What changed in this filing

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Item 7. Management’s Discussion and Analysis

2023-03-07 compared with 2022-03-10 · 72 added, 78 removed, 100 unchanged (60% of the section changed)

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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.”

We believe that we are a leader in the field of land-based aquaculture and the use of technology for improving its productivity and sustainability.

Our lead product is our GE Atlantic salmon, which received FDA approval in 2015 as the first genetically engineered animal available for sale for human consumption.

We have commenced commercial activities with operations in the United States and Canada where we have received regulatory approval.

We believe that we are a distinctive brand in the field of land-based aquaculture, leveraging decades of technology expertise to deliver innovative solutions that address food insecurity and climate change issues, while improving efficiency and sustainability.

We provide fresh Atlantic salmon to nearby markets by raising our fish in carefully monitored land-based fish farms through a safe, secure and sustainable process.

Our land-based Recirculating Aquaculture System farms, located in Indiana in the United States and Prince Edward Island in Canada, are close to key consumption markets and are designed to prevent disease and to include multiple levels of fish containment to protect wild fish populations.

We are raising nutritious salmon that is free of antibiotics and other contaminants and provides a solution with a reduced carbon footprint without the risk of pollution to marine ecosystems as compared to traditional sea-cage farming.

Our primary product is our GE Atlantic salmon, which received FDA approval in 2015 as the first genetically engineered animal available for sale for human consumption.

We commenced commercial activities in 2021 with operations in the United States and Canada.

We are actively engaged in genetic, genomic, fish health and fish nutrition research, which drive continuous improvement in our operations and may lead to new, disruptive technologies and products that could further expand our competitive offerings.

Although COVID-19 vaccines have become more readily available in the United States and other parts of the world, several variants of the virus continue to spread.

Although the COVID-19 pandemic has diminished in the United States and other parts of the world as vaccines have become more readily available, variants of the virus continue to spread.

Local governmental authorities in the United States and Canada have issued, and continue to update, directives aimed at minimizing the spread of the virus and we continue to monitor their status.

The ultimate impact of the evolving COVID-19 pandemic on our operations will depend on future developments, which cannot be predicted with confidence, and we cannot predict the extent or impact of the extended period of continued business interruption and reduced operations caused by the COVID-19 pandemic or any additional preventative or protective measures taken in response.

In connection with the COVID-19 pandemic, we made modifications to our biosecurity procedures at our farm sites in early 2020 to adapt to local requirements and to provide a safe work environment.

Our current preventative and protective measures include, but are not limited to, segregating farm workers to specific locations, rotating shifts, and monitoring worker temperatures upon arrival at our facilities.

In certain circumstances, we utilized, and continue to utilize, work-from-home arrangements for employees that do not have fish care responsibilities.

Due to the pandemic, we have experienced delays and cost increases in capital projects, additional challenges in our efforts to meet the capacity expectations at our existing facilities and continue to experience extended lead times on equipment purchases.

We may continue to experience delays and cost increases on farm construction, purchases of capital equipment and supplies and other materials required in our operations due to vendor shortages and other labor shortages.

We also expect to continue to be impacted by transportation or supply chain disruptions to our partners or customers.

In addition, we are carefully managing and monitoring the impact of labor shortages on our ability to meet the annual capacity expectations at our existing facilities.

Our operations were initially impacted by a reduction in the market price and demand for Atlantic salmon due to the pandemic’s impact on the food service sector.

This had a negative impact on revenue and inventory value, as we were not yet an established vendor and customers appeared reluctant to add a new supplier during a period of depressed demand.

During the second half of 2021, we were impacted by a shortage of labor at our Indiana farm and increased costs for third-party processing and transportation.

This had a negative effect on revenue and inventory values and resulted in higher than expected sales costs for the period.

We expect this to continue for the foreseeable future.

We remain focused on maintaining a strong balance sheet, liquidity, and financial flexibility and continue to monitor developments as we deal with the disruptions and uncertainties from a business and financial perspective relating to the evolving COVID-19 pandemic.

Recently elevated global inflation rates continue to impact all areas of our business.

We are experiencing higher costs for farming supplies, transportation costs, wage rates, and other direct operating expenses.

Additionally, inflation has impacted the cost estimates for our Ohio farm project, which is now expected to be in the range of $375 million to $395 million.

We expect inflation to continue to negatively impact our results of operations for the near-term.

Financial Overview

We have incurred significant losses since our inception, which we expect to continue for the foreseeable future, and we may never achieve or maintain profitability.

We expect to generate product revenue primarily through the sales of our GE Atlantic salmon.

We also sell conventional Atlantic salmon, salmon eggs, fry, and byproducts.

We expect revenues to grow modestly in 2022, as we increase our weekly harvesting capability at our Indiana farm and as the U.S.

economy continues to recover from the COVID-19 pandemic.

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”.

During the next several years, we expect that our working capital requirements and our capital expenditures will increase substantially due to our plans to construct four to five new land-based production farms.

During the next several years, we expect that our working capital requirements and our capital expenditures will increase substantially due to our plans to construct new land-based production farms.

Product Revenue

We currently generate product revenue through the sales of our GE Atlantic salmon, conventional Atlantic salmon eggs and fry, and salmon byproducts.

We expect revenues to grow modestly in 2022, as we increase our weekly harvesting capability at our Indiana farm.

In the future, we believe that our revenue will depend upon the number and capacity of grow-out farms we have in operation and the market acceptance we achieve.

We measure our harvest volume of GE Atlantic salmon in terms of metric tons (“mt”) of live weight taken out of the water.

We expect revenues to grow modestly in 2023 and in the future, we believe that our revenue will depend upon the number and capacity of grow-out farms we have in operation and the market acceptance we achieve.

Production Costs

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A portion of production costs is absorbed into inventory as fish in process to the extent that these costs do not exceed the net realizable value of the fish biomass.

The costs that are not absorbed into inventory, as well as any net realizable inventory value adjustments, are classified as production costs .

As of December 31, 2021 and 2020, we had sixty-one and forty-three employees, respectively engaged in production activities.

The costs that are not absorbed into inventory, as

well as any net realizable value inventory adjustments, are classified as production costs .

Our production costs also include the labor and related costs to maintain our salmon broodstock.

As of December 31, 2022 and 2021, we had seventy and sixty-one employees, respectively engaged in production activities.

Sales and Marketing Expenses

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During 2021, we also included the cost of our conventional salmon donation program.

As of December 31, 2021 and 2020, we had one and zero employees, respectively dedicated to sales and marketing.

As of December 31, 2022 and 2021, we had two and one employees, respectively, dedicated to sales and marketing.

We expect our sales and marketing expenses to increase as our production output and revenues grow.

Research and Development Expenses

As of December 31, 2021 and 2020, we employed nineteen and fifteen scientists and technicians, respectively at our facilities on Prince Edward Island to oversee our broodstock of GE Atlantic salmon, as well as the lines of fish we maintain for research and development purposes.

As of December 31, 2022 and 2021, we employed twelve and nineteen scientists and technicians, respectively, at our facilities on Prince Edward Island to oversee 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, development functions, and brood-stock husbandry;

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

 fees paid to contract research organizations and consultants who perform research for us;

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Other significant general and administrative expenses include corporate governance and public company costs, regulatory affairs, rent and utilities, insurance, and legal services.

We had fourteen employees in our general and administrative group at December 31, 2021 and 2020.

We had sixteen and fourteen employees in our general and administrative group at December 31, 2022 and 2021, respectively.

Other Income (Expense), Net

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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.

Inventories are mainly comprised of feed, eggs and fish in process.

Fish in process inventory is measured based on the estimated biomass of fish on hand.

Inventories are mainly comprised of feed, eggs, fry, fish in process and fish for sale.

Fish in process inventory is a biological asset that is measured based on the estimated biomass of fish on hand.

We have established a standard procedure to estimate the biomass of fish on hand using counting and sampling techniques.

We measure inventory at the lower of cost or net realizable value (“NRV”).

The NRV calculation contains various estimates and assumptions in regard to the calculation of the biomass, including expected yield, the market value of the biomass and estimated costs of processing and transportation.

The estimates and assumptions used in calculating the NRV can introduce variability in the inventory value from period to period.

This is primarily due to the variability in the market price for salmon;

the yield we can achieve in processing and the mix of products sold;

and the number and frequency of shipments from our farm to our customers.

Each of these factors in the calculation of NRV can change from week to week based on market conditions.

In our estimates, we rely on a combination of our actual experience, along with an estimation of foreseeable trends in the market.

We measure inventory at the lower of cost or net realizable value (“NRV”), where NRV is defined as the estimated market price, less the estimated costs of processing, packaging and transportation.

We consider fish that has been harvested and transported from its farm to be fish for sale.

Revenue Recognition

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Revenue excludes any sales tax collected and includes any estimate of future credits.

Our revenue can vary from period to period based on the available biomass of fish that are ready to be harvested;

our resource capability to harvest, process and ship salmon from our farms;

the percentage of fish that meet our quality requirements;

and the market price for salmon.

Additionally, once our product is received by a customer, it is subject to a quality review before acceptance.

To date, credits issued to customers for quality issues have been negligible, but we will continue to monitor and evaluate our customer quality experience as our shipments increase.

We started harvesting our GE Atlantic salmon in June of 2021 and we are still ramping up our internal harvesting resources and our customer base.

Recent Accounting Pronouncements

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The following table summarizes our results of operations for the years ended December 31, 2022 and 2021, together with the changes in those items in dollars (in thousands) and as a percentage:

‎ December, 31

Product revenue

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Operating loss

Total other expense

Total other (income) expense

Product Revenue

Product revenue for the year ended December 31, 2021 consisted of sales of our GE Atlantic salmon and conventional Atlantic salmon fry and eggs.

For the comparative period in 2020, revenue included the sale of conventional Atlantic salmon, fry and eggs.

During the current year, we began harvesting and selling our GE Atlantic salmon from both our Indiana and Rollo Bay farms.

Product revenue for the years ended December 31, 2022 and 2021 consisted of sales of our GE Atlantic salmon and conventional Atlantic salmon eggs, fry and byproducts.

During the current year, we increased the volume of harvests of GE Atlantic salmon from our Indiana farm and completed the final harvests of GE Atlantic salmon from our Rollo Bay farm, as it began its transition into a broodstock facility.

Our Indiana farm required extensive repairs to one of its buildings during Q4 of the current year, which impacted the number of fish that could be harvested and sold during the final two months of the year.

Repairs commenced immediately on the building and no fish were impacted by the situation.

However, we expect the repairs to continue into Q2 of 2023, which will continue to impact the number of fish harvested.

‎ December 31,

Harvest of GE Atlantic salmon (kg of live weight)

Product revenue

GE Atlantic salmon revenue

Non-GE Atlantic salmon revenue

Other revenue

Total product revenue

Production Costs

Production costs for the year ended December 31, 2021, were up from the corresponding period in 2020, due to production cost increases related to the commencement of harvesting at the Indiana and Rollo Bay farms.

Production costs for the year ended December 31, 2022, were up from the corresponding period in 2021, due to production cost increases for labor and other direct costs related to increased production output.

Increases included headcount additions, feed costs and other direct supplies, as well as the costs for processing and transportation to bring our product to market.

The current year includes net realizable inventory value adjustments of $8.0 million based on the market price for salmon, our production yields and external processing and transportation costs.

Costs for 2020 include net realizable inventory value adjustments of $4.2 million and a $1.5 million write-off against the carrying value of the conventional salmon biomass due to management’s decision to donate substantially all of the conventional salmon to local food charities during Q1 2021.

These cost increases were partly offset by an increase in the NRV of the fish in process inventory, which allowed more production cost to be absorbed into inventory.

The improvement in NRV was due to higher market pricing and lower costs per pound for transportation and processing.

Sales and Marketing Expenses

Sales and marketing expenses for the year ended December 31, 2021, were up from the corresponding period in 2020 due to an increase in headcount and promotional expenses related to marketing activities for our salmon.

Costs for the period also include a $514 thousand charge related to the donation program of conventional Atlantic salmon to local food charities.

Sales and marketing expenses for the year ended December 31, 2022, were down from the corresponding period in 2021 primarily due to the non-recurrence of an expense incurred during 2021 related to the donation of conventional Atlantic salmon to local food charities.

Net of this charge, sales and marketing expenses increased in the current period, due to an increase in headcount and marketing program costs.

Research and Development Expenses

Research and development expenses for the year ended December 31, 2021 , were down from the corresponding period in 2020 due to an increase in broodstock cost transferred to production costs for related product revenue during the period and a decrease in field trials, offset by increased outside contract service fees and personnel costs.

During the current period, research activities included feed nutrition trials, discovery research in salmon immunology and work on a genome study to identify genes associated with economically important traits in salmon.

Research and development expenses for the year ended December 31, 2022 , were down from the corresponding period in 2021 due to the transition of broodstock husbandry costs to production operations.

Net of this change, research and development expenses for the current period remained relatively unchanged as compared with the prior period.

Cost increases for headcount and lab supplies were offset by decreases in field trials and outside contract service fees.

During the current period, research activities included feed

nutrition trials, discovery research in salmon immunology and work on a genome study to identify genes associated with economically important traits in salmon.

General and Administrative Expenses

General and administrative expenses for the year ended December 31, 2021, were up from the corresponding period in 2020 due to increases in personnel, outside consulting and advisory fees, auditing fees, insurance costs, and travel, partly offset by decreases in legal fees and stock compensation charges.

General and administrative expenses for the year ended December 31, 2022, were up from the corresponding period in 2021 due to increases in personnel, auditing and legal fees, insurance costs, taxes and stock compensation charges, partly offset by decreases in consulting and outside advisory fees.

Total Other (Income) Expense

Total other (income) expense for 2021 is comprised of interest on debt, bank charges, and interest income.

Total other (income) expense for 2020 is comprised of interest on debt, bank charges, interest income, and a net gain on the disposal of assets.

Total other (income) expense for 2022 is comprised of interest income, interest on debt, bank charges, and a loss on the disposal of assets.

Total other (income) expense for 2021 is comprised of interest income, interest on debt and bank charges.

Interest income in 2022 was up considerably over 2021, due to our investments in marketable securities.

Liquidity and Capital Resources

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Liquidity has primarily come from equity financings, supplemented by debt transactions.

During 2020, we completed three public equity offerings totaling 33,028,000 shares of common stock for net proceeds of approximately $104.6 million and we issued 713,449 shares of common stock through the conversion of outstanding warrants for total proceeds of $2.3 million.

During 2021, we completed a public equity offering of 14,950,000 shares of common stock for net proceeds of approximately $119.1 million.

During 2021, we completed a public equity offering of 14,950,000 shares of common stock for net proceeds of approximately $119.1 million and we issued 530,414 shares of common stock through the conversion of outstanding warrants for total proceeds of $1.7 million.

During 2022, we received $476 thousand in debt proceeds from the draw-down on an existing loan facility.

In the future, we expect to use bond issuances to fund the construction of our farms and we may use additional equity issuances to supplement these costs or to fund other growth opportunities.

As of December 31, 2021, we had $191.2 million in cash and cash equivalents, marketable securities and restricted cash.

As of December 31, 2022, we had $102.6 million in cash and cash equivalents, and restricted cash.

Our principal contractual commitments include capital expenditure obligations, repayments of debt and related interest, and payments under operating leases.

Refer to the notes in our consolidated financial statements for further information about our share capital expenditure commitments (Note 6), debt (Note 7), and lease payment obligations (Note 10).

Refer to the notes in our consolidated financial statements for further information about our capital expenditure commitments (Note 6), debt (Note 7), and lease payment obligations (Note 10).

The following table sets forth the significant sources and uses of cash for the periods set forth below (in thousands):

‎ December 31,

Net cash provided by (used in):

Net cash (used in) provided by:

Operating activities

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Cash Flows from Operating Activities

Net cash used in operating activities during the year ended December 31, 2022, was primarily comprised of our $22.2 million net loss, offset by non-cash depreciation and stock compensation charges of $2.6 million and increased by working capital uses of $1.4 million.

Spending on operations increased in 2022 due to increases in production activities at our Rollo Bay and Indiana farm sites, increases in headcount and increases in costs for insurance, taxes, and professional fees.

Cash used for working capital was due primarily to increases in inventory and prepaid expenses, partially offset by an increase in accrued expenses.

We expect cash flows from operating activities to remain negative and roughly consistent until our Ohio farm is in operation.

Net cash used in operating activities during the year ended December 31, 2021, was primarily comprised of our $22.3 million net loss, offset by non-cash depreciation and stock compensation charges of $2.2 million and increased by working capital uses of $349 thousand.

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Cash used for working capital was due primarily to increases in receivables and prepaid expenses, partially offset by increases in accounts payable and accrued expenses and a decrease in inventory.

Net cash used in operating activities during the year ended December 31, 2020, was primarily comprised of our $16.4 million net loss, offset by non-cash depreciation and stock compensation charges of $1.9 million and by working capital sources of $136 thousand.

Spending on operations increased in 2020 due to increases in production activities at our Rollo Bay and Indiana farm sites, offset by lower field trial costs related to our demonstration farm in Panama and travel expenses.

Cash provided by working capital was due primarily to an increase in accounts payable and accrued liabilities, partially offset by increases in inventory and prepaid expenses.

Cash Flows from Investing Activities

During 2021, we used $5.7 million for renovations to our Indiana farm site, construction charges at our Rollo Bay farm site and renovations at our Fortune Bay hatchery, $45 thousand for deposits on equipment purchases and $101.8 million on the purchase of marketable securities.

During 2020, we used $4.0 million for renovations to our Indiana farm site and for construction charges at our Rollo Bay site, offset by $100 thousand in proceeds from the sale of equipment and $1 million in net proceeds from a settlement agreement.

We expect expenditures on capital projects to increase in future periods as we commence construction of our Ohio farm.

We currently estimate the construction costs to be in the range of $290 million to $320 million, including a reserve for potential contingencies of $30 million.

We expect to finance this project cost through a combination of cash on hand and debt.

Estimating the cost and timing for the completion of this new and complex capital project is inherently difficult and subject to change based on a number of factors, including design changes, fluctuating costs of materials, labor shortages, the impact of the COVID-19 pandemic, construction delays, dependence on contractors, financing costs, customer requirements and unexpected complications.

During 2022, we used $65.1 million for construction charges and equipment deposits for our Ohio farm, $1.4 million and $1.0 million for equipment purchases and deposits for our Indiana and Rollo Bay farms, respectively, and we received $101.8 million on the net sales of marketable securities.

During 2021, we used $5.7 million for renovations to our Indiana farm and Fortune Bay hatchery sites and for construction charges at our Rollo Bay farm, $45 thousand for deposits on equipment purchases and $101.8 million on the net purchase of marketable securities.

We expect expenditures on capital projects to increase in future periods as we continue construction of our Ohio farm.

For more information, see “ Our business plans include the need for substantial additional capital and without it we may not be able to implement our strategy as planned or at all .”

Cash Flows from Financing Activities

During 2022, we received approximately $476 thousand in proceeds from new debt and we repaid $640 thousand of outstanding debt.

During 2021, we received approximately $119.1 million in net proceeds from the issuance of shares of common stock in a public equity offering, $1.7 million from the exercise of warrants, and $606 thousand from new debt.

This was offset by $272 thousand in debt repayment.

During 2020, we received approximately $104.6 million in net proceeds from the issuance of shares of common stock in three public equity offerings, $2.3 million from the exercise of warrants, and $4.1 million from the issuance of debt, net of repayments and debt issuance costs.

Future Capital Requirements

In February 2021, we completed an equity raise with net proceeds of $119.1 million and we had $191.2 million of cash, cash equivalents, marketable securities and restricted cash as of December 31, 2021.

While we have experienced net losses and negative cash flows from operations since inception, we believe that we have sufficient cash to meet our requirements for at least the next twelve months from the filing date.

During 2022, we expect to use approximately $130 million of cash to fund our operations and the first year of construction costs for our Ohio farm.

In February 2021, we completed an equity raise with net proceeds of $119.1 million and we had $102.6 million of cash, cash equivalents, and restricted cash as of December 31, 2022.

Our plans include the continued construction of a 10,000 metric ton salmon farm in Ohio at a total project cost that is estimated to range from $375 million to $395 million.

We plan to use cash-on-hand and debt financing to fund the construction.

While we have committed a significant amount of our current cash to fund a portion of the project, if necessary, we can utilize that cash for working capital purposes, and therefore we believe we have sufficient cash to meet our requirements for at least the next twelve months from the filing date of these consolidated financial statements.

In 2020, we entered into a term loan agreement with First Farmers Bank and Trust in the amount of $4 million, which is secured by the assets of our Indiana subsidiary and a corporate guarantee.

The agreement contains certain financial and non-financial covenants, which if not met, could result in an event of default pursuant to the terms of the loan.

At December 31, 2022, the Indiana subsidiary was in compliance with its loan covenants.

The ability of the Indiana subsidiary to meet its debt covenants over the next twelve months is dependent upon its operating performance.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis