Marrone Bio (MBII) Q1 Earnings Review
Marrone Bio (MBII) Since the company closed its $8.2 million (net) secondary offering priced at $1.40 a share in late April, the stock has been wandering down toward that level. That’s not a surprise. And I expect a decent amount of support to come in around here and help firm up shares. The long-term debt solution is not fixed, but a relatively small dilutive offering resembles a short-term patch to allow a few more quarters to make meaningful progress on revenue, cash flow and, ideally, a cash infusion from a strategic partner or a comprehensive debt restructuring.
The company is by no means out of the woods, and it remains a deep turnaround story that only risk-tolerant investors should participate in. It’s by far our most speculative position right now. Despite the poor stock price performance, I’m maintaining my rating at Buy a Half. That’s because I think shares will recover. But I don’t want to get over-extended, and it makes sense to have remaining firepower to average down if/when that appears to be the right move. I don’t think the time is right just yet, but we might be getting close.
In the meantime, we have Q1 earnings to consider and some very interesting commentary from management regarding something I speculated about back in mid-January. I’ll get to that in a second. First, the results.
First-quarter revenues were up 56% to $4.2 million and Q1 product shipments were up 66% to a record $6.5 million. Both represent great progress on the top line. I’ve been tracking revenue as a percentage of the previous quarter’s product shipments, and over the past three quarters, it has ranged from 80% to 87%. This fairly basic forecasting method implies Q2 revenue should come in a range of $5.2 million to $5.7 million. On the other hand, revenue growth over the past four quarters has ranged from 41% to 56%. And if we plug in 50% growth for Q2, we get roughly $7.57 million.
At this point, I think $7 million or more is likely given that Q2 is the strongest period of the year and we have Majestene contributing (it was introduced in Q1 of last year) plus potential contribution from the new Haven anti-transpirant product that began shipping to customers for demonstrations in Q1 (though I suspect in relatively small quantities).
In terms of other new product developments, we still expect two or three new product introductions this year. Management said MBI-601 Biofumigant is EPA-approved and data from California strawberry field trials is being collected. They are ramping up manufacturing to commercial scale. The MBI-110 Fungicide is tracking toward EPA approval in Q3/Q4, as is MBI-010 Herbicide (weed control). The latter could really move the needle since weed control is such a challenge and Marrone doesn’t have a herbicide on the market yet. Here is a brief summary of each of these products from a recent presentation.
The company inked two distribution agreements that were just announced (incremental sales, not major developments).
The first is a master distribution agreement with Jet Harvest Solutions (relatively small company), which makes ag products to control disease and post-harvest decay. The agreement covers Jet-Ag, a product effective against bacteria, mold and yeasts, that can be used by growers to fight plant pathogens in the ag, horticultural and turf industries. The product mixes well in the tank with Marrone’s Regalia biofungicide. Marrone says it should also work well with Grandevo and Venerate to help against Spotted Wing Drosophila (looks like a nasty little housefly with red eyes), which is devastating berries and cherries in the Americas and Europe. It came to New England after Hurricane Irene.
The second deal is with Agri-Star, the Mexican affiliate of Albaugh (which is quite large). Agri-Star will be the exclusive distributor in Mexico for Marrone’s Grandevo and Venerate bioinsecticides, which work on a bunch of chewing and sucking insects. The partnership helps Marrone grow into the Mexican market, which exports nearly $20 million in fruits and veggies to the U.S. each year. This could be a more significant partnership.
Spending is relatively stable as the company is in cost-control mode. Reported cash at quarter-end was $4.8 million, but we need to add the $8.2 million from the secondary, for a rough total of $13 million. Add to that the new $7 million working capital line, and you get close to $20 million in total cash availability. Cash usage in Q1 was $7.6 million, including the expected $1.6 million semi-annual interest payment on the $40 million, 8% note due 8/2020. Assuming sales and spending remain about the same, cash usage in Q2 would be around $6 million, then $7.6 million in Q3 (another $1.6 million interest payment is due).
In reality, revenue growth should slow cash burn to around $4 million in Q2 then $6 million in Q3, but we have to take things one quarter at a time here. The bottom line is that the steps Marrone has taken should give it two to three more quarters before it needs another cash infusion (faster revenue growth would obviously push that out).
I’m going to go through the 10-Q filing when that comes up to try and firm up some financial projections, which I’ll share with you. But now I want to move on to the “interesting comments” I mentioned earlier.
Is Marrone Making a Significant Push into the Cannabis Growing Business?
In my January 13, 2017 Weekly Update, I wrote the following:
“I’m wondering if they could add a pesticide aimed at the growing marijuana industry. Recreational use was approved in Massachusetts, and Rhode Island will be taking another look at it. Clearly, this is the trend. And like most plants, I bet marijuana attracts its fair share of pests. Is it that hard to kill bugs that have been sucking down THC? One wouldn’t think. Scott’s Miracle-Grow is getting into the game. Maybe Marrone should too? I suspect all it would take to move the stock is a simple mention that their products “could be effective against pests targeting marijuana” in their next SEC filing, and speculation alone would help the stock.”
There have been a few hints here and there since I wrote that that Marrone could target the cannabis industry. But for the first time, the company has stepped out and more clearly defined the opportunity. On the Q1 conference call, Pam Marrone mentioned the potential applications for their products to help in the growing marijuana industry. All she had to do was mention the word “cannabis,” and the conversations went from there. The analysts on the call were probably prepped to respond to this, but either way. The transcript is out there, and hopefully the 10-Q will reference the market potential too. Pam Marrone mentioned cannabis four times in her prepared remarks, and it was mentioned five times in the Q&A, for a total of nine mentions. For comparison, “revenue” was mentioned 15 times (five in Q&A), “debt” was mentioned only once (in prepared remarks only), and “working capital” was mentioned three times (in prepared remarks only).
It just goes to show how intrigued people are by this budding marijuana industry. Whether you’re for, against or neutral on the matter, we’ve seen the stock market reward a number of stocks in the space.
So, what’s the deal?
Marrone said her products are “… transforming cannabis production through the reduction of toxic chemicals and pesticide residues that are harmful to both the environment and to people.” The company commissioned UC Davis (probably MBA students) to assess the market potential. And they said the Colorado, Oregon and Washington market is $91 million. California bumps that up to $1.4 billion.
Marrone also said that in less than a year, a new distributor has become a top-five customer selling into the cannabis growing industry. She pointed out that the company didn’t target this industry, but she seems excited that growers saw the potential. She said (edited for clarity): “They saw the potential of our product for powdery mildew, Botrytis/grey mold and mice, and the growers have been non-stop in chat rooms and walk-ins and on our customer service line asking for our product.” I believe she’s talking about Regailia, and probably Grandevo too.
The company’s focus at this point seems to be on the regulatory front. Given that loads of chemicals are used in cannabis production, Marrone’s head of regulatory is working with the states to create proper pesticide labels with worker protection, environmental protection and pesticide residue language on the label. She said that, with that focus, their products are getting listed for use in all the states that are currently legal for cannabis production, with California representing the biggest market.
I did a quick web search to see what I could find out there on this subject and I did indeed find quite a few mentions in forums, state registration websites, etc. It might take a little while but I think that this news will work its way out on investing websites, and help drive a little speculative buying. We would love any buying at this point, but more important is that while it’s early in the cannabis industry, it appears that Marrone already has one distributor that’s driving significant sales volume. Provided the products work, this could be a major new source of revenue that isn’t in any forecasts. And with a little luck, it could also help boost the slower quarters (Q3 and Q4) due to indoor growing in North America.
I’m sure we’ll have more to discuss on this topic. But that’s it for now. Marrone remains a Buy for risk-tolerant investors. Average in, don’t get overextended, and please keep in mind that this is a turnaround story and the company still has a way to go before it’s out of the woods. BUY A HALF.
Earnings: DONE