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MBII Marrone Bio Innovations

Filed: 13 May 21, 5:15pm

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

FORM 10-Q

 

 

 

(Mark One)

 

[X]Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended March 31, 2021

 

Or

 

[  ]Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the transition period from            to           

 

Commission File Number: 001-36030

 

 

 

Marrone Bio Innovations, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware 20-5137161

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

1540 Drew Avenue, Davis, CA 95618

(Address of principal executive offices and zip code)

 

(530) 750-2800

(Registrant’s telephone number, including area code)

 

 

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class Trading Symbol(s) Name of each exchange on which registered
Common Stock, $0.00001 par value MBII Nasdaq Capital Market

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [  ]

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes [X] No [  ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an Emerging Growth Company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “Emerging Growth Company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer[  ]Accelerated filer[  ]
Non-accelerated filer[X]Smaller reporting company[X]
Emerging growth Company[  ]  

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [  ]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [  ] No [X]

 

Class Shares Outstanding at May 7, 2021
Common Stock, $0.00001 par value 175,307,333

 

 

 

 
 

 

TABLE OF CONTENTS

 

 PAGE
PART I. FINANCIAL INFORMATION 
Item 1. Financial Statements (Unaudited)3
Condensed Consolidated Balance Sheets as of March 31, 2021 (Unaudited) and December 31, 20203
Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2021 and 2020 (Unaudited)4
Condensed Consolidated Statements of Stockholders’ Equity for the Three Months Ended March 31, 2021 and 2020 (Unaudited)5
Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2021 and 2020 (Unaudited)6
Notes to Condensed Consolidated Financial Statements7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations20
Item 3. Quantitative and Qualitative Disclosures About Market Risk29
Item 4. Controls and Procedures30
PART II. OTHER INFORMATION 
Item 1. Legal Proceedings31
Item 1A. Risk Factors31
Item 6. Exhibits31
SIGNATURES32

 

2
 

 

PART I. FINANCIAL INFORMATION

 

ITEM 1.FINANCIAL STATEMENTS (UNAUDITED)

 

MARRONE BIO INNOVATIONS, INC.

Condensed Consolidated Balance Sheets

(In Thousands, Except Par Value)

 

  MARCH 31,  DECEMBER 31, 
  2021  2020 
  (Unaudited)    
Assets        
Current assets:        
Cash and cash equivalents $18,923  $15,841 
Accounts receivable  13,533   10,113 
Inventories  6,414   6,618 
Prepaid expenses and other current assets  1,350   1,688 
Total current assets  40,220   34,260 
Property, plant and equipment, net  12,439   12,565 
Right of use assets, net  3,798   3,760 
Intangible assets, net  20,797   21,383 
Goodwill  6,740   6,740 
Restricted cash  1,560   1,560 
Other assets  911   929 
Total assets $86,465  $81,197 
         
Liabilities and stockholders’ equity        
Current liabilities:        
Accounts payable $2,190  $1,895 
Accrued liabilities  10,155   11,650 
Deferred revenue, current portion  439   374 
Lease liability, current portion  1,164   1,008 
Debt, current portion, net  12,085   9,301 
Total current liabilities  26,033   24,228 
Deferred revenue, less current portion  1,528   1,628 
Lease liability, less current portion  2,922   3,050 
Debt, less current portion, net  11,380   11,479 
Debt due to related parties  7,300   7,300 
Other liabilities  1,950   2,102 
Total liabilities  51,113   49,787 
Commitments and contingencies        
Stockholders’ equity:        
Preferred stock: $0.00001 par value; 20,000 shares authorized and no shares issued or outstanding at March 31, 2021 and December 31, 2020  -   - 
Common stock: $0.00001 par value; 250,000 shares authorized, 175,274 and 167,478 shares issued and outstanding as of March 31, 2021 and December 31, 2020, respectively  1   1 
Additional paid in capital  379,429   372,226 
Accumulated deficit  (344,078)  (340,817)
Total stockholders’ equity  35,352   31,410 
Total liabilities and stockholders’ equity $86,465  $81,197 

 

See accompanying notes.

 

3
 

 

MARRONE BIO INNOVATIONS, INC.

Condensed Consolidated Statements of Operations

(In Thousands, Except Per Share Amounts)

(Unaudited)

 

  THREE MONTHS ENDED
MARCH 31,
 
  2021  2020 
Revenues:        
Product $10,904  $9,535 
License  134   115 
Total revenues  11,038   9,650 
Cost of product revenues  4,069   4,081 
Gross profit  6,969   5,569 
Operating Expenses:        
Research, development and patent  2,512   3,234 
Selling, general and administrative  7,483   7,993 
Total operating expenses  9,995   11,227 
Loss from operations  (3,026)  (5,658)
Other income (expense):        
Interest expense  (393)  (337)
Loss on issuance of new warrants     (1,391)
Change in fair value of contingent consideration  134   237 
Other income, net  65   159 
Total other expense, net  (194)  (1,332)
Net loss before Income Taxes  (3,220)  (6,990)
Income Tax Expense  (41)  (34)
Net Loss $(3,261) $(7,024)
Basic and diluted net loss per common share: $(0.02) $(0.05)
Weighted-average shares outstanding used in computing basic and diluted net loss per common share:  168,938   141,572 

 

See accompanying notes.

 

4
 

 

MARRONE BIO INNOVATIONS, INC.

Condensed Consolidated Statements of Stockholder’s Equity

For the Three Months Ended March 31, 2021 and 2020

(In Thousands)

(Unaudited)

 

        ADDITIONAL     TOTAL 
  COMMON STOCK  PAID IN  ACCUMULATED  STOCKHOLDERS’ 
  SHARES  AMOUNT  CAPITAL  DEFICIT  EQUITY 
Balance at January 1, 2021  167,478  $1   372,226  $(340,817) $31,410 
Net loss           (3,261)  (3,261)
Net settlement of options  21      27      27 
Share-based compensation        915      915 
Employee stock purchase plan        86      86 
Settlement of restricted stock units  88             
Exercise of warrants  7,687      6,175      6,175 
Balance at March 31, 2021  175,274  $1  $379,429  $(344,078) $35,352

 

 

 

     ADDITIONAL     TOTAL 
  COMMON STOCK  PAID IN  ACCUMULATED  STOCKHOLDERS’ 
  SHARES  AMOUNT  CAPITAL  DEFICIT  EQUITY 
Balance at January 1, 2020  139,526  $1  $344,206  $(320,649) $23,558 
Net loss           (7,024)  (7,024)
Net settlement of options  15      12      12 
Share-based compensation        907      907 
Employee stock purchase plan        84      84 
Financing costs        (64)     (64)
Issuance of common stock in connection with call to exercise warrants  6,000      6,000      6,000 
Issuance of new warrants in connection with call to exercise warrants        1,391      1,391 
Balance at March 31, 2020  145,541  $1  $352,536  $(327,673) $24,864 

 

See accompanying notes

 

5
 

 

MARRONE BIO INNOVATIONS, INC.

Condensed Consolidated Statements of Cash Flows

(In Thousands)

(Unaudited)

 

  THREE MONTHS ENDED MARCH 31, 
  2021  2020 
Cash flows from operating activities        
Net loss $(3,261) $(7,024)
Adjustments to reconcile net loss to net cash used in operating activities:        
Depreciation and amortization  874   891 
Gain on disposal of equipment     (9)
Change in inventory reserves  (75)  72 
Right of use assets amortization  215   206 
Share-based compensation  915   907 
Non-cash interest expense  48   61 
Loss on issuance of new warrants     1,391 
Change in fair value of contingent consideration  (134)  (237)
Net changes in operating assets and liabilities:        
Accounts receivable  (3,420)  (4,492)
Inventories  279   1,000 
Prepaid Expenses and other assets  356   (281)
Accounts payable  252   3,068 
Accrued and other liabilities  (763)  (1,500)
Lease Liability  (225)  (208)
Deferred revenue  (78)  (137)
Net cash used in operating activities  (5,017)  (6,292)
Cash flows from investing activities        
Payment of consideration in connection with previous asset purchase  (750)  (540)
Purchases of property, plant and equipment  (119)  (135)
Proceeds from sale of equipment     2 
Net cash used in investing activities  (869)  (673)
Cash flows from financing activities        
Proceeds from secured borrowings  11,504   11,319 
Repayment in secured borrowings  (8,725)  (6,322)
Repayment of debt  (99)  (196)
Equity offering costs     (64)
Net settlement of options  27   12 
Proceeds from employee stock purchase plan  86   84 
Exercise of warrants  6,175   6,000 
Net cash provided by financing activities  8,968   10,833 
Net increase in cash and cash equivalents and restricted cash  3,082   3,868 
Cash and cash equivalents and restricted cash, beginning of period  17,401   7,812 
Cash and cash equivalents and restricted cash, end of period $20,483  $11,680 
         
Supplemental disclosure of cash flow information        
Cash paid for interest $339  $269 
Supplemental disclosure of non-cash investing and financing activities        
Property, plant and equipment included in accounts payable and accrued liabilities $43  $93 
Right of use assets (non-cash) acquired $253  $ 

 

See accompanying notes.

 

6
 

 

MARRONE BIO INNOVATIONS, INC.

 

Notes to Condensed Consolidated Financial Statements

March 31, 2021

(Unaudited)

 

1. Summary of Business, Basis of Presentation

 

Marrone Bio Innovations, Inc. (the “Company”), was incorporated under the laws of the State of Delaware on June 15, 2006, and is located in Davis, California. In July 2012, the Company formed a wholly-owned subsidiary, Marrone Michigan Manufacturing LLC (“MMM LLC”), which holds the assets of a manufacturing plant the Company purchased in July 2012. In September 2019 the Company closed its acquisition of Pro Farm Technologies OY, a Finnish limited company, which consisted of Pro Farm Technologies OY and its five subsidiaries Pro Farm International Oy (Finland), Pro Farm OU (Estonia), Pro Farm Technologies Comercio de Insumos Agricolas do Brasil ltda. (Brazil – 99% controlling interest), Pro Farm Inc. (Delaware), and Glinatur SA (Uruguay) (collectively “Pro Farm”). As a result of the acquisition, Pro Farm became a wholly-owned subsidiary of the Company. In December 2019, the Company created its subsidiary Pro Farm Russia, LLC (Russia). The condensed consolidated financial statements include the accounts of the Company and its wholly-owned and substantially owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

 

The accompanying condensed consolidated financial information as of March 31, 2021, and for the three months ended March 31, 2021 and 2020, has been prepared by the Company, without audit, in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Certain information and note disclosures normally included in annual financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such SEC rules and regulations and accounting principles applicable for interim periods. However, the Company believes that the disclosures are adequate to make the information presented not misleading. The information included in this Quarterly Report on Form 10-Q should be read in connection with the consolidated financial statements and accompanying notes included in the Company’s Annual Report filed on Form 10-K for the fiscal year ended December 31, 2020.

 

In the opinion of management, the condensed consolidated financial statements as of March 31, 2021, and for the three months ended March 31, 2021 and 2020, reflect all adjustments, which are normal recurring adjustments, necessary to present a fair statement of financial position, results of operations and cash flows. The results of operations for the three months ended March 31, 2021 are not necessarily indicative of the operating results for the full fiscal year or any future periods.

 

The Company is a growth-oriented agricultural company that supports environmentally sustainable farming practices through the discovery, development and sale of innovative biological products for crop protection, crop health and crop nutrition. The Company’s products are sold through distributors and other commercial partners to growers around the world for use in integrated pest management systems that improve efficacy and increase yields while protecting the environment. The Company’s products are often used in conjunction with or as an alternative to other agricultural solutions to control pests and enhance plant nutrition and health.

 

The Company’s portfolio of 15 products helps customers operate more sustainably while increasing their return on investment. The Company’s products are used globally and can be applied as foliar treatments or as seed-and-soil treatments, either on their own or in combination with other agricultural products. The Company targets the major markets that use conventional chemical pesticides and fertilizers where the Company’s biological products are used as alternatives or mixed with, conventional chemical products. The Company also targets new markets for which there are no available conventional chemical products or for which the use of conventional chemical products may not be desirable (including for organically certified crops) or permissible, either because of health and environmental concerns or because the development of pest resistance has reduced the efficacy of conventional chemical pesticides. The Company sell its products through distributors and other commercial partners to growers who use the Company’s bioprotection products to manage pests and plant diseases, the Company’s plant health products to reduce crop stress and both the Company’s plant health and bionutrition products to increase yields and quality.

 

7
 

 

Liquidity

 

The Company funds operations primarily with the proceeds from the sale of its products, promissory notes and term loans, and net proceeds from issuance and exercise of equity instruments. The Company will need to generate significant revenue growth to achieve and maintain profitability. As of March 31, 2021, the Company had a working capital surplus of $14,187,000, including cash and cash equivalents of $18,923,000. In addition, as of March 31, 2021, the Company had debt and debt due to related parties of $23,465,000 and $7,300,000, respectively, for which the underlying debt agreements contain various financial and non-financial covenants, as well as certain material adverse change clauses. As of March 31, 2021, the Company had a total of $1,560,000 of restricted cash relating to these debt agreements. (Refer to Notes 6 of these condensed consolidated financial statements)

 

In April 2020, the Company entered into a Warrant Exchange Agreement (the “Warrant Exchange Agreement”) with a group of historical investors (the “Investors”) pursuant to which the Company issued new warrants to the Investors (“April 2020 Warrants”) in exchange for cancellation of all of their outstanding warrants. The April 2020 Warrants all have an exercise price of $0.75 per share, and expire in five tranches. As of March 31, 2021 approximately 24,995,000 shares under the April 2020 Warrants were exercised prior to each of the four tranche expiration dates, leaving only the fifth tranche with an expiration date of December 15, 2021 with respect to 4,885,317 of the April 2020 Warrants remaining. (Refer to Note 7 of these condensed consolidated financial statements).

 

In December 2020, the Company also entered into an amendment (the “Warrant Amendment” to a previously outstanding warrant (the “Amended Warrant”) to purchase 5,333,333 shares of the Company’s common stock issued to a historical warrant holder (the “Amended Warrant Holder”) on February 5, 2018. As of March 31, 2021, 3,555,556 shares under the Amended Warrant were exercised, leaving 1,777,777 of the Amended Warrants remaining with an expiration date of December 15, 2021. (Refer to Note 7 of these condensed consolidated financial statements).

 

There can be no assurance that the Investors or the Amended Warrant Holder will exercise the remaining April 2020 Warrants and the Amended Warrant prior to their respective expiration date. (Refer to Note 7 of these condensed consolidated financial statements).

 

The Company could breach covenants contained within its debt agreements or if the material adverse change clauses are triggered, the entire unpaid principal and interest balances would be due and payable upon demand. Without entering into a continuation of its current waiver, which expires May 31, 2022, entering into strategic agreements that include significant cash payments upfront, significantly increasing revenues from sales or raising additional capital through the issuance of equity, the Company expects it will exceed its maximum debt-to-worth requirement under the June 2014 Secured Promissory Note with Five Star Bank. Further, a violation of a covenant in one debt agreement will cause the Company to be in violation of certain covenants under each of its other debt agreements. Breach of covenants included in the Company’s debt agreements, which could result in the lenders demanding payment of the unpaid principal and interest balances, will have a material adverse effect upon the Company and would likely require the Company to seek to renegotiate these debt arrangements with the lenders. If such negotiations are unsuccessful, the Company may be required to seek protection from creditors through bankruptcy proceedings. The Company’s inability to maintain compliance with its debt covenants could have a negative impact on the Company’s financial condition and ability to continue as a going concern.

 

The Company’s historical operating results, including prior periods of significant losses and negative use of operating cash flows, may indicate probable substantial doubt exists related to the Company’s ability to continue as a going concern for the next 12 months from the date of issuance of these condensed consolidated financial statements. The Company believes that its existing cash and cash equivalents at March 31, 2021, together with expected revenues, cost management, will be sufficient to fund operations as currently planned through one year from the date of the issuance of these condensed consolidated financial statements and therefore has alleviated doubts related to the Company’s ability to continue as a going concern.

 

8
 

 

2. Significant Accounting Policies

 

Use of Estimates

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The Company used significant estimates in accounting for assumptions and estimates associated with revenue recognition, including assumptions and estimates used in determining the timing and amount of revenue to recognize for those transactions with variable considerations, reserves for inventory obsolescence, fair value of stock-based compensation, and forecasted estimates and assumptions related to impairment analysis for long lived assets, intangibles, and goodwill and contingent considerations related to Pro Farm, assumptions and estimates associated with the fair value of warrants and in its going concern analysis.

 

Concentrations of Credit Risks

 

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash, cash equivalents, accounts receivable and debt. The Company deposits its cash and cash equivalents with high credit quality domestic financial institutions with locations in the U.S. and internationally. Such deposits may exceed federal or national deposit insurance limits. The Company believes the financial risks associated with these financial instruments are minimal.

 

The Company’s customer base is dispersed across many different geographic areas, and currently most customers are pest management distributors in the U.S. Generally, receivables are due up to 120 days from the invoice date and are considered past due after this date, although the Company may offer extended terms from time to time. The Company has provided extended payment terms on a case-by-case basis with a certain customer as a result of COVID-19.

 

The Company’s principal sources of revenues are its Regalia, Grandevo, Venerate and UPB-110 ST product lines. These four product lines accounted for 89% of the Company’s total revenues for each of the three months ended March 31, 2021 and 2020.

 

Revenues generated from international customers were 7% and 14% for the three months ended March 31, 2021 and 2020, respectively. For both the three months ended March 31, 2021 and 2020, international customers were primarily concentrated in the European Union.

 

Customers to which 10% or more of the Company’s total revenues are attributable for the three months ended March 31, 2021 and 2020 consist of the following:

 

  CUSTOMER 
MARCH 31, A  B  C  D 
2021  30%  16%  11%  8%
2020  17%  23%  16%  13%

 

Customers to which 10% or more of the Company’s outstanding accounts receivable are attributable as of either March 31, 2021 or December 31, 2020, which may or may not correspond with any of the customers above, consist of the following:

 

  CUSTOMER 
  A  B  C  D 
March 31, 2021  32%  13%  11%  9%
December 31, 2020  2%  49%  14%  14%

 

9
 

 

Concentrations of Supplier Dependence

 

The active ingredient in the Company’s Regalia product line is derived from the giant knotweed plant, which the Company obtains from China. The Company currently relies on one supplier for this plant. Such single supplier acquires raw knotweed from numerous regional sources and performs an extraction process on this plant, creating a dried extract that is shipped to the Company’s manufacturing plant. While the Company does not have a long-term supply contract with this supplier, the Company does have a long-term business relationship with this supplier. The Company endeavors to keep 10 months of knotweed extract on hand at any given time, but an unexpected disruption in supply including disruptions resulting from the COVID-19 pandemic, could have an effect on Regalia supply and revenues. Although the Company has identified additional sources of raw knotweed, there can be no assurance that the Company will continue to be able to obtain dried extract from China at a competitive price.

 

The Company continues to rely on third parties to formulate Grandevo into spray-dried powders, for all of its production of Venerate, Majestene/Zelto, Stargus and Haven, and from time to time, third-party manufacturers for supplemental production capacity to meet excess seasonal demand and for packaging. The Company’s products have been produced in quantities, and on timelines, sufficient to meet commercial demand and for the Company to satisfy its delivery schedules. However, the Company’s dependence upon others for the production of a portion of its products, or for a portion of the manufacturing process, particularly for drying and for all of its production of Venerate, may adversely affect its ability to satisfy demand and meet delivery obligations, as well as to develop and commercialize new products, on a timely and competitive basis. The Company has not entered into any long-term manufacturing or supply agreements for any of its products, and it may need to enter into additional agreements for the commercial development, manufacturing and sale of its products. There can be no assurance that it can do so on favorable terms, if at all.

 

Products produced by the Company’s Pro Farm subsidiary, including UBP and Foramin, are partially sourced by suppliers from a manufacturing plant in Russia, in which the Company owns a 12% interest. The Company plans for enough inventory on hand to fill its revenue forecasts for 12 months at any given time, but an unexpected disruption in supply could have an adverse effect on the supply and revenues related to the subsidiary. Although the Company has identified additional manufacturers who are capable suppling the products, there can be no assurance that the Company will continue to be able to obtain products at a competitive price.

 

Cash and Cash Equivalents

 

The following table provides a reconciliation of cash, cash equivalents and restricted cash to amounts shown in the condensed consolidated statements of cash flows (in thousands):

 

  MARCH 31,  DECEMBER 31, 
  2021  2020 
Cash and cash equivalents $18,923  $15,841 
Restricted cash, less current portion  1,560   1,560 
Total cash, cash equivalents and restricted cash $20,483  $17,401 

 

Restricted Cash

 

The Company’s restricted cash consists of cash that the Company is contractually obligated to maintain in accordance with the terms of its June 2014 Secured Promissory Note. (Refer to Note 6 of these condensed consolidated financial statements.)

 

Intangible Assets

 

The Company evaluates intangible assets for impairment at least annually and more often whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Whenever any such impairment exists, an impairment loss will be recognized for the amount by which the carrying value exceeds the fair value. The Company’s intangible assets include customer relationships, patents, trademarks, and in process research and development acquired in 2019 in connection with its asset acquisition of the Jet-Ag and Jet-Oxide product lines and the Company’s acquisition of Pro Farm.

 

10
 

 

Long-Lived Assets

 

Impairment losses related to long-lived assets are recognized in the event the net carrying value of such assets is not recoverable and exceeds fair value. The Company evaluates the recoverability of its long-lived assets whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. The carrying amount of a long-lived asset (asset group) is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset (asset group). If the carrying amount of a long-lived asset (asset group) is considered not recoverable, the impairment loss is measured as the amount by which the carrying value of the asset or asset group exceeds its estimated fair value.

 

Goodwill

 

Goodwill represents the excess of purchase price over the underlying net assets of businesses acquired. Goodwill is reviewed for impairment on an annual basis as of the first day of the Company’s fiscal fourth quarter or more frequently if events or changes in circumstances indicate that the carrying amount of goodwill may be impaired. The Company’s goodwill was recognized in connection with its acquisition of Pro Farm.

 

Fair Value

 

Accounting Standards Codification (“ASC”) 820, Fair Value Measurements (“ASC 820”), clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability.

 

ASC 820 requires that the valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. ASC 820 establishes a three-tier value hierarchy, which prioritizes inputs that may be used to measure fair value as follows:

 

● Level 1—Quoted prices in active markets for identical assets or liabilities.

 

● Level 2—Observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

 

● Level 3—Inputs that are generally unobservable and typically reflect management’s estimate of assumptions that market participants would use in pricing the asset or liability.

 

Deferred Revenue

 

When the Company receives consideration, or such consideration is unconditionally due, from a customer prior to transferring control of goods or services to the customer under the terms of a sales contract, the Company records deferred revenue, which represents a contract liability. The Company recognizes deferred revenue as net sales after the Company has transferred control of the goods or services to the customer and all revenue recognition criteria are met. The Company’s deferred revenue is broken out as follows (in thousands):

 

  MARCH 31,  DECEMBER 31, 
  2021  2020 
Product revenues $235  $189 
Financing costs  568   581 
License revenues  1,164   1,232 
Total deferred revenues  1,967   2,002 
Less current portion  (439)  (374)
Long term portion $1,528  $1,628 

 

Research, Development and Patent Expenses

 

Research and development expenses include payroll-related expenses, field trial costs, toxicology costs, regulatory costs, consulting costs and lab costs. Patent expenses include legal costs relating to the patents and patent filing costs. These costs are expensed to operations as incurred. For the three months ended March 31, 2021 and 2020, research and development expenses totaled $2,295,000 and $2,880,000, respectively, and patent expenses totaled $217,000 and $354,000, respectively.

 

11
 

 

Shipping and Handling Costs

 

Amounts billed for shipping and handling are included as a component of product revenues. Related costs for shipping and handling have been included as a component of cost of product revenues. Shipping and handling costs for the three months ended March 31, 2021 and 2020 were $345,000 and $302,000, respectively.

 

Advertising

 

The Company expenses advertising costs as incurred and has included these expenses as a component of selling, general and administrative costs. Advertising costs for the three months ended March 31, 2021 and 2020 were $111,000 and $150,000, respectively.

 

Depreciation and Amortization

 

The Company depreciates and amortizes its capitalized property, plant, and equipment and intangible assets over the useful life of each asset utilizing a straight-line method of expensing. All depreciation and amortization expenses are included in the “Selling, general, and administrative” caption in the condensed consolidated statement of operations.

 

For the three months ended March 31, 2021 and 2020, the total amount of depreciation expense was $288,000 and $304,000, respectively. For the three months ended March 31, 2021 and 2020, the total amount of amortization expense was $586,000 and $587,000, respectively.

 

Segment Information

 

The Company is organized as a single operating segment, whereby its chief operating decision maker assesses the performance of and allocates resources to the business as a whole.

 

Net Loss Per Share

 

Net loss per share is computed by dividing the net loss by the weighted average number of common shares outstanding for the period. The calculation of basic and diluted net loss per share is the same for all periods presented as the effect of certain potential common stock equivalents, which consist of stock options and warrants to purchase common stock and restricted stock units, and contingent shares to be issued in the future are anti-dilutive due to the Company’s net loss position. Anti-dilutive common stock equivalents are excluded from diluted net loss per share. The following table sets forth the potential shares of common stock as of the end of each period presented that are not included in the calculation of diluted net loss per share because to do so would be anti-dilutive (in thousands):

 

  MARCH 31,  MARCH 31, 
  2021  2020 
Stock options outstanding  13,572   11,529 
Warrants to purchase common stock  6,814   52,647 
Restricted stock units outstanding  4,772   2,466 
Common shares to be issued in lieu of agent fees  498   498 
Employee stock purchase plan  84   124 
Maximum contingent consideration shares to be issued  5,972   5,972 
   31,712   73,236 

 

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Recently Issued Accounting Pronouncements

 

In May 2021, the FASB issued Accounting Standards Update No. 2021-04, “Earnings Per Share (Topic 260), Debt-Modifications and Extinguishments (Subtopic 470-50), Compensation – Stock Based Compensation (Topic 718), and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options” (“ASU No. 2021-04”), which clarified an issuer’s accounting for modification or exchanges of freestanding equity-classified written call options that remain equity classified after modification or exchange. The provisions of ASU No. 2021-04 are effective for annual reporting periods beginning after December 15, 2021, and interim reporting periods within those annual periods, with early adoption permitted, including adoption in any interim period for public business entities for periods for which consolidated financial statements have not yet been issued or made available for issuance. This ASU shall be applied on a prospective basis. The Company has not yet determined the impact of implementing this new standard on the condensed consolidated financial statements.

 

3. Inventory

 

Inventories, net consist of the following (in thousands):

 

  MARCH 31,  DECEMBER 31, 
  2021  2020 
Raw materials $2,735  $2,487 
Work in progress  804   987 
Finished goods  2,875   3,144 
  $6,414  $6,618 

 

As of March 31, 2021 and December 31, 2020, the Company had $462,000 and $387,000, respectively, in reserves against its inventories. For the three months ended March 31, 2021 and 2020, the Company recorded an adjustment of $228,000 and $243,000, respectively, as a result of actual utilization of the Company’s manufacturing plant being less than what is considered normal capacity.

 

4. Right-Of-Use of Assets and Lease Liability

 

On March 31, 2021 the Company entered into a lease agreement for approximately 415 square meters of office and laboratory space located in Helsinki, Finland. The initial term of the lease is for a period of 24 months and requires a 6-month notice prior to termination. The minimum monthly rent is €9,462 per month, subject to increase based on the consumer price index increase on January 1 of each fiscal year if applicable.

 

The components of lease expense were as follows for each of the comparative three months ended March 31, 2021 and 2020 (in thousands):

 

  MARCH 31,  MARCH 31, 
  2021  2020 
       
Operating lease cost $290  $285 
Short-term lease cost  41   39 
Sublease income  -   (10)
Total operating lease costs: $331  $314 

 

Maturities of lease liabilities for each future calendar year as of March 31, 2021 are as follows (in thousands):

 

  OPERATING 
  LEASES 
2021 $1,047 
2022  1,380 
2023  1,321 
2024  867 
Total lease payments  4,615 
Less: imputed interest  529 
Total lease obligation  4,086 
Less lease obligation, current portion  1,164 
Lease obligation, non-current portion $2,922 

 

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5. Accrued Liabilities

 

Accrued liabilities consist of the following (in thousands):

 

  MARCH 31,  DECEMBER 31, 
  2021  2020 
Accrued compensation $3,267  $3,495 
Accrued warranty costs  484   475 
Accrued customer incentives  3,224   4,288 
Accrued liabilities, acquisition related  744   1,463 
Accrued liabilities, other  2,436   1,929 
Accrued Liabilities $10,155  $11,650 

 

Contingent Consideration

 

As of March 31, 2021, the contingent consideration in connection with the Company’s acquisition of Pro Farm was recorded at its fair value. The following table provides a reconciliation of the activity for the contingent consideration measured between the most recent reporting period and as of the balance sheet date based on the fair value using significant inputs including the unobservable inputs (Level 3) (in thousands):

 

  CONTINGENT CONSIDERATION
LIABILITY
 
Fair value at December 31, 2020 $2,182 
Change in estimated fair value recorded of contingent consideration  (134)
Fair value at March 31, 2021 $2,048 

 

The change in fair value for the reporting period was driven by the result of the unobservable fair value model, a Monte Carlo simulation in a risk-neutral framework assuming Geometric Browning Motion. The most significant input to the model was the estimated results of the Pro Farm subsidiary for the periods specified in the share purchase agreement of 2021 – 2023. The following represents other inputs used in determining the fair value of the contingent consideration liability:

 

  MARCH 31,  DECEMBER 31, 
  2021  2020 
Discount rate  16.0%  15.5%
Volatility  49.2%  45.8%
Credit spread  8.9%  9.0%
Risk-free rate  0.4%  0.2%

 

Discount Rate. Discount rate is based on an adjusted weighted cost of capital contribution considering an estimated operational leverage ratio and a risk-free rate, each (other than the risk-free rate) determined by publicly traded peer group median.

 

Estimated Volatility Factor. Volatility factor is based on the adjusted weighted cost of capital, operating asset volatility, operating leverage ratio and risk-free interest rate, each (other than the risk-free rate) determined by publicly traded peer group median.

 

Credit Spread. Credit spread based on the Company’s financial ratio in comparison with those of publicly traded peer group.

 

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Interest Rate. Interest rate based on US Constant Maturity Treasury rates for the same period as the period of performance of 2021 to 2023.

 

The change in the fair value estimate is recognized in the Company’s condensed consolidated statement of operations in Other Income (expense) under caption Change in fair value of contingent consideration. The contingent consideration will be determined at each reporting period and will be settled with the issuance of the Company’s common shares. As of March 31, 2021, the Company recorded $719,000 and $1,329,000, respectively, in accrued liabilities and other liabilities in the Company’s condensed consolidated balance sheets.

 

6. Debt

 

Debt, including debt due to related parties, consists of the following (in thousands):

 

  MARCH 31,  DECEMBER 31, 
  2021  2020 
Secured promissory notes (“October 2012 and April 2013 Secured Promissory Notes”) bearing interest at 8.00% per annum, interest and principal due at maturity (December 31, 2022), collateralized by substantially all of the Company’s assets. $3,425  $3,425 
Secured promissory note (“June 2014 Secured Promissory Note”) bearing interest at prime plus 2% (5.25% as of March 31, 2021) per annum, payable monthly through June 2036, collateralized by certain of the Company’s deposit accounts and MMM LLC’s inventories, chattel paper, accounts, equipment and general intangibles, net of unamortized debt discount as of March 31, 2021 and December 31, 2020 of $161 and $166.  8,024   8,106 
Secured revolving borrowing (“LSQ Financing”) bearing interest at (12.80% annually) payable through the lenders direct collection of certain accounts receivable through May 2021, collateralized by substantially all of the Company’s personal property.  11,745   8,966 
Senior secured promissory notes due to related parties (“August 2015
Senior Secured Promissory Notes”) bearing interest at 8% per annum, interest and principal payable at maturity (December 31, 2022), collateralized by Substantially all of the Company’s assets.
  7,300   7,300 
Research loan facility (“2018 Research Facility”) bearing interest at 1.00% per annum, interest payments are due annually on the anniversary date of the facility with principal payable in 25% increments on the anniversary date of the facility beginning on the fourth anniversary of the loan (September 2022), net of imputed interest as of March 31, 2021 and December 31, 2020 of $39K and $41K, respectively.  271   283 
Debt, including debt due to related parties $30,765  $28,080 
Less debt due to related parties, non-current  (7,300)  (7,300)
Less current portion  (12,085)  (9,301)
Debt, non-current $11,380  $11,479 

 

As of March 31, 2021, aggregate contractual future principal payments on the Company’s debt, including debt due to related parties for each calendar year, are due as follows (in thousands):

 

PERIOD ENDING DECEMBER 31, DEBT  DEBT TO RELATED PARTY 
2021 $12,010   - 
2022  2,900   5,000 
2023  471   - 
2024  491   - 
2025  515   - 
Thereafter  6,305   - 
Total future principal payments  22,690   5,000 
Interest payments included in debt balance (1)  975   2,300 
Total future debt payments $23,665   7,300 

 

 (1)Due to the debt extinguishment requirements, the Company has included both accrued interest and future interest in the debt balance for certain outstanding debt.

 

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October 2012 and April 2013 Secured Promissory Notes

 

As of March 31, 2021, there have been no changes to the previously reported total principal amount outstanding under the October 2012 and April 2013 Secured Promissory Note, which continues to be $2,450,000. Due to the historical accounting for the promissory note the amount recorded on the condensed consolidated balance sheet of $3,425,000 includes $975,000 in accrued interest, of which as of March 31, 2021 and 2020, a total of $631,000 and $435,000, respectively, had been incurred.

 

As of March 31, 2021, the Company is in compliance with all financial covenants, or has received an appropriate waiver of these covenants.

 

June 2014 Secured Promissory Note

 

In June 2014, the Company borrowed $10,000,000 pursuant to a business loan agreement and promissory note (“June 2014 Secured Promissory Note”) with Five Star Bank that bears an interest of 5.25% (per annum) as of March 31, 2021. The interest rate is subject to change and is based on the prime rate plus 2.00% per annum. The Company is required to maintain a deposit balance with the Five Star Bank of $1,560,000, which is recorded as restricted cash included in non-current assets.

 

Under this note the Company is required to maintain a current ratio of not less than 1.25-to-1.0, a debt-to-worth ratio of no greater than 4.0-to-1.0 and a loan-to-value ratio of no greater than 70% as determined by Five Star Bank. In the event of default on the debt, Five Star Bank may declare the entire unpaid principal and interest immediately due and payable. As of March 31, 2020, the Company was in compliance with the “loan to value ratio” covenant, the “current ratio”, and the “debt to worth ratio”, however, the Company has obtained a waiver from the lender for any non-compliance through May 31, 2022.

 

The following table reflects the activity under this note (in thousands):

 

  2021  2020 
Principal balance, net at December 31, preceding year $8,106  $8,404 
Principal payments  (196)  (217)
Interest  109   146 
Debt discount amortization  5   5 
Principal balance, net at March 31, $8,024  $8,338 

 

LSQ Financing

 

In January 2020, the Company entered into a Second Amendment to the Company’s Invoice Purchase Agreement with LSQ. The amendment, among other things, (i) increased the amount of eligible customer invoices which LSQ may elect to purchase from the Company to up to $20,000,000 of eligible customer invoices from the Company from $7,000,000; (ii) increased the advance rate to 90% from 85% and 70% from 60%, respectively, of the face value of domestic and international receivables being sold; (iii) decreased the invoice purchase fee rate from 0.40% to 0.25%; (iv) increased the funds usage fee from 0.020% to 0.025%; (v) extended the 0% aging and collection fee percentage charged at the time when the purchased invoice is collected from 90 days to 120 days, and increased the fee percentage charged thereafter from 0.35% to 0.75%; and (vi) decreased the early termination fee from 0.75% to 0.50%.

 

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In addition to the Amendment, the Company simultaneously entered into an Amended Inventory Financing Addendum (the “Addendum”) with LSQ. The Addendum allows the Company to request an advance up to the lesser of (i) 100% of the Company’s unpaid finished goods inventory; (ii) 65% of the appraised value of the Company’s inventory performed on or on behalf of LSQ; or (iii) $3,000,000. Funds advance under the Addendum are subject to a monthly inventory management fee of 0.5% on the average monthly inventory funds available and a daily interest rate of 0.025%.

 

as of March 31, 2021, the Company is in compliance with all financial covenants of the agreement. For the three months ended March 31, 2021 and 2020, the Company recorded interest expense of approximately $232,000 and $124,000, respectively, in connection with the LSQ arrangement. As of March 31, 2021, $10,286,000 was outstanding under the LSQ Financing.

 

7. Warrants

 

On April 29, 2020, the Company entered into a warrant exchange agreement (“Warrant Exchange Agreement”) with certain holders of warrants issued under the August 2015 Senior Secured Promissory Notes, the Securities Purchase Agreement and the Amendment and Plan of Reorganization agreements. Pursuant to the Warrant Exchange Agreement, the Company agreed to exchange an aggregate of 45,977,809 previously outstanding warrants for 29,881,855 new warrants (“April 2020 Warrants”).

 

The April 2020 Warrants have terms expiring (i) for a total of 3,392,581 shares on May 1, 2020, (ii) for a total of 2,714,065 shares on September 15, 2020 (iii) for a total of 13,027,512 shares on December 15, 2020, (iv) for a total of 5,862,380 shares on March 15, 2021 and (v) for a total of 4,885,317 Warrant Shares on December 15, 2021. All April 2020 Warrants have an exercise price of $0.75 per share. As of March 31, 2021, approximately 24,995,000 shares under the April 2020 Warrants were exercised prior to each of the four tranche expiration dates, leaving only the fifth tranche with an expiration date of December 15, 2021 with respect to 4,885,317 of the April 2020 Warrants remaining.

 

In December 2020, the Company also entered into an amendment (the “Warrant Amendment”) to a previously outstanding warrant (the “Amended Warrant”) to purchase 5,333,333 shares of the Company’s common stock issued to a historical warrant holder (the “Amended Warrant Holder”) on February 5, 2018. Pursuant to the Warrant Amendment, in exchange for the Holder’s exercise of the Amended Warrant on December 29, 2020 with respect to 1,777,778 shares at the then-applicable exercise price of $0.96 per share the warrant’s expiration date was partially extended and allows the Amended Warrant Holder to purchase (i) 1,777,778 shares under the Amended Warrant at $1.00 per share by March 25, 2021, and (ii) 1,777,777 shares under the Amended Warrant at $1.04 share by December 15, 2021. As of March 31, 2021, 3,555,556 shares under the April 2020 Warrants were exercised, leaving 1,777,777 of the Amended Warrants remaining with an expiration date of December 15, 2021.

 

The following table summarizes the Company’s common stock warrants outstanding as of March 31, 2021 (in thousands, except exercise price data):

 

              THREE MONTHS    
           SHARES  ENDED  SHARES 
           SUBJECT TO  NUMBER OF  SUBJECT TO 
  ISSUE  EXPIRATION     WARRANTS  WARRNTS  WARRANTS 
  DATE  DATE  EXERCISE  OUTSTANDING  EXERCISED  OUTSANDING 
DESCRIPTION MM/YY  MM/YY  PRICE  12/31/2020  3/31/2021  3/31/2021 
June 2013 Warrants 06/13  06/23  $8.40   27   -   27 
November 2016 Warrants 11/16  11/26  $2.38   125   -   125 
November 2017 Warrants 06/17  06/27  $1.10   80   (80)  - 
April 2020 Warrants, Tranche 4 04/20  03/21  $0.75   5,862   (5,862)  - 
April 2020 Warrants, Tranche 5 04/20  12/21  $0.75   4,885   -   4,885 
December 2020 Warrants, Tranche 2 12/20  03/21  $1.00   1,778   (1,778)  - 
December 2020 Warrants, Tranche 3 12/20  12/21  $1.04   1,777   -   1,777 
         TOTALS:   14,534   (7,720)  6,814 

 

The weighted average remaining contractual life and exercise price for these warrants is 0.81 years and $0.89, respectively.

 

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8. Share-Based Plans

 

As of March 31, 2021, there were options to purchase 13,572,000 shares of common stock outstanding, 4,772,000 restricted stock units outstanding and 9,787,000 share-based awards available for grant under the outstanding equity incentive plans.

 

For the three months ended March 31, 2021 and 2020, the Company recognized share-based compensation of $915,000 and $907,000, respectively.

 

In February 2021, in connection with the appointment of a new chief financial officer, the Company granted 400,000 options to purchase common stock at an exercise price of $2.60 and with a fair value of $567,000 to its new chief financial officer. The Company’s fair value of these grants was estimated utilizing a Black Scholes option pricing model based on assumptions which have determined consistent with the Company’s historical methodology.

 

The following table summarizes the activity of stock options from December 31, 2020 to March 31, 2021 (in thousands, except weighted average exercise price):

 

     WEIGHTED- 
     AVERAGE 
  SHARES  EXERCISE 
  OUTSTANDING  PRICE 
Balances at December 31, 2020  13,380  $2.32 
Options granted  438  $1.69 
Options exercised  (21) $1.31 
Options cancelled  (225) $3.62 
Balances at March 31, 2021  13,572  $2.28 

 

In February 2021, in connection with the Company’s separation and consulting arrangement with its former chief financial officer, the Company granted 200,000 restricted stock units to its former chief financial officer. The restricted stock units will vest and settle monthly for a period of 12 months.

 

The following table summarizes the activity of restricted stock units from December 31, 2020 to March 31, 2021 (in thousands, except weighted average grant date fair value):

 

     WEIGHTED 
     AVERAGE 
     GRANT 
  SHARES  DATE FAIR 
  OUTSTANDING  VALUE 
Outstanding at December 31, 2020  4,588  $1.14 
Granted  272   1.77 
Settled  (88)  1.62 
Forfeited  -   - 
Outstanding at March 31, 2021  4,772  $1.16 

 

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The following table summarizes the activity of non-vested restricted stock units from December 31, 2020 to March 31, 2021 (in thousands, except weighted average grant date fair value):

 

     WEIGHTED 
     AVERAGE 
     GRANT 
  SHARES  DATE FAIR 
  OUTSTANDING  VALUE 
       
Nonvested at December 31, 2020  1,437  $1.16 
Granted  272   1.77 
Vested  (97)  1.99 
Forfeited  -   - 
Nonvested at March 31, 2021  1,612  $1.22 

 

In April 2021 the Company also granted restricted stock units to certain executives and employees in lieu of cash bonuses for performance related to the fiscal year ended December 31, 2020. The total number of restricted stock units granted to these employees was 237,000 at an exercise price of $1.95 and will settle on May 20, 2021.

 

9. Related Party Transactions

 

Warrant Exercises

 

Ospraie, Ivy Science & Technology Fund (“IS&T”), Ivy VIP Science & Technology (“Ivy VIP” and, together with IS&T, the “Waddell Investors”, and Ardsley, are each beneficial owners of more than 10% of the Company’s common stock, holding 40.4%, 15.9%, and 9.9%, respectively, of the Company’s total outstanding common stock as of March 31, 2020. In March 2021, 4,264,299, 666,472 and 741,617, of the April 2020 Warrants were exercised by each of them, respectively, in accordance with the terms of the Warrant Exchange Agreement. (Refer to Note 7 of these condensed consolidated financial statements.)

 

August 2015 Senior Secured Promissory Notes

 

As of March 31, 2020, there have been no changes to the previously reported total principal amount outstanding under the August 2015 Senior Secured Promissory Notes, which continues to be $5,000,000. Due to the historical accounting for the promissory note the amount recorded on the condensed consolidated balance sheet of $7,300,000 includes $2,300,000 in accrued interest, of which as of March 31, 2021 and 2020, a total of $1,600,000 and $1,199,000, respectively, had been incurred.

 

The August 2015 Senior Secured Promissory Notes provide for various events of default, including, among others, default in payment of principal or interest, breach of any representation or warranty by the Company or any subsidiary under any agreement or document delivered in connection with the notes, a continued breach of any other condition or obligation under any loan document, certain bankruptcy, liquidation, reorganization or change of control events, the acquisition by any person or persons acting as group, other than the lenders, of beneficial ownership of 40% or more of the outstanding voting stock of the Company. Upon an event of default, the entire principal and interest may be declared immediately due and payable. As of March 31, 2021, the Company was in compliance with its covenants under the August 2015 Senior Secured Promissory Notes.

 

10. Subsequent Events

 

The Company has evaluated its subsequent events from March 31, 2021 through the date these condensed consolidated financial statements were issued, and has determined that there are no additional subsequent events required to be disclosed.

 

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

 

You should read the following discussion of our financial condition and results of operations in connection with our condensed consolidated financial statements and the related notes included elsewhere in this Quarterly Report on Form 10-Q and with our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2020, as filed with the Securities and Exchange Commission (the “Annual Report”) on March 23, 2021. Additional information regarding the Company is also available in our other reports filed with the Securities and Exchange Commission, which are also available on our investor relations website, investors.marronebio.com, which we also use, together with our corporate Twitter account, @Marronebio, as a means of disclosing material non-public information and for complying with our disclosure obligations under Regulation FD. We encourage our investors to monitor and review the information we make public in these locations. The information contained in the foregoing locations are not incorporated by reference into this filing, and the Company’s references to website URLs are intended to be inactive textual references only.

 

In addition to historical condensed consolidated financial information, this Quarterly Report on Form 10-Q contains forward-looking statements that reflect our plans, estimates and beliefs. Forward-looking statements are identified by words such as “would”, “could”, “will”, “may”, “expect”, “believe”, “should”, “anticipate”, “outlook”, “if”, “future”, “intend”, “plan”, “estimate”, “predict”, “potential”, “targets”, “seek” or “continue” or and similar words and phrases, including negatives of these terms or similar words, phases, expressions, or other variations of these terms, that denote future events. You should read these statements carefully because they discuss future expectations, contain projections of future results of operations or financial condition, or state other “forward-looking” information. These statements relate to our future plans, objectives, expectations, intentions and financial performance and the assumptions that underlie these statements. For example, forward-looking statements include any statements regarding the strategies, prospects, plans, expectations or objectives of management for future operations, including our plans to expand our business through diversification of our portfolio and strategic acquisition or partnerships and to expand our manufacturing plant, the progress, scope or duration of the development of product candidates or programs, commercialization plans, timelines and potential results, the benefits that may be derived from product candidates or the commercial or market opportunity in any target indication, our anticipated operations, financial position, revenues, costs or expenses, statements regarding future economic conditions or performance, the impact of COVID-19 on our operations and revenues, the potential exercise of Company warrants, statements of belief and any statement of assumptions underlying any of the foregoing. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere, including Part II, Item 1A— Risk Factors,” in this Quarterly Report on Form 10-Q, and in Part I—Item 1A—”Risk Factors” of our Annual Report. Forward-looking statements are based on our management’s beliefs and assumptions and on information currently available to our management. These statements, like all statements in this report, speak only as of their date, and we undertake no obligation to update or revise these statements in light of future developments. We caution investors that our business and financial performance are subject to substantial risks and uncertainties.

 

Overview

 

We are a growth-oriented agricultural company that supports environmentally sustainable farming practices through the discovery, development and sale of innovative biological products for crop protection, crop health and crop nutrition. Our products are sold through distributors and other commercial partners to growers around the world for use in integrated pest management systems that improve efficacy and increase yields while protecting the environment. Our products are often used in conjunction with or as an alternative to other agricultural solutions to control pests and enhance plant nutrition and health.

 

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Our portfolio of 15 products helps customers operate more sustainably while increasing their return on investment. Our products are used globally, and can be applied as foliar treatments or as seed-and-soil treatments, either on their own or in combination with other agricultural products. We target the major markets that use conventional chemical pesticides and fertilizers where our biological products are used as alternatives for, or mixed with, conventional chemical products. We also target new markets for which there are no available conventional chemical products or, the use of conventional chemical products may not be desirable (including for organically certified crops) or permissible either because of health and environmental concerns or because the development of pest resistance has reduced the efficacy of conventional chemical pesticides. We sell our products through distributors and other commercial partners to growers who use our bioprotection products to manage pests and plant diseases, our plant health products to reduce crop stress and both our plant health and bionutrition products to increase yields and quality.

 

Business Strategy

 

We have built a full-service biologicals organization with scope and capabilities across the spectrum of biological products in the market today. Our strategic objective is to capitalize on that position and emerge as the clear leader in the biologicals space with the financial and operational wherewithal to accelerate our path to profitability.

 

As we look forward, our goal is to leverage our base business, while accelerating our expansion plans and broadening our global reach. We are committed to launching the brand extensions and pipeline products that offer the greatest return on investment for our channel partners and grower customers. We anticipate that synergistic, value-creating acquisitions and partnerships will be part of our strategy. We believe we can continue to tuck in additional product lines as we build a larger commercial presence with a scalable platform.

 

Our strategy for the current long-term period includes the diversification of our portfolio which includes expanding our reach globally, moving away from having sales concentrated in the United States, ongoing research and development efforts to accelerate the time to market and revenue contributions of our pipeline products, and continued focus on our current operations to continue our growth, profitability and enhance stockholder value.

 

First Quarter 2021 Highlights

 

During the first quarter of 2021, we, like all businesses domestically and globally, continued to be impacted by the COVID-19 pandemic but are optimistic at the collectively global efforts to reopen fully in 2021. We are pleased to have continued to service the agricultural industry during this unprecedented environment through our product portfolio offerings. At the same time, we are conserving cash through prudent expense control while serving customers and working to ensure the safety of our employees, customers and partners.

 

The following are the more significant financial results for the three months ended March 31, 2021:

 

 Revenues increased approximately 14.4% year over year to $11.0 million, from $9.7 million for the same period in 2020;
   
 Gross profits increased approximately 25.1% year over year to $7.0 million, from $5.6 million for the same period in 2020, and gross margins increased to 63.1% from 57.7% for the same period in the prior year;
   
 

Operating expenses were $10.0 million in the first quarter of 2021, compared with $11.2 million in the first quarter of 2020; and

 

 Net loss in the first quarter of 2021 was $3.3 million, compared with a net loss of $7.0 million in first quarter of 2020.

 

Other significant developments for our business during the three months ended March 31, 2021 include the hire of Suping (Sue) Cheung as our Chief Financial Officer, the filing and effectiveness of our $90 million universal shelf registration statement, Grandevo WDG Bioinsecticide being approved for use in New Zealand, and our joining the United Nations Global Compact.

 

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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 GAAP. 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 estimating revenue recognition, including assumptions and estimates used in determining the timing and amount of revenue to recognize, forecast estimated utilized in identifying impairment indicators of long-lived asset, intangibles and goodwill, contingent consideration liabilities and our going concern assessment, have the greatest potential impact on our condensed consolidated financial statements. Therefore, we consider these to be our critical accounting policies and estimates.

 

Key Components of Our Results of Operations

 

Revenues

 

Our total revenues were $11.0 million and $9.7 million for the three months ended March 31, 2021 and 2020, respectively. We generate our revenues primarily from product sales, which are principally attributable to sales of our Grandevo, Regalia, UPB-110 ST, and Venerate product lines, but also included sales of out other product families. We believe our revenues may largely be impacted by weather, trade tariffs and other factors that affect commodity prices, natural disasters, infectious diseases and other factors affecting planting and growing seasons and incidence of pests and plant disease, and, accordingly, the decisions by our distributors, direct customers and end users about the types and amounts of pest management and plant health products to purchase and the timing of use of such products. Despite the continued impact of COVID-19, we presently expect revenues to continue to increase year-over-year for the remainder of 2021 in line with historic growth trends, in part due to our expanded seed treatment offerings.

 

Product Revenues

 

Product revenues consist of revenues generated primarily from sales to customers, net of rebates and cash discounts. Product revenues constituted 99% of our total revenues for each of the three months ended March 31, 2021 and 2020, respectively. Product revenues in the United States constituted 94% and 86% of our total revenues for the three months ended March 31, 2021 and 2020, respectively. While our first quarter results, reflect our historical trend, primarily driven by product revenues in the U.S. market, in 2021, we expect a larger portion of our business to be driven by international markets with our Pro Farm products and our continued focus on commercialization progress of our products in new countries. Latin America represents one of the geographies we have targeted for international expansion. While we cannot be certain as to the results at this time, with the recent fluctuations in COVID-19 cases in and around that region, our expected product revenues could be negatively impacted.

 

We currently rely, and expect to continue to rely, on a limited number of customers for a significant portion of our revenues since we sell to highly concentrated, traditional distributor-type customers. While we expect product sales to a limited number of customers 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 revenue stream will be diversified over a broader product portfolio and customer base, including as a result of our Pro Farm product offerings.

 

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License Revenues

 

License revenues generally consist of revenues recognized under our strategic collaboration and distribution agreements for exclusive distribution rights for our commercial product offerings, or for our broader pipeline of products, for certain geographic markets or for market segments that we do not address 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 certain 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. For each of the three months ended March 31, 2021 and 2020, license revenues constituted 1% of total revenues, respectively. As of March 31, 2021, an additional $0.8 million in payments under these agreements can potentially be received 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. As we have used our Bangor, Michigan manufacturing plant to produce certain of our products, cost of product revenues includes an allocation of operating costs including direct and indirect labor, production supplies, repairs and maintenance, depreciation, utilities and property taxes. The amount of indirect labor and overhead allocated to finished goods is determined on a basis presuming normal capacity utilization. Operating costs incurred in excess of production allocations, considered idle capacity, are expensed to cost of product revenues in the period incurred rather than added to the cost of the finished goods produced. Cost of product revenues may also include charges due to inventory adjustments and reserves. In addition, costs associated with license revenues have been included in cost of product revenues as they have not been significant. Gross profit is the difference between total revenues and cost of product revenues. Gross margin is gross profit expressed as a percentage of total revenues.

 

We expect to see increases in gross profit over the life cycle of each of our products as gross margins are expected to increase over time as production processes improve, including plans to expand our manufacturing plant, and as we gain efficiencies and increase product yields. While we expect margins to improve on a product-by-product basis, and target annual gross margins in the mid-50% range, our overall gross margins may vary as we introduce new products. In particular, we may experience downward pressure on overall gross margins as we continue to expand sales of our more recent commercially available products including Haven, Stargus, our Jet and Pro Farm products. Gross margin has been and will continue to be affected by a variety of factors, including plant utilization, product manufacturing yields, changes in production processes, new product introductions, product sales mix, sales incentives such as discounts and rebates and average selling prices.

 

Research, Development and Patent Expenses

 

Research, development and patent expenses include personnel costs, including salaries, wages, benefits and share-based compensation, related to our research, development and patent and regulatory staff in support of product discovery, development, and support for manufacturing, quality, and regulatory activities. Research, development and patent expenses also include costs incurred for laboratory supplies, field trials and toxicology tests, quality control assessment, consultants and facility and related overhead costs. Our research, development and patent expenses have historically comprised a significant portion of our operating expenses, amounting to $2.5 million and $3.2 million for the three months ended March 31, 2021 and 2020, respectively. We are also seeking collaborations with third parties to develop and commercialize more early stage candidates, on which we have elected not to expend significant resources given our near-term strategic priorities. Since some of our key research, development and patent resource employees are working remotely as a result of COVID-19, and due to some reliance on external suppliers who are also impacted by COVID-19, our expenses may not be at the level they otherwise would be during this period.

 

Selling, General and Administrative Expenses

 

Selling, general and administrative expenses consist primarily of personnel costs, including salaries, wages, benefits and share-based compensation, related to our executive, sales, marketing, finance and human resources personnel, as well as professional fees, including legal and accounting fees, and other selling costs incurred related to business development and to building product and brand awareness. We create brand awareness through programs such as speaking at industry events, trade show displays and hosting local-level grower and distributor meetings. In addition, we dedicate significant resources to technical marketing literature, targeted advertising in print and online media, webinars and radio advertising. Costs related to these activities, including travel, are included in selling expenses.

 

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Outside of operating expenses resulting from our Pro Farm subsidiaries, we generally expect selling, general, and administrative expenses to remain approximately flat in most departments. We continue to build a sales and marketing organization that provides us with a better ability to educate and support customers and for our product development staff to undertake responsibility for technical sales support, field trials and demonstrations to promote sales growth. However, as a result of COVID-19, such efforts have slowed including due to travel restrictions put in place by the Company, current and potential customers, and governmental authorities, which has impacted our ability to engage in sales and marketing efforts physically or perform in person demonstrations. We expect to continue to increase our marketing communications campaigns and put more “boots on the ground”, which we believe should increase grower demand, or pull-through, and develop new customers, as well as expand business with existing customers.

 

Interest Expense

 

Interest expenses are primarily driven by outstanding debt financing arrangements however not all of our current debt instruments are currently generating interest expenses. See Note 6 and 9 to our condensed consolidated financial statements.

 

Income Tax Provision

 

As of the three months ended March 31, 2021 and 2020 the Company recognized $41,000 and $34,000 in income tax provisions for foreign tax purposes, respectively. The effective tax rate (calculated as the ratio of income tax expense to pre-tax income) for the three months ended March 31, 2021 and 2020 was 1.24% and .46%, respectively. The Company does not recognize benefits from tax losses in the United States or for certain Pro Farm subsidiaries.

 

Results of Operations

 

The following table sets forth certain statements of operations data as a percentage of total revenues:

 

  

THREE MONTHS ENDED

MARCH 31,

 
  2021  2020 
Revenues:        
Product  99%  99%
License  1   1 
Total revenues  100   100 
Cost of product revenues  37   42 
Gross profit  63   58 
Operating Expenses:        
Research, development and patent  23   34 
Selling, general and administrative  68   83 
Total operating expenses  91   116 
Loss from operations  (28)  (59)
Other income (expense):        
Interest expense  (4)  (3)
Loss on issuance of new warrants     (14)
Change in fair value of contingent consideration  1   2 
Other income (expense), net  1   2 
Total other expense, net  (2)  (14)
Loss before income taxes  (30)  (72)
Income tax expense      
Net loss  (30)%  (73)%

 

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Comparison of Three Months Ended March 31, 2021 and 2020

 

  THREE MONTHS ENDED MARCH 31, 
  2021  2020 
  (Dollars in thousands) 
Product revenues $10,904  $9,535 
% of total revenues  99%  99%

 

Product revenues during the three months ended March 31, 2021 and 2020 increased by approximately $1.4 million, or 14.4% to the comparative period in 2020, as a result of higher demand for and sales of our legacy product families, Grandevo, Regalia, and Venerate, each experiencing year over year increases greater than 10%. During the three months ended March 31, 2021, we continued to see greater diversity in sales of our other product offerings and we expect to continue to see overall revenue growth and diversified sales mix as we continue to invest in our sales and marketing efforts, including during periods impacted by COVID-19.

 

License Revenues

 

  THREE MONTHS ENDED MARCH 31, 
  2021  2020 
  (Dollars in thousands) 
License revenues $134  $115 
% of total revenues  1%  1%

 

License revenues remained consistent for each of the three months ended March 31, 2021 and 2020, in line with our expectations. Future periods may be impacted positively upon us entering into new or amended collaborative agreements or by up to $0.8 million upon the completion of milestones from previous agreements.

 

Cost of Product Revenues and Gross Profit

 

  THREE MONTHS ENDED MARCH 31, 
  2021  2020 
  (Dollars in thousands) 
Cost of product revenues $4,069  $4,081 
% of total revenues  37%  42%
Gross profit  6,969   5,569 
   63.1%  57.7%

 

For the three months ended March 31, 2021, cost of product revenues was flat and gross profit increased to 63.1% from 57.7% from the prior comparative period. The primary driver of the margin increase is attributed to overall volume in sales.

 

Research, Development and Patent Expenses

 

  THREE MONTHS ENDED MARCH 31, 
  2021  2020 
  (Dollars in thousands) 
Research, development and patent $2,512  $3,234 
% of total revenues  23%  34%

 

Research, development and patent expenses for the three months ended March 31, 2021 decreased by $0.7 million, or 22.3%. For the three months ended March 31, 2020, decreases in consulting fees of $0.2 million, toxicology test costs of $0.1 million, and field testing costs of $0.1 million primarily contributed to the aggregated year over year decrease. Due to some reliance on external suppliers who are also impacted by COVID-19, our expenses may not be at the level they otherwise would be during this period however management cannot determine the direct impact on our operating results.

 

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Selling, General and Administrative Expenses

 

  THREE MONTHS ENDED MARCH 31, 
  2021  2020 
  (Dollars in thousands) 
Selling, general administrative expenses $7,483  $7,993 
% of total revenues  68%  83%

 

Selling, general and administrative expenses for the three months ended March 31, 2021 decreased by $0.5 million, or 6.4%. The decrease was primarily due to reductions of $0.1 million in accounting and tax professional services, $0.1 million in advertising and marketing expenses and $0.2 million in travel related expenses in connection with travel restrictions put into place at the start of the COVID-19 pandemic. As a result of COVID-19, our selling, general and administrative expenses may not be at the level they otherwise would be during this period however management cannot determine aside from our travel restriction, the direct impact on our operating results.

 

Other Expense, Net

 

  THREE MONTHS ENDED MARCH 31, 
  2021  2020 
  (Dollars in thousands) 
Interest expense  (393)  (337)
Loss on issuance of new warrants     (1,391)
Change in fair value of contingent consideration  134   237 
Other income (expense) net  65   159 
  $(194) $(1,332)

 

For the three months ended March 31, 2021 and 2020, respectively, other expense, net, decreased by $1.1 million as compared to the same period in 2020, primarily due to the prior period’s losses incurred as a result of our call of outstanding warrants resulting in a 1-for-1 issuance of replacement warrants, offset by the current period change in the fair value of our contingent consideration obligations.

 

Seasonality and Quarterly Results

 

The second half of the year is typically a transition period in the agricultural industry, with the harvest of crops completing in certain areas and planting beginning in others. Accordingly, we have increasingly had higher sales during the first half of the year than the second half, and believe this trend will continue. However, the level of seasonality in our business may change due to a number of factors, such as our expansion into new geographical territories, the introduction of new products, the timing of introductions of new products, and the impact of weather and climate change. Further, we expect substantial fluctuation in sales year over year and quarter over quarter as a result of the number of variables on which sales of our products are dependent. Weather conditions, new trade tariffs, natural disasters, outbreaks of infectious diseases (including the current COVID-19 pandemic) and other factors affect planting and growing seasons and incidence of pests and plant disease, and may, accordingly affect decisions by our distributors, direct customers and end users about the types and amounts of pest management and plant health products to purchase and the timing of use of such products. In addition, disruptions that cause delays by growers in harvesting or planting can result in the movement of orders to a future quarter, which would negatively affect the quarter and cause fluctuations in our operating results. Customers also may purchase large quantities of our products in a particular quarter to store and use over long periods of time or time their purchases to manage their inventories, which may cause significant fluctuations in our operating results for a particular quarter or year, and low commodity prices may discourage growers from purchasing our products in an effort to reduce their costs and increase their margins for a growing season.

 

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Our expense levels are based in part on our expectations regarding future sales. As a result, any shortfall in sales relative to our expectations could cause significant fluctuations in our operating results from quarter to quarter, which could result in uncertainty surrounding our level of earnings and possibly a decrease in our stock price.

 

Liquidity and Capital Resources

 

Since our inception, our operations have been financed primarily by net proceeds from public offerings of common stock and private placements of convertible preferred stock, convertible notes and promissory notes, exercise of warrants, and term loans, as well as proceeds from the sale of our products and payments under strategic collaboration and distribution agreements and government grants. As of March 31, 2021, our cash and cash equivalents totaled $18.9 million, and we had an additional $1.6 million of restricted cash that we are contractually obligated to maintain in accordance with a debt agreement with Five Star Bank.

 

In March 2017, we entered into an invoice purchase agreement with LSQ. Our obligations under the LSQ financing are secured by a lien on substantially all of the Company’s personal property; such lien is first priority with respect to our accounts receivable, inventory, and related property. In January 2020, we entered into a second amendment to the invoice purchase agreement, the terms of which included among other terms an increase to $20.0 million of eligible customer invoices to be purchased and simultaneously entered into an addendum to allow us to request that LSQ advance a maximum of $3.0 million of our finished goods inventory. As of March 31, 2021, we had an outstanding balance of $11.7 million in secured borrowings.

 

In April 2020, we entered into a warrant exchange agreement (the “Warrant Exchange Agreement”) with a group of historical investors (the “Investors”). Pursuant to the Warrant Exchange Agreement, the Investors have exchanged certain previously issued and outstanding warrants to purchase an aggregate of up to 45,977,809 shares of our common stock, for new warrants (the “April 2020 Warrants”) to purchase an aggregate of up to 29,881,855 shares of our common stock (the “Warrant Shares”).

 

The April 2020 Warrants all have an exercise price of $0.75 per share, and expire in five tranches. As of March 31, 2021, a total of 24,995,845 Warrant Shares were exercised prior to their expiration dates. The next warrant expiration date is December 15, 2021 with respect to the remaining 4,885,317 Warrant Shares. The total aggregate exercise price of all future April 2020 Warrants is approximately $3.7 million. There can be no assurance that the Investors will exercise the remainder of the April 2020 Warrants prior to their expiration. (Refer to Note 7 of our condensed consolidated financial statements).

 

In December 2020, we entered into an amendment (the “Warrant Amendment”) to a previously outstanding warrant to purchase 5,333,333 shares of our common stock issued to a historical warrant holder on February 5, 2018. Pursuant to the Warrant Amendment, in exchange for the holder’s agreement to exercise the warrant on December 29, 2020 with respect to 1,777,778 shares at the warrant’s then-applicable exercise price of $0.96 per share we agreed to partially extend the warrant’s expiration date by allowing the holder to exercise (i) 1,777,778 of the subject shares at $1.00 per share by March 25, 2021, and (ii) the remaining 1,777,777 shares at $1.04 per share by December 15, 2021. As of March 31, 2021, 3,555,556 shares under the Amended Warrant were exercised, leaving 1,777,777 of the Amended Warrants remaining with an expiration date of December 15, 2021. The total aggregate exercise price of the remaining tranche is approximately $1.8 million. There can be no assurance that the holder will exercise the remainder of the warrants prior to its expiration date. (Refer to Note 7 of our condensed consolidated financial statements)

 

On February 8, 2021, we filed a universal “shelf” registration statement on Form S-3 with the U.S. Securities and Exchange Commission (“SEC”) which has since been declared effective by the SEC. Under the shelf registration statement, we may offer and sell, from time to time over a three-year period, various securities in an aggregate amount of up to $90 million.

 

As of March 31, 2021 debt outstanding includes $3.4 million and $7.3 million due to related parties, in principal and accrued interest with a maturity date of December 31, 2022. To the extent that debt is not restructured, extended, converted or otherwise amended, we will be required to repay these debts along with our general operating expenses in that period.

 

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As of March 31, 2021, we were out of compliance with certain covenant requirements under our June 2014 Secured Promissory Note. However, the lender, Five Star Bank, has waived its right to deem recurring losses, liquidity, going concern, and financial condition as material adverse changes through May 31, 2022. Thereafter, unless the lender further extends its waiver a material adverse change clause could be triggered and the entire unpaid principal and interest balances would be due and payable upon demand as well as trigger certain covenants under each of our other debt agreements (Refer to Note 6 of our condensed consolidated financial statements).

 

Since our inception, we have incurred significant net losses, and we expect to incur additional losses related to the continued development and expansion of our business. However, we believe that our existing cash and cash equivalents of $18.9 million as of March 31, 2021, expected revenues, and cost management as well as cost reductions will be sufficient to fund operations as currently planned through one year from the date of the issuance of our accompanying condensed consolidated financial statements. Changes in our current plans, or slower than expected adoption of our products may require that we secure additional sources through equity and/or debt financings, or through other sources of financing, which we cannot predict, with certainty, will be based on terms acceptable to us or at all. We may also require additional sources of cash for general corporate purposes, which may include operating expenses, working capital to improve and promote our commercially available products, advance product candidates, expand international presence and commercialization, general capital expenditures and satisfaction of debt obligations which are not currently planned.

 

We had the following debt arrangements in place as of March 31, 2021 (dollars in thousands):

 

  STATED ANNUAL  BALANCE (INCLUDING ACCRUED   
DESCRIPTION INTEREST RATE  INTEREST)  PAYMENT/MATURITY
Promissory Notes (1)  8.00% $     3,081  Due December 31, 2022 (5)
Promissory Note (2)  5.25%  7,322  Monthly/June 2036
Promissory Notes (3)  8.00%  6,599  Due December 31, 2022(5)
Secured Borrowing (4)  12.78%  576  Varies(6)/May 2021
Loan Facility  1.00%  271  Proportionately each September 2022, 2023, 2024, 2025

 

See Notes 6 and 9 of the condensed consolidated financial statements for each of the following debt arrangements:

 

(1) “—October 2012 and April 2013 Secured Promissory Notes.”

(2) “—June 2014 Secured Promissory Note.”

(3) “—August 2015 Senior Secured Promissory Notes.”

(4) “—LSQ Financing.”

(5) In February 2018, the maturity date and all interest payments were extended to December 2022

(6) Payable through the lender’s direct collection of certain accounts receivable through May 2021.

 

We may continue to require additional sources of cash for general corporate purposes, which may include operating expenses, working capital to improve and promote its commercially available products, advance product candidates, expand international presence and commercialization, general capital expenditures and satisfaction of debt obligations. We may seek additional capital through debt financings, collaborative or other funding arrangements with partners, or through other sources of financing. If we seek additional financing from outside sources, we may not be able to raise such financing on terms acceptable to us or at all. If we are unable to raise additional capital when required or on acceptable terms, we may be required to scale back or to discontinue the promotion of currently available products, scale back or discontinue the advancement of product candidates, reduce headcount, file for bankruptcy, reorganize, merge with another entity, or cease operations.

 

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The following table sets forth a summary of our cash flows for the periods indicated (in thousands):

 

  MARCH 31,  MARCH 31, 
  2021  2020 
    
Net cash used in operating activities $(5,017) $(6,292)
Net cash used in investing activities  (869)  (673)
Net cash provided in financing activities  8,968   10,833 
Net increase in cash, cash equivalents, and restricted cash  3,082   3,868 

 

Cash Flows from Operating Activities

 

Net cash used in operating activities of $5.0 million during the three months ended March 31, 2021 primarily resulted from our net loss of $3.3 million and cash used in operating assets and liabilities of $3.6 million. This use was partially offset by non-cash charges of $1.8 million consisting of $0.9 million of depreciation and amortization, $0.9 million of share-based compensation expense, $0.2 million of amortization of right of use assets, and $0.1 million in changes to the Company’s contingent consideration in connection with the Pro Farm acquisition.

 

Net cash used in operating activities of $6.3 million during the three months ended March 31, 2020 primarily resulted from our net loss of $7.1 million and cash used in operating assets and liabilities of $2.5 million. This use was partially offset by non-cash charges of $3.2 million consisting of $1.4 million related to loss on issuance of new warrant in connection with our call of the exercise of 6,000,000 shares under outstanding warrants, $0.9 million of depreciation and amortization, $0.9 million of share-based compensation expense, and $0.2 million of amortization of right-of-use assets, offset by $0.2 million in changes to the Company’s contingent consideration in connection with the Pro Farm acquisition.

 

Cash Flows from Investing Activities

 

Net cash used in investing activities were $0.9 million during the three months ended March 31, 2021. Cash flow from investing included $0.8 million consideration payments in connection with the purchase of the Jet-Ag and Jet-Oxide product lines with the remainder a result of purchases of property, plant and equipment to support our operations.

 

Other than as a result of purchases of property, plant and equipment to support our operations, the company made the first of a number of contingent payments in the amount of $0.5 million in connection with the purchase of the Jet-Ag product lines for the three-month period ended March 31, 2020.

 

Cash Flows from Financing Activities

 

Net cash provided in financing activities of $9.0 million during the three months ended March 31, 2021 consisted primarily of $2.7 million in net proceeds from of secured borrowing and debt, $6.2 million related to the exercise of warrants and $0.1 million in proceeds from employee equity related instruments. (Refer to Note 7 of our condensed consolidated financial statements)

 

Net cash provided in financing activities of $10.8 million during the three months ended March 31, 2020 consisted primarily of $5 million in net reductions and repayment of debt, $5.9 million related to the exercise of previously outstanding warrants, net of registration costs and $0.1 million in proceeds from employee equity related instruments.

 

Recently Issued Accounting Pronouncements

 

See Note 2 of the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q in Part I—Item 1— “Financial Information.”

 

ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

We currently have minimal exposure to the effect of interest rate changes, foreign currency fluctuations and changes in commodity prices. We are exposed to changes in the general economic conditions in the countries where we conduct business, which currently is substantially all in the United States. Our current investment strategy is to invest in financial instruments that are highly liquid, readily convertible into cash and which mature within twelve months from the date of purchase. To date, we have not used derivative financial instruments to manage any of our market risks or entered into transactions using derivative financial instruments for trading purposes.

 

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We do not believe our cash equivalents have significant risk of default or illiquidity. While we believe our cash equivalents do not contain excessive risk, we cannot provide absolute assurance that in the future our investments will not be subject to adverse changes in market value.

 

Commodity Risk

 

Our exposure to market risk for changes in commodity prices currently is minimal. As our commercial operations grow, our exposure will relate mostly to the demand side as our end users are exposed to fluctuations in prices of agricultural commodities. Recent tariffs have contributed to depressed prices of some commodities.

 

ITEM 4.CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to management, including our principal executive officer and our principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. As of the end of the period covered by this report, we carried out an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer (“CEO”) and our Chief Financial Officer (“CFO”), of the effectiveness of the design and operation of our disclosure controls and procedures in ensuring that material information required to be disclosed in our reports filed or submitted under the Exchange Act has been made known to them in a timely fashion. Based on this evaluation, our CEO and CFO each concluded that our disclosure controls and procedures were effective as of March 31, 2021.

 

Management’s Report on Internal Control over Financial Reporting

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined in Rule 13a-15(f) of the Exchange Act. Our management assessed, with the oversight of the board of directors, the effectiveness of our internal control over financial reporting as of March 31, 2021. In making this assessment, management used the criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on this assessment, management has concluded that our internal control over financial reporting was effective as of March 31, 2021.

 

Changes in Internal Control

 

For the three months ended March 31, 2021, the Company has designed and implemented internal controls over its significant acquired Pro Farm subsidiary locations, otherwise there have been no changes to our internal control over financial reporting identified in management’s evaluation pursuant to Rules 13a-15(d) or 15d-15(d) of the Exchange Act during the period covered by this Quarterly Report on Form 10-Q that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

Limitations on Effectiveness of Controls and Procedures

 

In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable, not absolute, assurance of achieving the desired control objectives. Because of the inherent limitations in internal control over financial reporting, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision making can be faulty and that breakdowns can occur because of a simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

 

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PART II. OTHER INFORMATION

 

ITEM 1.LEGAL PROCEEDINGS

 

None.

 

ITEM 1A.RISK FACTORS

 

We have not identified any material changes to the risk factors previously disclosed in Part I—Item 1A—”Risk Factors” in our Annual Report filed on Form 10-K for the fiscal year ended December 31, 2020. Our business, financial condition and operating results can be affected by a number of factors, whether currently known or unknown, including but not limited to those described in the Annual Report, any one or more of which could, directly or indirectly, cause our actual financial condition and operating results to vary materially from past, or from anticipated future, financial condition and operating results. Any of these factors, in whole or in part, could materially and adversely affect our business, financial condition, operating results and stock price. You should carefully consider the risks and uncertainties described in our Annual Report filed on Form 10-K for the fiscal year ended December 31, 2020, together with all of the other information in this Quarterly Report on Form 10-Q, including in “Part I—Item 2—”Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the condensed consolidated financial statements and related notes.

 

ITEM 6.EXHIBITS

 

The following documents are filed, or furnished, as applicable, as part of this report on Form 10-Q:

 

INDEX TO EXHIBITS

 

EXHIBIT

NUMBER

 EXHIBIT DESCRIPTION
   
10.1# Offer letter, effective January 25, 2021, by and between Marrone Bio Innovations, Inc. and Suping Liu Cheung (incorporated by reference to Exhibit 10.1 of the registrants Current Report on Form 8-K filed January 29, 2021).
   
10.2# 

Change in Control Agreement, dated as of January 26, 2021, by and between Marrone Bio Innovations, Inc. and Suping Liu Cheung (incorporated by reference to Exhibit 10.2 of the registrants Current Report on Form 8-K filed January 29, 2021).

   
31.1 Certification of Principal Executive Officer Required Under Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended.
   
31.2 Certification of Principal Financial Officer Required Under Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended.
   
32.1 Certification of Principal Executive Officer and Principal Financial Officer Required Under Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended, and 18 U.S.C. §1350.
   
101 Interactive Data Files Pursuant to Rule 405 of Regulation S-T: (i) Condensed Consolidated Balance Sheets as of March 31, 2021 and December 31, 2020, (ii) Condensed Consolidated Statements of Operations for the Three Months ended March 31, 2021 and 2020, (iii) Condensed Consolidated Statements of Stockholders’ Equity for the Three Months ended March 31, 2021 and 2020, (iv) Condensed Consolidated Statements of Cash Flows for the Three Months ended March 31, 2021 and 2020 and (v) Notes to Condensed Consolidated Financial Statements
   
104 XBRL for cover page of the Company’s Quarterly Report on Form 10-Q, included in the Exhibit 101 Inline XBRL Document Set

 

# Indicates management compensatory agreement.

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Davis, State of California, on May 13, 2021.

 

 MARRONE BIO INNOVATIONS, INC.
  
 /s/Kevin Helash
 Kevin Helash
 Chief Executive Officer

 

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