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MBII > SEC Filings for MBII > Form 10-Q on 8-Nov-2013All Recent SEC Filings

Show all filings for MARRONE BIO INNOVATIONS INC | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for MARRONE BIO INNOVATIONS INC


8-Nov-2013

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read together with our condensed consolidated financial statements and the notes to those statements included elsewhere in this Quarterly Report on Form 10-Q, the Consolidated Financial Statements and Notes thereto for the year ended December 31, 2012, and with management's discussion and analysis of our financial condition and results of operations included in our prospectus filed pursuant to Rule 424(b) under the Securities Act with the Securities and Exchange Commission on August 2, 2013.

This Quarterly Report on Form 10-Q, including this Management's Discussion and Analysis of Financial Condition and Results of Operations, contains forward-looking statements that involve risks and uncertainties. In some cases, you can identify forward-looking statements by terminology such as "believe," "may," "estimate," "continue," "anticipate," "intend," "should," "plan," "expect," "predict," "potential," and similar words and phrases, including the negative of these terms or other similar expressions, that denote future events. The statements we make regarding the following subject matters are forward-looking by their nature:

our plans to target our existing products for new markets and for new uses and applications;

our plans with respect to growth in sales of new product lines, including Grandevo and Zequanox;

our ability and plans to screen, source, in-license develop, register and commercialize additional new product candidates and bring new products to market across multiple categories faster and at a lower cost than other developers of pest management products, and in particular products that are allowed for use by organic farmers;

our expectations regarding registering new products and new formulations and expanded use labels for existing products, including submitting new products to the EPA;

our belief that challenges facing the use of conventional chemical pesticides will continue to grow;

our beliefs regarding the growth of markets for, and unmet demand for, biopesticides, and in particular, our beliefs that the current trends will continue and that Zequanox presents a unique opportunity for generating long term revenue;

our beliefs regarding market adoption for our products;

our intention to maintain existing and develop new, supply, sales and distribution channels and extend market access;

our anticipation that we will receive future payments under our strategic collaboration and development agreements for the achievement of testing validation, regulatory progress and commercialization events;

our plans regarding repurposing and expanding capacity at our manufacturing facility;

our plans to collaborate with chemical manufacturers to develop products that combine our bio-based pest management solutions with their technologies;

our plans to grow our business and expand operations, including plans to hire additional qualified personnel and expectations that we will generate a significant portion of our revenues from international sales of our products and that our revenues stream will be increasingly diversified;

our intention to continue to devote significant resources toward our proprietary technology and research and development and the potential for pursuing acquisition and collaboration opportunities to gain access to third-party products and technologies;

our expectations that sales will be seasonal and the impact of continued drought conditions;

our ability to protect our intellectual property in the United States and abroad;

our expectations regarding market risk, including interest rate changes, foreign currency fluctuations and commodity price changes;

our belief in the sufficiency of our cash flows to meet our needs for 24 months; and

our future financial and operating results.

The preceding list is not intended to be an exhaustive list of all of our forward-looking statements. The forward-looking statements are based on our beliefs, assumptions and expectations of future performance, taking into account the information currently available to us. These statements are only predictions based upon our current expectations and projections about future events. There are important factors that could cause our actual results, level of activity, performance or achievements to differ materially from the results, level of activity, performance or achievements expressed or implied in any forward-looking statements included in this Form 10-Q.


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Our actual results could differ materially from those anticipated in the forward-looking statements as a result of various factors, including, but not limited to those discussed below and the risks described under Item 1A of Part II - "Risk Factors," Item 2 of Part I - "Management's Discussion and Analysis of Financial Condition and Results of Operations," included elsewhere in this Quarterly Report on Form 10-Q and those discussed in other documents we file with the SEC. We make these forward-looking statements based upon information available on the date of this Form 10-Q, and we have no obligation (and expressly disclaim any such obligation) to update or alter any forward-looking statements, whether as a result of new information or otherwise except as otherwise required by securities regulations.

Overview

We make bio-based pest management and plant health products. Bio-based products are comprised of naturally occurring microorganisms such as bacteria and fungi, and plant extracts. We target the major markets that use conventional chemical pesticides, including agricultural and water markets, where our bio-based products are used as substitutes for, or in conjunction with, conventional chemical pesticides. We also target new markets for which there are no available conventional chemical pesticides, the use of conventional chemical pesticides may not be desirable or permissible because of health and environmental concerns or the development of pest resistance has reduced the efficacy of conventional chemical pesticides. Our current portfolio of EPA-approved and registered "biopesticide" products and our pipeline address the growing global demand for effective, efficient and environmentally responsible products.

Our goal is to provide growers with solutions to a broad range of pest management needs by adding new products to our product portfolio, continuing to broaden the commercial applications of our existing product lines, leveraging relationships with existing distributors and growers' positive experiences with existing product lines, and educating growers with on-farm product demonstrations and controlled product launches with key target customers and other early adopters. We believe this approach enables us to stay ahead of our competition in providing innovative pest management solutions, enhances our sales process at the distributor level and helps us to capture additional value from our products.

The agricultural industry is increasingly dependent on effective and sustainable pest management practices to maximize yields and quality in a world of increased demand for agricultural products, rising consumer awareness of food production processes and finite land and water resources. In addition, our research has shown that the global market for biopesticides is growing substantially faster than the overall market for pesticides. This demand is in part a result of conventional growers acknowledging that there are tangible benefits to adopting natural pest management products into integrated pest management (IPM) programs. We believe that our competitive strengths, including our commercially available products, robust pipeline of novel product candidates, proprietary technology and product development process, commercial relationships and industry experience, position us for rapid growth by providing solutions for these global trends.

We currently offer three product lines for commercial sale: Regalia, an initial formulation of which we began selling in the fourth quarter of 2008, Grandevo, an initial formulation of which we began selling in the fourth quarter of 2011, and Zequanox, an initial formulation of which we began selling in the second half of 2012. We have one product candidate, Opportune, an herbicide (for weed control), which received EPA approval in April 2012, that we are in the process of developing for commercial application. In addition, we submitted Venerate, an insecticide (for insect and mite control), and MBI-011, another herbicide to the EPA for registration. A large portion of our sales are currently attributable to conventional growers who use our natural pest management products either to replace conventional chemical pesticides or enhance the efficacy of their IPM programs. In addition, a portion of our sales are attributable to organic farmers, who cannot use conventional pesticides and have few alternatives for pest management. We intend to continue to develop and commercialize natural pest management and plant health products that are allowed for use by organic farmers.

We sell our crop protection products to leading agrichemical distributors while also working directly with growers to increase existing and generate new product demand. To date, we have marketed our bio-based pest management and plant health products for agricultural applications to U.S. growers, through distributors and our own sales force, and we have focused primarily on high value specialty crops such as grapes, citrus, tomatoes, leafy greens and ornamental plants. As we continue to demonstrate the efficacy of our bio-based pest management and plant health products on new crops or for new applications, we may either continue to sell our product through our in-house sales force or collaborate with third parties for distribution to select markets. For example, we anticipate that there may be a significant opportunity for selling Regalia as a yield enhancer for large-acre row crop markets such as corn, cotton and soybeans, and we have engaged third-party distributors for these sales.

We have historically sold the significant majority of our products in the United States, although we have strategically launched Regalia in select international markets. For example, we launched Regalia in the United Kingdom in 2009, Turkey in 2010, Mexico in 2011 and Canada in 2012. We are continuing to form strategic collaborations with major agrichemical companies such as FMC (for markets in Latin America) and Syngenta (for markets in Africa, Europe and the Middle East) to accelerate our entry into certain international markets where these distributors are already selling Regalia, as well as in Asia Pacific markets. In addition to engaging


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these large-scale international distributors, we intend to form new strategic collaborations with other market-leading companies in our target markets and regions to expand the supply of our products globally, particularly in markets for which our products fall under exemptions from registration. In the longer term, when we launch Grandevo and other products internationally, we expect to generate a significant portion of our revenues from international sales of our products.

We currently market our water treatment product, Zequanox, through our sales and technical workforce to hydroelectric power generation companies, combustion power generation companies and industrial facilities at various geographical sites. We are also in discussions with several potential leaders in water treatment technology and applications regarding potential arrangements to sell Zequanox in the United States and international markets to supplement the efforts of our sales force. We intend to enter into distribution arrangements with third parties to market Zequanox internationally. We may enter into similar arrangements for the distribution of Zequanox for use in certain applications such as treatment of lakes, aqueducts and drinking water facilities in the United States. We believe that Zequanox presents a unique opportunity for generating long-term revenue, as there are limited water treatment options available to date, most of which are time-consuming, costly or subject to high levels of regulation.

Our biopesticide products cannot be sold in the United States except under an EPA-approved use label. As such, we launch early formulations of our products to targeted customers under EPA-approved use labels, which list a limited number of crops and applications, to gather field data, gain product knowledge and get feedback to our research and development team while the EPA reviews new product formulations and expanded use labels for already approved formulations covering additional crops and applications. Based on these initial product launches, sales and demonstrations in additional regions and other tests and trials, we continue to enhance our products and submit product formulations and expanded use labels to the EPA and other regulatory agencies. For example, we began sales of Regalia SC, an earlier formulation of Regalia, in the Florida fresh tomatoes market in 2008, while a more effective formulation of Regalia with an expanded use label, including listing for use in organic farming, was under review by the EPA. When approved, we launched this new formulation into the Southeast United States in 2009 and nationally in 2010. In 2011, we received EPA approval of a newly expanded Regalia label covering hundreds of crops and various new uses for applications to soil and through irrigation systems. Likewise, in May 2013, we received approval for an improved Grandevo label, and have submitted the revised label for individual U.S. state approval.

Our total revenues were $8.6 million and $4.2 million for the nine months ended September 30, 2013 and 2012, respectively, and $1.3 million and $0.7 million for the three months ended September 30, 2013 and 2012, respectively, and have risen as growers have increasingly adopted our products. We generate our revenues primarily from product sales, which historically were principally attributable to sales of Regalia and are now increasingly attributable to Grandevo. Since 2011, we have also recognized revenues from our strategic collaboration and distribution agreements, which amounted to $0.2 million for each of the nine months ended September 30, 2013 and 2012 and $0.1 million for each of the three months ended September 30, 2013 and 2012.

We currently sell our crop protection products through the same leading agricultural distributors used by the major agrichemical companies. Distributors with 10% or more of the Company's total revenues consist of the following:

                                Customer         Customer         Customer         Customer         Customer         Customer
                                   A                B                C                D                E                F
For the three months ended
September 30,
2013                                   18 %             17 %              *                *                *               10 %
2012                                   35 %              *               16 %             13 %              *               12 %
For the nine months ended
September 30,
2013                                   39 %              *                *                *                *                *
2012                                   36 %              *               14 %              *               11 %              *

* Represents less than 10% of total revenues

While we expect product sales to a limited number of distributors to continue to be our primary source of revenues, as we continue to develop our pipeline and introduce new products to the marketplace, we anticipate that our revenues stream will be diversified over a broader product portfolio and customer base.

Our cost of product revenues was $6.3 million and $2.1 million in the nine months ended September 30, 2013 and 2012, respectively, and $1.1 million and $0.5 million in the three months ended September 30, 2013 and 2012, respectively. Cost of product revenues consists principally of the cost of raw materials, including inventory costs and third-party services related to procuring, processing, formulating, packaging and shipping our products. We expect our cost of product revenues to increase as we expand sales of Regalia, Grandevo and Zequanox.


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Our research and development expenses have historically comprised a significant portion of our operating expenses, amounting to $11.7 million and $8.5 million in the nine months ended September 30, 2013 and 2012, respectively, and $4.5 million and $3.4 million in the three months ended September 30, 2013 and 2012, respectively. We intend to continue to devote significant resources toward our proprietary technology and adding to our pipeline of natural pest management and plant health products using our proprietary discovery process, sourcing and commercialization expertise and rapid and efficient development process.

Selling, general and administrative expenses incurred to establish and build our market presence and business infrastructure have generally comprised the remainder of our operating expenses, amounting to $10.4 million and $7.1 million in the nine months ended September 30, 2013 and 2012, respectively, and $4.5 million and $2.6 million in the three months ended September 30, 2013 and 2012, respectively. We expect that in the future, our selling, general and administrative expenses will increase due to our expanded product portfolio and due to additional costs incurred relating to being a public company.

Historically, we have funded our operations from the issuance of shares of common stock, preferred stock, warrants and convertible notes, the issuance of debt and entry into financing arrangements, product sales, payments under strategic collaboration and distribution agreements and government grants, but we have experienced significant losses as we invested heavily in research and development. We expect to incur additional losses related to our investment in the continued development, expansion and marketing of our product portfolio.

In August 2013, we closed an initial public offering of 5,462,500 shares of our common stock (inclusive of 712,500 shares of common stock sold upon the exercise of the underwriters' option to purchase additional shares) (the "IPO"). The public offering price of the shares sold in the offering was $12.00 per share. Our total gross proceeds from the offering were $65.6 million, and after deducting underwriting discounts and commissions and offering expenses payable by the Company, the aggregate net proceeds that we received totaled approximately $56.1 million. Upon the closing of the IPO, all shares of our outstanding convertible preferred stock and convertible notes automatically converted into shares of common stock and outstanding warrants to purchase convertible preferred stock and certain warrants to purchase common stock were exercised into shares of common stock.

Critical Accounting Policies and Estimates

Our condensed consolidated financial statements and the related notes included elsewhere in this Quarterly Report on Form 10-Q are prepared in accordance with accounting principles generally accepted in the United States. The preparation of these condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, net revenue, costs, and expenses, and any related disclosures. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Changes in accounting estimates are reasonably likely to occur from period to period. Accordingly, actual results could differ significantly from the estimates made by our management. We evaluate our estimates and assumptions on an ongoing basis. To the extent that there are material differences between these estimates and our actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected.

We believe that the assumptions and estimates associated with revenue recognition, income taxes, inventory valuation, share-based compensation, and financial instruments with characteristics of both liabilities and equity have the greatest potential impact on our condensed consolidated financial statements. Therefore, we consider these to be our critical accounting policies and estimates.

There have been no material changes to our critical accounting policies and estimates as compared to the critical accounting policies and estimates described in our Prospectus filed pursuant to Rule 424(b) under the Securities Act of 1933 with the Securities and Exchange Commission on August 2, 2013 (our "Prospectus").

Key Components of Our Results of Operations

Product Revenues

Product revenues consist of revenues generated from sales to distributors and from sales of our products to direct customers, net of rebates and cash discounts. Our product revenues historically were primarily derived from sales of Regalia, but now are increasingly attributable to Grandevo. We elected to discontinue marketing GreenMatch, our first product, an organic herbicide in 2011 to focus on more attractive opportunities and products. We sold our remaining inventory of GreenMatch to a limited number of existing customers and terminated such sales upon the exhaustion of product inventory in July 2012. Product revenues in the United States constituted 86% and 79% of our total revenues during the nine months ended September 30, 2013 and 2012, respectively, and 67% and 85% during the three months ended September 30, 2013 and 2012, respectively. Product revenues constituted 97% and 95% of our total revenues during the nine months ended September 30, 2013 and 2012, respectively, and 94% and 90% of our total revenues during the three months ended September 30, 2013 and 2012, respectively.


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In 2013, we began to offer terms in excess of terms historically offered to our customers. We believe our competitors and other vendors in the pest management and plant health industry also offer extended payment terms and, in the aggregate, we believe that by expanding the use of extended payment terms, we have provided a competitive response to the market. When we offer terms that are considered to be extended in comparison to our historical terms, we defer recognizing revenue until payment is due. As of September 30, 2013, we recorded current deferred product revenues of $0.8 million. As of December 31, 2012, we had no deferred product revenues.

License Revenues

License revenues generally consist of revenues recognized under our strategic collaboration and distribution agreements for exclusive distribution rights, either for Regalia or for our broader pipeline of products, for certain geographic markets or for market segments that we are not addressing directly through our internal sales force. Our strategic collaboration and distribution agreements generally outline overall business plans and include payments we receive at signing and for the achievement of testing validation, regulatory progress and commercialization events. As these activities and payments are associated with exclusive rights that we provide over the term of the strategic collaboration and distribution agreements, revenues related to the payments received are deferred and recognized as revenues over the term of the exclusive period of the respective agreements, which we estimate to be between 5 and 17 years based on the terms of the contract and the covered products and regions. For the nine months ended September 30, 2013 and 2012, license revenues constituted 3%, and 5% of total revenues, respectively. For the three months ended September 30, 2013 and 2012, license revenues constituted 6% and 10% of total revenues, respectively. As of September 30, 2013, we had received an aggregate of $2.4 million in payments under these agreements, and there were up to $4.9 million in payments under these agreements that we could potentially receive if the testing validation, regulatory progress and commercialization events occur.

Cost of Product Revenues and Gross Profit

Cost of product revenues consists principally of the cost of raw materials, including inventory costs and third-party services related to procuring, processing, formulating, packaging and shipping our products. Cost of product revenues also may include charges due to inventory adjustments. Gross profit is the difference between total revenues and the cost of product revenues. Gross margin is the gross profit as expressed as a percentage of total revenues.

We have entered into in-license technology agreements with respect to the use and commercialization of our three commercially available product lines, including Regalia, Grandevo and Zequanox, and certain products under development. Under these licensing arrangements, we typically make royalty payments based on net product revenues, with royalty rates varying by product and ranging between 2% and 5% of net sales, subject in certain cases to aggregate dollar caps. These royalty payments are included in cost of product revenues, but they have historically not been significant. In addition, costs associated with license revenues have been included in cost of product revenues, as they have not been significant. The exclusivity and royalty provisions of these agreements are generally tied to the expiration of underlying patents. The in-licensed patents for Regalia and Zequanox will expire in 2017 and the in-licensed currently issued U.S. patent for Grandevo is expected to expire in 2024. There is, however, a pending in-licensed patent application relating to Grandevo which could expire later than 2024. After the termination of these provisions, we may continue to produce and sell these products. Additionally, as of September 30, 2013, we have 8 issued U.S. patents and 13 issued foreign patents (of which 5 U.S. patents and 10 foreign patents were in-licensed), 33 pending U.S. provisional and non-provisional patent applications (of which 2 were in-licensed), and over 200 pending foreign patent applications (of which 6 were in-licensed) relating to microorganisms and natural product compounds, uses and related technologies associated with our commercially available product lines and other products under development. Our patents relating to Regalia, Grandevo, and Zequanox expire between 2017 and 2024. In addition, we have 12 U.S. patent applications that we filed relating to Regalia, Zequanox and Grandevo, which could expire in 2030 or later. While third parties thereafter may develop products using the technology under expired patents, we do not believe that they can produce competitive products without infringing other aspects of our proprietary technology, and we therefore do not expect the expiration of the patents or the related exclusivity obligations to have a significant adverse financial or operational impact on our business.

We expect to see increases in gross profit over the life cycle of each of our products because gross margins are expected be increased over time as production processes improve and gain efficiencies and we increase product yields. While we expect margins to improve on a product-by-product basis, our overall gross margins may vary from time to time as we introduce new products. In particular, we are experiencing and expect further near-term declines in overall gross margins as we expand sales of Grandevo and Zequanox and if we introduce Opportune, our EPA-approved bioherbicide. Gross profit has been and will . . .

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