07 billion in annual revenue; (2) the date we qualify as a “large accelerated filer,” with at least $700.0 million of equity securities held by non-affiliates; (3) the issuance, in any three-year period, by our company of more than $1.0 billion in non-convertible debt securities; and (4) December 31, 2023, which is the last day of the fiscal year following the fifth anniversary of the date of the first sale of our common stock pursuant to an effective registration statement filed under the Securities Act.
Our Executive Officers
The following table sets forth certain information regarding our directors and executive officers as of March 6, 2019:

Name | Age | Position(s)
Sylvia A. Wulf | 61 | Director, Chief Executive Officer, and President
Ronald L. Stotish | 69 | Director and Chief Technology Officer
David A. Frank | 58 | Chief Financial Officer and Treasurer
Alejandro Rojas | 57 | Chief Operating Officer, AquaBounty Farms
Christopher Martin | 52 | General Counsel and Corporate Secretary

Our executive officers are elected by our Board of Directors and hold office until removed by the Board of Directors, and until their successors have been duly elected and qualified or until their earlier resignation, retirement, removal, or death.
Sylvia A. Wulf, Chief Executive Officer and President of the Company. Ms. Wulf was appointed Executive Director, President, and Chief Executive Officer of AquaBounty January 1, 2019. Prior to joining AquaBounty, Ms. Wulf served as a Senior Vice President of US Foods, Inc., where she had been President of the Manufacturing Division since June 2011. Prior to US Foods, Ms. Wulf held senior positions in Tyson Foods, Inc., Sara Lee Corporation, and Bunge Corp. She is also currently on the Board of Directors and the Executive Committee of the National Fisheries Institute. Ms. Wulf was chosen for her experience in the food industry in North America, including its fish sector. Ms. Wulf received a B.S. in Finance from Western Illinois University and an MBA from DePaul University.
Ronald L. Stotish, Ph.D., Chief Technology Officer. Dr. Stotish was appointed Chief Technology Officer of AquaBounty effective January 1, 2019. He joined AquaBounty in 2006 as Vice-President for Regulatory Affairs and was Senior Vice-President for R&D and Regulatory Affairs. In 2008, Mr. Stotish was appointed Executive Director, President, and Chief Executive Officer of AquaBounty and held the latter positions until December 31, 2018. Prior to joining AquaBounty, Dr. Stotish was Executive Vice-President for R&D at MetaMorphix, Inc. He has served as Vice-President for Pharmaceutical R&D at Fort Dodge Animal Health and held a variety of positions at American Cyanamid. He began his career in research at Merck & Co. Dr. Stotish has degrees in biochemistry and over 40 years’ experience in the discovery, development, and commercialization of new animal health products. Dr. Stotish has a Bachelor of Science degree from Pennsylvania State University and a Master of Science and a Ph.D. from Rutgers University.
David A. Frank, M.B.A. Chief Financial Officer and Treasurer. Mr. Frank was appointed Chief Financial Officer and Treasurer of AquaBounty in October 2007. Previously he served as President and General Manager of TekCel LLC, a subsidiary of Magellan Biosciences, after serving as Magellan’s Chief Financial Officer since the company’s founding in 2004 and as TekCel’s Chief Financial Officer. Mr. Frank has over 30 years of financial management experience, including as Chief Financial Officer of SmartEnergy, an independent energy supplier, as Corporate Controller for Moldflow Corporation, and in financial roles at PerSeptive Biosystems, Inc., Lotus Development Corporation, Apollo Computer, Inc., and Honeywell International, Inc. He has a Bachelor of Science in finance and accounting from Boston College and a Master of Business Administration from Babson College.
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Alejandro Rojas, D.V.M. Chief Operating Officer, AquaBounty Farms. Dr. Rojas joined AquaBounty as the Chief Operating Officer, AquaBounty Farms in February 2014. He formerly was the Production and Technical Manager for Marine Harvest from 1988 to 2000, where he was responsible for operations and the production of salmonids in Chile. He was also responsible for managing Quality Control Labs, Environmental Programs, and Fish Health Programs. Dr. Rojas has a doctorate in Veterinary Medicine and a Bachelor of Science degree from the Universidad Austral de Chile and for the past 14 years has been a Technical Advisor and Consultant to numerous global aquaculture and biotech companies working with marine fish, including salmon, seabass, seabream, and barramundi. His areas of expertise include benchmarking and market studies, technical and economic analysis for M&A activities, new species development in Latin America, the Middle East, and Africa, and consulting on fish production, aquatic health, environment, and biosecurity programs to private companies and governments.
Christopher Martin, J.D. General Counsel and Corporate Secretary. Mr. Martin has served as our General Counsel since June 2015 and as our Corporate Secretary since July 2015. Prior to joining AquaBounty, he was Assistant General Counsel at athenahealth, Inc. from 2012 to 2014 and Senior Corporate Counsel from 2008 to 2012. He also served as Corporate Counsel at LeMaitre Vascular, Inc. from 2006 to 2008 and practiced in the areas of commercial, corporate, finance, and intellectual property law with Hemenway & Barnes LLP in Boston and Cummings & Lockwood LLC in Connecticut. Mr. Martin holds a Bachelor of Arts from Stanford University and a Juris Doctor from the University of California, Berkeley (Boalt Hall).
Item 1A. Risk Factors
The following are certain risk factors that could affect our business, financial condition, and results of operations. You should carefully consider the risks described below, together with the other information contained in this 10-K, including our consolidated financial statements and the related notes. We cannot assure you that any of the events discussed in the risk factors below will not occur. These risks could have a material and adverse impact on our business, results of operations, financial condition, or prospects. If that were to happen, the trading price of our common stock could decline, and you could lose all or part of your investment.
This Annual Report on Form 10-K also contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including the risks faced by us described below and elsewhere in this Annual Report on Form 10-K. See “Cautionary Note Regarding Forward-Looking Statements” for information relating to these forward-looking statements.
Risks Relating to our Business
We must raise additional capital in the first half of 2019 to fund our operations in order to continue as a going concern.
Currently, we do not have sufficient capital to continue our operations after the first six months of 2019. If we are unable to generate additional funds through financings, sales of our products, government grants, loans, or from other sources or transactions, we would exhaust our resources and be unable to maintain our currently planned operations and continue as a going concern. We therefore plan to seek additional financing in the form of debt or equity to fund our cash requirements for the next twelve months. We may also cut operating costs or delay capital spend in order to preserve available cash. There can be no assurance that we will be successful in securing additional financing, and, if we do not, we would not be able to continue as a going concern, and our stockholders would likely lose most or all of their investment in us.
You should not rely on our consolidated balance sheet as an indication of the amount of proceeds that would be available to satisfy claims of creditors, and potentially be available for distribution to shareholders, in the event of liquidation. Our audited consolidated financial statements included in this Annual Report on Form 10-K have been prepared assuming that we will continue as a going concern and do not include any adjustment to reflect the possible future effects on the recoverability and classification of assets, or the amounts and classification of liabilities that may result if we do not continue as a going concern. We have concluded that substantial doubt about our ability to continue as a going concern exists, and our auditors have made reference to this in their audit report on our audited consolidated financial statements for the year ended December 31, 2018.
We have a history of net losses and will likely incur future losses, at least during the next five years, and we may not achieve or maintain profitability.
Although we were established in 1991, we did not start to develop our current product portfolio until 1996. In the period since incorporation to December 31, 2018, we have incurred net losses of approximately $119 million. These losses reflect our personnel, research and development, and marketing costs. We have constructed a 250-metric-ton annual capacity production facility in Rollo Bay, and in 2017 we acquired a facility in Albany, Indiana, which has undergone renovations to increase its annual capacity to 1,200 metric tons. Modest revenues are expected from our Panama farm during 2019, and we expect more significant revenues in 2020 once our new facilities are in full production. However, our ability to realize revenues and the timing thereof are not certain, and achieving revenues does not assure that we will become profitable.
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We will need substantial additional capital in the future in order to fund our business.
We do not expect significant sales until 2020, at the earliest, and to date we have not generated any profit and expect to incur losses for the foreseeable future and may never become profitable. Therefore, based on our current business plan, we anticipate a need to raise further funds. Any issuance of shares of our common stock could have an effect of depressing the market price of shares of our common stock through dilution of earnings per share or otherwise.
The amount and timing of the expenditures needed to achieve our development and commercialization programs will depend on numerous factors, some of which are outside our control. Changes in our plans could result in the need for additional funds. The primary factor impacting the amount and timing of any additional expenditure is the timing of the stocking of AquAdvantage Salmon in our two production facilities in Rollo Bay and Indiana, the latter of which is dependent upon the lifting of the Import Alert by the FDA. Until these two sites reach full capacity, we will have only modest revenues from our Panama site to cover net losses, which were $10.4 million and $9.3 million in 2018 and 2017, respectively.
While we await the completion of the first harvests from our two production facilities, we plan to evaluate additional commercialization alternatives for our product through the channel we determine to be most advantageous to the Company. Such efforts may involve engaging in partnerships or joint ventures or licensing the technology to salmon growers. If we elect to grow out the fish ourselves, we would need to invest in the construction or purchase of additional land-based recirculating aquaculture system facilities. These facilities have estimated construction costs of $17 million for each 1,000 metric tons of output.
Our share price and our ability to raise additional funds may depend on our success in growing, or our perceived ability to grow, our AquAdvantage Salmon successfully and profitably at commercial scale.
We have not yet demonstrated that we can grow our AquAdvantage Salmon successfully or profitably at commercial scale. If we are unsuccessful in growing our salmon to harvest size and selling the fish in the market at a profit from our commercial-scale facilities, or are perceived as being unable to do so prior to commercial-scale harvest and sale, we may lose credibility with the investor community and other funding sources, which may negatively impact our share price and our ability to raise additional funds.
There can be no assurance that additional funds will be available on a timely basis, on favorable terms, or at all, or that such funds, if raised, would be sufficient to enable us to continue to implement our business strategy.
To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interests of holders of our common stock will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of holders of our common stock. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures, or declaring dividends. If we raise additional funds through government or other third-party funding; marketing and distribution arrangements; or other collaborations, strategic alliances, or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs, or product candidates or to grant licenses on terms that may not be favorable to us.
Our ability to generate revenue to support our operations depends on obtaining additional regulatory approvals for AquAdvantage Salmon, the receipt of which is uncertain, and the maintenance of existing approvals.
As a bioengineered animal for human consumption, AquAdvantage Salmon required approval from the FDA in the United States and the Ministers of Health and Environment in Canada before it could be produced, sold, or consumed in those countries. Our FDA approval covers the production of our eggs in our hatchery in Canada and the grow-out of our eggs in our facilities in Panama and Rollo Bay. FDA approvals will be needed for each additional facility we plan to bring on line. Additionally, we will require local regulatory approvals in other countries in which we hope to operate. There is no guarantee that we will receive or be able to maintain regulatory approvals from the FDA or other regulatory bodies or that there will not be a significant delay before approval. There is also no guarantee that any approvals granted will not be subject to onerous obligations in relation to matters such as production or labeling, or that any regulator will not require additional data prior to approval, which may be costly and time-consuming to acquire.
We will be required to continue to comply with FDA and foreign regulations.
Even with the approval of the NADA and other regulatory applications for AquAdvantage Salmon, we must continue to comply with FDA and other regulatory requirements not only for manufacturing, but also for labeling, advertising, record keeping, and reporting to the FDA and other regulators of adverse events and other information. Failure to comply with these requirements could subject us to administrative or judicial enforcement actions, including but not limited to product seizures, injunctions, civil penalties, criminal prosecution, refusals to approve new products, or withdrawal of existing approvals, as well as increased product liability exposure, any of which could have a material adverse effect on our business, financial condition, or results of operations.
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Ethical, legal, and social concerns about bioengineered products could limit or prevent the use of our products and limit our revenues.
Our technologies include the use of bioengineering. Public perception about the safety and environmental hazards of, and ethical concerns over, bioengineered products could influence public acceptance of our technologies and products. Activist groups opposing the bioengineering of organisms have in the past pressured a number of retail food outlets and grocery chains to publicly state that they will not carry bioengineered Atlantic salmon. If we are not able to overcome the ethical, legal, and social concerns relating to bioengineering, products using our technologies may not be accepted in the marketplace, and demand for our products could fall short of what we expect. These concerns could also result in increased expenses, regulatory scrutiny, delays, or other impediments to implementation of our business plan.
The subject of bioengineered products has received negative publicity, which has aroused public debate. This adverse publicity could lead to greater regulation and trade restrictions on imports of bioengineered products. Further, there is a concern that products produced using our technologies could be perceived to cause adverse events, which could also lead to negative publicity.
We may have limited success in gaining consumer acceptance of our products.
There is an active and vocal group of opponents to bioengineered products who wish to ban or restrict the technology and who, at a minimum, hope to sway consumer perceptions and acceptance of this technology. Their efforts include regulatory legal challenges and labeling campaigns for bioengineered products, as well as application of pressure to consumer retail outlets seeking a commitment not to carry bioengineered Atlantic salmon. Consumer acceptance could also be adversely affected if AquAdvantage Salmon were found, or believed, to grow to a larger final size than conventional Atlantic salmon. We may not be able to overcome the negative consumer perceptions that these organizations have instilled against our products.
We or regulatory agencies approving of our products may be sued by non-governmental organizations and others who are opposed to the development or commercialization of bioengineered products.
There are many organizations in the United States and elsewhere that are fundamentally opposed to the development of bioengineered products. These groups have a history of bringing legal action against companies attempting to bring new biotechnology products to market. On December 23, 2013, an application was filed by two NGOs with the Canadian Federal Court seeking judicial review to declare invalid the decision by the Canadian Minister of the Environment to publish in the Canadian Gazette a Significant New Activity Notice (“SNAN”) with respect to AquAdvantage Salmon. Though the Canadian Federal Court dismissed this challenge, the petitioners filed an appeal of the ruling, which was subsequently dismissed by the Canadian Federal Court of Appeal on October 21, 2016.
In the United States, a coalition of NGOs filed a complaint on March 30, 2016, against the FDA, the United States Fish and Wildlife Service, and related individuals for their roles in the approval of AquAdvantage Salmon, claiming that the FDA had no statutory authority to regulate bioengineered animals, and, if it did, that the agency failed to analyze and implement measures to mitigate ecological, environmental, and socioeconomic risks that could impact wild salmon and the environment, including the risk that AquAdvantage Salmon could escape and threaten endangered wild salmon stocks. Among other things, the claimants are seeking a judgment that the FDA decision to approve AquAdvantage Salmon is not authorized by the FFDCA, that an injunction be issued requiring the FDA to withdraw its assertion of jurisdiction over bioengineered animals, that the FDA decision to approve AquAdvantage Salmon and its EA and FONSI determinations be declared in violation of the FFDCA, and that the decision to approve the AquAdvantage Salmon NADA be vacated.
Though we believe this legal action lacks merit, it is currently ongoing, and may take considerable time to resolve. We may be subject to future litigation brought by one or more of these organizations in their attempt to block the development or sale of our product. In addition, animal rights groups and various other organizations and individuals have attempted to stop bioengineering activities by pressing for legislation and additional regulation in these areas. To the extent the actions of these organizations are successful, commercialization of our product may be restricted, and our business may be adversely affected. Such actions, even if unsuccessful, may distract management from its operational priorities and may cause us to incur significant costs.
We will have to label our AquAdvantage Salmon at the retail level as containing a bioengineered product, which could negatively impact consumer acceptance.
Until the passage of the National Sea Grant College Program Reauthorization in July 2016, which contained the National Bioengineered Food Disclosure Standard, or Labeling Act, our AquAdvantage Salmon did not need to be labeled as containing a bioengineered product, because it had been deemed to be “substantially equivalent” to the conventional product. However, because several states either passed or considered new laws specifying varying requirements for labeling products sold at the retail level that contain bioengineered ingredients, the United States Congress passed the Labeling Act to establish a national standard for package labeling for foods containing bioengineered ingredients. The USDA issued its final rule for such labeling on December 21, 2018, and AquAdvantage Salmon must be labeled in accordance with those regulations. In addition, a bill was introduced in the United States Senate in July 2017 and reintroduced in January 2019 that could, if it became law, require labeling specific to AquAdvantage Salmon, rather than applicable to all bioengineered foods. Labeling requirements could cause consumers to view the label as either a
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warning or as an indication that AquAdvantage Salmon is inferior to conventional Atlantic salmon, which could negatively impact consumer acceptance of our product.
The markets in which we intend to sell our products are subject to significant regulations.
In addition to our FDA approval for the sale and consumption of AquAdvantage Salmon in the United States, we will also be subject to state and local regulations and permitting requirements, which could impact or delay the commercialization and commencement of revenue generation from the sale of AquAdvantage Salmon. International sales are also subject to rules and regulations promulgated by regulatory bodies within foreign jurisdictions. There can be no assurance that foreign, state, or local regulatory bodies will approve the sale and consumption of our product in their jurisdiction.
We may incur significant costs complying with environmental, health, and safety laws and regulations, and failure to comply with these laws and regulations could expose us to significant liabilities.
Our operations are subject to a variety of federal, state, local, and international laws and regulations governing, among other matters, the use, generation, manufacture, transportation, international shipment, storage, handling, disposal of, and human exposure to our products in both the United States and overseas, including regulation by governmental regulatory agencies, such as the FDA and the U.S. Environmental Protection Agency. We have incurred, and will continue to incur, capital and operating expenditures and other costs in the ordinary course of our business in complying with these laws and regulations.
We may become subject to increasing regulation, changes in existing regulations, and review of existing regulatory decisions.
Regulations pertaining to bioengineered animals are still developing and could change from their present state. In addition, new legislation could require new regulatory frameworks, changes in existing regulation, or re-evaluation of prior regulatory decisions. For example, despite the FDA’s final determination that AquAdvantage Salmon may be sold without being labeled as a bioengineered product, a provision added to the 2016 Omnibus Appropriations Act requires the FDA to issue final guidance for such labeling. The FDA is therefore obligated to maintain an Import Alert prohibiting import of AquAdvantage Salmon until such guidance is finalized or the provision is no longer effective. While the USDA promulgated its final rule establishing a national standard for the labeling of bioengineered foods, including AquAdvantage Salmon, on December 21, 2018, the FDA has not yet taken action in regard to the Import Alert. Similarly, in July 2017, a bill was introduced in the United States Senate that could have, had it become law, required labeling unique to, as well as re-examination of the environmental assessments used by the FDA in its 2015 approval of the NADA for, AquAdvantage Salmon. While this bill was reintroduced in January 2019 without the requirement for re-examination of those environmental assessments, any such legislatively imposed review of a completed regulatory process could result in new restrictions on, or delays in, commercialization of our product in the United States. We could be subject to increasing or more onerous regulatory hurdles as we attempt to commercialize our product, which could require us to incur significant additional capital and operating expenditures and other costs in complying with these laws and regulations. Our regulatory burdens could also increase if AquAdvantage Salmon are found, or believed, to grow to a larger final size than conventional Atlantic salmon.
Atlantic salmon farming is restricted in certain states.
Concerns regarding the possible environmental impact from AquAdvantage Salmon have led Washington and California to impose legislative and regulatory restrictions or bans on its farming. In addition, some states, such as Alaska, have enacted restrictions on Atlantic salmon farming generally. While we currently believe that many states will offer excellent potential sites for AquAdvantage Salmon production systems, if additional states adopt similar restrictions, or otherwise prohibit the rearing of AquAdvantage Salmon in those states, the number of potential sites available to us for production farms in the United States could be reduced.
The loss of AquAdvantage Salmon broodstock could result in the loss of our commercial technology.
AquAdvantage Salmon, or more specifically the breeding population of live fish, or broodstock, themselves, is a product of our combined intellectual property, which includes our trade secrets related to creating and maintaining the broodstock. Destruction of AquAdvantage Salmon broodstocks by whatever means would result in the loss of the product of that commercial technology. Live animals are subject to disease that may, in some cases, prevent or cause delay in the export of fish or eggs to customers. Disease organisms may be present undetected and transferred inadvertently. In addition, our broodstock is kept at a limited number of facilities, and damage to or failure of critical systems at any one of those facilities could lead to the loss of a substantial percentage of our broodstock. Such events may cause loss of revenue, increased costs, or both. The broodstock, however, could be reinstated, in whole or in part, using our technology and stored breeding reserves.
Atlantic salmon farming is subject to disease outbreaks, which can increase the cost of production and/or reduce production harvests.
Salmon farming systems, particularly conventional, open sea-cage systems, are vulnerable to disease introduction and transmission, primarily from the marine environment or adjacent culture systems. The economic impact of disease to these production systems can
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be significant, as farmers must incur the cost of preventative measures, such as vaccines and antibiotics, and then, if the fish become infected, the cost of lost or reduced harvests.
Although we will produce and grow our AquAdvantage Salmon in land-based, closed containment facilities, we will still be at risk for potential disease outbreaks. We have implemented biosecurity measures in our facilities intended to prevent or mitigate disease impact, but there can be no assurance that any measures will be 100% effective.
Our ability to compete may be negatively impacted if we do not adequately protect our proprietary technologies or if we lose some of our intellectual property rights.
Our success depends in part on our ability to obtain patents and maintain adequate protection of our intellectual property in the United States and abroad for our technologies and resultant products and potential products. We have adopted a strategy of seeking patent protection in the United States and abroad with respect to certain of the technologies used in or relating to our products; however, the patent to the technology covering AquAdvantage Salmon, which we license under a global, perpetual, royalty-free, non-exclusive license from Genesis Group, Inc., an affiliate of Memorial University of Newfoundland, and an affiliate of the Hospital for Sick Children of Toronto, expired in August 2013. We expect to protect our proprietary technology in regards to AquAdvantage Salmon through a combination of in-house know-how and the deterrence of the regulatory process that would need to be completed for a competing product to be commercialized, which we believe would be cost-prohibitive to our competitors. There can be no guarantee that this strategy will be successful.
We also rely on trade secrets to protect our technologies, particularly in cases when we believe patent protection is not appropriate or obtainable. However, trade secrets are difficult to protect, and we may not be able to adequately protect our trade secrets or other proprietary or licensed information. While we require our employees, academic collaborators, consultants, and other contractors to enter into confidentiality agreements with us, if we cannot maintain the confidentiality of our proprietary and licensed technologies and other confidential information, our ability and that of our licensor to receive patent protection, and our ability to protect valuable information owned or licensed by us may be imperiled.
Enforcing our intellectual property rights may be difficult and unpredictable.
Enforcing our intellectual property rights can be expensive and time consuming, and the outcome of such efforts can be unpredictable. If we were to initiate legal proceedings against a third party to enforce a patent covering one of our technologies, the defendant could counterclaim that our patent is invalid and/or unenforceable or assert that the patent does not cover its manufacturing processes, manufacturing components, or products. Furthermore, in patent litigation in the United States, defendant counterclaims alleging both invalidity and unenforceability are commonplace. Although we may believe that we have conducted our patent prosecution in accordance with the duty of candor and in good faith, the outcome following legal assertions of invalidity and unenforceability during patent litigation is unpredictable. With respect to the validity of our patent rights, we cannot be certain, for example, that there is no invalidating prior art, of which we and the patent examiner were unaware during prosecution. If a defendant were to prevail on a legal assertion of invalidity and/or unenforceability, we would not be able to exclude others from practicing the inventions claimed therein. Such a loss of patent protection could have a material adverse impact on our business. Even if our patent rights are found to be valid and enforceable, patent claims that survive litigation may not cover commercially valuable products or prevent competitors from importing or marketing products similar to our own, or using manufacturing processes or manufacturing components similar to those used to produce the products using our technologies.
Although we believe that we have obtained assignments of patent rights from all inventors, if an inventor did not adequately assign their patent rights to us, a third party could obtain a license to the patent from such inventor. This could preclude us from enforcing the patent against such third party.
We may not be able to enforce our intellectual property rights throughout the world.
The laws of some foreign countries do not protect intellectual property rights to the same extent as the laws of the United States. Many companies have encountered significant problems in protecting and defending intellectual property rights in certain foreign jurisdictions. The legal systems of certain countries, particularly certain developing countries, often do not favor the enforcement of patents and other intellectual property protection, particularly those relating to bioengineering. This could make it difficult for us to stop the infringement of our patents or misappropriation of our other intellectual property rights. Proceedings to enforce our patent rights in foreign jurisdictions could result in substantial costs and divert our efforts and attention from other aspects of our business. Accordingly, our efforts to protect our intellectual property rights in such countries may be inadequate.
Security breaches and other disruptions could compromise our information, expose us to fraud or liability, or interrupt our operations, which would cause our business and reputation to suffer.
In the ordinary course of our business, we use our servers and networks to store sensitive data, including our proprietary business and financial information; general business information regarding our customers, suppliers, and business partners; and personally identifiable information of our employees. The secure storage and maintenance of this information is critical to our operations. Despite our security measures, our information technology and infrastructure may be vulnerable to attacks by hackers or breached due to
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employee error or malfeasance. A breach of our security could compromise our networks, and the information stored there could be accessed, manipulated, publicly disclosed, lost, or stolen. Any such access, manipulation, disclosure, or loss of information could result in errors in our records, fraudulent use of our financial information, legal claims or proceedings, liability under laws that protect the privacy of personal information, theft of our intellectual property, or damage to our reputation. In addition, our systems could be the subject of denial of service or other interference, which could disrupt our operations and commercial transactions. Any of the foregoing could adversely affect our business, revenues, and competitive position.
Competitors and potential competitors may develop products and technologies that make ours obsolete or garner greater market share than ours.
We do not believe that we have a direct competitor for bioengineered, growth-enhanced Atlantic salmon. However, the market for Atlantic salmon is dominated by a group of large, multinational corporations with entrenched distribution channels. Our ability to compete successfully will depend on our ability to demonstrate that AquAdvantage Salmon is superior to and/or less expensive than other products available in the market.
Certain of our competitors may benefit from government support and other incentives that are not available to us. As a result, our competitors may be able to develop competing and/or superior products and compete more aggressively and sustain that competition over a longer period of time than we can. As more companies develop new intellectual property in our markets, a competitor could acquire patent or other rights that may limit our ability to successfully market our product.
If our technologies or products are stolen, misappropriated, or reverse engineered, others could use the technologies to produce competing technologies or products.
Third parties, including our collaborators, contractors, and others involved in our business often have access to our technologies. If our technologies or products were stolen, misappropriated, or reverse engineered, they could be used by other parties that may be able to reproduce our technologies or products using our technologies for their own commercial gain. If this were to occur, it would be difficult for us to challenge this type of use, especially in countries with limited intellectual property protection.
If we lose key personnel, including key management personnel, or are unable to attract and retain additional personnel, it could delay our commercialization plans or harm our research and development efforts, and we may be unable to sell or develop our own products.
Our success depends substantially on the efforts and abilities or our officers and other key employees. The loss of any key members of our management, or the failure to attract or retain other key employees who possess the requisite expertise for the conduct of our business, could prevent us from developing and commercializing our products and executing on our business strategy. We may not be able to attract or retain qualified employees in the future due to the intense competition for qualified personnel among biotechnology and other technology-based businesses, or due to the unavailability of personnel with the particular qualifications or experience necessary for our business. If we are not able to attract and retain the necessary personnel to accomplish our business objectives, we may experience staffing constraints that could adversely affect our ability to meet the demands of our customers in a timely fashion or to support our internal research and development programs. In particular, our product development programs are dependent on our ability to attract and retain highly skilled scientists. Competition for experienced scientists and other technical personnel from numerous companies and academic and other research institutions may limit our ability to attract and retain such personnel on acceptable terms.
We may encounter difficulties managing our growth, which could adversely affect our business.
We could face a period of rapid growth following commercial availability of our products, which may place significant pressure on our management, sales, operational, and financial resources. The execution of our business plan and our future success will depend, in part, on our ability to manage current and planned expansion and on our ability to continue to implement and improve our operational management. Any failure to manage the planned growth may have a significant adverse effect on our business, financial condition, trading performance, and prospects.
We may pursue strategic acquisitions and investments that could have an adverse impact on our business if they are unsuccessful.
If appropriate opportunities become available, we may acquire businesses, assets, technologies, or products to enhance our business in the future. In connection with any future acquisitions, we could:
•issue additional equity securities, which would dilute our current shareholders;
•incur substantial debt to fund the acquisitions; or
•assume significant liabilities.
Acquisitions involve numerous risks, including:
•difficulties integrating the purchased operations, technologies, or products;
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•unanticipated costs and other liabilities;
•diversion of management’s attention from our core business;
•adverse effects on existing business relationships with current and/or prospective customers and/or suppliers;
•risks associated with entering markets in which we have no or limited prior experience; and
•potential loss of key employees.
We do not have extensive experience in managing the integration process, and we may not be able to successfully integrate any businesses, assets, products, technologies, or personnel that we might acquire in the future without a significant expenditure of operating, financial, and management resources. The integration process could divert management time from focusing on operating our business, result in a decline in employee morale, or cause retention issues to arise from changes in compensation, reporting relationships, future prospects, or the direction of the business. Acquisitions also may require us to record goodwill and non-amortizable intangible assets that will be subject to impairment testing on a regular basis and potential periodic impairment charges, incur amortization expenses related to certain intangible assets, and incur large and immediate write-offs and restructuring and other related expenses, all of which could harm our operating results and financial condition. In addition, we may acquire companies that have insufficient internal financial controls, which could impair our ability to integrate the acquired company and adversely impact our financial reporting. If we fail in our integration efforts with respect to any of our acquisitions and are unable to efficiently operate as a combined organization, our business and financial condition may be adversely affected.
We have entered into agreements that require us to pay a significant portion of our future revenue to third parties.
In 2009, we received a grant from the Atlantic Canada Opportunities Agency to fund a research program. A total of C$2.9 million was made available under the grant, and we received the entire amount through December 31, 2015. Once we begin to generate revenue from any of the products from the research program, we must commence repayment of the outstanding loan in the form of a 10% royalty. These payments could negatively impact our ability to support our operations. Revenues from sales of our AquAdvantage Salmon are not subject to the royalty.
In February 2013, we entered into the ECC with Intrexon, pursuant to which we are permitted to use Intrexon’s UltraVector and other technology platforms to develop and commercialize additional bioengineered traits in finfish for human consumption. The ECC grants us a worldwide license to use certain patents and other intellectual property of Intrexon in connection with the research, development, use, importing, manufacture, sale, and offer for sale of products involving DNA administered to finfish for human consumption. We agreed under the ECC to pay Intrexon, on a quarterly basis, 16.66% of the gross profits calculated for each developed product. We also agreed to pay Intrexon 50% of the quarterly revenue obtained from a sublicensee in the event of a sublicensing arrangement. In addition, we agreed to reimburse Intrexon for the costs of certain services provided by Intrexon. The ECC remains in effect. These payments could negatively impact our ability to support our operations.
Our financial condition or results of operations may be adversely affected by international business risks, including exchange rate fluctuation.
The majority of our employees, including our research personnel, are currently located outside of the United States. As a consequence of the international nature of our business, we are exposed to risks associated with international operations. For example, we are based in the United States and present our financial statements in U.S. dollars, and the majority of our cash resources are held in U.S. dollars or in Canadian dollars. Some of our future expenses and revenues are expected to be denominated in currencies other than in U.S. dollars. Other risks include possible governmental restrictions of the movement of funds, limitation of contractual rights, or expropriation of assets without fair compensation. Therefore, movements in exchange rates to translate to foreign currencies and other international operational risks may have a negative impact on our reported results of operations, financial position, and cash flows.
We have received government research grants and loans in the past, but such grants and loans may not be available in the future.
We have in the past received government assistance in the form of research grants and loans to partially fund various research projects, including projects involving our AquAdvantage Salmon. There can be no assurance that additional government assistance will be available in the future to help offset the cost of our research activities, in which case we would need to fund our research projects entirely from our available cash resources, which may be limited. This could delay progress on future product development and introduction. In addition, we may be subject to audit by the government agencies that provided research assistance to ensure that the funds were used in accordance with the terms of the grant or loan. Any audit of the use of these funds would require the expenditure of funds and result in the diversion of management’s attention.
Our success will depend in part on our ongoing relationship with Intrexon.
We are party to agreements with Intrexon, including the ECC. Our success will depend, in part, on the maintenance of our ongoing relationship with Intrexon.
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Certain members of management and our Board of Directors may hold stock in both Intrexon and AquaBounty, and as a result may face actual or potential conflicts of interest.
The management and directors of each of Intrexon and AquaBounty may own both Intrexon common stock and AquaBounty common stock. This ownership overlap could create, or appear to create, potential conflicts of interest when AquaBounty management and directors and Intrexon management and directors face decisions that could have different implications for AquaBounty and Intrexon. For example, potential conflicts of interest could arise in connection with the resolution of any dispute between AquaBounty and Intrexon regarding the terms of their relationship. Potential conflicts of interest may also arise out of additional commercial arrangements that AquaBounty or Intrexon may enter into in the future.
Our ability to use net operating losses and other tax attributes to offset future taxable income may be subject to certain limitations.
In general, under Sections 382 and 383 of the U.S. Tax Code, a corporation that undergoes an “ownership change” is subject to limitations on its ability to utilize its pre-change net operating losses (“NOLs”), tax credits, or other tax attributes to offset future taxable income or taxes. For these purposes, an ownership change generally occurs where the aggregate stock ownership of one or more stockholders or groups of stockholders who owns at least 5% of a corporation’s stock increases its ownership by more than 50 percentage points over its lowest ownership percentage within a specified testing period. In addition to limitations imposed by the 2017 Tax Cuts and Jobs Act, a portion of our NOLs are subject to substantial limitations arising from previous ownership changes, and, if we undergo an ownership change, our ability to utilize NOLs could be further limited by Sections 382 and 383 of the Code. In addition, future changes in our stock ownership, many of which are outside of our control, could result in an ownership change under Sections 382 and 383 of the Code. Our NOLs may also be impaired under state law. Accordingly, we may not be able to utilize a material portion of our NOLs. Furthermore, our ability to utilize our NOLs is conditioned upon our attaining profitability and generating U.S. federal and state taxable income.
Risks Relating to our Common Stock
Intrexon’s significant share ownership position allows it to influence corporate matters.
Based solely on a Schedule 13D/A filed on October 25, 2018, by Randal J. Kirk, Intrexon, and Third Security, LLC (“Third Security”), Intrexon currently owns 8,239,199 shares of our common stock, or approximately 53.9% of our outstanding shares. In addition, entities controlled by Randal J. Kirk, including Third Security and its affiliates other than Intrexon, currently hold 837,554 shares of our common stock, or approximately 5.5% of our outstanding shares. Based on these holdings, Randal J. Kirk, Intrexon’s Chairman, Chief Executive Officer, and controlling shareholder, and Third Security’s Chief Executive Officer and Senior Managing Director, has reported control over approximately 59.4% of our outstanding shares. Given this, and our grant to Intrexon of certain rights to nominate members of our Board of Directors that are intended to ensure that Intrexon-nominated Board members represent a percentage of our Board that is proportionate to Intrexon’s percentage ownership of our common stock, Intrexon will be able to significantly influence who serves on our Board of Directors and the outcome of matters required to be submitted to our shareholders for approval, including decisions relating to the outcome of any proposed merger or consolidation of our company. Intrexon’s interests may not be consistent with those of our other shareholders. Furthermore, Intrexon’s significant interest in us may discourage third parties from seeking to acquire control of us, which may adversely affect the market price of our common stock.
An active trading market for our common stock may not develop or be sustained.
Although our common stock is currently traded on the Nasdaq Capital Market, an active trading market for our common stock may not be maintained. If an active market for our common stock is not maintained, it may be difficult for shareholders to sell shares of our common stock. An inactive trading market may impair our ability to raise capital to continue to fund operations by selling shares and may impair our ability to acquire other companies or technologies by using our shares as consideration.
The price of our shares of common stock is likely to be volatile.
The share price of publicly traded emerging companies can be highly volatile and subject to wide fluctuations. The prices at which our common stock are quoted and the prices which investors may realize will be influenced by a large number of factors, some specific to our company and operations and some that may affect the quoted biotechnology sector, or quoted companies generally. These factors could include variations in our operating results, publicity regarding the process of obtaining regulatory approval to commercialize our products, divergence in financial results from analysts’ expectations, changes in earnings estimates by stock market analysts, overall market or sector sentiment, legislative changes in our sector, the performance of our research and development programs, large purchases or sales of our common stock, currency fluctuations, legislative changes in the bioengineering environment, and general economic conditions. Certain of these events and factors are outside of our control. Stock markets have from time to time experienced severe price and volume fluctuations, which, if recurring, could adversely affect the market prices for our commons stock.
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We do not anticipate paying cash dividends in the foreseeable future, and, accordingly, shareholders must rely on stock appreciation for any return on their investment.
We have never declared or paid cash dividends on our common stock. We do not anticipate paying cash dividends in the foreseeable future and intend to retain all of our future earnings, if any, to finance the operations, development, and growth of our business. There can be no assurance that we will have sufficient surplus under Delaware law to be able to pay any dividends at any time in the future. As a result, absent payment of dividends, only appreciation of the price of our common stock, which may never occur, will provide a return to shareholders. You may also have to sell some or all of your shares of our common stock in order to generate cash flow from your investment in us.
If securities or industry analysts do not publish research or reports, or publish inaccurate or unfavorable research or reports about our business, our share price and trading volume could decline.
The U.S. trading market for our shares of common stock depends, in part, on the research and reports that securities or industry analysts publish about us or our business. We do not have any control over these analysts. If we obtain securities or industry analyst coverage, and one or more of the analysts who covers us downgrades our shares of common stock, changes their opinion of our shares, or publishes inaccurate or unfavorable research about our business, our share price would likely decline. If one or more of these analysts ceases coverage of us or fails to publish reports on us regularly, demand for our shares of common stock could decrease, and we could lose visibility in the financial markets, which could cause our share price and trading volume to decline.
We are an “emerging growth company,” and we cannot be certain if the reduced reporting requirements applicable to emerging growth companies will make our shares of common stock less attractive to investors.
We are an “emerging growth company,” as defined in Section 2(a) of the Securities Act. For as long as we continue to be an emerging growth company, we may take advantage of exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including the auditor attestation requirements in the assessment of our internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act, compliance with any new requirements adopted by the PCAOB requiring mandatory audit firm rotation or a supplement to the auditors’ report in which the auditor would be required to provide additional information about the audit and the financial statements of the issuer, disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and the requirements of holding advisory “say-on-pay” votes on executive compensation and shareholder advisory votes on golden parachute compensation not previously approved. Under the JOBS Act, we will remain an emerging growth company until the earliest of (1) December 31, 2023, which is the last day of the fiscal year following the fifth anniversary of the date of the first sale of our common stock pursuant to an effective registration statement filed under the Securities Act; (2) the last day of the fiscal year during which we have total annual gross revenues of $1 billion or more; (3) the date on which we have, during the previous three-year period, issued more than $1 billion in non-convertible debt; and (4) the date on which we are deemed to be a “large accelerated filer” as defined in Rule 12b-2 under the Exchange Act. We cannot predict if investors will find our shares of common stock to be less attractive because we may rely on these exemptions. If some investors find our shares of common stock less attractive as a result, there may be a less active trading market for our shares of common stock, and our share price may be more volatile.
Under the JOBS Act, emerging growth companies also can delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have irrevocably elected to avail ourselves of this exemption from new or revised accounting standards and, therefore, will not be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.
Our shareholders may not have the same protections generally available to shareholders of other Nasdaq listed companies because we are currently a “controlled company” within the meaning of the Nasdaq listing rules.
Because Intrexon holds a majority of the voting power for the election of our Board of Directors, we are a “controlled company” within the meaning of Nasdaq Listing Rule 5615(c). As a controlled company, we qualify for exemptions from several of Nasdaq’s corporate governance requirements, including requirements that:

• | a majority of our Board of Directors consist of independent directors;

• | compensation of officers be determined or recommended to our Board of Directors by a majority of its independent directors or by a compensation committee comprised solely of independent directors; and

• | director nominees be selected or recommended to our Board of Directors by a majority of its independent directors or by a nominating committee that is composed entirely of independent directors.

While our Board of Directors has determined that a majority of its members are independent, we are not required to have a compensation committee or a nominating committee composed entirely of independent directors. Accordingly, our shareholders may not be afforded the same protections generally as shareholders of other Nasdaq-listed companies for so long as Intrexon controls the composition of our Board of Directors and our Board of Directors determines to rely upon exemptions available to controlled companies.
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If we fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results or prevent fraud.
Effective internal controls over financial reporting are necessary for us to provide reliable financial reports and, together with adequate disclosure controls and procedures, are designed to prevent fraud. Any failure to implement required new or improved controls, or difficulties encountered in their implementation, could cause us to fail to meet our reporting obligations. In addition, any testing by us conducted in connection with Section 404 of the Sarbanes-Oxley Act, or any subsequent testing by our independent registered public accounting firm, may reveal deficiencies in our internal controls over financial reporting that are deemed to be material weaknesses or that may require prospective or retroactive changes to our financial statements or identify other areas for further attention or improvement. Ineffective internal controls could also cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our common stock.
We may issue preferred stock with terms that could dilute the voting power or reduce the value of our common stock.
While we have no specific plan to issue preferred stock, our certificate of incorporation authorizes us to issue, without the approval of our shareholders, one or more series of preferred stock having such designation, relative powers, preferences (including preferences over our common stock respecting dividends and distributions), voting rights, terms of conversion or redemption, and other relative, participating, optional, or other special rights, if any, of the shares of each such series of preferred stock and any qualifications, limitations, or restrictions thereof, as our Board of Directors may determine. The terms of one or more classes or series of preferred stock could dilute the voting power or reduce the value of our common stock. For example, the repurchase or redemption rights or liquidation preferences we could assign to holders of preferred stock could affect the residual value of the common stock.
The financial reporting obligations of being a public company in the United States are expensive and time consuming and place significant additional demands on our management.
The obligations of being a public company in the United States place additional demands on our management and require significant expenditures, including costs resulting from public company reporting obligations under the Exchange Act; the rules and regulations regarding corporate governance practices, including those under the Sarbanes-Oxley Act and the Dodd Frank Wall Street Reform and Consumer Protection Act; and the listing requirements for the Nasdaq Capital Market. Our management and other personnel devote a substantial amount of time to ensure that we comply with all of these requirements. Moreover, despite reforms made possible by the JOBS Act, the reporting requirements, rules, and regulations will increase our legal and financial compliance costs and will make some activities more time-consuming and costly, particularly if we were no longer to qualify as an emerging growth company. Any changes that we make to comply with these obligations may not be sufficient to allow us to satisfy our obligations as a public company on a timely basis, or at all.
These rules and regulations make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. These factors also could make it more difficult for us to attract and retain qualified persons to serve on our Board of Directors, particularly to serve on our Audit Committee and Compensation Committee, or as executive officers.
There can be no assurance that we will be able to comply with the continued listing standards of the Nasdaq Capital Market.
Even though our common stock has been listed on the Nasdaq Capital Market, we cannot assure you that we will be able to comply with standards necessary to maintain a listing of our common stock on the Nasdaq Capital Market. Our failure to meet the continuing listing requirements may result in our common stock being delisted from the Nasdaq Capital Market.
Provisions in our corporate documents and Delaware law could have the effect of delaying, deferring, or preventing a change in control of us, even if that change may be considered beneficial by some of our shareholders.
The existence of some provisions of our articles of incorporation or our bylaws or Delaware law could have the effect of delaying, deferring, or preventing a change in control of us that a shareholder may consider favorable. These provisions include:

• | providing that the number of members of our board is limited to a range fixed by our bylaws;

• | establishing advance notice requirements for nominations of candidates for election to our Board of Directors or for proposing matters that can be acted on by shareholders at shareholder meetings; and

• | authorizing the issuance of “blank check” preferred stock, which could be issued by our Board of Directors to issue securities with voting rights and thwart a takeover attempt.

As a Delaware corporation, we are also subject to provisions of Delaware law, including Section 203 of the General Corporation Law of the State of Delaware. Section 203 prevents some shareholders holding more than 15% of our voting stock from engaging in certain business combinations unless the business combination or the transaction that resulted in the shareholder becoming an interested shareholder was approved in advance by our Board of Directors, results in the shareholder holding more than 85% of
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our voting stock (subject to certain restrictions), or is approved at an annual or special meeting of shareholders by the holders of at least 66 2/3% of our voting stock not held by the shareholder engaging in the transaction. Any provision of our certificate of incorporation or our bylaws or Delaware law that has the effect of delaying or deterring a change in control could limit the opportunity for our shareholders to receive a premium for their shares of our common stock and affect the price that some investors are willing to pay for our common stock.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
Our corporate headquarters are located in Maynard, Massachusetts, and consist of approximately 3,500 square feet of office space under a lease that expires in March 2023. We operate a demonstration farm for AquAdvantage Salmon in Panama under a lease that expires in April 2019. On Prince Edward Island, Canada, we own both a hatchery in Fortune and a salmon farm, consisting of a hatchery, a grow-out facility, and a broodstock facility in Rollo Bay, and we own a production grow-out facility in Albany, Indiana. We believe that the spaces that we lease and own are sufficient to meet our current and near-term needs. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Contractual Obligations.
Item 3. Legal Proceedings
Lawsuit Against the FDA Approval of NADA
On March 30, 2016, a coalition of NGOs filed a complaint against the FDA, the United States Fish and Wildlife Service, and related individuals for their roles in the FDA approval of the NADA for AquAdvantage Salmon. The coalition, including the Centre for Food Safety and Friends of the Earth, claims that the FDA had no statutory authority to regulate bioengineered animals, and, if it did, that the agency failed to analyze and implement measures to mitigate ecological, environmental, and socioeconomic risks that could impact wild salmon and the environment, including the risk that AquAdvantage Salmon could escape and threaten endangered wild salmon stocks. This lawsuit is currently in the discovery phase of litigation.
Other than as set forth above, we are not party to any legal proceedings the outcome of which, we believe, if determined adversely to us, would individually or in the aggregate have a material adverse effect on our future business, consolidated results of operations, cash flows, or financial position. We may, from time to time, be subject to legal proceedings and claims arising from the normal course of business activities.
Item 4. Mine Safety Disclosures
Not applicable.
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Part II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
Our common stock is currently traded on the Nasdaq Capital Market under the symbol “AQB.” Prior to our listing on the Nasdaq Capital Market, we were listed in 2006 on the Alternative Investment Market (“AIM”), the London Stock Exchange’s international market for smaller growing companies, initially under the symbol “ABTX” and, commencing in 2014, under the symbol “ABTU.” For the period from January 19, 2017, to May 31, 2017, we were dual-listed on both the Nasdaq Capital Market and AIM. Effective June 1, 2017, we voluntarily delisted our common stock from AIM. As of March 6, 2019, 15,275,398 shares of our common stock were issued and outstanding.
As of March 6, 2019, there were approximately 328 holders of record of our common stock. The transfer agent for our common stock is Computershare Trust Company, N.A.
Dividends
We have never declared or paid any cash dividends on our common stock. We currently intend to retain earnings, if any, to finance the growth and development of our business. We do not expect to pay any cash dividends on our common stock in the foreseeable future. Payment of future dividends, if any, will be at the discretion of our Board of Directors and will depend on our financial condition, results of operations, capital requirements, restrictions contained in current or future financing instruments, provisions of applicable law, and other factors the Board of Directors deems relevant.
Securities Authorized for Issuance Under Equity Compensation Plans
The information under “Equity Compensation Plan Information” to be included in our definitive proxy statement relating to our 2019 annual meeting of stockholders to be filed with the SEC within 120 days after the end of our fiscal year ended December 31, 2018, is incorporated herein by reference.
Recent Sales of Registered Securities
The following sets forth information regarding all registered securities sold since January 1, 2018:

• | On January 17, 2018, we completed a public offering of 3,692,307 shares of our common stock and 4,246,153 warrants for net proceeds of approximately $10.6 million. Intrexon participated in this offering, purchasing 1,538,461 shares of our common stock and warrants for $5 million.

• | During the period of March 23, 2018, to June 26, 2018, 249,824 Common Shares were issued through the conversion of outstanding warrants at a price of $3.25. Proceeds to the Company totaled $0.8 million.

• | On October 24, 2018, 2,250,461 Common Shares were issued through the exercise of outstanding warrants at a discounted price of $2.00. Net proceeds to the Company were $4.3 million. Intrexon participated in the exercise, converting warrants for 1,538,461 Common Shares, resulting in gross proceeds of $3.1 million.

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Item 6. Selected Financial Data
The following table sets forth our selected consolidated financial data for the periods and as of the dates indicated. You should read the following selected consolidated financial data in conjunction with our audited consolidated financial statements and the related notes thereto included elsewhere in this Annual Report on Form 10-K and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
The consolidated statement of operations data for the years ended December 31, 2018, 2017, and 2016, and the consolidated balance sheet data as of December 31, 2018 and 2017, are derived from our audited consolidated financial statements. Our audited consolidated financial statements have been prepared in U.S. dollars in accordance with United States generally accepted accounting principles, or U.S. GAAP.
Our historical results for any prior period are not necessarily indicative of results to be expected in any future period.

|  | Fiscal Years Ended December 31,
|  | 2018 |  | 2017 |  | 2016
(in thousands, except share data) |  |
Statement of Operations Data |  |  |  |  |  |
Revenues: |  |  |  |  |  |
Product revenues |  | $ | 85 |  |  | $ | 53 |  |  | $ | — |
Costs and expenses: |  |  |  |  |  |
Product Costs |  | 78 |  |  | 51 |  |  | — |
Sales and marketing |  | 298 |  |  | 799 |  |  | 860 |
Research and development |  | 3,459 |  |  | 3,372 |  |  | 3,430 |
General and administrative |  | 6,616 |  |  | 5,063 |  |  | 3,775 |
Total costs and expenses |  | 10,451 |  |  | 9,285 |  |  | 8,065 |
Operating loss |  | (10,366 | ) |  | (9,232 | ) |  | (8,065) |
Other income (expense): |  |  |  |  |  |
Interest and other income (expense), net |  | (16 | ) |  | (27 | ) |  | (406) |
Total other income (expense) |  | (16 | ) |  | (27 | ) |  | (406) |
Net loss |  | $ | (10,382 | ) |  | $ | (9,259 | ) |  | $ | (8,471 | )
Other comprehensive income |  |  |  |  |  |
Foreign currency translation gain (loss) |  | (360 | ) |  | 72 |  |  | (60 | )
Total other comprehensive income (loss) |  | (360 | ) |  | 72 |  |  | (60 | )
Comprehensive loss |  | $ | (10,742 | ) |  | $ | (9,187 | ) |  | $ | (8,531 | )
Earnings per share |  |  |  |  |  |
Net loss |  | (10,382 | ) |  | (9,259 | ) |  | (8,471 | )
Deemed dividend |  | (1,823 | ) |  | — |  |  | — |
Net loss attributable to common shareholders |  | $ | (12,205 | ) |  | $ | (9,259 | ) |  | $ | (8,471 | )
Basic and diluted net loss per share attributable to common shareholders |  | $ | (0.94 | ) |  | $ | (1.06 | ) |  | $ | (1.60 | )
Weighted average number of common shares-basic and diluted (1) |  | 13,028,760 |  |  | 8,772,494 |  |  | 5,303,114 |

(1) | The basic and diluted net loss per share and weighted average number of common shares used in the net loss per share calculation have been adjusted to reflect the 1-for-30 reverse stock split effected January 2017.

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| As of December 31,
| 2018 |  | 2017
Balance Sheet Data: |  |  |
Cash and CD’s | $ | 3,003 |  |  | $ | 506 |
Total assets | $ | 27,671 |  |  | $ | 23,732 |
Debt | $ | 3,591 |  |  | $ | 3,084 |
Stockholders’ equity | $ | 23,234 |  |  | $ | 17,981 |

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes that appear elsewhere in this Annual Report on Form 10-K. In addition to historical consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Annual Report on Form 10-K, particularly in “Risk Factors.”
Overview
We believe that we are a leader in the field of biotechnology tools for improving the productivity of aquaculture. Our lead product is the AquAdvantage Salmon, which received FDA approval in 2015 as the first bioengineered animal available for sale for human consumption. We have commenced commercial activities with operations in markets where we have received regulatory approval. The first steps in our commercial plan have been implemented, including the following:

• | in 2017 and 2018, we sold small harvest quantities from our farm site in Panama;

• | we received approval from the provincial regulatory authorities in Prince Edward Island for the construction of a broodstock facility to house our conventional Atlantic salmon stock and a 250-metric-ton recirculating aquaculture system (“RAS”) facility to grow out our AquAdvantage Salmon, and both facilities are currently under construction; and

• | we purchased certain assets of the aquaculture facility of Bell Fish Company LLC, which we intend to use to grow out our AquAdvantage Salmon for sale and consumption in the United States.

We are also continuing an active search in both the United States and Canada for either an existing land-based RAS facility or a site on which to build a new facility for the commercial production of AquAdvantage Salmon. We intend to utilize a combination of partnerships and licensing arrangements to expand our commercial output.
Financial Overview
We have incurred significant losses since our inception. We expect to continue to incur significant losses for the foreseeable future, and we may never achieve or maintain profitability. We generate product revenue through the sale of our AquAdvantage Salmon, and to a lesser extent, the sale of conventional Atlantic Salmon eggs and fry. In 2017 and 2018, the Company sold AquAdvantage Salmon from its site in Panama. Prior to this, the Company had no revenues from any other product since 2008. At December 31, 2018, we had limited capital to fund operations. This raises doubt of our ability to continue as a going concern.
We expect our future capital requirements will be substantial, particularly as we continue to develop our business and expand our commercial activities. As discussed in “Liquidity and Capital Resources,” in February 2016, we executed a convertible debt facility providing for borrowings of up to $10 million with Intrexon, our majority shareholder. On December 16, 2016, the entire $10 million (plus accrued interest) of convertible debt was converted into 1,212,908 shares of our common stock.
In January 2017, we sold 2,421,073 shares of our common stock to Intrexon for proceeds of approximately $25 million. In January 2018, we completed a public offering of 3,692,307 shares of our common stock and 4,246,153 warrants for net proceeds of approximately $10.6 million.
During the period of March 23, 2018, to June 26, 2018, 249,824 Common Shares were issued through the conversion of outstanding warrants at a price of $3.25. Proceeds to the Company totaled $0.8 million.
On October 24, 2018, 2,250,461 Common Shares were issued through the exercise of outstanding warrants at a discounted price of $2.00. Net proceeds to the Company were $4.3 million after deducting discounts, fees, and expenses. Intrexon participated in the exercise, converting warrants for 1,538,461 Common Shares, resulting in gross proceeds of $3.1 million.
During the next several years, we expect that our working capital requirements and our capital expenditures will increase due to the operation of our production facilities in Indiana and Rollo Bay. We also expect that our annual spending on operations will increase as our company grows. We may also decide to construct or purchase additional production facilities to grow-out AquAdvantage
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Salmon. These activities would require substantial new investment to fund the cost of purchase or construction of land-based farming facilities. However, the uncertainty of the timing of the commencement of the grow-out of AquAdvantage Salmon at our production facilities in Indiana and Rollo Bay makes it difficult to forecast these expenses or create a definitive operational plan beyond the short term. Upon completion of the first harvests at our production facilities in Indiana and Rollo Bay, we expect to finalize our operational plan and move forward with further expansion, which will require us to raise additional funds.
Revenue
We generate product revenue primarily through the sale of our AquAdvantage Salmon. We may also sell excess conventional salmon eggs and fry to local growers. We expect that our sales will be modest and infrequent until our grow-out facilities in Indiana and Rollo Bay are operational and commence harvesting.
In the future, we believe that our revenue will depend upon the number of countries in which we have received regulatory approval for the sale of our products, the number and capacity of grow-out facilities we have in operation, and the market acceptance we achieve.
Cost of Products
Cost of products includes the labor and related costs to grow out our fish, including feed, oxygen, and other direct costs; an application of overhead; and the cost to process and ship our products to customers.
Sales and Marketing Expenses
Our sales and marketing expenses currently include personnel costs, travel, and consulting fees for market-related activities. As of December 31, 2018, we had one employee dedicated to sales and marketing.
Research and Development Expenses
As of December 31, 2018, we employed twenty scientists and technicians at our facilities on Prince Edward Island to oversee our broodstock of AquAdvantage Salmon, as well as the lines of fish we maintain for research and development purposes. We recognize research and development expenses as they are incurred. Our research and development expenses consist primarily of:

• | salaries and related overhead expenses for personnel in research and development functions;

• | fees paid to contract research organizations, Intrexon, and consultants who perform research for us;

• | costs related to laboratory supplies used in our research and development efforts;

• | costs related to the operation of our field trials; and

• | costs related to the grow-out of fish at the Panama site that are not capitalized in inventory.

General and Administrative Expenses
General and administrative expenses consist of salaries and related costs for employees in executive, corporate, and finance functions. Other significant general and administrative expenses include corporate governance and public market maintenance, regulatory compliance, rent and utilities, insurance, and legal services. Additionally, pre-production and capacity utilization costs for our grow-out facilities are charged to general and administrative expenses. We had eighteen employees in our general and administrative group at December 31, 2018.
Other Income (Expense), Net
Interest expense includes the interest on our outstanding loans. Other income (expense) includes bank charges, fees, interest income, and miscellaneous gains or losses on asset disposals.
Critical Accounting Policies and Estimates
This Management’s Discussion and Analysis of Financial Condition and Results of Operations is based on our consolidated financial statements, which we have prepared in accordance with GAAP. The preparation of our consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported revenues and expenses during the reporting periods. We evaluate these estimates and judgments on an ongoing basis. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Our actual results may differ from these estimates under different assumptions or conditions.
While our significant accounting policies are more fully described in Note 2 to our audited consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K, we believe that the following accounting policies and estimates are the most critical for fully understanding and evaluating our financial condition and results of operations.
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Valuation Allowance for Net Deferred Tax Assets
We record a valuation allowance to offset any net deferred tax assets if, based upon the available evidence, it is more likely than not that we will not recognize some or all of the deferred tax assets. We have had a history of net losses since inception, and, as a result, we have established a 100% valuation allowance for our net deferred tax assets. If circumstances change, and we determine that we will be able to realize some or all of these net deferred tax assets in the future, we will record an adjustment to the valuation allowance. Additionally, enacted changes in domestic or foreign tax rates, that require remeasurement of our deferred tax assets and liabilities, also require remeasurement of our valuation allowance.
Inventory
The Company has adopted ASU 2015-11, “Inventory: Simplifying the Measurement of Inventory.” The main provision of the guidance is that an entity should measure inventory at the lower of cost or net realizable value (“NRV”), where NRV is defined as the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation.
Results of Operations
Comparison of the year ended December 31, 2018, to the year ended December 31, 2017.
The following table summarizes our results of operations for the years ended December 31, 2018 and 2017, together with the changes in those items in dollars(in thousands) and as a percentage:

|  | Year Ended December 31, |  | Dollar Change |  | % Change
|  | 2018 |  | 2017 |
Product revenue |  | $ | 85 |  |  | $ | 53 |  |  | $ | 32 |  |  | 60 | %
Operating expenses: |  |  |  |  |  |  |  |
Product costs |  | 78 |  |  | 51 |  |  | 27 |  |  | 53 | %
Sales and marketing |  | 298 |  |  | 799 |  |  | (501 | ) |  | (63 | )%
Research and development |  | 3,459 |  |  | 3,372 |  |  | 87 |  |  | 3 | %
General and administrative |  | 6,616 |  |  | 5,063 |  |  | 1,553 |  |  | 31 | %
Operating loss |  | (10,366 | ) |  | (9,232 | ) |  | (1,134 | ) |  | 12 | %
Total other (income) expense, net |  | (16 | ) |  | (27 | ) |  | 11 |  |  | (41 | )%
Net loss |  | $ | (10,382 | ) |  | $ | (9,259 | ) |  | $ | (1,123 | ) |  | 12 | %

Product Revenue and Product Costs
We expect that sales of our fish will be infrequent and modest until our Indiana and Rollo Bay facilities are fully operational and harvesting.
Product revenues for the year ended December 31, 2018, were up from the corresponding period in 2017, as a result of selling conventional Atlantic Salmon eggs and fry in addition to the sale of AquAdvantage Salmon.
Product costs on sales for the year ended December 31, 2018, were up from the corresponding period in 2017.
Sales and Marketing Expenses
Sales and marketing expenses for the year ended December 31, 2018, were down from the corresponding period in 2017 due to lower personnel and travel costs. We expect that our sales and marketing expenses will be relatively flat until we increase our production of AquAdvantage Salmon.
Research and Development Expenses
Research and development expenses for the year ended December 31, 2018, were slightly up from the corresponding period in 2017 due to increases in personnel and field trial costs, which were partially offset by a reduction in outside contracted research and development services. We expect that our research and development expenses will continue to increase as we further develop our Rollo Bay farm site and as we continue to pursue regulatory approval for additional products and additional markets.
General and Administrative Expenses
General and administrative expenses for the year ended December 31, 2018, were significantly higher than the corresponding period in 2017 due to increases in personnel, legal fees and Board costs, along with the pre-production and start-up costs at our Indiana site. We expect that our general and administrative expenses will decrease as production increases at the Indiana facility.
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Total Other (Income) Expense
Total other (income) expense for 2018 and 2017 is comprised of interest on debt, bank charges, interest income, and a net gain on the disposal of assets.
Comparison of the year ended December 31, 2017, to the year ended December 31, 2016.
The following table summarizes our results of operations for the years ended December 31, 2017 and 2016, together with the changes in those items in dollars (in thousands) and as a percentage:

|  | Year Ended December 31, |  | Dollar Change |  | % Change
|  | 2017 |  | 2016 |
Product revenue |  | $ | 53 |  |  | $ | — |  |  | $ | 53 |  |  | — | %
Operating expenses: |  |  |  |  |  |  |  |
Product costs |  | 51 |  |  | — |  |  | 51 |  |  | 0 | %
Sales and marketing |  | 799 |  |  | 860 |  |  | (61 | ) |  | (7 | )%
Research and development |  | 3,372 |  |  | 3,430 |  |  | (58 | ) |  | (2 | )%
General and administrative |  | 5,063 |  |  | 3,775 |  |  | 1,288 |  |  | 34 | %
Operating loss |  | (9,232 | ) |  | (8,065 | ) |  | (1,167 | ) |  | 14 | %
Total other (income) expense, net |  | (27 | ) |  | (406 | ) |  | 379 |  |  | (93 | )%
Net loss |  | $ | (9,259 | ) |  | $ | (8,471 | ) |  | $ | (788 | ) |  | 9 | %

Product Revenue and Product Costs
The first sales of AquAdvantage Salmon were recognized during the year ended December 31, 2017. Regulatory approval for the harvest and export of our fish from our Panama farm site was received during the year, and a batch of fish was sold and shipped to customers in Canada.
Product costs on sales consisted of the labor and related direct costs to grow out our fish, an application of overhead, and processing and shipping costs.
Sales and Marketing Expenses
Sales and marketing expenses for the year ended December 31, 2017, were down from the corresponding period in 2016 due to lower travel and outside service costs related to the exploratory design fees for a land-based recirculating aquaculture facility.
Research and Development Expenses
Research and development expenses for the year ended December 31, 2017, were down from the corresponding period in 2016 due to a reduction in outside contract research expenses and an allocation of cost to inventory, which were partly offset by an increase in compensation.
General and Administrative Expenses
General and administrative expenses for the year ended December 31, 2017, were significantly higher than the corresponding period in 2016 due to increased compensation charges and higher professional fees, corporate taxes, and the pre-production costs at the Indiana site, which were partially offset by a reduction in stock compensation charges and legal fees.
Total Other (Income) Expense
Total other (income) expense for 2017 is comprised of interest on debt, bank charges, interest income, and gains on asset disposals. Total other (income) expense for 2016 is comprised of interest on the convertible debt with Intrexon, bank charges, interest income, and gains on asset disposals.
Liquidity and Capital Resources
Sources of Liquidity
We have incurred losses from operations since our inception in 1991, and, as of December 31, 2018, we had an accumulated deficit of $119 million. In February 2016, we entered into a convertible debt facility with Intrexon (the “Debt Facility”). Advances under the Debt Facility carried an interest rate of 10% per year and had a maturity date of March 1, 2017. The entire $10 million (plus accrued interest) under the Debt Facility was converted into 1,212,908 shares of our common stock on December 16, 2016. In January 2017, we completed a private placement of 2,421,073 shares of our common stock to Intrexon for proceeds of approximately $25 million.
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In January 2018, we completed a public offering of 3,692,307 Common Shares and warrants for 4,246,153 Common Shares. Net proceeds to the Company were $10.6 million. Intrexon Corporation participated in the offering, purchasing 1,538,461 Common Shares and warrants for 1,538,461 Common Shares for gross proceeds of $5.0 million.
During the period of March 23, 2018, to June 26, 2018, 249,824 Common Shares were issued through the conversion of outstanding warrants at a price of $3.25. Proceeds to the Company totaled $0.8 million.
On October 24, 2018, 2,250,461 Common Shares were issued through the exercise of outstanding warrants at a discounted price of $2.00. Net proceeds to the Company were $4.3 million. Intrexon participated in the exercise, converting warrants for 1,538,461 Common Shares, resulting in gross proceeds of $3.1 million.
As of December 31, 2018, we had a cash balance of $3.0 million.
Cash Flows
The following table sets forth the significant sources and uses of cash for the periods set forth below (in thousands):

|  | Years Ended December 31,
|  | 2018 |  | 2017 |  | 2016
Net cash provided by (used in): |  |  |  |  |  |
Operating activities |  | $ | (9,817 | ) |  | $ | (9,101 | ) |  | $ | (7,449 | )
Investing activities |  | (4,082 | ) |  | (19,046 | ) |  | (1,074 | )
Financing activities |  | 16,449 |  |  | 25,238 |  |  | 10,541 |
Effect of exchange rate changes on cash |  | (53 | ) |  | 77 |  |  | (7 | )
Net increase (decrease) in cash |  | $ | 2,497 |  |  | $ | (2,832 | ) |  | $ | 2,011 |

Cash Flows from Operating Activities
Net cash used in operating activities during the year ended December 31, 2018, was primarily comprised of our $10.4 million net loss, offset by non-cash depreciation and stock compensation charges of $1.1 million, and increased by working capital uses of $527 thousand. Spending on operations increased in 2018 due to headcount additions and commencement of partial activities at our Rollo Bay and Indiana farm sites. The use of cash in working capital in 2018 was primarily due to a reduction in accounts payable and accrued liabilities and increases in prepaid expenses and other current assets.
Net cash used in operating activities during the year ended December 31, 2017, was primarily comprised of our $9.3 million net loss, offset by non-cash depreciation and stock compensation charges of $307 thousand, and increased by working capital uses of $148 thousand. Spending on operations increased in 2017 due to headcount additions and renovation costs at our Indiana site, offset by a reduction in legal fees. The use of cash in working capital in 2017 was due to the establishment of inventory in Panama and Canada, deposits for insurance and utilities in Indiana, and costs of our public offering.
Net cash used in operating activities during the year ended December 31, 2016, was primarily comprised of our $8.5 million net loss, offset by non-cash depreciation and stock compensation charges and accrued interest of $765 thousand, and working capital sources of $257 thousand. Spending on operations increased during 2016 due to headcount additions, increased legal fees, the commencement of two international field trials, and the purchase of a new farm site. The increase in cash sourced by working capital in 2016 was due to an increase in accrued expenses, offset by an increase in government receivables.
Cash Flows from Investing Activities
During 2018, we used $4.1 million for property and equipment purchases for renovations to our Indiana farm site and for construction charges at our Rollo Bay site. This was partly offset by the $23 thousand in proceeds from the sale of existing assets.
During 2017, we used $19.0 million for property and equipment purchases, including $14.7 million for the purchase and initial renovation work of our Indiana site and $4.2 million for construction activities at our Rollo Bay site.
During 2016, we used $1.1 million for property and equipment purchases, primarily for the purchase of the Rollo Bay farm site, and $6 thousand for patent charges. This was offset by $24 thousand in proceeds from the sale of existing assets.
Cash Flows from Financing Activities
During 2018, we received approximately $10.6 million in net proceeds from the issuance of Common Shares and warrants in a public offering and $5.1 million from the exercise of warrants, and $716 thousand from the issuance of debt, net of repayments.
During 2017, we received $25.0 million in proceeds from the issuance of our common stock in a private placement of shares, $28 thousand from the exercise of stock options, and $221 thousand from the issuance of debt, net of repayments.
During 2016, we received $10.0 million in proceeds from the issuance of convertible debt, which was converted into common stock, and $541 thousand in proceeds from the issuance of term debt, net of repayments.
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Future Capital Requirements
As discussed in Note 1 to the financial statements, the Company has experienced net losses and negative cash flows from operations since its inception and has cumulative losses attributable to common stockholders of $119 million as of December 31, 2018. Our cash balance on December 31, 2018, was $3.0 million. We have evaluated our cash resources as of the date of issuance of this report, in view of our planned spending for ongoing operations, capital expenditures, and working capital and have determined that our current funds will be used during the first half of 2019. These conditions raise substantial doubt about the Company’s ability to continue as a going concern.
The Company plans to raise capital through equity and/or debt financings. There is no assurance, however, that the Company will be successful in raising the needed capital and, if funding is available, that it will be available on terms acceptable to the Company. Therefore, the accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company may also cut operating costs or delay capital spend in order to preserve available cash. If we are unable to generate additional funds in the future through financings, sales of our products, government grants, loans, or from other sources or transactions, we will exhaust our resources and will be unable to maintain our currently planned operations. If we cannot continue as a going concern, our stockholders would likely lose most or all of their investment in us.
Until such time, if ever, as we can generate positive operating cash flows, we may finance our cash needs through a combination of equity offerings, debt financings, government or other third-party funding, strategic alliances, and licensing arrangements. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interests of holders of our common stock will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of holders of our common stock. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures, or declaring dividends. If we raise additional funds through government or other third-party funding; marketing and distribution arrangements; or other collaborations, strategic alliances, or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs, or product candidates or to grant licenses on terms that may not be favorable to us.
Off-Balance Sheet Arrangements
We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements as defined under SEC rules.
Contractual Obligations
The following table summarizes our significant contractual obligations and commercial commitments at December 31, 2018, and the effects such obligations are expected to have on our liquidity and cash flows in future periods (in thousands):

|  | Total |  | Less than 1 year |  | 1-3 years |  | 3-5 years |  | More than 5 years
PEI Finance term loan |  | $ | 1,219 |  |  | $ | 34 |  |  | $ | 86 |  |  | $ | 1,099 |  |  | $ | — |
ACOA term loan |  | 204 |  |  | 27 |  |  | 55 |  |  | 55 |  |  | 67 |
Kubota Canada Ltd |  | 61 |  |  | 10 |  |  | 20 |  |  | 20 |  |  | 11 |
ACOA AIF grant (1) |  | 2,107 |  |  | — |  |  | — |  |  | — |  |  | 2,107 |
Maynard office lease |  | 278 |  |  | 63 |  |  | 131 |  |  | 84 |  |  | — |
Panama site lease |  | 60 |  |  | 60 |  |  | — |  |  | — |  |  | — |
Indiana auto lease |  | 11 |  |  | 5 |  |  | 6 |  |  | — |  |  | — |
Indiana well lease |  | 717 |  |  | 15 |  |  | 32 |  |  | 33 |  |  | 637 |
Total |  | $ | 4,657 |  |  | $ | 214 |  |  | $ | 330 |  |  | $ | 1,291 |  |  | $ | 2,822 |

(1) repayment of the AIF grant is royalty-based and estimated on revenue projections of products resulting from the project
In addition to the obligations in the table above, as of December 31, 2018, we also have the following significant contractual obligations described below:

• | In February 2013, we entered into the ECC with Intrexon, pursuant to which we are permitted to use Intrexon’s UltraVector and other technology platforms to develop and commercialize additional bioengineered traits in finfish for human consumption. We agreed under the ECC to pay Intrexon, on a quarterly basis, 16.66% of the gross profits calculated for each developed product. We also agreed to pay Intrexon 50% of the quarterly revenue obtained from a sublicensor in the event of a sublicensing arrangement. In addition, we agreed to reimburse Intrexon for the costs of certain services provided by Intrexon. Amounts required to be paid to Intrexon under the ECC are not included in the table above due to the uncertainty of the timing of payments.

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Recent Accounting Pronouncements
The following is a brief description of recent accounting pronouncements not yet adopted that could have a material effect on our financial statements:
In February 2016, the FASB issued ASU 2016-02, “Leases,” which requires a lessee to recognize lease liabilities for the lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis, and right-of-use assets, representing the lessee’s right to use, or control the use of, specified assets for the lease term. Additionally, the new guidance has simplified accounting for sale and leaseback transactions. Lessor accounting is largely unchanged. The ASU is effective for fiscal years beginning after December 15, 2018. We will adopt the ASU effective January 1, 2019 and based on our current portfolio of leases, approximately $532 thousand of lease assets and liabilities will be recognized on our balance sheet, primarily relating to real estate.
We do not expect any other recently issued, but not yet effective, accounting standards to have a material effect on our results of operations or financial condition.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The following sections provide quantitative information on our exposure to interest rate risk and foreign currency exchange risk. We make use of sensitivity analyses, which are inherently limited in estimating actual losses in fair value that can occur from changes in market conditions.
Interest Rate Risk
Our primary exposure to market risk is interest rate risk associated with debt financing that we utilize from time to time to fund operations or specific projects. The interest on this debt is usually determined based on a fixed rate and is contractually set in advance. At December 31, 2018, and December 31, 2017, we had $1.2 million and $545 thousand, respectively, in interest-bearing debt instruments on our consolidated balance sheet. All of our interest-bearing debt is at fixed rates.
Foreign Currency Exchange Risk
Our functional currency is the U.S. Dollar. The functional currency of our Canadian subsidiary is the Canadian Dollar, and the functional currency of our Panama, U.S., and Brazil subsidiaries is the U.S. Dollar. For the Canadian subsidiary, assets and liabilities are translated at the exchange rates in effect at the balance sheet date, equity accounts are translated at the historical exchange rate, and the income statement accounts are translated at the average rate for each period during the year. Net translation gains or losses are adjusted directly to a separate component of other comprehensive loss within shareholders’ equity (deficit).
Item 8. Financial Statements and Supplementary Data
The financial statements required by this Item are located beginning on page F-1 of this Annual Report.
Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports that we file or submit under the Securities and Exchange Act of 1934 is (1) recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and (2) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure. As of December 31, 2018 (the “Evaluation Date”), our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934). Our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Our Chief Executive Officer and Chief Financial Officer have concluded based upon the evaluation described above that, as of the Evaluation Date, our disclosure controls and procedures were effective at the reasonable assurance level.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting for our company. Internal control over financial reporting is defined in Rules 13a-15(f) and 15(d)-15(f) promulgated under the Securities Exchange Act of 1934, as amended, as a process designed by, or under the supervision of, our Chief Executive and Chief Financial Officers and
30

effected by our board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:

• | pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and disposition of our assets;

• | provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles;

• | provide reasonable assurance that our receipts and expenditures are being made only in accordance with authorization of our management and directors; and

• | provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements.

Because of inherent limitations, internal controls over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.
Our management, including our Chief Executive Officer and Chief Financial Officer, has conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2018. In conducting this evaluation, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework (2013).
Based upon this evaluation and those criteria, management believes that, as of December 31, 2018, our internal controls over financial reporting were effective.
This Annual Report on Form 10-K does not include an attestation report of the Company’s independent registered accounting firm as we are an emerging growth company, as defined under the JOBS Act, and are subject to reduced public company reporting requirements. The JOBS Act provides that an emerging growth company is not required to have the effectiveness of the Company’s internal control over financial reporting audited by its external auditors for as long as the Company is deemed to be an emerging growth company.
Changes in Internal Control
There have been no changes in our internal control over financial reporting for the year ended December 31, 2018, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information
None.
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Part III
Item 10. Directors, Executive Officers and Corporate Governance
The information required by this Item is set forth in our 2019 Proxy Statement to be filed with the SEC within 120 days of December 31, 2018, and is incorporated by reference into this Annual Report on Form 10-K by reference.
Item 11. Executive Compensation
We are an emerging growth company, as defined under the JOBS Act, and are therefore not required to provide certain disclosures regarding executive compensation required of larger public companies or hold a nonbinding advisory vote on executive compensation or obtain stockholder approval of any golden parachute payments not previously approved.
The information required by this Item is set forth in our 2019 Proxy Statement to be filed with the SEC within 120 days of December 31, 2018, and is incorporated by reference into this Annual Report on Form 10-K by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this Item is set forth in our 2019 Proxy Statement to be filed with the SEC within 120 days of December 31, 2018, and is incorporated by reference into this Annual Report on Form 10-K by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this Item is set forth in our 2019 Proxy Statement to be filed with the SEC within 120 days of December 31, 2018, and is incorporated by reference into this Annual Report on Form 10-K by reference.
Item 14. Principal Accounting Fees and Services
The information required by this Item is set forth in our 2019 Proxy Statement to be filed with the SEC within 120 days of December 31, 2018, and is incorporated by reference into this Annual Report on Form 10-K by reference.
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Part IV
Item 15. Exhibits and Financial Statement Schedules
List of Documents Filed as Part of this Report
1. Consolidated Financial Statements
The following consolidated financial statements are filed herewith in accordance with Item 8 of Part II above:

(i) | Report of Independent Registered Public Accounting Firm

(ii) | Consolidated Balance Sheets

(iii) | Consolidated Statements of Operations and Comprehensive Loss

(iv) | Consolidated Statements of Changes in Stockholders’ Equity (Deficit)

(v) | Consolidated Statements of Cash Flows

(vi) | Notes to Consolidated Financial Statements

2. Schedules
Schedules not listed are omitted because the required information is inapplicable or is presented in the consolidated financial statements.
3. Exhibits

Exhibit Number |  | Exhibit Description
3.1* |  | Third Amended and Restated Certificate of Incorporation of AquaBounty Technologies, Inc. (incorporated by reference to Exhibit 3.1 to the Registrant’s Registration Statement on Form 10, filed on November 7, 2016).
3.2* |  | Certificate of Amendment of Third Amended and Restated Bylaws of AquaBounty Technologies, Inc. (incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K, filed on January 6, 2017).
3.3* |  | Amended and Restated Bylaws of AquaBounty Technologies, Inc. (incorporated by reference to Exhibit 3.2 to the Registrant’s Registration Statement on Form 10, filed on November 7, 2016).
4.1* |  | Specimen Certificate of Common Stock (incorporated by reference to Exhibit 4.1 to the Registrant’s Registration Statement on Form 10, filed on November 7, 2016).
4.2* |  | Specimen Common Stock Purchase Warrant (incorporated by reference to Exhibit 4.2 to the Registrant’s Registration Statement on Form S-1, filed on January 9, 2018).
10.1* |  | Stock Purchase Agreement, by and between AquaBounty Technologies, Inc. and Intrexon Corporation, dated November 7, 2016 (incorporated by reference to Exhibit 10.1 to the Registrant’s Registration Statement on Form 10, filed on November 7, 2016).
10.2*† |  | AquaBounty Technologies, Inc. 2006 Equity Incentive Plan (incorporated by reference to Exhibit 10.2 to the Registrant’s Registration Statement on Form 10, filed on November 7, 2016).
10.3*† |  | Amendment No. 1 to AquaBounty Technologies, Inc. 2006 Equity Incentive Plan (incorporated by reference to Exhibit 10.3 to the Registrant’s Registration Statement on Form 10, filed on November 7, 2016).
10.4*† |  | Form of Stock Option Agreement pursuant to AquaBounty Technologies, Inc. 2006 Equity Incentive Plan (incorporated by reference to Exhibit 10.4 to the Registrant’s Registration Statement on Form 10, filed on November 7, 2016).
10.5*† |  | Form of Restricted Stock Agreement pursuant to AquaBounty Technologies, Inc. 2006 Equity Incentive Plan (incorporated by reference to Exhibit 10.5 to the Registrant’s Registration Statement on Form 10, filed on November 7, 2016).
10.6*† |  | AquaBounty Technologies, Inc. 2016 Equity Incentive Plan (incorporated by reference to Exhibit 10.6 to the Registrant’s Registration Statement on Form 10, filed on November 7, 2016).
10.7*† |  | Form of Stock Option Agreement pursuant to AquaBounty Technologies, Inc. 2016 Equity Incentive Plan (incorporated by reference to Exhibit 10.22 to the Registrant’s Registration Statement on Form 10, filed on December 12, 2016).
10.8*† |  | Form of Restricted Stock Agreement pursuant to AquaBounty Technologies, Inc. 2016 Equity Incentive Plan (incorporated by reference to Exhibit 10.21 to the Registrant’s Registration Statement on Form 10, filed on December 12, 2016).
10.9* |  | Relationship Agreement, by and between AquaBounty Technologies, Inc. and Intrexon Corporation, dated December 5, 2012 (incorporated by reference to Exhibit 10.7 to the Registrant’s Registration Statement on Form 10, filed on November 7, 2016).

33

Exhibit Number |  | Exhibit Description
10.10* |  | Exclusive Channel Collaboration Agreement, by and between AquaBounty Technologies, Inc. and Intrexon Corporation, dated February 14, 2013 (incorporated by reference to Exhibit 10.8 to the Registrant’s Registration Statement on Form 10, filed on November 7, 2016).
10.11* |  | Subscription Agreement, by and between AquaBounty Technologies, Inc. and the investors listed therein, dated February 14, 2013 (incorporated by reference to Exhibit 10.9 to the Registrant’s Registration Statement on Form 10, filed on November 7, 2016).
10.12* |  | Subscription Agreement, by and between AquaBounty Technologies, Inc. and Intrexon Corporation, dated March 5, 2014 (incorporated by reference to Exhibit 10.10 to the Registrant’s Registration Statement on Form 10, filed on November 7, 2016).
10.13* |  | Subscription Agreement, by and between AquaBounty Technologies, Inc. and Intrexon Corporation, dated June 24, 2015 (incorporated by reference to Exhibit 10.11 to the Registrant’s Registration Statement on Form 10, filed on November 7, 2016).
10.14* |  | Promissory Note Purchase Agreement, by and between AquaBounty Technologies, Inc. and Intrexon Corporation, dated February 22, 2016 (incorporated by reference to Exhibit 10.12 to the Registrant’s Registration Statement on Form 10, filed on November 7, 2016).
10.15* |  | Form of Warrant Exercise Agreement, by and between AquaBounty Technologies, Inc. and certain holders of its Common Stock Purchase Warrants, dated October 24, 2018 (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K, filed on October 25, 2018).
10.16* |  | Lease and Management Agreement, by and between AquaBounty Panama, S. de R.L. and Luis Lamastus, dated October 1, 2013 (incorporated by reference to Exhibit 10.13 to the Registrant’s Registration Statement on Form 10, filed on November 7, 2016).
10.17* |  | Agreement, by and among Atlantic Canada Opportunities Agency and AQUA Bounty Canada Inc. and AquaBounty Technologies Inc., dated December 16, 2009 (incorporated by reference to Exhibit 10.14 to the Registrant’s Registration Statement on Form 10, filed on November 7, 2016).
10.18* |  | Offer Letter dated as of July 10, 2018, from Prince Edward Island Century 2000 Fund Inc. to AQUA Bounty Canada Inc. and accepted by AQUA Bounty Canada Inc. and AquaBounty Technologies, Inc. on August 20, 2018 (incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q, filed on November 2, 2018).
10.19* |  | Negotiable Promissory Note dated as of October 16, 2018, issued by AQUA Bounty Canada Inc. in favor of Prince Edward Island Century 2000 Fund Inc. (incorporated by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q, filed on November 2, 2018).
10.20* |  | Collateral Mortgage dated as of July 26, 2016, by and between AQUA Bounty Canada Inc. and Prince Edward Island Century 2000 Fund Inc. (incorporated by reference to Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q, filed on November 2, 2018).
10.21* |  | Collateral Mortgage dated as of October 9, 2018, by and between AQUA Bounty Canada Inc. and Prince Edward Island Century 2000 Fund Inc. (incorporated by reference to Exhibit 10.4 to the Registrant’s Quarterly Report on Form 10-Q, filed on November 2, 2018).
10.22* |  | General Security Agreement dated as of July 26, 2016, by and between AQUA Bounty Canada Inc. and Prince Edward Island Century 2000 Fund Inc. (incorporated by reference to Exhibit 10.5 to the Registrant’s Quarterly Report on Form 10-Q, filed on November 2, 2018).
10.23* |  | Guarantee dated as of October 9, 2018, made by AquaBounty Technologies, Inc. in favor of Prince Edward Island Century 2000 Fund Inc. (incorporated by reference to Exhibit 10.6 to the Registrant’s Quarterly Report on Form 10-Q, filed on November 2, 2018).
10.24*† |  | Employment Agreement, by and between Sylvia Wulf and AquaBounty Technologies, Inc., dated November 27. 2018 (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K, filed on November 28, 2018).
10.25*† |  | Employment Agreement, by and between Ronald Stotish and AquaBounty Technologies, Inc., dated April 1, 2006 (incorporated by reference to Exhibit 10.15 to the Registrant’s Registration Statement on Form 10, filed on November 7, 2016).
10.26*† |  | Employment Agreement, by and between David Frank and AquaBounty Technologies, Inc., dated October 1, 2007 (incorporated by reference to Exhibit 10.16 to the Registrant’s Registration Statement on Form 10, filed on November 7, 2016).
10.27*† |  | Employment Agreement, by and between Alejandro Rojas and AquaBounty Technologies, Inc., dated December 30, 2013 (incorporated by reference to Exhibit 10.17 to the Registrant’s Registration Statement on Form 10, filed on November 7, 2016).
10.28* |  | Collaborative Research Agreement, by and between AQUA Bounty Canada Inc. and Tethys Aquaculture Canada, Inc., dated March 22, 2012 (incorporated by reference to Exhibit 10.18 to the Registrant’s Registration Statement on Form 10, filed on November 7, 2016).
10.29* |  | Intellectual Property License and Full and Final Release among Genesis Group, Inc., HSC Research and Development Partnership and AquaBounty Technologies, Inc., dated February 28, 2014 (incorporated by reference to Exhibit 10.19 to the Registrant’s Registration Statement on Form 10, filed on November 7, 2016).

34

Exhibit Number |  | Exhibit Description
10.30* |  | Amended and Restated Lease Agreement, by and between AquaBounty Panama, S. de R.L. and Ligia Gabriela Surgeon de Lamastus, dated May 1, 2016 (incorporated by reference to Exhibit 10.20 to the Registrant’s Registration Statement on Form 10, filed on November 7, 2016).
10.31* |  | Asset Purchase Agreement by and between AquaBounty Technologies, Inc. and Bell Fish Company LLC, dated as of June 9, 2017 (incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q, filed on August 4, 2017).
21.1 |  | List of Subsidiaries of AquaBounty Technologies, Inc.
31.1 |  | Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 |  | Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 |  | Certification of the Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

*Incorporated herein by reference as indicated.
†Management contract or compensatory plan or arrangement.
The registrant hereby undertakes to file with the Securities and Exchange Commission, upon request, copies of any constituent instruments defining the rights of holders of long-term debt of the registrant or its subsidiaries that have not been filed herewith because the amounts represented thereby are less than 10% of the total assets of the registrant and its subsidiaries on a consolidated basis.
Item 16. Form 10-K Summary
Not applicable.
35

Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

AQUABOUNTY TECHNOLOGIES, INC.
By: | /s/ Sylvia A. Wulf
| Sylvia A. Wulf
| Chief Executive Officer, President, and Director

Power of Attorney
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints David A. Frank and Christopher Martin, as his or her attorneys-in-fact, each with the power of substitution, for him or her in any and all capacities, to sign any amendment to this Annual Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company and in the capacities and on the dates indicated below.

Signature |  | Title |  | Date
/s/ Sylvia A. Wulf |  | President, Chief Executive Officer and Director (Principal Executive Officer) |  | March 7, 2019
Sylvia A. Wulf |  |  |
/s/ David A. Frank |  | Chief Financial Officer and Treasurer (Principal Financial Officer and Principal Accounting Officer) |  | March 7, 2019
David A. Frank |  |  |
/s/ Ronald L. Stotish |  | Chief Technology Officer and Director |  | March 7, 2019
Ronald L. Stotish |  |  |  |
/s/ Richard J. Clothier |  | Chairman of the Board, Director |  | March 7, 2019
Richard J. Clothier |  |  |  |
/s/ Jack A. Bobo |  | Director |  | March 7, 2019
Jack A. Bobo |  |  |  |
/s/ Richard L. Huber |  | Director |  | March 7, 2019
Richard L. Huber |  |  |  |
/s/ Christine St.Clare |  | Director |  | March 7, 2019
Christine St.Clare |  |  |  |
/s/ Rick Sterling |  | Director |  | March 7, 2019
Rick Sterling |  |  |  |
/s/ James C. Turk |  | Director |  | March 7, 2019
James C. Turk |  |  |  |

36

Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of AquaBounty Technologies, Inc.:
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of AquaBounty Technologies, Inc. (the “Company”) as of December 31, 2018 and 2017, the related consolidated statements of operations and comprehensive loss, changes in stockholders’ equity (deficit), and cash flows, for each of the three years in the three-year period ended December 31, 2018, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the three-year period ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of America.
Emphasis of a Matter Regarding Going Concern
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has suffered recurring losses and negative cash flows from operations. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Wolf & Company, P.C.
Boston, Massachusetts
March 7, 2019
We have served as the Company’s auditor since 2011.
F-1

AquaBounty Technologies, Inc.
Consolidated Balance Sheets

|  | As of
|  | December 31,
|  | 2018 |  | 2017
Assets |  |  |  |
Current assets: |  |  |  |
Cash and cash equivalents |  | $ | 2,990,196 |  |  | $ | 492,861 |
Certificate of deposit |  | 12,361 |  |  | 13,422 |
Other receivables |  | 115,982 |  |  | 183,926 |
Inventory |  | 76,109 |  |  | 172,363 |
Prepaid expenses and other current assets |  | 315,969 |  |  | 527,322 |
Total current assets |  | 3,510,617 |  |  | 1,389,894 |
Property, plant and equipment, net |  | 23,716,768 |  |  | 21,802,976 |
Definite-lived intangible assets, net |  | 171,292 |  |  | 184,995 |
Indefinite-lived intangible assets |  | 191,800 |  |  | 191,800 |
Other assets |  | 80,583 |  |  | 162,093 |
Total assets |  | $ | 27,671,060 |  |  | $ | 23,731,758 |
Liabilities and stockholders’ equity |  |  |  |
Current liabilities: |  |  |  |
Accounts payable and accrued liabilities |  | $ | 845,323 |  |  | $ | 2,666,855 |
Current debt |  | 71,613 |  |  | 49,794 |
Total current liabilities |  | 916,936 |  |  | 2,716,649 |
Long-term debt |  | 3,519,821 |  |  | 3,034,420 |
Total liabilities |  | 4,436,757 |  |  | 5,751,069 |
Commitments and contingencies |  |  |  |  |  |
Stockholders’ equity: |  |  |  |
Common stock, $0.001 par value, 50,000,000 shares authorized; |  |  |  |
15,098,837, (2017: 8,895,094) shares outstanding |  | 15,099 |  |  | 8,895 |
Additional paid-in capital |  | 142,707,957 |  |  | 126,718,186 |
Accumulated other comprehensive loss |  | (574,186 | ) |  | (213,884 | )
Accumulated deficit |  | (118,914,567 | ) |  | (108,532,508 | )
Total stockholders’ equity |  | 23,234,303 |  |  | 17,980,689 |
Total liabilities and stockholders’ equity |  | $ | 27,671,060 |  |  | $ | 23,731,758 |

See accompanying notes to the consolidated financial statements and report of the independent registered public accounting firm.
F-2

AquaBounty Technologies, Inc.
Consolidated Statements of Operations and Comprehensive Loss

|  | Years ended December 31,
|  | 2018 |  | 2017 |  | 2016
Revenues |  |  |  |  |  |
Product Revenues |  | $ | 84,518 |  |  | $ | 53,278 |  |  | $ | — |
Costs and expenses |  |  |  |  |  |
Product costs |  | 78,155 |  |  | 50,777 |  |  | — |
Sales and marketing |  | 297,687 |  |  | 799,009 |  |  | 860,365 |
Research and development |  | 3,458,564 |  |  | 3,371,767 |  |  | 3,429,400 |
General and administrative |  | 6,615,908 |  |  | 5,063,824 |  |  | 3,775,289 |
Total costs and expenses |  | 10,450,314 |  |  | 9,285,377 |  |  | 8,065,054 |
Operating loss |  | (10,365,796 | ) |  | (9,232,099 | ) |  | (8,065,054 | )
Other income (expense) |  |  |  |  |  |
Gain on disposal of equipment |  | 13,233 |  |  | 941 |  |  | 2,861 |
Interest expense |  | (22,257 | ) |  | (21,537 | ) |  | (402,554 | )
Other income (expense), net |  | (7,239 | ) |  | (5,952 | ) |  | (5,914 | )
Total other income (expense) |  | (16,263 | ) |  | (26,548 | ) |  | (405,607 | )
Net loss |  | $ | (10,382,059 | ) |  | $ | (9,258,647 | ) |  | $ | (8,470,661 | )
Other comprehensive income (loss): |  |  |  |  |  |
Foreign currency translation gain (loss) |  | (360,302 | ) |  | 72,388 |  |  | (59,840 | )
Total other comprehensive income (loss) |  | (360,302 | ) |  | 72,388 |  |  | (59,840 | )
Comprehensive loss |  | $ | (10,742,361 | ) |  | $ | (9,186,259 | ) |  | $ | (8,530,501 | )
Earnings per share |  |  |  |  |  |
Net loss |  | (10,382,059 | ) |  | (9,258,647 | ) |  | (8,470,661 | )
Deemed dividend |  | (1,822,873 | ) |  | — |  |  | — |
Net loss attributable to common shareholders |  | (12,204,932 | ) |  | (9,258,647 | ) |  | (8,470,661 | )
Basic and diluted net loss per share attributable to common shareholders |  | $ | (0.94 | ) |  | $ | (1.06 | ) |  | $ | (1.60 | )
Weighted average number of common shares -basic and diluted |  | 13,028,760 |  |  | 8,772,494 |  |  | 5,303,114 |

See accompanying notes to the consolidated financial statements and report of the independent registered public accounting firm.
F-3

AquaBounty Technologies, Inc.
Consolidated Statements of Changes in Stockholders’ Equity (Deficit)

|  | Common stock issued and outstanding |  | Par value |  | Additional paid-in capital |  | Accumulated other comprehensive loss |  | Accumulated deficit |  | Total
Balance at December 31, 2015 |  | 5,247,605 |  |  | $ | 5,248 |  |  | $ | 90,968,813 |  |  | $ | (226,432 | ) |  | $ | (90,803,200 | ) |  | $ | (55,571 | )
Net loss |  |  |  |  |  |  |  |  |  | (8,470,661 | ) |  | (8,470,661 | )
Other comprehensive loss |  |  |  |  |  |  |  | (59,840 | ) |  |  |  | (59,840 | )
Conversion of debt and accrued interest to common stock |  | 1,212,908 |  |  | 1,213 |  |  | 10,394,620 |  |  |  |  |  |  | 10,395,833 |
Cashless exercise of options for common stock |  | 524 |  |  | — |  |  | — |  |  |  |  |  |  | — |
Share based compensation |  | 2,899 |  |  | 3 |  |  | 218,291 |  |  |  |  |  |  | 218,294 |
Balance at December 31, 2016 |  | 6,463,936 |  |  | $ | 6,464 |  |  | $ | 101,581,724 |  |  | $ | (286,272 | ) |  | $ | (99,273,861 | ) |  | $ | 2,028,055 |
Net loss |  |  |  |  |  |  |  |  |  | (9,258,647 | ) |  | (9,258,647 | )
Other comprehensive income |  |  |  |  |  |  |  | 72,388 |  |  |  |  | 72,388 |
Issuance of common stock, net of expenses |  | 2,421,073 |  |  | 2,421 |  |  | 24,986,836 |  |  |  |  |  |  | 24,989,257 |
Exercise of options for common stock |  | 8334 |  |  | 8 |  |  | 27,494 |  |  |  |  |  |  | 27,502 |
Share based compensation |  | 1,751 |  |  | 2 |  |  | 122,132 |  |  |  |  |  |  | 122,134 |
Balance at December 31, 2017 |  | 8,895,094 |  |  | $ | 8,895 |  |  | $ | 126,718,186 |  |  | $ | (213,884 | ) |  | $ | (108,532,508 | ) |  | $ | 17,980,689 |
Net loss |  |  |  |  |  |  |  |  |  | (10,382,059 | ) |  | (10,382,059 | )
Other comprehensive loss |  |  |  |  |  |  |  | (360,302 | ) |  |  |  | (360,302 | )
Issuance of common stock and warrants, net of expenses |  | 3,692,307 |  |  | 3,692 |  |  | 10,612,354 |  |  |  |  |  |  | 10,616,046 |
Exercise of warrants for common stock, net of expenses |  | 2,500,285 |  |  | 2,501 |  |  | 5,114,032 |  |  |  |  |  |  | 5,116,533 |
Share based compensation |  | 11,151 |  |  | 11 |  |  | 263,385 |  |  |  |  |  |  | 263,396 |
Balance at December 31, 2018 |  | 15,098,837 |  |  | $ | 15,099 |  |  | $ | 142,707,957 |  |  | $ | (574,186 | ) |  | $ | (118,914,567 | ) |  | $ | 23,234,303 |

See accompanying notes to the consolidated financial statements and report of the independent registered public accounting firm.
F-4

AquaBounty Technologies, Inc.
Consolidated Statements of Cash Flows

|  | Years ended December 31,
|  | 2018 |  | 2017 |  | 2016
Operating activities |  |  |  |  |  |
Net loss |  | $ | (10,382,059 | ) |  | $ | (9,258,647 | ) |  | $ | (8,470,661 | )
Adjustment to reconcile net loss to net cash used in |  |  |  |  |  |
operating activities: |  |  |  |  |  |
Depreciation and amortization |  | 843,387 |  |  | 184,946 |  |  | 153,996 |
Share-based compensation |  | 263,396 |  |  | 122,134 |  |  | 218,294 |
Gain on disposal of equipment |  | (13,233 | ) |  | (941 | ) |  | (2,861 | )
Non-cash interest and other expenses |  | (1,364 | ) |  | — |  |  | 395,833 |
Changes in operating assets and liabilities: |  |  |  |  |  |
Other receivables |  | 56,212 |  |  | (11,440 | ) |  | (121,640 | )
Inventory |  | 93,956 |  |  | (169,991 | ) |  | — |
Prepaid expenses and other assets |  | 289,868 |  |  | (592,602 | ) |  | 38,054 |
Accounts payable and accrued liabilities |  | (966,928 | ) |  | 625,763 |  |  | 340,092 |
Net cash used in operating activities |  | (9,816,765 | ) |  | (9,100,778 | ) |  | (7,448,893 | )
Investing activities |  |  |  |  |  |
Purchase of property, plant and equipment |  | (4,009,736 | ) |  | (18,893,264 | ) |  | (934,495 | )
Deposits on equipment purchases |  | (95,001 | ) |  | (153,663 | ) |  | (156,982 | )
Proceeds from sale of equipment |  | 23,233 |  |  | 941 |  |  | 23,844 |
Payment of patent costs |  | — |  |  | — |  |  | (5,664 | )
Net cash used in investing activities |  | (4,081,504 | ) |  | (19,045,986 | ) |  | (1,073,297 | )
Financing activities |  |  |  |  |  |
Proceeds from issuance of debt |  | 771,858 |  |  | 256,807 |  |  | 547,142 |
Repayment of term debt |  | (55,615 | ) |  | (35,812 | ) |  | (6,268 | )
Proceeds from the issuance of convertible debt |  | — |  |  | — |  |  | 10,000,000 |
Proceeds from the issuance of common stock and warrants, net |  | 10,616,046 |  |  | 24,989,257 |  |  | — |
Proceeds from exercise of stock options and warrants, net |  | 5,116,533 |  |  | 27,502 |  |  | — |
Net cash provided by financing activities |  | 16,448,822 |  |  | 25,237,754 |  |  | 10,540,874 |
Effect of exchange rate changes on cash and cash equivalents |  | (53,218 | ) |  | 77,262 |  |  | (7,496 | )
Net change in cash and cash equivalents |  | 2,497,335 |  |  | (2,831,748 | ) |  | 2,011,188 |
Cash and cash equivalents at beginning of period |  | 492,861 |  |  | 3,324,609 |  |  | 1,313,421 |
Cash and cash equivalents at the end of period |  | $ | 2,990,196 |  |  | $ | 492,861 |  |  | $ | 3,324,609 |
Supplemental disclosure of cash flow information and non-cash transactions: |  |  |  |  |  |
Interest paid in cash |  | $ | 22,257 |  |  | $ | 21,537 |  |  | $ | 6,721 |
Conversion of convertible debt and accrued interest to common stock |  | $ | — |  |  | $ | — |  |  | $ | 10,395,833 |
Property and equipment included in accounts payable and accrued liabilities |  | $ | 193,378 |  |  | $ | 1,036,240 |  |  | $ | 50,132 |
Acquisition of equipment under debt arrangement |  | $ | 74,068 |  |  | $ | — |  |  | — |

See accompanying notes to the consolidated financial statements and report of the independent registered public accounting firm.
F-5

AquaBounty Technologies, Inc.
Notes to the Consolidated Financial Statements
for the years ended December 31, 2018, 2017, and 2016
1. Nature of business and organization
Nature of business
AquaBounty Technologies, Inc. (the “Parent” and, together with its subsidiaries, the “Company”) was incorporated in December 1991 in the State of Delaware for the purpose of conducting research and development of the commercial viability of a group of proteins commonly known as antifreeze proteins. In 1996, the Parent obtained the exclusive licensing rights for a gene construct (transgene) used to create a breed of farm‑raised Atlantic salmon that exhibit growth rates that are substantially faster than conventional salmon.
In 2015, the Parent obtained approval from the US Food and Drug Administration (the “FDA”) for the production, sale, and consumption of its AquAdvantage Salmon product in the United States.
In 2016, the Parent obtained approval from Health Canada for the sale and consumption of its AquAdvantage Salmon product in Canada. Previously, in 2013, the Parent obtained approval from Environment Canada for the production of the product.
AQUA Bounty Canada Inc. (the “Canadian Subsidiary”) was incorporated in January 1994 for the purpose of establishing a commercial biotechnology laboratory to conduct research and development programs related to the Parent’s technologies and to commercialize the Parent’s products in Canada.
AquaBounty Panama, S. de R.L. (the “Panama Subsidiary”) was incorporated in May 2008 in Panama for the purpose of conducting commercial trials of the Parent’s products.
AquaBounty Farms, Inc. (the “U.S. Subsidiary”) was incorporated in December 2014 in the State of Delaware for the purpose of conducting field trials and commercializing the Parent’s products in the United States.
AquaBounty Farms Indiana LLC (the “Indiana Subsidiary”), which is wholly owned by the U.S. Subsidiary, was formed in June 2017 in the State of Delaware for the purpose of operating its aquaculture facility in Albany, Indiana.
AquaBounty Brasil Participações Ltda. (the “Brazil Subsidiary”) was incorporated in May 2015 for the purpose of conducting field trials and commercializing the Parent’s products in Brazil.
Basis of presentation
The consolidated financial statements include the accounts of AquaBounty Technologies, Inc. and its wholly owned direct subsidiaries, AQUA Bounty Canada Inc.; AquaBounty Panama, S. de R.L.; AquaBounty Farms, Inc.; AquaBounty Farms Indiana LLC; and AquaBounty Brasil Participacoes Ltda. The entities are collectively referred to herein as the “Company.” All inter-company transactions and balances have been eliminated upon consolidation.
Going Concern Uncertainty and Management's Plan
The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.
The Company has experienced net losses and negative cash flows from operations since its inception and has cumulative losses attributable to common stockholders of $119 million as of December 31, 2018. At December 31, 2018, the Company had limited capital to fund its operations. This raises substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the accompanying consolidated financial statements are issued.
The Company plans to raise capital through equity and/or debt financings. There is no assurance, however, that the Company will be successful in raising the needed capital and, if funding is available, that it will be available on terms acceptable to the Company. The Company may also cut operating costs or delay capital spend in order to preserve available cash. The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of the above uncertainty.
2. Summary of significant accounting policies
Use of estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities as of the date of the consolidated financial statements, and the reported amounts of expenses during the reporting periods. Actual results could differ from those estimates.
F-6

AquaBounty Technologies, Inc.
Notes to the Consolidated Financial Statements
for the years ended December 31, 2018, 2017, and 2016
Comprehensive loss
The Company displays comprehensive loss and its components as part of its consolidated financial statements. Comprehensive loss consists of net loss and other comprehensive income (loss). Other comprehensive income (loss) includes foreign currency translation adjustments.
Foreign currency translation
The functional currency of the Parent is the US Dollar. The functional currency of the Canadian Subsidiary is the Canadian Dollar (C$), and the functional currency of the Panama, US, Indiana, and Brazil Subsidiaries is the US Dollar. For the Canadian Subsidiary, assets and liabilities are translated at the exchange rates in effect at the balance sheet date, equity accounts are translated at the historical exchange rate, and the income statement accounts are translated at the average rate for each period during the year. Net translation gains or losses are adjusted directly to a separate component of other comprehensive income (loss) within stockholders’ equity (deficit).
Cash equivalents
The Company considers all highly liquid investments with maturities of three months or less when purchased to be cash equivalents. Cash equivalents consist primarily of business savings accounts.
Short-term investments
The Company considers all liquid investments with maturities greater than three months but less than one year when purchased to be short-term investments. The Company has a six-month certificate of deposit at December 31, 2018 and 2017. It is renewable semi-annually in January and July.
Inventories
The Company measures inventory at the lower of cost or net realizable value (NRV), where NRV is defined as the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The Company also considers capacity utilization in calculating its inventory value with any excess capacity charged to general and administrative expenses.
Intangible assets
Definite-lived intangible assets include patents and licenses. Patent costs consist primarily of legal and filing fees incurred to file patents on proprietary technology developed by the Company. Patent costs are amortized on a straight-line basis over 20 years beginning with the filing date of the applicable patent. License fees are capitalized and expensed over the term of the licensing agreement.
Indefinite-lived intangible assets include trademark costs, which are capitalized with no amortization as they have an indefinite life.
Property, plant and equipment
Property, plant and equipment are carried at cost, and depreciation expense commences when the asset is placed into service, which may include receiving applicable regulatory approval. The Company depreciates all asset classes over their estimated useful lives, as follows:

Building | 20 - 25 years
Equipment | 7 - 10 years
Office furniture and equipment | 3 years
Leasehold improvements | shorter of asset life or lease term
Vehicles | 3 years

Impairment of long-lived assets
The Company reviews the carrying value of its long-lived tangible assets and definite-lived intangible assets on an annual basis or more frequently if facts and circumstances suggest that they may be impaired. The carrying values of such assets are considered impaired when the anticipated identifiable undiscounted cash flows from such assets are less than their carrying values. An impairment loss, if any, is recognized in the amount of the difference between the carrying amount and fair value.
Indefinite-lived intangible assets are subject to impairment testing annually or more frequently if impairment indicators arise. The Company’s impairment testing utilizes a discounted cash flow analysis that requires significant management judgment with respect to
F-7

AquaBounty Technologies, Inc.
Notes to the Consolidated Financial Statements
for the years ended December 31, 2018, 2017, and 2016
revenue and expense growth rates, changes in working capital, and the selection and use of the appropriate discount rate. An impairment loss is recognized in the amount of the difference between the carrying amount and fair value.
Revenue recognition
The Company records revenue on the sale of a product when all revenue recognition criteria are fulfilled, including identifying the contract with a customer; identifying the performance obligations in the contract; determining the transaction price; allocating the transaction price to the performance obligations in the contract; and recognizing revenue when (or as) the Company satisfies a performance obligation. In addition, collectability is assessed before applying the revenue recognition criteria. The Company evaluates customer credit risk in order to conclude it is “probable” it will collect the amount of consideration due in exchange for the goods or services.
Income taxes
The Company uses the liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recorded for the expected future tax consequences of temporary differences between the financial reporting and income tax bases of assets and liabilities and are measured using the enacted tax rates and laws that are expected to be in effect when the differences reverse. A valuation allowance is established to reduce net deferred tax assets to the amount expected to be realized. The Company follows accounting guidance regarding the recognition, measurement, presentation, and disclosure of uncertain tax positions in the financial statements. Tax positions taken or expected to be taken in the course of preparing the Company’s tax returns are required to be evaluated to determine whether the tax positions are “more likely than not” to be upheld under regulatory review. The resulting tax impact of these tax positions is recognized in the financial statements based on the results of this evaluation. The Company did not recognize any tax liabilities associated with uncertain tax positions, nor has it recognized any interest or penalties related to unrecognized tax positions. Generally, the Company is no longer subject to federal and state tax examinations by tax authorities for years before 2015.
Net loss per share
Basic and diluted net loss per share available to common stockholders has been calculated by dividing net loss attributable to common shareholders by the weighted average number of common shares outstanding during the year. Basic net loss per share is based solely on the number of common shares outstanding during the year. Fully diluted net loss per share includes the number of shares of common stock issuable upon the exercise of warrants and options with an exercise price less than the fair value of the common stock. Since the Company is reporting a net loss for all periods presented, all potential common shares are considered anti-dilutive and are excluded from the calculation of diluted net loss per share.
Share-based compensation
The Company measures and recognizes all share-based payment awards, including stock options made to employees and Directors, based on estimated fair values. The fair value of a share-based payment award is estimated on the date of grant using an option pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as an expense over the requisite service period in the Company’s consolidated statement of operations. The Company uses the Black-Scholes option pricing model (“Black-Scholes”) as its method of valuation. Non-employee stock-based compensation is accounted for using Black-Scholes to determine the fair value of warrants or options awarded to non-employees with the fair value of such issuances expensed over the period of service.
3. Risks and uncertainties
The Company is subject to risks and uncertainties common in the biotechnology and aquaculture industries. Such risks and uncertainties include, but are not limited to: (i) results from current and planned product development studies and trials; (ii) decisions made by the FDA or similar regulatory bodies in other countries with respect to approval and commercial sale of any of the Company’s proposed products; (iii) the commercial acceptance of any products approved for sale and the Company’s ability to manufacture, distribute, and sell for a profit any products approved for sale; (iv) the Company’s ability to obtain the necessary patents and proprietary rights to effectively protect its technologies; and (v) the outcome of any collaborations or alliances entered into by the Company.
Concentration of credit risk
Financial instruments that potentially subject the Company to credit risk consist principally of cash and cash equivalents and certificates of deposit. This risk is minimized by the Company’s policy of investing in financial instruments with short-term maturities issued by highly rated financial institutions. The Company’s cash balances may at times exceed insurance limitations. The Company holds cash balances in bank accounts located in Canada to fund its local operations. These amounts are subject to foreign currency exchange risk, which is minimized by the Company’s policy to limit the balances held in these accounts. Balances in Canadian bank accounts totaled $230,677 at December 31, 2018.
F-8

AquaBounty Technologies, Inc.
Notes to the Consolidated Financial Statements
for the years ended December 31, 2018, 2017, and 2016
Financial instruments
The carrying amounts reported in the consolidated balance sheets for other receivables and accounts payable approximate fair value based on the short-term maturity of these instruments. The carrying value of term debt approximates its fair value since it provides for market terms and interest rates.
Included in other assets is a long-term investment that consists of 216,281 shares of common stock of A/F Protein, Inc. (AFP), equating to less than 1% ownership, with a cost basis of $21,628, which the Company believes to be the best estimate of market value. AFP and the Company have certain shareholders in common.
4. Inventory
Major classifications of inventory are summarized as follows for December 31, 2018 and 2017:

|  | 2018 |  | 2017
Feed |  | $ | 24,288 |  |  | 60,161 |
Eggs |  | — |  |  | 73,967 |
Packaging |  | 8,913 |  |  | — |
Fish in process |  | 42,908 |  |  | 38,235 |
Total inventory |  | $ | 76,109 |  |  | $ | 172,363 |

5. Property, plant and equipment
Major classifications of property, plant and equipment are summarized as follows for December 31, 2018 and 2017:

|  | 2018 |  | 2017
Land |  | $ | 704,567 |  |  | $ | 676,083 |
Building and improvements |  | 9,244,737 |  |  | 9,187,160 |
Construction in process |  | 6,091,265 |  |  | 5,119,961 |
Equipment |  | 9,713,030 |  |  | 8,211,510 |
Office furniture and equipment |  | 192,606 |  |  | 136,091 |
Vehicles |  | 26,832 |  |  | 29,135 |
Total property and equipment |  | $ | 25,973,037 |  |  | $ | 23,359,940 |
Less accumulated depreciation and amortization |  | (2,256,269 | ) |  | (1,556,964 | )
Property, plant and equipment, net |  | $ | 23,716,768 |  |  | $ | 21,802,976 |

Depreciation and amortization expense for 2018 on property, plant and equipment was $829,684 (2017: $171,242; 2016: 140,649).
In July 2016, the Company purchased the property, plant and equipment of the former Atlantic Sea Smolt plant in Rollo Bay West on Prince Edward Island for $717,225, including legal and other expenses incurred. The Company allocated the purchase price to land, building, and equipment based on valuations and management’s estimates. Included in construction in process is $5.7 million for renovation and new construction costs incurred at our Rollo Bay farm site. An additional $785 thousand has been committed.
In June 2017, the Company purchased the aquaculture facility of Bell Fish Company LLC in Albany, Indiana, for $14.2 million, including legal and other expenses incurred. Through December 31, 2018, the Company has invested $2.6 million to upgrade the facility for use to grow out its AquAdvantage Salmon for harvest and sale in the United States. The Company currently has an additional $122 thousand committed to this project. This facility is operational, although the Company expects that upgrades will continue through 2020.
F-9

AquaBounty Technologies, Inc.
Notes to the Consolidated Financial Statements
for the years ended December 31, 2018, 2017, and 2016
6. Prepaid expenses and other current assets
Prepaid expenses and other current assets include the following at December 31, 2018 and 2017:

|  | 2018 |  | 2017
Prepaid insurance |  | $ | 90,754 |  |  | $ | 84,801 |
Prepaid supplies |  | 19,422 |  |  | 33,132 |
Prepaid professional services |  | 38,375 |  |  | 16,059 |
Prepaid rent and lease deposits |  | 13,508 |  |  | 5,852 |
Other current assets |  | 153,910 |  |  | 387,478 |
Total prepaid expenses and other current assets |  | $ | 315,969 |  |  | $ | 527,322 |

7. Accounts payable and accrued liabilities
Accounts payable and accrued liabilities include the following at December 31, 2018 and 2017:

|  | 2018 |  | 2017
Accounts payable |  | $ | 366,917 |  |  | $ | 1,089,919 |
Accrued payroll including vacation |  | 223,481 |  |  | 364,368 |
Accrued professional fees and contract services |  | 185,992 |  |  | 443,178 |
Accrued taxes |  | 23,678 |  |  | 240,880 |
Accrued construction costs |  | 13,716 |  |  | 509,950 |
Accrued other |  | 31,539 |  |  | 18,560 |
Accounts payable and accrued liabilities |  | $ | 845,323 |  |  | $ | 2,666,855 |

8. Debt
The current terms and conditions of long-term debt outstanding at December 31, 2018 and 2017, are as follows:

|  | Interest rate |  | Monthly repayment |  | Maturity date |  | 2018 |  | 2017
ACOA AIF grant (C$2,871,919) |  | 0% |  | Royalties |  | - |  | $ | 2,106,840 |  |  | $ | 2,287,771 |
ACOA term loan (C$337,000) |  | 0% |  | C$3,120 |  | June 2026 |  | 203,735 |  |  | 251,056 |
Kubota Canada Ltd (C$95,961) |  | 0% |  | C$1,142 |  | Jan 2025 |  | 61,178 |  |  | — |
PEI Finance term loan (C$2,717,093) |  | 4% |  | C$4,333 |  | July 2021 |  | 1,219,681 |  |  | 545,387 |
Total debt |  |  |  |  |  |  |  | $ | 3,591,434 |  |  | $ | 3,084,214 |
less: current portion |  |  |  |  |  |  |  | (71,613 | ) |  | (49,794 | )
Long-term debt |  |  |  |  |  |  |  | $ | 3,519,821 |  |  | $ | 3,034,420 |

Principal payments due on the long-term debt are as follows:

Year |  | AIF |  | ACOA |  | Kubota |  | FPEI |  | Total |
2019 |  | $ | — |  |  | $ | 27,466 |  |  | $ | 10,057 |  |  | $ | 34,090 |  |  | $ | 71,613 |  |
2020 |  | — |  |  | 27,466 |  |  | 10,057 |  |  | 42,034 |  |  | 79,557 |  |
2021 |  | — |  |  | 27,466 |  |  | 10,057 |  |  | 43,746 |  |  | 81,269 |  |
2022 |  | — |  |  | 27,466 |  |  | 10,057 |  |  | 45,529 |  |  | 83,052 |  |
2023 |  | — |  |  | 27,466 |  |  | 10,057 |  |  | 1,054,282 |  |  | 1,091,805 |  |
Thereafter |  | 2,106,840 |  |  | 66,405 |  |  | 10,893 |  |  | — |  |  | 2,184,138 |  |
Total |  | $ | 2,106,840 |  |  | $ | 203,735 |  |  | $ | 61,178 |  |  | $ | 1,219,681 |  |  | $ | 3,591,434 |  |

Atlantic Canada Opportunities Agency (“ACOA”)
ACOA is a Canadian government agency that provides funding to support the development of businesses and promote employment in the Atlantic region of Canada.
F-10

AquaBounty Technologies, Inc.
Notes to the Consolidated Financial Statements
for the years ended December 31, 2018, 2017, and 2016
ACOA Atlantic Innovation Fund (“AIF”) Grant
In January 2009, the Canadian Subsidiary was awarded an AIF grant from ACOA to provide a contribution towards the funding of a research and development project. Contributions under the grant were made through 2014 and no further funds are available. Amounts claimed by the Canadian Subsidiary must be repaid in the form of a 10% royalty on any products that are commercialized out of this research project until the loan is fully repaid. Revenue from the sale of AquAdvantage Salmon are not subject to the royalty, and the Company does not expect to commercialize products that would be subject to the royalty in the next five years.
ACOA term loans
In February 2016, the Canadian Subsidiary executed an agreement with ACOA to partially finance the renovations to the Rollo Bay farm site. All available funding under the agreement was disbursed through May 2017, and no further amounts are available. The loan is being repaid over a period of nine years.
On November 13, 2018, the Canadian Subsidiary executed a second agreement with ACOA to partially finance the renovations to the Rollo Bay site. The terms of the agreement include funding up to C$500 thousand ($367 thousand) with repayment commencing after the final draw-down of the funds. The loan term is nine years with a zero percent interest rate. No funds were drawn during 2018.
Kubota
Kubota is a manufacturer of power equipment for the construction, agriculture, commercial, and residential industries.
In January 2018, the Canadian Subsidiary financed the purchase of equipment through a loan with Kubota. The total amount is being repaid in monthly installments. The loan is secured by the underlying equipment.
Finance PEI (“FPEI”)
FPEI is a corporation of the Ministry of Economic Development and Tourism for Prince Edward Island, Canada, and administers business financing programs for the provincial government.
In August 2016, the Canadian Subsidiary obtained a loan from FPEI to partially finance the purchase of the assets of the former Atlantic Sea Smolt plant in Rollo Bay West on Prince Edward Island.
On October 16, 2018, the Canadian Subsidiary obtained a new loan from FPEI, which incorporates the existing loan and provides
C$2.0 million ($1.5 million) of additional funds. As of December 31, 2018, C$1.0 million ($734 thousand) has been drawn down. Payments will commence once all funds have been drawn. The loan has an interest rate of 4% and is collateralized by a mortgage executed by the Canadian Subsidiary, which conveys a first security interest in all of its current and acquired assets. The loan is guaranteed by the Parent.
The Company recognized interest expense in 2018 of $22,185 (2017: $21,520; 2016: $402,554) on its interest-bearing debt.
9. Stockholders’ equity
In May 2018, the Company’s shareholders approved a reduction in the number of authorized shares from 240 million to 55 million shares of stock, of which 5 million are authorized as preferred stock and 50 million as common stock. At December 31, 2018, the Company had zero shares (2017: zero) of preferred stock and 15,098,837 shares (2017: 8,895,094) of common stock, issued and outstanding.
In December 2016, the shareholders approved a reverse share split ratio of 1-for-30 to be implemented on January 5, 2017. All share balances in the Financial Statements and accompanying notes have been restated to reflect this change.
Common stock
The holders of the common stock are entitled to one vote for each share held at all meetings of stockholders. Dividends and distribution of assets of the Company in the event of liquidation are subject to the preferential rights of any outstanding preferred shares. At December 31, 2018, the Company had reserved 339,964 shares of common stock for the exercise of options and 1,745,868 shares of common stock for the exercise of warrants.
Recent issuances
In January 2017, the Company closed an equity subscription of $25 million with Intrexon for 2,421,073 common shares at a price of $10.326.
In January 2018, the Company completed a public offering of 3,692,307 Common Shares and warrants for 4,246,153 Common Shares. Net proceeds to the Company were $10.6 million after deducting discounts, fees, and expenses. Intrexon Corporation, the Company’s majority shareholder, participated in the offering, purchasing 1,538,461 Common Shares and warrants for 1,538,461 Common Shares for gross proceeds of $5.0 million.
F-11

AquaBounty Technologies, Inc.
Notes to the Consolidated Financial Statements
for the years ended December 31, 2018, 2017, and 2016
On October 24, 2018, 2,250,461 Common Shares were issued through the exercise of outstanding warrants at a discounted price of $2.00. Net proceeds to the Company were $4.3 million after deducting discounts, fees, and expenses. Intrexon participated in the exercise, converting warrants for the issuance of 1,538,461 Common Shares, resulting in gross proceeds of $3.1 million.
Additionally during 2018, the Company issued 249,824 Common Shares in conjunction with the exercise of warrants, with total proceeds of $0.8 million.
Warrants
In connection with the public offering of Common Shares that was completed in January 2018, the Company issued warrants to purchase 4,246,153 Common Shares. Each warrant has an exercise price per share of $3.25, is immediately exercisable, and will expire five years from the date of issuance. During 2018 249,824 warrants were exercised at $3.25 and the Board approved the exercise of 2,250,461 warrants in October 2018 at a discounted price of $2.00. The intrinsic value of the warrants that were converted at the discounted price was $1.8 million. The warrant inducement was treated as an extinguishment of an equity contract, as the warrant holders had to exercise their warrants in order to take advantage of the discounted conversion price. In accounting for the transaction the Company analogized to guidance regarding the treatment of preferred stock extinguishments and recognized the intrinsic value of the inducement, totaling $1.8 million, as a return of capital and as an addition to net loss for the purpose of calculating basic and diluted earnings per share.
The following table summarizes information about outstanding warrants at December 31, 2018:

|  | Number of warrant shares |  | Weighted average exercise price
Outstanding at December 31, 2017 |  | — |  |  |  | $— |
Issued |  | 4,246,153 |  |  | 3.25 |
Exercised |  | (2,500,285 | ) |  | 2.12 |
Outstanding at December 31, 2018 |  | 1,745,868 |  |  |  | $3.25 |
Exercisable at December 31, 2018 |  | 1,745,868 |  |  |  | $3.25 |

Share-based compensation
In 2006, the Company established the 2006 Equity Incentive Plan (the “2006 Plan”). The 2006 Plan provided for the issuance of incentive stock options to employees of the Company and non-qualified stock options and awards of restricted stock to Directors, officers, employees, and consultants of the Company. In accordance with its original terms, the 2006 Plan terminated on March 18, 2016. All outstanding awards under the 2006 Plan will continue until their individual termination dates.
In March 2016, the Company’s Board of Directors adopted the AquaBounty Technologies, Inc. 2016 Equity Incentive Plan (the “2016 Plan”) to replace the 2006 Plan. The 2016 Plan provides for the issuance of incentive stock options, non-qualified stock options, and awards of restricted and direct stock purchases to Directors, officers, employees, and consultants of the Company. The aggregate number of shares of common stock that may be issued pursuant to awards granted under the 2016 Plan cannot exceed 450,000. The 2016 Plan was approved by the Company’s shareholders at its Annual Meeting on April 26, 2016.
Restricted stock
The Company’s restricted stock activity under the 2006 Plan and the 2016 Plan is summarized as follows:

|  | Shares |  | Weighted average grant date fair value
Unvested at December 31, 2017 |  | 2,697 |  |  | $ | 11.37 |
Granted |  | 11,151 |  |  | 2.50 |
Vested |  | (4,981 | ) |  | 5.50 |
Unvested at December 31, 2018 |  | 8,867 |  |  | $ | 3.51 |

During 2018, the Company expensed $27,298 (2017: $26,400; 2016: $18,070) related to restricted stock awards. At December 31, 2018, the balance of unearned share-based compensation to be expensed in future periods related to the restricted stock awards is $31,015. The period over which the unearned share-based compensation is expected to be earned is approximately 2.2 years.
F-12

AquaBounty Technologies, Inc.
Notes to the Consolidated Financial Statements
for the years ended December 31, 2018, 2017, and 2016
Stock options
The Company’s option activity under the 2006 Plan and the 2016 Plan is summarized as follows:

|  | Number of options |  | Weighted average exercise price
Outstanding at December 31, 2017 |  | 227,203 |  |  | $ | 9.39 |
Issued |  | 113,561 |  |  | 2.50 |
Expired |  | (800 | ) |  | 9.90 |
Outstanding at December 31, 2018 |  | 339,964 |  |  | $ | 7.09 |
Exercisable at December 31, 2018 |  | 303,986 |  |  | $ | 6.94 |

Unless otherwise indicated, options issued to employees, members of the Board of Directors, and non-employees are vested over one to three years and are exercisable for a term of ten years from the date of issuance.
The weighted average fair value of stock options granted during 2018 was $2.50 (2017: $4.55; 2016: $4.46). There were no options exercised in 2018. The total intrinsic value of options exercised in 2017 was $43,420 (2016: $6,338). At December 31, 2018, the total intrinsic value of all options outstanding was $0 (2017: $17,454; 2016: $602,773), the total intrinsic value of exercisable options was $0 (2017: $17,454; 2016 $597,872), and the total number of shares available for grant under the 2016 Plan was 268,138 (2017: 397,500; 2016: 450,000).
The following table summarizes information about options outstanding and exercisable at December 31, 2018:

Weighted average exercise price of outstanding options |  | Number of options outstanding |  | Weighted average remaining estimated life (in years) |  | Number of options exercisable |  | Weighted average price of outstanding and exercisable options
$2.50 - $5.70 |  | 204,034 |  |  | 5.6 |  | 185,985 |  |  |
$6.90 - $9.60 |  | 53,175 |  |  | 3.7 |  | 53,175 |  |  |
$10.50 - $10.80 |  | 4,000 |  |  | 5.1 |  | 4,000 |  |  |
$14.20 - $23.40 |  | 78,755 |  |  | 7.2 |  | 60,826 |  |  |
|  | 339,964 |  |  |  |  | 303,986 |  |  | $6.94

The fair values of stock option grants to employees and members of the Board of Directors during 2018, 2017, and 2016 were measured on the date of grant using Black-Scholes, with the following weighted average assumptions:

|  | 2018 |  | 2017 |  | 2016
Expected volatility |  | 81% |  | 78% |  | 53%
Risk free interest rate |  | 2.60% |  | 1.80% |  | 1.31%
Expected dividend yield |  | 0.0% |  | 0.0% |  | 0.0%
Expected life (in years) |  | 5 |  | 5 |  | 5

The risk-free interest rate is estimated using the Federal Funds interest rate for a period that is commensurate with the expected term of the awards. The expected dividend yield is zero because the Company has never paid a dividend and does not expect to do so for the foreseeable future. The expected life was based on a number of factors including historical experience, vesting provisions, exercise price relative to market price, and expected volatility. The Company believes that all groups of employees demonstrate similar exercise and post-vesting termination behavior and, therefore, does not stratify employees into multiple groups and forfeitures are recognized as they occur. The expected volatility was estimated using the Company’s historical price volatility over a period that is commensurate with the expected term of the awards.
Total share-based compensation on stock-option grants amounted to $236,098 in 2018 (2017: $95,734; 2016: $200,224). At December 31, 2018, the balance of unearned share-based compensation to be expensed in future periods related to unvested share-based awards is $111,243. The period over which the unearned share-based compensation is expected to be earned is 1.2 years.
F-13

AquaBounty Technologies, Inc.
Notes to the Consolidated Financial Statements
for the years ended December 31, 2018, 2017, and 2016
Share-based compensation
The following table summarizes share-based compensation costs recognized in the Company’s Consolidated Statements of Operations and Comprehensive Loss for the years ended December 31, 2018, 2017, and 2016:

|  | 2018 |  | 2017 |  | 2016
Research and development |  | $ | 3,238 |  |  | $ | 3,168 |  |  | $ | 2,115 |
Sales and marketing |  | — |  |  | 9,315 |  |  | 65,517 |
General and administrative |  | 260,158 |  |  | 109,651 |  |  | 150,662 |
Total share-based compensation |  | $ | 263,396 |  |  | $ | 122,134 |  |  | $ | 218,294 |

10. Income taxes
The components of loss before income taxes for the years ended December 31, 2018, 2017, and 2016, are presented below:

|  | 2018 |  | 2017 |  | 2016
Domestic |  | $ | (9,702,869 | ) |  | $ | (6,526,706 | ) |  | $ | (5,950,862 | )
Foreign |  | (679,190 | ) |  | (2,731,941 | ) |  | (2,519,799 | )
Loss before income taxes |  | $ | (10,382,059 | ) |  | $ | (9,258,647 | ) |  | $ | (8,470,661 | )

Income taxes computed using the federal statutory income tax rate differs from the Company’s effective tax rate for the years ended December 31, 2018, 2017, and 2016, primarily due to the following:

|  | 2018 |  | 2017 |  | 2016
Income tax benefit |  | $ | (2,180,233 | ) |  | $ | (3,147,940 | ) |  | $ | (2,880,025 | )
State and provincial income tax, net of federal benefit |  | (534,789 | ) |  | (678,438 | ) |  | (604,354 | )
Permanent differences |  | 53,795 |  |  | (2,923 | ) |  | 234,247 |
US-Foreign rate differential |  | (13,955 | ) |  | 371,551 |  |  | 359,729 |
Other, net |  | 1,182,900 |  |  | (98,947 | ) |  | 73,220 |
Effect of tax reform |  | 0 |  |  | 3,687,844 |  |  | — |
|  | (1,492,282 | ) |  | 131,147 |  |  | (2,817,183 | )
Change in valuation allowance |  | 1,492,282 |  |  | (131,147 | ) |  | 2,817,183 |
Total income tax |  | $ | — |  |  | $ | — |  |  | $ | — |

Included in Other for 2018 are $0.4 million related to state tax rate changes and $0.6 million related to foreign currency changes.
As of December 31, 2018, the Company has domestic net operating loss carryforwards of approximately $37.8 million, after consideration of limitations pursuant to section 382, to offset future federal taxable income, which begin to expire in 2031. The future utilization of certain historic net operating loss and tax credit carryforwards, however, is subject to annual use limitations based on the change in stock ownership rules of Internal Revenue Code Sections 382 and 383. The Company experienced a change in ownership under these rules during 2012 and revised its calculation of net operating loss carryforwards based on annual limitation rules. The Company also has foreign net operating loss carryforwards and research loss carryforwards totaling approximately $14.0 million and foreign research and development expense tax credits of approximately $2.6 million at December 31, 2018, which expire at various times commencing in 2019. Since the Company has incurred only losses from inception and there is uncertainty related to the ultimate use of the loss carryforwards and tax credits, a valuation allowance has been recognized to offset the Company’s deferred tax assets, and no benefit for income taxes has been recorded.
F-14

AquaBounty Technologies, Inc.
Notes to the Consolidated Financial Statements
for the years ended December 31, 2018, 2017, and 2016
Significant components of the Company’s deferred tax assets and liabilities are as follows:

|  | 2018 |  | 2017
Deferred tax assets: |  |  |  |
Net operating loss carryforwards |  | $ | 14,120,607 |  |  | $ | 12,411,425 |
Foreign research and development tax credit carryforwards |  | 2,628,190 |  |  | 2,832,340 |
Property and equipment |  | 463,343 |  |  | 482,161 |
Other |  | 19,695 |  |  | 13,627 |
Total deferred tax assets |  | $ | 17,231,835 |  |  | $ | 15,739,553 |
Valuation allowance |  | $ | (17,231,835 | ) |  | $ | (15,739,553 | )
Net deferred tax assets |  | $ | — |  |  | $ | — |

The valuation allowance increased by $1.5 million during 2018 and increased by $131,147 during 2017. The increase in 2018 is primarily due to increases in net operating loss carryforwards.
The increase in 2017 was primarily due to increases in foreign research and development tax credits and property and equipment, partially offset by a reduction in the U.S. deferred tax assets resulting from the impact of U.S. tax reform.
11. Commitments and contingencies
The Company recognizes and discloses commitments when it enters into executed contractual obligations with other parties. The Company accrues contingent liabilities when it is probable that future expenditures will be made and such expenditures can be reasonably estimated.
Lease commitments
In July 2017, the Company extended the lease for its office space in Maynard, Massachusetts. The new lease for 3,558 square feet of office space has a term of five years and seven months, ending March 2023. Lease payments over the term total $332,824.
In 2017, the Company assumed a lease for well water rights as part of its purchase of certain assets of Bell Aquaculture. The lease has a thirty year term with auto-renewal for an additional twenty years. Semi-annual payments total $7,320 with annual increases of 3% over the term.
In May 2018, the Company extended its lease for its Panama farm site. The lease has a term of twelve months, ending in April 2019.
In addition, the Company leases office space in Brazil on a month-to-month basis.
Total rent expense in 2018 was $238,131 (2017: $214,634; 2016: $202,788). Future minimum commitments under the Company’s operating leases are $338,414 with $122,858 in 2019 and $64,637 in 2020.
The following table summarizes our significant contractual obligations and commercial commitments at December 31, 2018, and the effects such obligations are expected to have on our liquidity and cash flows in future periods (in thousands):

|  | Total |  | Less than 1 year |  | 1-3 years |  | 3-5 years |  | More than 5 years
Maynard office lease |  | $ | 278 |  |  | $ | 63 |  |  | $ | 131 |  |  | $ | 84 |  |  | $ | — |
Panama site lease |  | 60 |  |  | 60 |  |  | — |  |  | — |  |  | — |
Indiana auto lease |  | 11 |  |  | 5 |  |  | 6 |  |  | — |  |  | — |
Indiana well lease |  | 717 |  |  | 15 |  |  | 32 |  |  | 33 |  |  | 637 |
Total |  | $ | 1,066 |  |  | $ | 143 |  |  | $ | 169 |  |  | $ | 117 |  |  | $ | 637 |

Employment agreements
The Company has employment agreements with certain of its officers. The agreements provide for base pay and benefits, as defined. Under certain circumstances of termination, the Company must make severance payments.
12. Retirement plan
The Company has a savings and retirement plan for its US employees that qualifies under Section 401(k) of the Internal Revenue Code. The plan covers substantially all employees and provides for voluntary contributions by participating employees up to the maximum contribution allowed under the Internal Revenue Code. Contributions by the Company can be made, as determined by the Board of Directors, provided the amount does not exceed the maximum permitted by the Internal Revenue Code. Company
F-15

AquaBounty Technologies, Inc.
Notes to the Consolidated Financial Statements
for the years ended December 31, 2018, 2017, and 2016
contributions made and expensed in operations in connection with the plan during the year ended December 31, 2018, amounted to $43,866 (2017: $31,308; 2016: $33,422).
The Company also has a Registered Retirement Savings Plan for its Canadian employees. Company contributions made and expensed in operations in connection with the plan during the year ended December 31, 2018, amounted to $25,900 (2017: $26,578; 2016: $21,777).
13. Related Party Collaboration Agreement
In February 2013, the Company entered into the ECC with Intrexon, its majority shareholder, pursuant to which the Company will use Intrexon’s UltraVector and other technology platforms to develop and commercialize additional bioengineered traits in finfish for human consumption. The ECC, which can be terminated by the Company upon 90 days’ written notice, grants the Company a worldwide license to use specified patents and other intellectual property of Intrexon in connection with the research, development, use, importing, manufacture, sale, and offer for sale of products involving DNA administered to finfish for human consumption. Such license is exclusive with respect to any clinical development, selling, offering for sale, or other commercialization of developed products, and otherwise is non-exclusive.
Under the ECC and subject to certain exceptions, the Company is responsible for, among other things, the performance of the program, including development, commercialization, and certain aspects of manufacturing developed products. Among other things, Intrexon is responsible for the costs of establishing manufacturing capabilities and facilities for the bulk manufacture of certain products developed under the program; certain other aspects of manufacturing; costs of discovery-stage research with respect to platform improvements; and costs of filing, prosecution, and maintenance of Intrexon’s patents.
The Company will pay Intrexon quarterly 16.66% of the gross profits calculated under the terms of the agreement for each developed product. The Company has likewise agreed to pay Intrexon 50% of quarterly revenue obtained from a sublicensor in the event of a sublicensing arrangement. In addition, the Company will reimburse Intrexon for the costs of certain services provided by Intrexon. No royalties were paid to Intrexon in 2018, and the Company does not expect to pay royalties in 2018.
Total Intrexon service costs incurred under the terms of this agreement amounted to $217,833 in 2018 (2017: $562,039; 2016: $912,182), of which $800 is included in accounts payable and accrued liabilities at December 31, 2018 (2017: $135,301), and is included as a component of research and development expense in the Consolidated Statements of Operations and Comprehensive Loss.
14. Recently Issued Accounting Standards
Recently issued accounting pronouncements that may be relevant to the Company are the following:
In February 2016, the FASB issued ASU 2016-02, “Leases,” which requires a lessee to recognize lease liabilities for the lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis, and right-of-use assets, representing the lessee’s right to use, or control the use of, specified assets for the lease term. Additionally, the new guidance has simplified accounting for sale and leaseback transactions. Lessor accounting is largely unchanged. The ASU is effective for fiscal years beginning after December 15, 2018. We will adopt the ASU effective January 1, 2019 and based on our current portfolio of leases, approximately $532 thousand of lease assets and liabilities will be recognized on our balance sheet, primarily relating to real estate.
Management does not expect any other recently issued, but not yet effective, accounting standards to have a material effect on its results of operations or financial condition.
F-16

AquaBounty Technologies, Inc.
Notes to the Consolidated Financial Statements
for the years ended December 31, 2018, 2017, and 2016
15. Quarterly Financial Information (unaudited)
The following information has been derived from unaudited consolidated statements that, in the opinion of management, include all recurring adjustments necessary for a fair statement of such information.

|  | Three Months Ended 2018
|  | March 31 |  | June 30 |  | September 30 |  | December 31
Revenue |  | $ | 19,097 |  |  | $ | 47,898 |  |  | $ | 10,938 |  |  | $ | 6,585 |
Operating loss |  | (2,443,472 | ) |  | (2,784,583 | ) |  | (2,720,027 | ) |  | (2,417,714 | )
Net loss |  | (2,449,787 | ) |  | (2,781,149 | ) |  | (2,727,028 | ) |  | (2,424,095 | )
Deemed dividend |  | — |  |  | — |  |  | — |  |  | (1,822,873 | )
Basic and diluted net loss per share attributable to common shareholders |  | $ | (0.21 | ) |  | $ | (0.22 | ) |  | $ | (0.21 | ) |  | $ | (0.30 | )
|  | Three Months Ended 2017
|  | March 31 |  | June 30 |  | September 30 |  | December 31
Revenue |  | $ | — |  |  | $ | 53,278 |  |  | $ | — |  |  | $ | — |
Operating loss |  | (2,049,098 | ) |  | (2,087,074 | ) |  | (2,439,230 | ) |  | (2,655,756 | )
Net loss |  | (2,055,743 | ) |  | (2,093,436 | ) |  | (2,446,219 | ) |  | (2,663,249 | )
Basic and diluted net loss per share attributable to common shareholders |  | $ | (0.24 | ) |  | $ | (0.24 | ) |  | $ | (0.28 | ) |  | $ | (0.30 | )

16. Subsequent events
On January 3, 2019, the Company issued 164,088 restricted Common Shares to Sylvia Wulf, its new Chief Executive Officer, per the terms of her employment agreement. The shares vest over a one-year period.
On March 5, 2019, the Company issued 12,473 restricted Common Shares to Richard Clothier, Chair of the Board of Directors, per the terms of his compensation plan. The shares vest over a three-year period.
On March 7, 2019, the Canadian Subsidiary received C$500 thousand in debt funding from ACOA (Note 8).
F-17