MARRONE BIO INNOVATIONS, INC. 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 endedDecember 31, 2019 , as filed with theSecurities and Exchange Commission (the "Annual Report") onMarch 16, 2020 . Additional information regarding the Company is also available in our other reports filed with theSecurities 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," "believe," "will," "may," "estimate," "continue," "anticipate," "intend," "should," "plan," "expect," "predict," "could," "potential" "outlook," "if," "future," "targets," "seek," or and similar words and phrases, including negatives of these terms or similar 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, the progress, scope or duration of the development of product candidates or programs, clinical trial 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 ability to protect intellectual property rights, the benefits of our recent acquisitions, our anticipated operations, financial position, revenues, costs or expenses, statements regarding future economic conditions or performance, the impact of COVID-19 on our operations, 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. 27 Overview We strive to lead the sustainable agriculture movement through the discovery, development, production and promotion of effective, efficient and environmentally responsible biological products for pest management, plant nutrition and plant health. 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 products. We also target new markets for which there are no available conventional chemical products or where 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. Business Strategy The agricultural industry is increasingly dependent on effective and sustainable crop protection practices to maximize yields and quality in a world of increased demand for agricultural products, rising consumer awareness of food production processes and finite land and water resources. In addition, external market research reported that the global market for biopesticides, plant health and bionutrition products is growing substantially faster than the overall markets for chemical products and fertilizers (plant nutrition). This demand is in part a result of conventional growers acknowledging that there are tangible benefits to adopting bio-based crop protection and plant health products into integrated pest management ("IPM") programs, as well as increasing consumer demand for sustainably produced and organic food. We seek to capitalize on these global trends by providing both conventional and organic growers with solutions to a broad range of crop protection and plant health needs through strategies such as adding new products to our product portfolio, continuing to broaden the commercial applications of our existing product lines, leveraging growers' positive experiences with existing product lines, educating growers with on farm product demonstrations and controlled product launches with key target customers and other early adopters.
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. Out of ourDavis, California facilities we have developed and commercialized several patent-protected product lines based on various active ingredients, which we refer to in this Quarterly Report as ourMarrone products, including our Regalia product line (based on the active ingredient knotweed), for controlling plant disease and increasing plant health, our Grandevo and Venerate product lines (based on two new species of bacteria, Chromobacterium subtsugae and Burkholderia rinojensis), each for insect and mite control, our Majestene product line and its turf and ornamentals counterpart brand Zelto (based on the same active ingredient bacterium in Venerate), each for nematode control, and our Stargus product line (based on a new strain of Bacillus nakamurai), for downy mildew and white mold control and increased plant health. In addition, in 2019, we acquired the peroxyacetic acid-based plant health product lines Jet-Ag and Jet-Oxide from Jet Harvest Solutions, which we refer to in this Quarterly Report as our Jet products, and through our 2019 acquisition ofPro Farm Technologies OY ("Pro Farm "), we added to our portfolio bionutrition and plant health product lines, which we refer to in this Quarterly Report as ourPro Farm products, including UBP and Foramin. 28
Our research and development efforts in recent periods have been focused on supporting existing commercial products, including Regalia, Grandevo, Venerate, Majestene/Zelto, Haven and Stargus with a focus on reducing cost of product revenues, further understanding the modes of action, manufacturing support and improving formulations. In addition, our internal efforts in development and commercialization are now focused on two promising product candidates, MBI-306 a next generation formulation of our current nematicide product, Majestene and two bioherbicides, MBI-014 and MBI-015 (formerly MBI-010), of which MBI-014 was submitted to theEPA inAugust 2018 . Simultaneously, we are seeking collaborations with third parties to develop and commercialize more early stage candidates on which we have elected not to expend significant internal resources given our reduced budget. We believe this prioritization plan, together with our competitive strengths, including our leadership in the biologicals industry, commercially available products, robust pipeline of novel product candidates, proprietary discovery and development processes and industry experience, position us for growth. We have also expanded our growth strategy through acquisitions of products and companies that broaden our plant health and bionutrition product offerings, both multibillion-dollar segments that are also rapidly growing. InSeptember 2019 , we completed the acquisition ofPro Farm , which expanded our portfolio of bio-based products for integrated crop protection and plant health to now include UBP, Foramin and LumiBio. Also inSeptember 2019 , we completed the purchase of substantially all rights and assets related to the Jet-Ag and Jet-Oxide (biofungicide and disinfectants) product lines fromAustin Grant, Inc. , aFlorida corporation d/b/a Jet Harvest Solutions. Third Quarter 2020 Highlights
During the third quarter of 2020, we, like all businesses domestically and globally, continued to be impacted by the COVID-19 pandemic. Our headquarters inDavis, California , our manufacturing facility inBangor, Michigan and our international subsidiary headquarters inHelsinki, Finland , are located in geographic regions where at the state and/or local levels, governments continue to mandate social distancing measures which began in early- tomid-March 2020 along with shelter in place orders. However, as a supplier to the broader agriculture industry, we have continued to maintain scaled operations under the essential business definition under these orders. We are pleased to have continued to service the agricultural industry during this unprecedented environment through our product portfolio offerings. Further, in part as a result of the$1.7 million of low-interest support from the Payroll Protection Program (the "PPP"), we have not had to lay off employees, and thereby have been able to supply growers during the critical spring growing season without significant interruptions. At the same time, we are conserving cash through prudent expense control and restricting non-essential travel 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
? Revenues increased approximately 26.8% year over year to
? Gross profits increased approximately 39.5% year over year to
from
56.7% from 51.5% for the same period in the prior year;
? Operating expenses were
with
? Net loss in the third quarter of 2020 was
loss of $16.4 million in third quarter of 2019.
The following are the more significant financial results for the nine months
ended
? Revenues increased approximately 35.2% year over year to
? Gross profits increased approximately 45.0% year over year to
from
58.6% from 54.6% for the same period in the prior year;
? Operating expenses were
compared with $32.2 million in the first three quarters of 2019; and
? Net loss for the first three quarters of 2020 was
with a net loss of $27.0 million in the first three quarters of 2019.
Other significant developments for our business during the three months ended
September 30, 2020 include the announcement of the upcoming retirement of our
Chief Financial Officer and President, Jim Boyd and execution of an exclusive
distribution agreement with Rizobacter for a foliar fertilizer and plant health
technology in South America .
29
In addition, in April 2020 , we entered into a warrant exchange agreement with
certain warrant holders reducing the number of shares subject to the outstanding
Company warrants from 52.6 million to 36.4 million. Pursuant to the warrant
exchange agreement, warrants representing the right to purchase up to 46.0
million shares of common stock at varying exercise prices and expiration dates
were exchanged for warrants representing the right to purchase up to 29.9
million shares of common stock with an exercise price of $0.75 per share. The
new warrants have five different expirations dates, three in 2020 and two in
2021. The new warrants that were subject to the expiration dates of May 1, 2020
and September 15, 2020 , were exercised to purchase 3.4 million and 2.7 million
shares of common stock resulting in gross proceeds of $4.6 million .
As previously reported, in March 2020 , prior to the warrant exchange agreement,
we called for the exercise of 6.0 million shares of common stock pursuant to
outstanding warrant agreements at $1.00 per share, which were included in the
results above for the nine months ended September 30, 2020 in a non-cash charge
of $1.4 million related to the fair value of new warrants to purchase up to 6.0
million shares of common stock at an exercise price of $1.75 . The 6.0 million
warrants issued as a result of this transaction were subsequently exchanged
pursuant to the warrant exchange agreement.
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, fair value of warrants, forecast estimated utilized in our impairment assessment 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$8.8 million and$7.0 million for the three months endedSeptember 30, 2020 and 2019, respectively. Our total revenues were$30.7 million and$22.7 million for the nine months endedSeptember 30, 2020 and 2019, respectively. We generate our revenues primarily from product sales, which are principally attributable to sales of our Regalia, Grandevo, Venerate, and LumniBio product lines, but also included sales of Majestene, Stargus, Foramin, UBP-110, Jet-Ag and Jet-Oxide. 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 impact of COVID-19, we presently expect revenues to continue to increase year-over-year for 2020 in line with historic growth rates, in part due to our expanded seed treatment offerings. 30 Product Revenues Product revenues consist of revenues generated primarily from sales to customers, net of rebates and cash discounts. Product revenues constituted 99% and 98% of our total revenues for the three months endedSeptember 30, 2020 and 2019, respectively and 99% of our total revenues for each of the nine months endedSeptember 30, 2020 and 2019. Product revenues inthe United States constituted 75% and 92% of our total revenues for the three months endedSeptember 30, 2020 and 2019, respectively. Product revenues inthe United States constituted 75% and 94% of our total revenues for each of the nine months endedSeptember 30, 2020 and 2019, respectively. 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. 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, which we estimate to be between 5 and 17 years based on the terms of the contract and the covered products and regions. For each of the three and nine months endedSeptember 30, 2020 and 2019, license revenues constituted 2% and 1% of total revenues, respectively. As ofSeptember 30, 2020 , we had received an aggregate of$4.1 million in payments under our strategic collaboration and distribution agreements. There will be an additional$0.8 million in payments under these agreements that we can potentially receive if the testing validation, regulatory progress and commercialization events occur.
Cost of Product Revenues and Gross Profit
Cost of product revenues consists principally of the cost of inventory, which includes raw materials, third-party services and allocation of operating expenses of our manufacturing plant related to procuring, processing, formulating, packaging and shipping of our products. Allocation of operating costs of ourBangor, Michigan manufacturing plant includes direct and indirect labor, productions 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. We expect our cost of product revenues related to the cost of inventory to increase and cost of product revenues relating to write-downs of inventory and idle capacity of our manufacturing plant to decrease as we expand sales and increase production of our existing commercial products. 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 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, ourJet 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. 31 In connection with the Company's receipt of PPP funds, the Company allocated$0.3 million to qualified costs incurred at our manufacturing plant which was previously capitalized. For the three and nine months as ofSeptember 30, 2020 $0.1 million has been recognized as a reduction to cost of product revenues and the remaining$0.2 million will be recognized in future periods consistent with the amortization of similar items.
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$3.1 million and$3.8 million for the three months endedSeptember 30, 2020 and 2019, respectively and$8.7 million and$10.3 million for the nine months endedSeptember 30, 2020 and 2019, respectively. We have utilized a significant portion of our research and development resources to improve margins on existing products and pipeline products to market including supporting manufacturing and quality. 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 reduced budget. 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. Additionally in connection with the Company's receipt of PPP funds, for the three and nine months endedSeptember 30, 2020 , our operating expenses for research, development and patent expenses were reduced by none and$0.7 million , respectively.
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. Outside of operating expenses resulting from ourPro 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. For the three and nine months endedSeptember 30, 2020 , in connection with the Company's receipt of PPP funds, our selling, general and administrative expenses were reduced by none and$0.7 million , respectively. 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 10 to our condensed consolidated financial statements.
32 Income Tax Provision As of the three and nine months endedSeptember 30, 2020 the Company recognized$0.04 million and$0.1 million , respectively in income tax provisions for foreign tax purposes and no amounts for the comparative three and nine month periods endedSeptember 30, 2019 . The effective tax rate (calculated as the ratio of income tax expense to pre-tax income) for the nine months endedSeptember 30, 2020 was (0.77%). The effective tax rate for the first three quarters of 2020 reflects additional foreign income tax required by the acquisition ofPro Farm . The Company does not recognize benefits from tax losses inthe United States or for certainPro Farm subsidiaries. Results of Operations
The following table sets forth certain statements of operations data as a percentage of total revenues:
Comparison of Three and Nine Months Ended
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
2020 2019 2020 2019
Revenues:
Product 99 % 98 % 99 % 99 %
License 1 % 2 % 1 % 1 %
Total revenues 100 % 100 % 100 % 100 %
Cost of product revenues 43 % 49 % 41 % 45 %
Gross profit 57 % 51 % 59 % 55 %
Operating Expenses:
Research, development and
patent 35 % 54 % 28 % 46 %
Selling, general and
administrative 83 % 138 % 73 % 96 %
Total operating expenses 118 % 192 % 101 % 142 %
Loss from operations -61 % -140 % -43 % -87 %
Other income (expense):
Interest expense -5 % -5 % -4 % -4 %
Loss on modification of
warrants 0 % -22 % 0 % -7 %
Loss on issuance of new
warrants 0 % -68 % -5 % -21 %
Change in fair value of
contingent consideration -2 % 0 % -2 % 0 %
Other income (expense), net 0 % 1 % 1 % 1 %
Total other expense, net -7 % -95 % -9 % -32 %
Loss before taxes -68 % -235 % -52 % -119 %
Income tax expense 0 % 0 % 0 % 0 %
Net Loss -68 % -235 % -52 % -119 %
Product Revenues
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
2020 2019 2020 2019
(Dollars in thousands)
Product revenues $ 8,697 $ 6,859 $ 30,295 $ 22,342
% of total revenues 99 % 98 % 99 % 99 %
Product revenues during the three and nine months endedSeptember 30, 2020 and 2019 increased by approximately$1.8 million , or 26.8% and by approximately$8.0 million , or 35.6% to the comparative periods in 2019, as a result of higher demand for and sales of our legacy product families, Regalia, Venerate, and Grandevo and as a result of product sales of ourPro Farm subsidiary product LumiBio Kelta. During the three months endedSeptember 30, 2020 , the Company continued to see great diversity in sales of product offerings and we expect to continue to see diversity in our sales mix as we continue to invest in our sales and marketing efforts, including during periods impacted by COVID-19. 33 License Revenues THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30, 2020 2019 2020 2019 (Dollars in thousands) License revenues $ 131 $ 107 $ 361 $ 337 % of total revenues 1 % 2 % 1 % 1 %
License revenues increased consistent for each of the three and nine months endedSeptember 30, 2020 and 2019, 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 SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
2020 2019 2020 2019
(Dollars in thousands)
Cost of product revenues $ 3,826 $ 3,381 $ 12,701 $ 10,298
% of total revenues 43 % 49 % 41 % 45 %
Gross profit 5,002 3,585 17,955 12,381
% of total revenues 56.7 % 51.5 % 58.6 % 54.6 %
For the three months ended September 30, 2020 , cost of product revenues
increased by approximately $0.4 million or 13.2% and gross profit increased to
56.7% from 51.5% from the prior comparative period. For the nine months ended
September 30, 2020 , cost of product revenues increased by $2.4 million or 23.3%
and gross profit increased to 58.6% from 54.6% from the prior comparative
period. Increases in gross profit for each period was driven by more favorable
and more diverse sales mix.
Research, Development and Patent Expenses
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
2020 2019 2020 2019
(Dollars in thousands)
Research, development and patent $ 3,112 $ 3,760 $ 8,658 $ 10,336
% of total revenues 35 % 54 % 28 % 46 %
Research, development and patent expenses for the three months ended September
30, 2020 decreased by $0.6 million , or 17.2%, and for the nine months ended
September 30, 2020 decreased by $1.7 million , or 16.2%. For the three months
ended September 30, 2020 , costs associated with toxicology, regulatory field
trials and field testing in the aggregate decreased by $0.7 million . For the
nine months ended September 30, 2020 costs associated with toxicology,
regulatory field trials and field testing in the aggregate decreased by $0.9
million and depreciation expense of $0.3 million . The nine month decrease
includes $0.7 million in PPP funds for payroll related expenses and is the
result of cost management efforts which began at the tail end of the prior
interim period in light of COVID-19 whereby resources are allocated to high
priority projects and pipeline products.
Selling, General and Administrative Expenses
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
2020 2019 2020 2019
(Dollars in thousands)
Selling, general
administrative expenses $ 7,335 $ 9,598 $ 22,406 $ 21,876
% of total revenues 83 % 138 % 73 % 96 %
34
Selling, general and administrative expenses for the three months ended
September 30, 2020 decreased by $2.3 million , or 23.6%. The decrease in the
results for the three months ended September 30, 2020 was primarily due to
operating expenses related our acquisition activities in the prior year and the
settlement of litigation, including as reduction of $2.0 million in legal
related expenses, as well as reductions of $0.7 million in consulting and
outside services, $0.5 million in accounting and tax professional services and
$0.3 million in travel related expenses in connection with travel restrictions
put into place as a result of COVID-19. These decreases were offset by increases
of $0.4 million related to amortization of the acquired intangibles assets and
$0.2 million related to stock-based compensation.
Selling, general and administrative expenses for the nine months ended September
30, 2020 increased by $0.5 million , or 2.4%. The increase for the nine months
ended September 30, 2020 compared to the first three quarters of 2019 was due
primarily to increases in our expenses related to the acquired Pro Farm
business, an increase of $1.6 million related to amortization of the acquired
intangibles assets both of which were not included in the comparative prior
period, an increase of $0.7 million in stock based compensation. These increases
were offset by operating expenses related our acquisition activities in the
prior year and the settlement of litigation, including a reduction of $2.6
million in legal related expenses, as well as reductions of $0.6 million in
consulting and outside services, $0.3 million in accounting and tax professional
services and $0.6 million in travel related expenses in connection with travel
restrictions put into place as a result of COVID-19. Additionally during the
nine months ended September 30, 2020 , these expenses were also offset by $0.7
million in PPP funds used primarily for payroll related expenses.
Other Expense, Net
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
2020 2019 2020 2019
(Dollars in thousands)
Interest expense $ (405 ) $ (355 ) $ (1,073 ) $ (1,014 )
Loss on modification of
warrants - (1,564 ) - (1,564 )
Loss on issuance of new
warrants - (4,751 ) (1,391 ) (4,751 )
Change in fair value of
contingent consideration (200 ) - (563 ) -
Other (expense) income, net 24 77 296 126
Total other income (expense),
net $ (581 ) $ (6,593 ) $ (2,731 ) $ (7,203 )
% of total revenues -7 % -95 % -9 % -32 %
For the three months endedSeptember 30, 2020 and 2019, respectively, other expense, net, decreased by$6.0 million as compared to the same period in 2019, respectively, primarily due to the prior period's losses incurred as a result of our modification and call of outstanding warrants offset by the current period change in the fair value of our contingent consideration obligations. For the nine months endedSeptember 30, 2020 and 2019, respectively, other expense, net, decreased by$4.5 million as compared to the same period in 2019, respectively, primarily due to$3.4 million in loss recognized for the for the issuance ofAugust 2019 warrants in connection with the Company's call option of outstanding warrants and$1.5 million related to the loss on modification of outstanding warrants, and due to the change in the fair value of our contingent consideration obligations offset by$0.2 million primarily due to foreign currency translation included in Other expense (income), net.
Seasonality and Quarterly Results
The second half of the year is typically a shoulder 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 (including as the result of the acquisition ofPro Farm ), 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, 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. 35 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
Our historical operating results indicate substantial doubt exists related to our ability to continue as a going concern.
In
Pursuant to the Warrant Exchange Agreement, the Investors have exchanged certain previously issued and outstanding warrants (the "Prior Warrants") to purchase an aggregate of up to 45,977,809 shares of the Company's common stock, for new warrants (the "New Warrants") to purchase an aggregate of up to 29,881,855 shares of Common Stock (the "Warrant Shares"). All of the New Warrants were issued to the Investors upon execution of the Warrant Exchange Agreement. The New Warrants all have an exercise price of$0.75 per share, and expire in five tranches, as follows: (i)May 1, 2020 , with respect to 3,392,581 Warrant Shares, (ii)September 15, 2020 , with respect to 2,714,065 Warrant Shares, (iii)December 15, 2020 , with respect to 13,027,512 Warrant Shares, (iv)March 15, 2021 , with respect to 5,862,380 Warrant Shares, and (v) andDecember 15, 2021 with respect to 4,885,317 Warrant Shares. Prior to theMay 1, 2020 andSeptember 15, 2020 expiration dates, the Investors exercised all the New Warrants subject to the first and second tranche, for an aggregate of approximately$4.6 million . (Refer to Note 7 of the condensed consolidated financial statements) We believe that our existing cash and cash equivalents of$9.0 million atSeptember 30, 2020 , expected revenues and tightly managed operating costs, the exercise of a portion of outstanding warrants, including those which were issued inApril 2020 , will be sufficient to fund operations as currently planned through at least one year from the date of the issuance of these financial statements. We cannot predict, with certainty, the outcome of our actions to grow revenues or manage or reduce costs, or that our outstanding warrants will be exercised by the warrant holders. We have based this belief on assumptions and estimates that may prove to be wrong, and we could spend our available financial resources less or more rapidly than currently expected, including adverse impacts of the current COVID-19 pandemic on our operations. We may continue to 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 our 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. Should 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. We incorporated additional information regarding risks related to our capital and liquidity described in Part II- Item 1A- "Risk Factors." 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. Our liquidity may be negatively impacted as a result of slower than expected adoption of our products. 36 We had the following debt arrangements in place as ofSeptember 30, 2020 (dollars in thousands): PRINCIPAL BALANCE STATED ANNUAL (INCLUDING DESCRIPTION INTEREST RATE ACCRUED INTEREST) PAYMENT/MATURITY Due December 31, Promissory Notes (1)(5) 8.00 % $ 2,983 2022 Promissory Note (2) 5.25 % $ 8,378 Monthly/June 2036 Due December 31, Promissory Notes (3)(5) 8.00 % $ 6,399 2022 Secured Borrowing (4)(6) 12.78 % $ 6,038 Varies/November 2020 Loan Facility(A) 1.00 % 84 Proportionately each September 2022, $ 2023, 2024, 2025
See Note 6 of the condensed consolidated financial statements for each of the following debt arrangements:
(1) "-
(2) "-
(3) "-
(4) "-LSQ Financing."
(5) In
(6) Payable through the lender's direct collection of certain accounts
receivable through
(A) See the description of the "September 2018 Bank Facility" in Note 9 of the Company's Annual Report filed on Form 10-K for the fiscal year endedDecember 31, 2019 .
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.
The following table sets forth a summary of our cash flows for the periods
indicated (in thousands):
NINE MONTHS ENDED SEPTEMBER 30,
2020 2019
(in Thousands)Net cash used in operating activities$ (8,600 ) $ (16,395 ) Net cash used in investing activities$ (1,346 ) $ (6,611 ) Net cash provided in financing activities$ 12,665 $
12,684
Net increase (decrease) in cash, cash equivalents, and restricted cash $ 2,719 $
(10,322 )
37
Cash Flows from Operating Activities
Net cash used in operating activities of$8.6 million during the nine months endedSeptember 30, 2020 primarily resulted from our net loss of$16.0 million and cash used in operating assets and liabilities of$0.8 million . This use was partially offset by non-cash charges of$8.1 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,$2.7 million of depreciation and amortization,$2.8 million of share-based compensation expense, and$0.6 million of amortization of right-of-use assets, and$0.6 million in changes to the Company's contingent consideration in connection with the Pro Farm Acquisition. Net cash used in operating activities of$16.4 million during the nine months endedSeptember 30, 2019 primarily resulted from our net loss of$27.0 million and the operating assets and liabilities from our acquisitions ofPro Farm and Jet-Ag and Jet-Oxide including cash and contingent consideration to be paid in the future. These uses were partially offset by non-cash charges of$10.5 million consisting of$1.6 million related to loss on modification of previously outstanding warrants,$4.8 million related to loss on issuance of new warrant in connection with our call of the exercise of 10,000,000 shares under outstanding warrants,$1.4 million of depreciation and amortization,$1.9 million of share-based compensation expense,$0.6 million of amortization of right-of-use assets and$0.2 million of non-cash interest expense.
Cash Flows from Investing Activities
Net cash used in investing activities were$1.3 million during the nine months endedSeptember 30, 2020 . Cash flow from investing included$0.9 million contingent 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. Net cash used in investing activities were$6.6 million during the nine months endedSeptember 30, 2019 . Cash flow from investing activities included$5.8 million , net related to the acquisition ofPro Farm and$0.5 million related to the acquisition of product lines Jet-Ag and Jet-Oxide with the remainder a result from purchases of property, plant and equipment to support our operations.
Cash Flows from Financing Activities
Net cash provided in financing activities of
Net cash provided in financing activities of
Inflation
We believe that inflation has not had a material impact on our results of
operations for the three and nine months ended
Off-Balance Sheet Arrangements
We have not been involved in any material off-balance sheet arrangements.
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."
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