Marrone Bio (MBII) Reports Another Good Quarter
Marrone reported yesterday after the close and I listened to the conference call, then read the 10Q when it came out. There’s a lot to get through so I’ve organized my summary of earnings into bullet points by topic. The bottom line was a good quarter, with remarkably few surprises. At this point, “good” is great. Most important is to avoid a setback in the recovery story that allows doubt to creep in. Marrone accomplished this and disclosed no material setbacks. For the most part, all major income statement and balance sheet lines were within the range of what I had expected. And the company looks to be on track with new product development, strategic partnerships, etc. The biggest looming challenge remains capital. Details below:
Q3 financial results:
• Q3 revenue was up 47% to $3.6 million. My 2017 estimate of $14.3 million still seems reasonable. The addition of Majestene (introduced in January) is clearly having a positive impact.
• Product shipments were up 72% to $3.1 million. This supplementary information helps us understand trends in what’s going out the door, and helps forecast revenue in the next quarter. It’s worth noting that Q3 is typically the company’s smallest quarter for product shipment.
• Gross margin of 31.4% was up from a meager 5.5% in Q3 last year, but down from 38.2% in Q2 2016. Management explained the decrease by a mix shift in products sold as well as some charges from plant under-utilization. I had plugged in 40% gross margin in my model, so I’ll now pull that back in to 32% on a go-forward basis.
• SG&A and R&D expenses were within a few hundred thousand of what I expected. No surprises.
• Net loss of $7.2 million ($0.29 per share) was about $700K lower than I expected, mostly due to the gross margin shortfall. Not a big deal.
• No secondary stock offering was announced, which is good.
• The company used $5.1 million in cash during the quarter, bringing its cash balance down to $16.06 million. It still has $3 million in restricted cash which may or may not be released. If not, it looks like Marrone will need to raise capital in the first half of 2017, at the latest. Things that could push this back a quarter or two are (1) access to the $3 million in restricted cash and/or quarterly revenue growth well above 50% and continued vigilance on cost control. Even so, I think debt financing/restructuring in 2017 is a high priority. Alternatively, a strategic partnership that brings in several million dollars (probably Zequanox is the best candidate for this) could push financing needs back. I think a secondary stock offering at some point is a foregone conclusion, but it would seem a last resort until the stock gets well above 5. I’ve factored in 25% dilution into my investment thesis and for us, the higher the share price when this happens, the better.
On the reorganization front:
• Marrone amended the terms of its 18% $12.45 million loan to (1) lower the interest rate to 14%, and (2) extend the maturity date by one year, to October 2, 2018. This should save roughly $160K per quarter in interest payments and is an incremental positive. I hope it is able to further reduce the interest rate in the first half of 2017.
• Marrone also regained listing compliance with the Nasdaq in October. This is good.
On the product development front:
• The company expects to release at least one new product in 2017. Two seems possible given the pipeline’s status, but capital for new product launches is limited. The most likely new products are MBI-110 (biofumigant) and MBI-505 (anti-transpirant).
• Marrone established a partnership with a water industry and engineering firm in Spain for Zequanox. No details given, other than Spain has an intense need for zebra mussel control. No update on potential U.S. partners.
• The company is working on a third row-crop deal (in addition to current partnerships with Albaugh and Koch). No details given. These haven’t included up-front payments in the past.
• Marrone received registration for Grandevo and Venerate in Mexico, an incremental positive.
• Venerate approved for use against corn rootworm (three years of data shows efficacy) and performed well against two chemicals for use against walnut husk fly.
• Regalia increased California rice yields by 12% (by 1,000 lbs. per acre) and increased tomato yields by 10% to 15% in soils invested with Fusarium wilt. Good stuff.
• Majestene recognized by Agrow as best new product in biopesticide category.
Looking forward:
• Marrone continues to grow in a relatively soft market for agriculture.
• The company seems intently focused on delivering (and communicating) products that help farmers make more money, work more safely, and expand the market for their produce.
• I’m very interested to hear if row crop products help juice Marrone’s Q4 results. Revenue north of $3 million would be great.
• My forward estimates remain unchanged at this point.
Shares of Marrone are up well over 20% since I established coverage at the beginning of the month. Some of that rise is undoubtedly due to our subscriber group buying shares (how much is impossible to tell). The stock traded in a relatively tight range today on very normal volume. This suggests to me that the few analysts covering the stock didn’t race out to tell their clients to buy and/or sell. And they’re probably working through the numbers as I have been. I think we’re looking good here, but there remains near-term downside risk simply because of the rapid rise from 1.60 to 2.45, and broader market uncertainty. Therefore, I advise buying only with use of limit orders, and place those below 2.20 (at least 10% below the current market price). In other words, buy on a dip. And try to create that dip by placing orders below the current market price. Yes, this could drive shares down in the short-term. But if the story plays out as we hope it will, a little dip here is not a big deal. BUY ON DIPS.
