AQUABOUNTY TECHNOLOGIES INC

Condensed Consolidated Balance Sheets

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Condensed Consolidated Statements of Operations and Comprehensive Loss

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Condensed Consolidated Statements of Changes in Stockholders’ Equity

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Condensed Consolidated Statements of Cash Flows

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Notes to the condensed consolidated financial statements

(unaudited)

1. Nature of business and organization

AquaBounty Technologies, Inc. (the “Parent” and, together with its wholly owned 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 Atlantic salmon. In 2015, the Parent obtained regulatory approval from the U.S. Food and Drug Administration (“FDA”) for the production and sale of its genetically engineered AquAdvantage salmon product (“GE Atlantic salmon”) in the United States, and in 2016, the Parent obtained regulatory approval from Health Canada for the production and sale of its GE Atlantic salmon product in Canada. In 2021, the Parent obtained regulatory approval from the National Biosafety Technical Commission for the sale of its GE Atlantic salmon product in Brazil. In 2021, the Company began harvesting and selling its GE Atlantic salmon in the United States and Canada.

In the first quarter of 2024, the Company commenced a process to identify a potential buyer for its Indiana farm. This decision resulted in a $4.3 million non-cash impairment charge against long-lived assets and a $1.0 million net realizable value adjustment of inventory at the Indiana farm. The impairment charge was based on the best available information at the time regarding the potential sale price for the farm.

In the second quarter of 2024, the Company began marketing the Indiana farm for sale, and on June 28, 2024, signed a Purchase and Sale Agreement with a buyer for a sale price of $9.5 million less transaction expenses, which included certain equipment assets that had been purchased for the Company’s Ohio farm. Based on this agreement, the Company recorded an additional non-cash impairment charge of $18.2 million and classified the assets to be sold in the transaction as Assets Held for Sale on the condensed consolidated balance sheet at June 30, 2024. The transaction closed on July 26, 2024 and the Company received proceeds of $9.0 million at closing and $500 thousand on October 17, 2024. Related transaction expenses were $305 thousand.

In the second quarter of 2024, the Company initiated a plan to sell additional equipment from the Ohio farm to generate liquidity, resulting in a non-cash impairment charge of $26.3 million. The Company sold some of this equipment for net proceeds of $506 thousand. The remaining equipment assets were classified as Assets Held for Sale on the condensed consolidated balance sheet at September 30, 2024.

In the third quarter of 2024, the Company began to market its Rollo Bay farm on Prince Edward Island, Canada for sale and reclassified the net book value of $9.8 million for the associated assets as Assets Held for Sale on the condensed consolidated balance sheet at September 30, 2024.

2. Going Concern Uncertainty

Since inception, the Company has incurred cumulative net losses and negative cash flows from operations and expects that this will continue for the foreseeable future. As of September 30, 2024, the Company had $500 thousand in cash and cash equivalents.

The Company’s ability to continue as a going concern is dependent upon its ability to raise additional capital, including its ability to sell its Rollo Bay farm and additional equipment from the Ohio farm to generate liquidity to fund ongoing operations, and there can be no assurance that such capital will be available in sufficient amounts, on a timely basis, or on terms acceptable to the Company, or at all. This raises substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the accompanying condensed consolidated financial statements are issued. The accompanying condensed 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 and do not include any adjustments that might result from the outcome of this uncertainty. Until such time as the Company reaches profitability, it will require additional financing to fund its operations and execute its business plan.

3. Basis of presentation

The unaudited interim condensed consolidated financial statements include the accounts of AquaBounty Technologies, Inc. and its wholly owned direct subsidiaries. All intercompany transactions and balances have been eliminated upon consolidation.

The unaudited interim condensed consolidated financial statements have been prepared in conformity with generally accepted accounting principles in the United States (“GAAP”) consistent with those applied in, and should be read in conjunction with, the Company’s audited financial statements and related notes for the year ended December 31, 2023. The unaudited interim condensed consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments, which are, in the opinion of management, necessary for a fair presentation of the Company’s financial position as of September 30, 2024, results of operations and cash flows for the interim periods presented, and are not necessarily indicative of results for subsequent interim periods or for the full year. The unaudited interim condensed consolidated financial statements do not include all of the information and notes required by GAAP for complete financial statements, as allowed by the relevant SEC rules and regulations; however, the Company believes that its disclosures are adequate to ensure that the information presented is not misleading.

On October 12, 2023, the stockholders of the Company approved a reverse stock split of the Company’s common stock, and the Board of Directors approved a split ratio of 1-for-20. The reverse stock split was implemented on October 16, 2023. In conjunction with the reverse stock split, the number of shares of common stock authorized for issuance was reduced from 150 million to 75 million. All share and per share information, as well as other related information on equity instruments in the unaudited condensed consolidated financial statements and accompanying notes have been adjusted to reflect this change.

Revenue recognition

The Company is comprised of one reporting segment and generates revenue from the sale of its products. Revenue is recognized when the customer takes physical control of the goods in an amount that reflects the transaction price consideration that the Company expects to receive in exchange for the goods. Revenue excludes any sales tax collected and includes any estimate of future credits.

During the three and nine months ended September 30, 2024, the Company recognized the following product revenue:

During the three and nine months ended September 30, 2023, the Company recognized the following product revenue:

During the three and nine months ended September 30, 2024 and 2023, the Company had the following customer concentration of revenue:

Net loss per share

Basic and diluted net loss per share available to common stockholders have been calculated by dividing net loss by the weighted average number of shares of common stock outstanding during the period. Basic net loss per share is based solely on the number of shares of common stock outstanding during the period. Fully diluted net loss per share includes the number of shares of common stock issuable upon the exercise of warrants or 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 shares of common stock are considered anti-dilutive and are excluded from the calculation of diluted net loss per share.

The following potentially dilutive securities have been excluded from the calculation of diluted net loss per share, as their effect is anti-dilutive:

Accounting Pronouncements

In November 2023, the Financial Accounting Standards Board issued Accounting Standards Update 2023-07, Segment Reporting (Topic 280), to improve reportable segment disclosure requirements. This update requires companies to disclose significant segment expense categories that are regularly provided to the chief operating decision maker ("CODM") on an interim and annual basis and expands disclosure requirements for interim reporting. Companies must also disclose how segment measures of profit or loss are used by the CODM.

The amendments in this update are effective for public entities for annual periods beginning after December 15, 2023, and interim periods beginning after December 15, 2024. The amendments should be adopted on a retrospective basis and early adoption is permitted. The Company is evaluating the impact of the update but does not believe that adoption will have a material impact on its results of operations or financial condition.

4. 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 produce, 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. This risk is mitigated by the Company’s policy of maintaining all balances with highly rated financial institutions and investing in cash equivalents with maturities of less than 90 days. 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 $87 thousand and $227 thousand as of September 30, 2024 and December 31, 2023, respectively.

5. Inventory

Major classifications of inventory are summarized as follows:

6. Prepaid and other current assets

Major classifications of prepaid and other current assets are summarized as follows:

7. Property, plant and equipment

Major classifications of property, plant and equipment are summarized as follows:

Depreciation expense was $857 thousand and $1.6 million for the nine months ended September 30, 2024 and 2023, respectively.

As of September 30, 2024, construction in process included $77.1 million for construction related to the Ohio farm site. An additional$6.3 million has been contractually committed for the Ohio farm site as of September 30, 2024.

See Note 1 for discussions on the reclassification of property, plant and equipment to Assets Held for Sale.

8. Debt

In April 2024, the Parent and certain of its subsidiaries entered into a Loan and Security agreement (“Loan Agreement”) with JMB Capital Partners Lending, LLC (“JMB”) to fund working capital through a secured term loan of up to $10 million that was scheduled to mature on July 31, 2024 or, if earlier, upon the sale of certain collateral or upon an Event of Default (as defined in the Loan Agreement). Of the total loan amount, $5 million was advanced in April 2024 and $1.5 million was advanced in July 2024. The loan bore interest at a rate of 15% on its outstanding principal balance and was subject to a commitment fee equal to 5% and an exit fee equal to 8%. Of the initial loan advancement, approximately $2.8 million was used to pay the remaining outstanding balance of the Company’s term loan with First Farmers Bank & Trust. The outstanding loan balance with JMB of $6.5 million was repaid on July 26, 2024 from the net proceeds of the Indiana farm sale.

In December 2023, AQUA Bounty Canada Inc. (the “Canadian Subsidiary”) entered into a Contribution Agreement with the Atlantic Canada Opportunities Agency, whereby it is eligible to receive up to C$612 thousand ($452 thousand) to support business productivity and scale-up for its Rollo Bay farm (the “ACOA term loan #4”). On February 29, 2024, the Canadian Subsidiary borrowed C$158 thousand ($117 thousand) underthe ACOA term loan #4. Borrowings are at a 3% interest rate, and monthly repayments commence in April 2025, with maturity in March 2034.

In September 2020, the Canadian Subsidiary entered into a Contribution Agreement with the Department of Fisheries and Ocean's Atlantic Fisheries Fund, whereby it is eligible to receive up to C$1.9 million ($1.4 million) to finance new equipment for its Rollo Bay farm (the “DFO Term Loan”). As of December 31, 2023, the Canadian Subsidiary had borrowed C$1.7 million ($1.3 million) under the facility, and on September 3, 2024, the Canadian Subsidiary borrowed an additional C$192 thousand ($142 thousand) under the DFO Term Loan. Borrowings are interest free and monthly repayments commence in November 2024, with maturity in January 2034.

The Company recognized interest expense of $1.8 million and $196 thousand for the nine months ended September 30, 2024 and 2023, respectively, on its interest-bearing debt.

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

9. Leases

The tables below summarize the Company’s outstanding lease liabilities at September 30, 2024 and December 31, 2023 and its lease expense for the three and nine months ended September 30, 2024 and 2023:

10. Stockholders’ equity

Share-based compensation

At September 30, 2024, the Company has reserved 71,918 and 14,665 shares of common stock issuable upon the exercise of outstanding stock options and unvested stock awards, respectively, under its 2006 and 2016 Equity Incentive Plans. An additional 72,176 shares of common stock are reserved for future equity awards under the 2016 Equity Incentive Plan.

Unvested Stock Awards

A summary of the Company’s unvested stock awards for the nine months ended September 30, 2024, is as follows:

During the nine months ended September 30, 2024 and 2023, the Company expensed $106 thousand and $294 thousand, respectively, related to the stock awards. At September 30, 2024, the balance of unearned share-based compensation to be expensed in future periods related to the stock awards is $101 thousand. The period over which the unearned share-based compensation is expected to be earned is approximately 0.7 years.

Stock options

The Company’s option activity is summarized as follows:

Unless otherwise indicated, options issued to employees, members of the Board of Directors, and non-employees generally vest over a period ofone year tothree years and are exercisable for a term often years from the date of issuance. There wereno stock options granted during the nine months ended September 30, 2024.

There wasno intrinsic value for options outstanding or exercisable at September 30, 2024 and December 31, 2023.

The following table summarizes information about options outstanding and exercisable at September 30, 2024:

Total share-based compensation on stock-option grants amounted to $134 thousand and $130 thousand for the nine months ended September 30, 2024 and 2023, respectively. At September 30, 2024, the balance of unearned share-based compensation to be expensed in future periods related to unvested share-based awards was $75 thousand. The period over which the unearned share-based compensation is expected to be earned is approximately 0.7 years.

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.

The Company is subject to legal proceedings and claims arising in the normal course of business. Management believes that final disposition of any such matters existing at September 30, 2024, will not have a material adverse effect on the Company’s financial position or results of operations.

12. Income Taxes

The Company incurred losses for the nine months ended September 30, 2024 and is forecasting additional losses through the remainder of the year ending December 31, 2024, resulting in an estimated net loss for both financial statement and tax purposes for the year ending December 31, 2024. Therefore, no federal or state income taxes are expected andnone have been recorded at this time. Income taxes have been accounted for using the liability method.

Due to the Company’s history of losses since inception, there is not enough evidence at this time to support that the Company will generate future income of a sufficient amount and nature to utilize the benefits of its net deferred tax assets. Accordingly, the deferred tax assets have been reduced by a full valuation allowance, since the Company does not currently believe that realization of its deferred tax assets is more likely than not.

As of September 30, 2024, the Company hadno unrecognized income tax benefits that would reduce the Company’s effective tax rate if recognized.

13. Subsequent Events

On October 17, 2024, the Company received the $500 thousand escrow balance outstanding on the sale of its Indiana farm.

On October 29, 2024, the Company entered into a Promissory Note (the “Note”) with Latham & Watkins LLP to convert outstanding and future legal fee advances to a term loan. The Note has a face amount of $1.5 million and is secured by the equipment assets of the Company’s Ohio subsidiary. The Note’s terms include a repayment schedule, which, if not met, would accrue interest at the default rate of 3% of the missed payment balance. The outstanding loan balance and any accrued interest is due on December 31, 2025.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations