Marrone Bio Innovations, Inc.
Q4 2015 Earnings Call Transcript

Published: 31 Mar 2016

[Operator:]

Good day and welcome to the Marrone Bio Innovations Fourth Quarter and Full Year 2015 Earnings Conference Call. Today’s conference is being recorded. Following the prepared remarks, there will be a question-and-answer session and instructions will be given at that time on how to be placed in the queue. At this time, I would like to turn the call over to Linda Moore, General Counsel. Please go ahead.

[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 today on March 30, 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 a 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 for joining us. With me today is Jim Boyd, our Chief Financial Officer; and as you just heard, Linda Moore, our General Counsel. Fiscal 2015 was, as you know, an important transitional year for our Company. While was challenging, we are pleased to have our focus squarely on the future and we’ve begun 2016 with a renewed enthusiasm. The entire organization is energized and purpose-driven to achieve a clear set of strategic priorities. As the fiscal year came to a close, we pushed forward on each of the three key legs of our refined market strategy. First, drive demand for our current commercial products; second, advance the development of selected products with superior near-term market opportunities; and third, accelerate our efforts to grow in international markets. We believe execution along these lines will demonstrate our capability to be a leader in the growing sustainable agricultural movement. We believe that these three lines of focus provide the clearest path to grow revenues, achieve manufacturing scale and leverage our current operating structure. We have identified a number of specific operational objectives that we believe can enable increased growth. These objectives are centered around growth of product shipment, gaining market access in row crops and seed treatment, inching [ph] international distributor agreement and launching a new formulation of Grandevo. Before I talk about our strategy in each of these objectives, I would like to provide some context with some highlights from our fourth quarter and full year results. First, revenues, in the fourth quarter revenues were $1.9 million as compared to $1.1 million in 2014. Additionally, I’ll note that we also booked a net increase in deferred revenues of approximately $1 million during the fourth quarter. Our business and our execution certainly improved during the fourth quarter and we have continued to focus on execution to strengthen our business. We have reported revenues for the full year of $9.8 million as compared to $9.1 million in fiscal 2014. Starting the year with high channel inventories had been masking the actual products we have made and adoption of our products propounds on the ground. We believe these inventories are improved, and to that point, our year-over-year fourth quarter growth rate was the strongest of any quarter in 2015. Our cash outflow numbers in both years reflect excess legal and accounting expenses, related to the investigations in subsequent restatement. Jim will discuss this in greater detail. While significant, these expenses were not operational and we believe they are predominantly behind us and subject to the resolution of related litigation; we do not expect them to continue in the future. In addition, we have one time capital expenditures related to our moving to our new Davis facility. These non-recurring expenses mask the progress we have made in restructuring. Speaking strictly operationally, we’ve been able to reduce our annual operational expense rate by nearly $8 million. While we also continue to look for further operational efficiencies, we must be mindful to preserve our ability to execute our strategy to grow the business. At a high level, we believe that maximizing the opportunity for growth is best accomplished by the development of a diversified suite of proprietary agronomic solutions, not through the process of a single block buster product. For the conventional agricultural market, we are positioning ourselves to facilitate a fully integrated crop management solution in concert with chemical solutions. Organic growers are rapidly expanding segment of the ag market. These are supplier with a full portfolio of products that addresses all of their pest control and plant growth need, as they grow their acreage to meet the rapid growth and consumer demand. Every one of our ag products is listed for organic production. In addition to the benefit to our customers, our diversified product portfolio should enhance the stability of our revenue stream by offsetting the national variation in market demand for any one product because of seasonality and growing conditions. Multiple products should also allow us to better leverage our investments in our sales infrastructure. Our product portfolio strategy for the agriculture market is focused on four of our five key commercialized products. Regalia, Grandevo, Venerate and Majestene. We are working to supplement these with a select few new products from our development pipeline and some partnerships. This includes our own MBI-110, a broad spectrum biofungicide which we submitted to the EPA in January and Isagro’s Bio-Tam 2.0, an organically lifted [ph] biofungicide that we are distributing. We have rights to distribute in the western United States and think this will be a good complementary product that fits well with our portfolio strategy. Zequanox, as we have discussed is a special product that is not aimed at the agriculture market by which provides its own discreet opportunity. As I update you on each product, I’ll highlight some of the specific business development objectives I mentioned a few moments ago. I’ll then also talk about a couple of additional objectives that cut across the whole range of our portfolio. First, Regalia

[Jim Boyd:]

Thank you, Pam, and good afternoon, everyone. I would like to walk you through our full year and quarterly results. For the fourth quarter of 2015, we reported total revenue of $1.9 million, up significantly compared to $1.1 million in the fourth quarter of last year. During this year’s fourth quarter, as Pam mentioned, you should also notice that we added a net of approximately $1 million to deferred revenue. We believe these increases represent growth with key customers, demonstrate that our execution has improved and also reflect improved channel inventory levels. We reported revenues for the full year of 2015 of $9.8 million, this compares to reported revenues in 2014 of $9.1 million. The net increase in revenues to the year from deferred revenue was $500,000 in 2015 and $1.8 million in 2014. Our cost of goods sold for 2015 was $9.3 million, this compares to 2014 cost of goods sold of $9.4 million. 2015 and 2014 cost of goods sold includes charges of $400,000 and $1.9 million, respectively to adjust the carrying value of inventory, as well as $2.5 million and $900,000 for charges of unabsorbed costs related to low capacity utilization at our manufacturing plant. An excess inventory position, both in-house and in the channel negatively impacted plant utilization in the fourth quarter of both years, although it was more significant in 2014 as targeted sales to inventory ratios have improved. As we discussed last year, achieving scale related benefits in our Michigan facility is critical to improving margins. We continue to produce Regalia, Zequanox and Grandevo in our facility. And we are studying how to add Venerate and Majestene production capabilities as well as automated bottling and packaging capabilities and expanding our Regalia capacity. We recently installed pilot driving capabilities that are expected to help us develop lower cost processes and help us scale those processes faster. In addition, with increased sales, we’re moving to a more consistent production environment which will allow the plant to run more efficiently. I will now discuss our operating expenses. SG&A was very high in 2015 and 2014 at $26.5 million and $29.0 million when compared to the $15.0 million that we incurred in 2013. In fiscal 2015 and 2014, $7.7 million and $7.5 million respectively of SG&A was related to the audit committee and SEC investigations, the resulting restatement and related matters. In 2014, this included a $1.75 million accrued expense to settle the SEC investigation. With the completion of the investigation and the restatement work in 2015, we expect with respect to the ongoing related -- with the exception of the ongoing related litigation expenses, we don’t now expect these expenses to continue in 2016. SG&A in the fourth quarter of 2015 and 2014 was $5.9 million and $9.3 million, respectively. This includes investigation restatement related expenses in those quarters of $2.2 million and $4.6 million. As we discussed last quarter, in October 2015, we completed the second restructuring. When combined with our earlier restructuring, we have achieved operating expense reductions of approximately $8 million annually. Through both restructurings, our headcount has been reduced by approximately half from 161 employees at the end of 2014 to 84 today. Full year R&D costs in 2015 were $13 million versus $19.3 million in 2014, a 30% reduction. In the fourth quarter of 2015, they were $3.3 million versus $5.9 million in Q4 of 2014, a 44% reduction, also reflecting our restructuring efforts. These restructuring efforts have been extensive. We see improved efficiencies resulting primarily from the intense effort our people are putting in and our very targeted focus on a select group of efficacious products. These products are either already in the marketplace or close to commercialization. Our R&D sales and marketing resources are now concentrated and coordinated on our current revenue producing products and products that present the greatest opportunity for near-term revenue generation. This best positions us for growth and maximize shareholder value. Now turning to the balance sheet, inventory at the end of the year was $9.1 million, which compares to $12.6 million at the end of 2014, and reflects our efforts to reduce our inventory levels. At the end of the fiscal year, our balance sheet had total cash of $38.3 million, which includes cash and cash equivalents of $19.8 million as well as short and long-term restricted cash of $18.4 million. Since the first quarter of 2014, we have averaged approximately $11 million in cash usage per quarter. This includes what we believe are significant nonreincurring expenses. First, the build out of our Michigan manufacturing facility; second, our build out and move of over Davis headquarters and Maine lab facility; and third, the cost associated with our internal investigation and restatement. The investigation restatement expenses consist of approximately $1 million in Q3 of 2014. The total over the following five quarters was an additional approximately $13 million in expenses and finally a $1.75 million accrual in the fourth quarter of 2014 for our settlement with the SEC. Because of the differences between incurring the expense and obtaining invoices, it would be difficult to communicate the true impact to cash by quarters. However, subject to the resolution of the related litigation, we think that go forward cash flow impact of the investigation and restatement will be minor with the exception of Q1 2016, in which we did already pay out the $1.7 million SEC settlement. In the fourth quarter of 2015, our cash usage was $8 million, down from $9 million in the previous quarter. Finally, in our 10-K, you will read that the audit opinion has an additional paragraph to highlight a going concern uncertainty. While we acknowledge we have risk including the potential of violating certain covenants under our loan agreements, we intend to work hard to grow our business and if necessary seek waivers on any particular covenant. Finally, we will continue to evaluate other strategic options including additional financing. Thank you and I return the call to Pam for additional comments.

[Pam Marrone:]

Thank you, Jim. Now, a word about the development of our sales and marketing team, their going forward will be the cornerstone of our ability to drive value to the market to our partners and to our shareholders. Due to the circumstances around the investigation and restatement activities, we found ourselves needing to nearly completely rebuild our sales and marketing team. Sales happen only when there is a stability of personnel and a specific territory over time to develop key relationships with both distribution and grower customers. Effective marketing can also guide product positioning, pricing and segmentation. We are pleased at the quality of the sales team built from the fourth quarter of 2014 in 2015, and in 2016, having found people who have experience and belief in the value of biological and integrated programs and who can select and guide on farm demos to both address the immediate needs of growers and expand the addressable market for our products. In 2015 and 2016, we also reorganized our product development team to provide more technical service to our sales team, assist growers with on farm demos in addition to their constantly conducting of scientific field trials. Our new marketing VP is well on her way in 2016 to rebuild our marketing team and our marketing plan. Now operator, we are ready to take questions.

[Operator:]

Thank you. [Operator Instructions] I’ll take our first question from Tyler Etten with Piper Jaffray.

[Tyler Etten:]

I was wondering if you could talk first about the international markets. Which regions are you seeing the most traction with your guys’ products and were there any new regions that you guys entered within the first quarter, or the fourth quarter? Excuse me.

[Pam Marrone:]

We didn’t enter any new regions but our orders through our partners are particularly in Latin America, which are the FMC are typically in Brazil and Mexico. And those are the two probably most important markets now. We’ve got a lot of registrations, eight or nine other registrations in smaller countries but they’re small relative to the markets in Mexico and Brazil. We’re awaiting registration on Chile which is going to be a significant market but we don’t have registration yet.

[Tyler Etten:]

And then building on that, do you have any timeline on when the Europe registration may go through? I know that you guys have submitted your data already, but is there any visibility on when that could get passed?

[Pam Marrone:]

I don’t have that. Europe is very difficult for both chemicals and biologicals, as you know. I don’t at this time have any projection on that.

[Tyler Etten:]

Okay, that’s fine. Okay, let’s just shift to maybe some row crops. I guess that most of us know that row crops are going to be very difficult because of farmer profitability this year. [Ph] Do you have any sense of what kind of growth you could achieve in row crops or if there will be significant growth in row crops this year just based on the orders that you see in front of you?

[Pam Marrone:]

Our growth is mostly dependent on our continued ability to execute well and the primary focus of the business is also in specialty crops. And we’re addressing the row crop market through -- we expect to address the row crop market through additional partners. So, I really think that the growth opportunity is dependent on our continued ability to execute rather than the outside market forces.

[Tyler Etten:]

Okay, that’s great. How about preferred cash burn this year, and do you guys have any sense on what you’re looking for with the cash burn as far as fiscal year 2016?

[Jim Boyd:]

Well, we’re not giving any guidance but we are very focused on our cash and we are working very hard to grow the business and keep our expenses down. We also believe we have a number of options that create greater flexibility with respect to our cash position. Although I’m not going to speculate on what they might be here today, rather we’re just really focused on the business.

[Tyler Etten:]

Okay, yes, that’s fair enough. One more from me and then I’ll get back in queue. Is the distribution and the sales network ready right now or is it still in a rebuilding process? I guess I just want a sense of are you guys still working on getting the sales force rebuilt or are you guys ready to go and do...

[Pam Marrone:]

You’re asking about the distribution channel or the sales team or both?

[Tyler Etten:]

The sales team.

[Pam Marrone:]

We pretty well established our sales team infrastructure right now. We added two people in Florida recently and we added, as I mentioned in the script, added a position in the Pacific Northwest because we felt that there was a increased opportunity there for supporting that position. And I don’t think we have any more open sales right now.

[Operator:]

[Operator Instructions] We’ll next go to Sameer Joshi with Rodman & Renshaw.

[Sameer Joshi:]

So, first of all, congratulations on the Bio-Tam distribution agreement. How significant is this; what level of sales do you expect to achieve; and are there any minimum sales requirements that you have to fulfill?

[Pam Marrone:]

We don’t give any guidance on individual projections by product. We have -- think that’s very complementary to our existing portfolio. And it’s in line the strategy of building a number of products across the full range of need. It is an area where we’re not currently present. Regalia is a biofungicide and we don’t have a lot of focus on soil application. So, this fills quite a need -- good grower need for soil application, the soil diseases. And in terms of just is that the market, it is a significant market and there is not a lot of chemicals and biologicals as there are not as many effective products for soil applications as there are for foliar. So, we think it both fits the need in our portfolio as well as in the market.

[Sameer Joshi:]

And are there any minimum sales requirements for MBI to sell?

[Pam Marrone:]

Well, we can’t talk about the terms of the agreement. But also mentioned that they got -- Isagro got registration on trunk line diseases of grape. And there is only a few registered products on that one and that is actually the most one -- in grower surveys is the most -- one of the most important diseases of grapes globally and the west of course where we have our rights to distribute this. It’s also an area that Regalia is not registered on, so it’s fills the need in our portfolio as well as with our customers.

[Sameer Joshi:]

So, on the Venerate and Majestene, are you seeing any sales traction; would you be able to comment on where and in what regions are you seeing more sales of these two products?

[Pam Marrone:]

We have focused Venerate in the west in California particularly, when we first launched it. And on Majestene, we just started sales, even though -- because we just started in January. In terms of region, we have been focusing -- we don’t have registration in California for Majestene yet. So, we’ve been focusing on other fruit and vegetable markets, which are available now and coming up, which would be other parts to the west and east countries.

[Sameer Joshi:]

And next question, so you may have answered already, but as far as the international agreement, what specific products do you expect will have a new storm [ph] in 2016 or partially [ph] in new international revenues as beyond 2016?

[Pam Marrone:]

Yes. There are some regulatory gating on Grandevo, Venerate and Majestene. They are very early in their international development and we’re rapidly getting partners to help us get through this. Each country requires field trials and regulatory. So, we’re getting partners to do that. Where we’re currently registered is in 9, I think it’s 9 or 10 Latin America countries with Regalia and in a few countries in Europe, Africa, and Middle East, not EU, but South Africa, Morocco, Tunisia, Turkey were registered and have a little bit of sales there. So, as countries come on line -- so that’s with Regalia. So, as countries -- more countries -- several pending, many countries pending with Regalia, and as they come on line, we’ll see more revenues. And then Mexico, as I mentioned in the script, Mexico is pending for Grandevo and Venerate, we do expect those sometime this year hopefully. And then, we’ll be making submissions with Grandevo, Venerate, and Majestene as we get partners.

[Sameer Joshi:]

And you will actually see sales from these deferred in 2016?

[Pam Marrone:]

I can’t speculate on the timeframe from when we get registration to when we have sales, because of the seasonality of the crop. Sometimes registration comes when it’s not -- when the crop is in the ground. So, I really can’t speculate on that.

[Sameer Joshi:]

One last question for me. I know that most of your litigation and the counting related expenses are behind you. But you also mentioned that there could be some ongoing litigation related expenses and would you just clarify that and what level should we expect by the Q1 or Q2 going forward 2016?

[Jim Boyd:]

Yes. It’s really impossible to say, what possibly expenses could be associated with any litigation related activities.

[Sameer Joshi:]

Okay. But the SEC settlement is behind you and there is no other…

[Jim Boyd:]

We paid the SEC settlement amount in Q1 of 2016. And pretty much everything with regards to the restatement and the investigation, the internal investigation and the SEC investigations have been wrapped up.

[Operator:]

Thank you. It appears there are no further questions at this time. I would like to turn the conference back to management for any additional or closing remarks.

[Pam Marrone:]

This is Pam again. Thank you everyone for your questions. We continue to see a tremendous opportunity ahead of us. As I have previously discussed, we are focused on several operational objectives that we believe would best position us for growth including row crop distribution partnership, seed treatment distribution partnership, international distribution agreement, Zequanox partnerships, Majestene adoption and expansion, registration and launch of Grandevo WDD [ph] formulation. I’ll end on a perspective of where MBI is positioned in the industry. We believe we are witnessing a time I’ve dreamed of, where biologicals are the tipping point to becoming mainstream. Private investment into new startups and large company initiatives in biologicals are largely focused on biostimulants via living microorganism. This area has lower barriers to entry including easier discovery and development and regulatory processes relative to regulated biopesticides. We think MBI has a unique strategy to approach the marketplace. With products based on natural product chemistries, we have developed a broad portfolio of unique proprietary biopesticides across the wide spectrum of customer need. Our products are designed to have a dual purpose to control pest in plant diseases, while we also promotion plant health and increasing yield. By comparison, what we do at MBI is actually very hard and more proprietary. I would like to thank you again for your support and continued attention and interest in Marrone Bio Innovations. Thank you.

[Operator:]

That concludes today’s conference and thank you for your participation.