Marrone Bio Innovations, Inc.
Q1 2016 Earnings Call Transcript

Published: 13 May 2016

[Operator:]

Good day, ladies and gentlemen welcome to the Marrone Bio Innovations First Quarter 2016 Earnings Conference Call. At this time, I would like to turn the call over to Linda Moore, General Counsel. And today’s conference call is being recorded.

[Linda Moore:]

Good afternoon. Before beginning, I would like to remind you that this conference call may contain statements regarding management’s expectations, hopes, beliefs, intentions or strategies regarding the future as well as projections, forecasts or other characterizations of future events or circumstances. Such statements are based on management’s current expectations and beliefs concerning future developments and their potential effects on the company. There can be no assurance that future developments affecting the company will be those that management has anticipated. Such statements involve a number of risks and uncertainties, some of which are beyond management’s control or other assumptions that may cause actual results or performance to be materially different from those expressed or implied by these statements. Important factors that could cause differences are contained in the reports filed by the company with the Securities and Exchange Commission, including the Form 10-K that the company has filed on March 30, 2016 and our Form-10-Q to be filed with first quarter of 2016, under the heading Risk Factors and elsewhere and in our earnings release posted on the company’s website. Should one or more of these risks or uncertainties materialize or should any of management’s assumptions prove incorrect, actual results may vary in material respects from those discussed today. Any guidance that management may offer in this conference call represents point-in-time estimate. The company expressly disclaims any obligation to revise or update any guidance or other forward-looking statements to reflect events or circumstances that may arise after the date of this call. After our remarks, we will answer your questions. Now, I will turn the call over to our Chief Executive Officer, Pam Marrone. Pam?

[Pam Marrone:]

Thank you, Linda. Good afternoon and thank you to everyone for joining us. With me today is Jim Boyd, our Chief Financial Officer; and as you just heard, Linda Moore, our General Counsel. Our business has grown in the first quarter of 2016 and we continue to drive the growth and momentum we reported last quarter. Our results show growth in adoption rates, orders, shipments and revenue. As we remained keenly focused on rapid growth we are also managing cost. The enthusiasm and energy in the company that I noted on our year-end call has only increased. We are working hard to implement our market strategy to drive demand, develop additional core products and to accelerate growth. We believe that we are on the right path to drive value to all of our stakeholders. As you may recall from our last quarter call we identified a number of key operational objective. We captured a number of those during the first quarter and continue to work towards a number of others including additional seed treatment collaborations, row crop distribution deals, international distribution agreements and Zequanox partnership. We are also excited to have recently added several new sales and technical services personnel. As we’ve discussed our sales effort is fundamental to our success both short and long-term. Before I go into additional detail, I would like to review the highlights from the first quarter. Total revenues for the quarter were $2.7 million, an increase of 30% versus the first quarter of 2015. Additionally in order to provide our investors with supplemental information regarding corporate performance, we are introducing a non-GAAP product shipment measure. For this quarter product shipments were $3.9 million, a 79% increase from the first quarter of 2015. Jim will describe this measure in more detail later. This growth is coming from increases in the adoption of our product for a variety of crops in multiple U.S. regions, both inorganic and conventional integrated crop management programs. This kind of across the board strength is excellent to see. It is the clear demonstration of the value of our technology and the strength of our sales and marketing organization. Our execution focus is also evident in our moderation of our operating expenses and capital expenditures in the first quarter. We’ve now completed our restructuring and the move to our new headquarters. Our primary goal is now to leverage the investments and restructuring of the past two years to increase revenues and drive operational efficiencies. We continue to design our portfolio of products to meet a broad range of customer needs. As we’ve discussed we expect this strategy will diversify our business, reduce revenue volatility, and enable growth. Our four already commercialized agricultural brands Regalia, Grandevo, Venerate and Majestene each contributed to our growth in the first quarter. We are looking forward to the near-term expansion of our product portfolio with a 5th brand. Bio-Tam 2.0 Isagro’s organically listed biofungicide for soil and great wine truck diseases, which we have agreed to distribute in the Western U.S. Before I do into our agricultural product, I’d like to update you on our water product Zequanox. We captured a significant grand as part of the great Lake Restoration Initiative, which allows us to continue to work on this exciting water product without diverting resources from driving growth in our ag business. We also continue to make progress in discussions with potential distributors for in pipe treatment who are scheduled to visit treatment sides with customers as applications this year are conducted. We are pleased to have announced that the United States Environmental Protection Agency has approved funding to assess open water applications with Zequanox that the EPA note potentially could expand in base of zebra and quagga mussel control possibilities throughout the Great Lakes Basin. The two years the 641,000 award will be administered by Petoskey, Michigan-based, Tip of the Mitt Watershed Council. As laid out in the work plan, the project collaborators will partner with researchers and consultants to apply Zequanox, evaluate control efficacy, and assess environmental responses using a new non-enclose treatment approach. The project will cover 3 acres of invasive mussels to determine the viability of a large scale Zequanox application and native species restoration. Invasive zebra and quagga mussel have been highly distractive to the Great Lakes and Upper Mississippi River Basin Watershed and the mussels have increasingly become associated with toxic algae bloom, outbreaks of avian botulism and the looming collapse of the important commercial and sports fisheries such as Lake Michigan King salmon. We are pleased to be partnering with federal, state and local resource managers to further develop Zequanox as a possible ecosystem restoration tool. Now I’d like to turn to our suite of agricultural product, REGALIA continues to grow into a leadership position into biofungicide category. REGALIA’s treated acres increased in all regions. New field data on fire blight and other apple diseases have provided us entry into a new market and geographical segment. We also saw a more normal weather patterns inducive to crop diseases at California which helped boost Ragalia adoption. Our new formulation of Ragalia launched in January has been well received by the market and this has also helped our growth. I would add that we remain excited to pushing into the row crop market with Ragalia RX and see clear economic benefit for growers of wheat, corn and soya as well as other row crops. Our row crop distribution deal is one of the operational objectives we mentioned during our last call and this objective has a full focus and involvement of the MBI leadership. Turning to Grandevo a broad spectrum bioinsecticide, we have seen our solid growth trends continue for fruit, nut and vegetable applications. We have new 2016 research data showing Grandevo reduces egg laying of adult Spotted Wing Drosophila flies, serious rapidly spreading invasive pests that needs integrated solutions to manage resistance. Grandevo’s broad spectrum pest control continues to come without harm to beneficial organisms. Grandevo is part of our aggressive drive forward in international market, based on our favorable testing in the EU, United Kingdom government support horticultural growers organization has requested emergency used authority for Grandevo to combat Spotted Wing Drosophila during the 2016 growing season. To support this request, MBI has established an MOU, with an EU distributor should emergency approval come to provision. In addition, we are working on developing relationships with several new distributors around the globe together product into testing that is required for registration. Field trails in Brazil and Mexico with Grandevo continue to show great promise. This includes field trials in the very serious invasive caterpillar cotton bollworm, helicoverpa armigera, Asian citrus psyllid and white fly these pests are extremely damaging for a number of key crops and have developed resistant to several chemical pesticides. I’m very pleased to say that we believe the EPA registration of our new Grandevo water dispersible granular formulation called Grandevo WDG is eminent. Launch plans are in progress and we are prepared to submit state registration. Grandevo WDG offers customers improve handling, mixing and application flexibility while continuing to provide broad spectrum protection and minimal risk to pollinators and other beneficials. I will now turn to Venerate, another broad spectrum bioinsecticide that’s complementary to Grandevo. Our efforts to crop growers to combine Grandevo and Venerate in an integrated test management programs are well received. With different modes of actions they are each effective as standalone insecticide, but together in rotation they enhance the total pest management program. For example, recent demonstration showed the early use of Grandevo gains control of the population by breaking the pest reproductive cycle. A follow-up with Venerate that makes an effective biologically based resistance and residue management program. New data from Europe continue to confirm Venerate’s strength against the while fly a damaging vegetable pest. Majestene our bionematicide is our most recent product. We’re now registered with the EPA and in 48 states in Puerto Rico. So the first quarter marks Majestene’s first contribution to our sales mix. The commercial launch of Majestene in January was the achievement of a very important development and product portfolio diversification objective. This is a key product for us given that there are a few conventional or biological options for nematode control. As I noted last quarter, over 80 billion of damage is caused by plant parasitic nematodes every year. We are excited to see spring plantings with Majestene showing excellent plant health benefit for many crops that are still early in the growing season. We will continue to closely monitor these commercial treatments in large scale demonstration programs throughout the season. While we are just getting started, the response from the market has been very encouraging. Demand for inspective low risk nematicide is durable. We are focused on driving forward with distributor partnerships in Asian and Latin America regulatory trials for Majestene. Bananas is the key target market. Moving to MBI-110, our downy mildews, white mold biofungicide product candidate; our submission of MBI-110 to the EPA in January was another key development objective. While our expected EPA approval date is not until the latter half of 2017, customers have already begun making inquiries as these diseases have very few control options and MBI-110 have potential to fill some critical unmet market needs. We achieved the fourth objective for 2016 in March when we signed an agreement to distribute Isagro’s Bio-Tam 2.0 to both conventional and organic growers in California, Oregon, Washington and Arizona. While it did not contribute to the first quarter results, this is a proven product that can be used this summer on end season vegetables and strawberries and in the fall season to combat great wine truck disease, which is responsible for significant economic losses to the wine and grape industry. I am very pleased to announce that we’ve embarked on the first of our seed treatment collaboration. This collaboration is with Israeli company Goundwork BioAg, who is specialized in a more effective and reliable way to produce mycorise fungi which enhance plant growth, yield and improves fertilizer uptake. MBI and Groundwork have created the first ever all biological seed treatment for corn and soybean to enhance crop yield, reduce fertilizer requirement especially phosphorus, while controlling soil dwelling pest and plant diseases. The first seed treatment from the two companies’ joint efforts have been delivered to cooperators for field trials in corn and soybean. We’ve achieved the following operational objective so far in 2016. The launch of our new Regalia formulation, first commercial sales Majestene, the mission of MBI-110 to the EPA, addition of Bio-Tam 2.0 to our portfolio, a formation of our seed treatment partnership with Groundwork BioAg, expansion of our staff of sales and technical services professionals and brand funding for Zequanox open water treatment. We are still working towards the launch of our improved Grandevo granular formulation, a partner for Zequanox distribution, the signing of one or more row crop distribution deal, additional seed treatment deals, new distribution agreements in international markets and hiring a new manager for the Latin America business. Above all we are intently focused on execution in three key focused areas. Number one, ramping commercial product sales; number two, developing a few near-term new products to fit unmet market needs; and three driving our international business. I’ll reserve some comments for closing, but I’d like now to turn the call over to Jim to go through the numbers and to provide additional detail on our financial performance and our manufacturing. Jim?

[James Boyd:]

Thank you, Pam and good afternoon, everyone. I’d like to walk you through our first quarter results. Our reported total revenue in the first quarter was $2.7 million, up significantly compared to $2.1 million in the first quarter of last year. As a reminder, our total revenue includes revenue from customers on the selling methods as well as customers on the sell through methods, but does not include deferred revenues not yet recognized from customers on the sell through revenue recognition method. Therefore to help you understand the pace of our business and the demand for our products, we are now also reporting product shipment. This new non-GAAP measure which is fully defined in our press release is intended to approximate the total value of product sold and entered into contract for sale in a given period. Product shipments for the first quarter were $3.9 million compared to $2.2 million for the first three months of 2015, a 79% increase. We believe this illustrates our improvement in sales performance. Now returning to GAAP reporting. Our gross margin in the quarter was 15% compared to 2.8% in the last year’s first quarter. This is the result of improved capacity utilization, continued focus on inventory management and better product sales mix. It is important to note unabsorbed manufacturing cost from idle capacity during the quarter was approximately $222,000 down from approximately $590,000 in the first quarter of 2015. I would like to take a moment to recognize all the people at our Michigan plant who are working extremely hard and long hours to supply the increased demand we are seeing, thank you. We also took an inventory right down adjustment of $449,000 during the quarter. Excluding the unabsorbed manufacturing cost and the inventory write downs gross margin would have been 40.1%. We are increasingly confident that we will be able to fully utilize our plant in the next few quarters. SG&A in the first quarter was $5.5 million this year compared to $7.9 million last year. It is important to understand that this includes approximately $830,000 of non-recurring legal and other investigation related expenses. Although the investigation and restatement are now concluded we had some carry over expenses related to the investigations, as well as some current expenses for the litigation. We are working diligently toward a timely resolution of these issues and the end of these expenses. We continue to search for operating efficiencies while focusing on growth opportunities. We believe that operating expenses excluding any litigation cost are likely to remain post to the level we saw in the first quarter. In addition, we have significant long-term opportunity to drive profitability through scale. R&D cost in the first quarter of 2016 were $2.3 million versus $3.4 million last year, a reduction of 32%. This reflects our extensive restructuring efforts. Our R&D staff along with manufacturing and quality control are putting forward an extraordinary effort on supporting our commercialized products as well as the continued development of our pipeline product. Maintaining our product by - maintaining our proprietary technology advantage is key to our business strategy and our future reverence growth. Turning now to the balance sheet. Inventory at the end of the first quarter was $8.6 million. We consider this level of inventory to be appropriate. This compares to $11.8 million at the same time last year. At the end of the first quarter our balance sheet had total cash of $28.2 million, which includes cash and cash equivalent of $9.8 million as well as short and long-term restricted cash of $18.4 million. Our first quarter cash usage was $10 million. Included in that number is $1.75 million for the SEC settlement payment, which we had booked in the fourth quarter of 2014. Additionally, we made a semi-annual interest payment during the quarter of $1.2 million. Thank you. And now we will take question.

[Operator:]

Thank you. [Operator Instructions] We’ll go to Tyler Etten with Piper Jaffray.

[Tyler Etten:]

Hi, guys. Thanks for taking my question today and I appreciate it. One thing I was hoping we could talk about is the inventory write down. What was the cause of the inventory write down and we wouldn’t expect something like that to happen again given the current levels of inventory is that the way to look at it?

[James Boyd:]

Sure, I’ll handle that. Generally speaking we evaluate our inventory constantly. We’re looking at appropriately a conservative way. A portion of the first quarter write-off was related to our transition to new formulations of Grandevo, another portion reflects aged raw materials related to our 2014 focus - forecast. And finally a portion relates to the startup production of Venerate and Majestene.

[Tyler Etten:]

Okay, great that clears that up. Okay how about the - I guess what stages of talks are you with these international distribution contracts? And what type of timeframe are you looking forward to have in international agreement locked up. Are we looking at some time this year or sometime in the coming month or just any color around that would be great?

[Pam Marrone:]

So we’re working on distribution agreements in multiple regions and we do have - we do expect to have some sign this year it might not be about final commercial agreement but it could be like an MOU stage. And so we can get going with the testing, which is important to not miss the season. But that is a key focus area for us and we have - in all regions we have multiple activities going on.

[Tyler Etten:]

Okay, great. For Zequanox award that you guys received this quarter it’s a two year award do you expect that agreement is going to be fairly consistent quarter-to-quarter or is there some lumpiness to it or how should we think about that?

[Pam Marrone:]

Because the treatment happens at one time of year the money will be - it will all come in a pretty much a one lump sum for the treatment.

[Tyler Etten:]

Okay. And what time of year do they usually…

[Pam Marrone:]

I believe that for the Zequanox that the first treatment is actually going to be in 2017.

[Tyler Etten:]

Yeah but in the third quarter I think.

[Pam Marrone:]

Yeah probably in the third quarter. Yeah.

[Tyler Etten:]

Okay, great. Alright, I’ll jump back in the queue. Thanks.

[Operator:]

Thank you. [Operator Instructions] We’ll now hear from Sameer Joshi with Rodman & Renshaw.

[Sameer Joshi:]

Hey, guys.

[Pam Marrone:]

Hi.

[Sameer Joshi:]

So following up on the previous question about the Great Lakes’ initiative. Is that an assessment allocation the $641,000?

[Pam Marrone:]

I’m sorry I didn’t understand. It’s a grant, it’s actual money granted out and it goes to ourselves for the Zequanox as well as our partners who are developing and helping us develop some of the treatment methodology.

[Sameer Joshi:]

Okay. So is this money for assessing the efficacy or is it for - is it revenues on the long-term basis?

[Pam Marrone:]

It assuming that the treatment works like planned then it could be a source of recurring revenue, but in the future.

[Sameer Joshi:]

But it’s specifically a demo right.

[Pam Marrone:]

Yes, specifically a demo right now, yeah.

[Sameer Joshi:]

Okay. Do you have any idea of what the annual revenues if approved and adopted would be for the…

[Pam Marrone:]

No.

[James Boyd:]

But those lakes are very big.

[Sameer Joshi:]

Okay, no that’s helpful. So moving on historically Q2 has been the biggest quarter. Should we expect similar behavior this year as well or do you think seasonality and the product mix makes it less of a lumpy quarter the revenues going forward.

[Pam Marrone:]

Q2 has historically been our largest quarter, that’s correct.

[James Boyd:]

But that is an interesting question because of growth.

[Pam Marrone:]

Yeah.

[Sameer Joshi:]

No, so the question is do we - should we expect the more smoothening out of revenues over the next year?

[Pam Marrone:]

Q2 was historically when - because that’s when the crops are - a lot crops are being treated in the lot of the regions it’s typically of the largest quarter.

[James Boyd:]

I think our sales are going out very close to the time that they are being applied. So from a seasonal basis we would expect Q2 to be the largest quarter, until we probably can give you advice otherwise.

[Pam Marrone:]

Yes, as international kicks in especially in the Southern Hemisphere that will change that mix. But until those ramp up more its U.S. based and therefore yes Q2 is typically the largest.

[Sameer Joshi:]

Okay. So the next question relates to the Majestene sales as the first sales were achieved in first quarter. But do we know what was or are you disclosing what percent of your total revenue was from Majestene and going forward what do you expect it to be over the next two three quarters, as a percent of total revenue?

[Pam Marrone:]

We don’t disclose revenue by product. Yeah, we don’t disclose revenue by product. I would just say that Majestene sales met our plans and we are happy with that and going forward we have nice plans for growth of that product.

[Sameer Joshi:]

Okay. And then just a book keeping issue or better understanding of the new measure that has been introduced. The $1.3 million in change in default product revenue, does that compare to the $1 million number that was referred to during the last earnings call?

[James Boyd:]

Yeah.

[Sameer Joshi:]

Okay. So it is... because I just wanted to compared it with that and it includes the sell through shipments, right? Shipments to sell through customer?

[James Boyd:]

The sell through portion that is deferred does go into the deferred on the balance sheet, if that’s the question.

[Pam Marrone:]

It is included in the product shipments, yes.

[Sameer Joshi:]

It is included in the product shipments. Okay, I think that’s all from me right now. Thanks.

[Operator:]

Thank you. And we will take a follow-up question from Tyler Etten.

[Tyler Etten:]

Just one for about this new seed treatment agreement. You said that it was going to be delivered to growers for field trials. Are those just trials alone or is there going to be real sales that happens to customers that we’ll be applying this to their normal growing operations?

[Pam Marrone:]

Not sales because it’s not registered yet. So we would have to get this treatment registered first. Our uses Marrone Bio the pesticide uses of our products as part of the seed treatment are all registered already and the micro rising part of it requires just state. So the state registration so it’s not a cumbersome process to get the registration. But this year it will not sales that will be out in trials and demos.

[Tyler Etten:]

Okay, great. Thanks.

[Operator:]

Thank you. This does conclude our question-and-answer session. I will turn it back over to Pam Marrone for any additional or closing remarks.

[Pam Marrone:]

Thank you everyone for your questions. We continue to see a tremendous opportunity ahead of us. As I previously discussed in addition to growing sales to current channels we are focused on several operational objectives that we believe would best position us for additional growth including row crop distribution partnerships, more seed treatment distribution partnerships, international distribution agreements, Zequanox distribution of partnerships and registration and launch of the Grandevo WDG formulation. Thank you again for your support and continued attention and interest in Marrone Bio Innovations.

[Operator:]

Thank you. Ladies and gentlemen that does conclude today’s conference. Thank you all again for your participation.