Notes
to Condensed Consolidated Financial Statements
March
31, 2018
(Unaudited)
1.
Summary of Business, Basis of Presentation and Liquidity
Marrone
Bio Innovations, Inc. (“Company”), formerly Marrone Organic Innovations, Inc., 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. The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary.
All significant intercompany balances and transactions have been eliminated in consolidation. The Company makes bio-based pest
management and plant health products. The Company targets the major markets that use conventional chemical pesticides, including
certain agricultural and water markets where its bio-based products are used as alternatives for, or mixed with, conventional
chemical pesticides. The Company also targets new markets for which (i) there are no available conventional chemical pesticides
or (ii) the use of conventional chemical pesticides may not be desirable or permissible either because of health and environmental
concerns (including for organically certified crops) or because the development of pest resistance has reduced the efficacy of
conventional chemical pesticides. The Company delivers EPA-approved and registered biopesticide products and other bio-based products
that address the global demand for effective, safe and environmentally responsible products.
From
October 2017 through January 2018, the
Company borrowed, pursuant to a convertible promissory
note (the “Secured December 2017 Convertible Note”) as amended and restated on December 22, 2017, $6,000,000, including
$4,000,000 borrowed in 2017 and $2,000,000 borrowed in January 2018
.
In February 2018, the
Company
issued, pursuant to a securities purchase agreement (the “Securities Purchase Agreement”) entered into on December
15, 2017, 70,514,000 unregistered shares of its common stock and converted $51,000,000 in outstanding debt principal (including
$6,000,000 outstanding under the Secured December 2017 Convertible Note and $45,000,000 outstanding under long-term senior secured
debt instruments) into a portion of the aforementioned common shares (the “February Stock and Debt Conversion Transaction”).
The gross proceeds to the Company from the offering were approximately $24,000,000, which excludes the $6,000,000 in debt converted
under the Secured December 2017 Convertible Note, and after deducting underwriting discounts and commissions and estimated offering
expenses payable by the Company, the aggregate net proceeds to the Company totaled approximately $21,800,000. See Notes 6 and
10 for further discussion of February Stock and Debt Conversion Transaction.
In
April 2018, the Company completed a public offering of 8,336,250 registered
shares of its
common stock
. The public offering price of the shares sold in the offering was $1.65 per share. The total gross proceeds
to the Company from the offerings were $13,800,000. The estimated aggregate net proceeds to the Company from common stock sold
under the shelf registration total approximately $12,700,000.
The Company is an early stage company with
a limited operating history and has a limited number of commercialized products. As of March 31, 2018, the Company had an accumulated
deficit of $266,179,000, has incurred significant losses since inception and expects to continue to incur losses for the
foreseeable future. Until the completion of the IPO in August 2013, the Company had funded operations primarily with net proceeds
from the private placements of convertible preferred stock, convertible notes, promissory notes and term loans, as well as with
the proceeds from the sale of its products and payments under strategic collaboration and distribution agreements and government
grants. The Company will need to generate significant revenue growth to achieve and maintain profitability. As of March 31, 2018,
the Company had working capital of $18,845,000, including cash and cash equivalents of $14,757,000. In addition, as of
March 31, 2018, the Company had debt and debt due to related parties of $13,826,000 and $7,285,000, respectively, for which the
underlying debt agreements contain various financial and non-financial covenants, as well as certain material adverse change clauses.
In addition, as of March 31, 2018, the Company had a total of $2,047,000 of restricted cash relating to these debt agreements
(see Note 6).
The
June 2014 Secured Promissory Note (as defined in Note 6) contains a material adverse change clause that could be invoked by the
lender as a result of the uncertainty related to the Company’s ability to continue as a going concern. If the lender were
to declare an event of default, the entire amount of borrowings related to all debt agreements at that time would have to be reclassified
as current in the financial statements. The lender has waived their right to deem recurring losses, liquidity, going concern,
and financial condition a material adverse change through November 15, 2019. As a result, none of the long term portion
of the Company’s outstanding debt has been reclassified to current in these financial statements as of March 31, 2018.
If
the Company breaches any of the covenants contained within the 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 November 15, 2019, 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 a 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, would 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 participates in a heavily regulated and highly competitive crop protection industry and believes that adverse changes
in any of the following areas could have a material effect on the Company’s future financial position, results of operations
or cash flows: inability to obtain regulatory approvals, increased competition in the pesticide market, market acceptance of the
Company’s products, weather and other seasonal factors beyond the Company’s control, litigation or claims against
the Company related to intellectual property, patents, products or governmental regulation, and the Company’s ability to
support increased growth.
It
is possible the Company may need to raise additional funds in the future. If so there can be no assurance that such efforts will
be successful or that, in the event that they are successful, the terms and conditions of such financing will not be unfavorable.
Any future equity financing may result in dilution to existing shareholders and any debt financing may include additional restrictive
covenants. Any failure to obtain additional financing or to achieve the revenue growth necessary to fund the Company with cash
flows from operations will have a material adverse effect upon the Company and will likely result in a substantial reduction in
the scope of the Company’s operations and impact the Company’s ability to achieve its planned business objectives.
The
accompanying financial statements have been prepared under the assumption that the Company will continue to operate as a going
concern, which contemplates the realization of assets and the settlement of liabilities in the normal course of business. The
condensed consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability
and classification of assets or the amounts of liabilities that may result from any inability of the Company to continue as a
going concern. The Company adopted the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update
No. 2014-15,
Presentation of Financial Statements – Going Concern (Subtopic 205-40)
effective December 31, 2016,
which requires the Company to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial
doubt about the entity’s ability to continue as a going concern within one year from the date of the issuance of these condensed
consolidated financial statements.
The
Company’s historical operating results indicate substantial doubt exists related to the Company’s ability to continue
as a going concern. The Company believes that its existing cash and cash equivalents of $14,757,000 at March 31, 2018, expected
revenues and, the net proceeds from equity financing discussed in Note 12 will be sufficient to fund operations as currently planned
through one year from the date of the issuance of these financial statements. The Company believes that the actions discussed
above are probable of occurring and mitigating the substantial doubt raised by the Company’s historical operating results
and satisfying the Company’s estimated liquidity needs 12 months from the issuance of the financial statements. Cash on
hand as of the issuance of these financial statements is estimated to be $21.0 million. However, the Company cannot predict, with
certainty, the outcome of its actions to grow revenues or manage or reduce costs. The Company has based this belief on assumptions
and estimates that may prove to be wrong, and the Company could spend its available financial resources less or more rapidly than
currently expected. The Company 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. Management may
seek additional capital through debt financings, collaborative or other funding arrangements with partners, or through other sources
of financing. Should the Company seek additional financing from outside sources, the Company may not be able to raise such financing
on terms acceptable to the Company or at all. If the Company is unable to raise additional capital when required or on acceptable
terms, the Company 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.
2.
Significant Accounting Policies
Basis
of Presentation
The
accompanying financial information as of March 31, 2018, and for the three months ended March 31, 2018 and 2017, 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,
2017.
In
the opinion of management, the condensed consolidated financial statements as of March 31, 2018, and for the three months ended
March 31, 2018 and 2017, 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, 2018
are not necessarily indicative of the operating results for the full fiscal year or any future periods.
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 the useful lives of property, plant and equipment, reserves
for inventory obsolescence, fair value estimates and in its going concern analysis.
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. See Note 6 for further discussion.
Cash
and Cash Equivalents and Restricted Cash
The
following table provides a reconciliation of cash, cash equivalents and restricted cash to amounts shown in the statement of cash
flows in thousands:
|
|
March 31, 2018
|
|
|
March 31, 2017
|
|
Cash and cash equivalents
|
|
$
|
14,757
|
|
|
$
|
1,782
|
|
Restricted cash, current portion
|
|
|
487
|
|
|
|
1,444
|
|
Restricted cash, less current portion
|
|
|
1,560
|
|
|
|
1560
|
|
Total cash, cash equivalents and restricted cash
|
|
$
|
16,804
|
|
|
$
|
4,786
|
|
Concentrations
of Credit Risk
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. Such deposits may exceed federal 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.
Revenues
generated from international customers were 18% for each of the three months ended March 31, 2018 and 2017.
The
Company’s principal sources of revenues are its Regalia, Grandevo and Venerate product lines. These three product lines
accounted for 91% of the Company’s total revenues for the three months ended March 31, 2018 and 2017.
Customers
to which 10% or more of the Company’s total revenues are attributable for any one of the periods presented consist of the
following:
|
|
CUSTOMER
A
|
|
|
CUSTOMER
B
|
|
|
CUSTOMER
C
|
|
|
CUSTOMER
D
|
|
|
CUSTOMER
E
|
|
Three months ended March 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
23
|
%
|
|
|
14
|
%
|
|
|
0
|
%
|
|
|
9
|
%
|
|
|
6
|
%
|
2017
|
|
|
18
|
%
|
|
|
0
|
%
|
|
|
15
|
%
|
|
|
13
|
%
|
|
|
12
|
%
|
Customers
to which 10% or more of the Company’s outstanding accounts receivable are attributable as of either March 31, 2018 or December
31, 2017 consist of the following:
|
|
CUSTOMER
|
|
|
CUSTOMER
|
|
|
CUSTOMER
|
|
|
CUSTOMER
|
|
|
|
A
|
|
|
B
|
|
|
C
|
|
|
D
|
|
March 31, 2018
|
|
|
37
|
%
|
|
|
0
|
%
|
|
|
9
|
%
|
|
|
9
|
%
|
December 31, 2017
|
|
|
22
|
%
|
|
|
16
|
%
|
|
|
11
|
%
|
|
|
11
|
%
|
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 has one supplier of 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 maintains 6-12 months of knotweed extract at any given time, but an unexpected
disruption in supply 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
Deferred
Cost of Product Revenues
Deferred
cost of product revenues are stated at the lower of cost or net realizable value and include product sold where title has transferred
but the criteria for revenue recognition have not been met. As of March 31, 2018 and December 31, 2017, the Company recorded deferred
cost of product revenues of $3,000 and $3,063,000 respectively.
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:
|
|
March 31, 2018
|
|
|
December 31, 2017
|
|
Product revenues
|
|
$
|
539
|
|
|
$
|
6,449
|
|
Financing costs
(1)
|
|
|
545
|
|
|
|
-
|
|
License revenues
|
|
|
1,731
|
|
|
|
1,790
|
|
|
|
|
2,815
|
|
|
|
8,239
|
|
Less current portion
|
|
|
(303
|
)
|
|
|
(6,193
|
)
|
|
|
$
|
2,512
|
|
|
$
|
2,046
|
|
(1)
Financing
costs relate to the implementation of ASC 606. Refer to the Company’s revenue recognition policy in this note.
Revenue
Recognition
On
January 1, 2018, the Company adopted the new accounting standard Accounting Standards Codification (“ASC”) 606,
Revenue
from Contracts with Customers
and all the related amendments (“the new revenue standard”) and applied it to all
contracts using the modified retrospective method. The Company recognized the cumulative effect of initially applying the new
revenue standard as an adjustment to the opening balance of accumulated deficit. The comparative information has not been restated
and continues to be reported under the accounting standards in effect for those periods. For the three months ended March 31,
2018, the adoption of this standard had a material impact on the Company’s financial statements, and it is expected to have
a material impact on future periods, because the Company will no longer recognize revenue on a sell-through basis.
The
cumulative effect of the changes made to the Company’s condensed consolidated balance sheet on January 1, 2018 for the adoption
of the new revenue standard was as follows (in thousands):
BALANCE SHEET
|
|
As Reported
Balance at
December 31, 2017
|
|
|
Adjustments
Due to ASC 606
|
|
|
Balance
at
January 1, 2018
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred cost of product revenues
|
|
$
|
3,063
|
|
|
$
|
(3,058
|
)
|
|
$
|
5
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred revenue, current portion
|
|
|
6,193
|
|
|
|
(5,893
|
)
|
|
|
300
|
|
Deferred revenue, less current portion
|
|
|
2,046
|
|
|
|
524
|
|
|
|
2,570
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated deficit
|
|
$
|
(265,572
|
)
|
|
$
|
2,311
|
|
|
$
|
(263,261
|
)
|
In
accordance with the new revenue standard requirements, the disclosure of the impact of adoption on the Company’s Condensed
Consolidated Balance Sheet and Condensed Consolidated Statement of Operations was as follows (in thousands):
|
|
March 31, 2018
|
|
BALANCE SHEET
|
|
As Reported
|
|
|
Balances
without
Adoption of ASC 606
|
|
|
Effect
of Change
Higher/(Lower)
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred cost of product revenues
|
|
$
|
3
|
|
|
$
|
3,381
|
|
|
$
|
3,384
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred revenue, current portion
|
|
|
303
|
|
|
|
6,352
|
|
|
|
6,655
|
|
Deferred revenue, less current portion
|
|
|
2,512
|
|
|
|
(545
|
)
|
|
|
1,967
|
|
Accumulated deficit
|
|
$
|
(266,179
|
)
|
|
$
|
(2,426
|
)
|
|
$
|
(268,605
|
)
|
|
|
For the Three Months Ended March 31, 2018
|
|
|
|
As Reported
|
|
|
Activity Without
Adoption of ASC 606
|
|
|
Effect of Change Higher/(Lower)
|
|
STATEMENT OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
|
|
$
|
4,224
|
|
|
$
|
(469
|
)
|
|
$
|
3,755
|
|
License
|
|
|
100
|
|
|
|
(42
|
)
|
|
|
58
|
|
Cost of product revenues
|
|
|
2,242
|
|
|
|
(323
|
)
|
|
|
1,919
|
|
Interest expense
|
|
|
(1,119
|
)
|
|
|
72
|
|
|
|
(1,047
|
)
|
Net loss
|
|
$
|
(2,918
|
)
|
|
$
|
(116
|
)
|
|
$
|
(3,034
|
)
|
Product
Sales.
The Company recognizes revenue for product sales at a point in time following the transfer of control of such products
to the customers, which typically occurs upon shipment or delivery depending on the terms of the underlying contracts. The Company
may enter into contracts in which the standalone selling prices (“SSP”) is different from the amount the Company is
entitled to bill the customer. As of March 31, 2018, the Company had deferred product revenue in the amount of $539,000 associated
primarily with billings in excess of SSP.
Licenses
Revenues.
The Company recognizes license revenues pursuant to strategic collaboration and distribution agreements under which
the Company receives payments for the achievement of certain testing validation, regulatory progress and commercialization events.
As these activities and payments are associated with exclusive rights that the Company provides in connection with strategic collaboration
and distribution agreements over the term of the agreements, revenues related to the payments received are deferred and recognized
over the term of the exclusive distribution period of the respective agreement.
Financing
Component Revenues.
The Company recognizes a financing component, if material, when the Company receives consideration from
the customer, and when the Company expects control of the product or service to be transferred to the customer in a period of
greater than one year from the date of receipt of the consideration.
Revenue
recognition requires the Company to make a number of estimates that include variable consideration. For example, customers may
receive sales or volume-based pricing incentives or receive incentives for providing the Company with marketing-related information.
The Company makes estimates surrounding variable consideration and the net impact to revenues. In making such estimates, significant
judgment is required to evaluate assumptions related to the amount of net contract revenues, including the impact of any performance
incentives and the likelihood that customers will achieve them. In the event estimates related to variable consideration change,
the cumulative effect of these changes is recognized as if the revised estimates had been used since revenue was initially recognized
under the contract. Such revisions could occur in any reporting period, and the effects may be material.
From
time to time, the Company offers certain product rebates to its distributors and growers, which are estimated and recorded as
reductions to product revenues, and an accrued liability is recorded at the later of when the revenues are recorded or the rebate
is being offered.
Contract
Assets.
The Company does not have contract assets since revenue is recognized as control of goods are transferred or as services
are performed or such contract assets are incurred or expensed within one year of the recognition of the revenue.
Contract
Liabilities.
The contract liabilities consist of deferred revenue. The Company classifies deferred revenue as current or noncurrent
based on the timing of when the Company expects to recognize revenue. Generally all contract liabilities, excluding deferred revenue,
are expected to be recognized within one year and are included in accounts payable in the Company’s condensed consolidated
balance sheet.
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, 2018 and 2017, research and development expenses totaled $2,286,000
and $2,138,000, respectively, and patent expenses totaled $248,000 and $306,000, respectively.
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, 2018 and 2017 were $174,000 and
$104,000, respectively.
Advertising
The
Company expenses advertising costs as incurred. Advertising costs for the three months ended March 31, 2018 and 2017 were $206,000
and $124,000, 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, 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,
|
|
|
|
2018
|
|
|
2017
|
|
Stock options outstanding
|
|
|
5,343
|
|
|
|
3,325
|
|
Warrants to purchase common stock
|
|
|
52,725
|
|
|
|
4,152
|
|
Restricted stock units outstanding
|
|
|
931
|
|
|
|
415
|
|
Recently
Adopted Accounting Pronouncements
In
May 2014, the FASB issued ASU 2014-09,
Revenue from Contracts with Customers (Topic 606)
, to clarify the principles of
recognizing revenue and create common revenue recognition guidance between U.S. GAAP and International Financial Reporting Standards.
Under ASU 2014-09, revenue is recognized when a customer obtains control of promised goods or services and is recognized at an
amount that reflects the consideration expected to be received in exchange for such goods or services. In addition, ASU 2014-09
requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.
The
Company adopted ASU 2014-09 in the first quarter of 2018 using the modified-retrospective method. This adoption primarily affected
the Company’s product revenues accounted for using the sell-through method under ASC 605
, Revenue Recognition,
and
also the accounting for variable consideration in the form of customer incentives.
The
Company adopted Accounting Standards Update 2014-09 (“ASU 2014-09”), which supersedes the revenue guidance under ASC
605, generally requires the Company to recognize revenue and profit from its product sales arrangements earlier and in a more
linear fashion than historical practice under ASC 605, including the estimation of sell-through revenue and variable consideration
that would otherwise have been deferred. Following the adoption of ASU 2014-09, the revenue recognition for the Company’s
license arrangements remained materially consistent with its historical practice. See the tables above in this note for the effects
of the adoption of ASU 2014-09 on the Company’s condensed consolidated financial statements as of January 1, 2018 and for
the three months ended March 31, 2018. See “Revenue Recognition” above for further discussion of the effects of the
adoption of ASU 2014-09 on the Company’s significant accounting policies. The adoption of this standard had a material impact
on the Company’s financial statements as disclosed above and is expected to continue to have a material impact for the foreseeable
future.
The
Company adopted Accounting Standards Update No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts
and Cash Payments (“ASU 2016-15”). The amendment updated and clarified how certain cash receipts and cash payments
are to be presented and classified in the statement of cash flows. The adoption of this standard did not have a material impact
on the condensed consolidated financial statements and is not expected to have a material impact on future periods.
In
March 2018, the Financial Accounting Standards Board (“FASB”) issued guidance pertaining to the accounting of the
Tax Cuts and Jobs Act (“TCJA”), allowing companies a year to finalize and record any provisional or inestimable impacts
of the TCJA. This guidance is effective upon issuance during this quarter. The adoption of this particular guidance did not have
a material effect on the Company’s financial statements.
In
July 2017, the FASB issued ASU No. 2017-011, “Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic
480); Derivatives and Hedging (Topic 815), (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part
II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and
Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception,” (ASU No. 2017-11) which allows for the
exclusion of a down round feature, when evaluating whether or not an instrument or embedded feature requires derivative classification.
The Company early adopted this guidance beginning January 1, 2018. The adoption of this standard had a material impact on the
Company’s financial statements as the Company was not required to classify the warrants issued in conjunction with the February
5, 2018 equity financing as derivatives.
In
March 2018, the FASB issued ASU No. 2018-05, “Income Taxes (Topic 740)—Amendments to SEC Paragraphs Pursuant to SEC
Staff Accounting Bulletin No. 118,” (ASU No. 2018-05) which amends certain Securities and Exchange Commission (SEC) material
in Topic 740 for the income tax accounting implications of the recently issued Tax Reform. This guidance clarifies the application
of Topic 740 in situations where a registrant does not have the necessary information available, prepared, or analyzed in reasonable
detail to complete the accounting under Topic 740 for certain income tax effects of Tax Reform for the reporting period in which
Tax Reform was enacted. The adoption of this guidance did not have a material impact on the financial statements of the Company.
Recently
Issued Accounting Pronouncements
In
February 2018, the FASB issued ASU No. 2018-02, “Income Statement—Reporting Comprehensive Income (Topic 220),”
(ASU No. 2018-02) which allows for the stranded tax effects resulting from the Tax Cuts and Jobs Act of 2017 (Tax Reform) to be
reclassified from accumulated other comprehensive income to retained earnings. The provisions of ASU No. 2018-02 are effective
for annual reporting periods beginning after December 15, 2018, and interim reporting periods within those annual periods, with
early adoption permitted. This ASU shall be applied either at the beginning of the annual or interim period of adoption or retrospectively
to each period in which the income tax effects of Tax Reform affects the items remaining in accumulated other comprehensive income
(loss). The Company has not yet determined the impact of implementing this new standard.
3.
Fair Value Measurements
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.
|
The
following table presents the Company’s financial assets measured at fair value on a recurring basis as of March 31, 2018
and December 31, 2017 (in thousands):
|
|
MARCH 31, 2018
|
|
|
|
TOTAL
|
|
|
LEVEL 1
|
|
|
LEVEL 2
|
|
|
LEVEL 3
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liability
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
DECEMBER 31, 2017
|
|
|
|
TOTAL
|
|
|
LEVEL 1
|
|
|
LEVEL 2
|
|
|
LEVEL 3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liability
|
|
$
|
674
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
674
|
|
The
Company estimated the fair value of the derivative liability as of February 5, 2018 and as of December 31, 2017 using an option
pricing model. See Note 6 for further discussion of the extinguishment of the derivative liability in conjunction with the conversion
of debt into common shares and issuance of warrants. The fair value is subjective and is affected by certain significant inputs
to the valuation model, which are disclosed in the table below. The fair value of the derivative liability is based upon the outputs
of the option pricing model. As the option pricing model estimates the fair value of derivative liability using unobservable inputs,
it is considered to be a Level 3 fair value measurement.
As
a result of the change in the estimated fair value between December 31, 2017 and February 5, 2018, the Company recognized a net
loss from the total change in estimated fair value of the derivative liabilities as shown in the tables below. This loss is included
in the change in estimated fair value of derivative liability in the Company’s condensed consolidated statement of operations.
The
following table provides a reconciliation of the activity between the beginning date and ending balances for the derivative liability
measured at fair value using significant unobservable inputs (Level 3) (in thousands):
|
|
Derivative
LIABILITY
|
|
Fair value at December 31, 2017
|
|
$
|
674
|
|
Derivative liability issued
|
|
|
573
|
|
Change fair value of financial instruments
|
|
|
5,177
|
|
Derivative liability extinguished
|
|
|
(6,424
|
)
|
Fair value at March 31, 2018
|
|
$
|
—
|
|
The
following table represents significant unobservable inputs used in determining the fair value of the derivative liability:
|
|
MARCH 31, 2018
|
|
|
DECEMBER 31, 2017
|
|
Stock Price volatility
|
|
|
60
|
%
|
|
|
60
|
%
|
Risk-free rate
|
|
|
1.46
|
%
|
|
|
1.28
|
%
|
Probability weighted term in years
|
|
|
0.18
|
|
|
|
0.42
|
|
4.
Inventories
Inventories,
net consist of the following (in thousands):
As
of March 31, 2018 and December 31, 2017, the Company had $306,000 and $252,000, respectively, in reserves against its inventories.
|
|
MARCH 31, 2018
|
|
|
DECEMBER 31, 2017
|
|
Raw materials
|
|
$
|
3,339
|
|
|
$
|
2,310
|
|
Work in progress
|
|
|
2,174
|
|
|
|
2,441
|
|
Finished goods
|
|
|
4,534
|
|
|
|
5,076
|
|
|
|
$
|
10,047
|
|
|
$
|
9,827
|
|
5.
Accrued Liabilities
Accrued
liabilities consist of the following (in thousands):
|
|
MARCH 31, 2018
|
|
|
DECEMBER 31, 2017
|
|
Accrued compensation
|
|
$
|
1,582
|
|
|
$
|
1,825
|
|
Accrued warranty costs
|
|
|
472
|
|
|
|
556
|
|
Accrued legal costs
|
|
|
616
|
|
|
|
1,558
|
|
Accrued customer incentives
|
|
|
2,151
|
|
|
|
1,986
|
|
Accrued liabilities, other
|
|
|
1,984
|
|
|
|
2,264
|
|
|
|
$
|
6,805
|
|
|
$
|
8,189
|
|
The
Company warrants the specifications and/or performance of its products through implied product warranties and has extended product
warranties to qualifying customers on a contractual basis. The Company estimates the costs that may be incurred during the warranty
period and records a liability in the amount of such costs at the time product is shipped. The Company’s estimate is based
on historical experience and estimates of future warranty costs as a result of increasing usage of the Company’s products.
During the three months ended March 31, 2018, the Company recognized $44,000 in warranty expense associated with product shipments
for the period. This expense was reduced by $121,000 as a result of the historical usage of warranty reserves being lower than
previously estimated and $7,000 in settlements during the period. The Company periodically assesses the adequacy of its recorded
warranty liability and adjusts the amount as necessary. Changes in the Company’s accrued warranty costs during the period
are as follows (in thousands):
Balance at December 31, 2017
|
|
$
|
556
|
|
Warranties issued (released) during the period
|
|
|
(77
|
)
|
Settlements made during the period
|
|
|
(7
|
)
|
Balance at March 31, 2018
|
|
$
|
472
|
|
6.
Debt
Debt,
including debt due to related parties, consists of the following (in thousands):
|
|
MARCH 31, 2018
|
|
|
DECEMBER 31, 2017
|
|
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, net of unamortized debt discount as of March 31, 2018 and December 31, 2017 of $0 and $103, respectively, imputed interest rate of 0% (see Note 6)
|
|
|
3,411
|
|
|
|
12,347
|
|
Secured promissory note (“June 2014 Secured Promissory Note”) bearing interest at prime plus 2% (6.5% as of March 31, 2018) 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, 2018 and December 31, 2017 of $220 and $226, respectively, discount is based on imputed interest rate of 6.7%
|
|
|
8,811
|
|
|
|
8,872
|
|
Senior secured convertible promissory notes (“Secured December 2017 Convertible Note”) bearing interest at 10% per annum, interest and principal through the conversion date in February 2018, collateralized by substantially all of the Company’s assets, net of unamortized discount as of March 31, 2018 and December 31, 2017 of $0 and $510, respectively
|
|
|
—
|
|
|
|
3,490
|
|
Secured revolving borrowing (“LSQ Financing”) bearing interest at (12.8% annually) payable through the lenders direct collection of certain accounts receivable through May 2018, collateralized by substantially all of the Company’s personal property, net of unamortized debt discount as of March 31, 2018 and December 31, 2017 of $0 and $54, respectively, with an imputed interest rate of 43.3%
|
|
|
1,604
|
|
|
|
1,222
|
|
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, net of unamortized discount as of March 31, 2018 and December 31, 2017 of $0 and $2,178, respectively debt discount is based on imputed interest rate of 0% (see Note 9)
|
|
|
7,285
|
|
|
|
37,822
|
|
Debt, including debt due to related parties
|
|
|
21,111
|
|
|
|
63,753
|
|
Less debt due to related parties
|
|
|
(7,285
|
)
|
|
|
(37,822
|
)
|
Less current portion
|
|
|
(1,852
|
)
|
|
|
(1,524
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
11,974
|
|
|
$
|
24,407
|
|
As
of March 31, 2018, aggregate contractual future principal payments on the Company’s debt, including debt due to related
parties, are due as follows (in thousands):
Period ended March 31, 2018
|
|
|
|
2018
|
|
$
|
1,800
|
|
2019
|
|
|
279
|
|
2020
|
|
|
296
|
|
2021
|
|
|
318
|
|
2022
|
|
|
7,789
|
|
Thereafter
|
|
|
7,604
|
|
Total future principal payments
|
|
|
18,086
|
|
Interest payments included in debt balance
(1)
|
|
|
3,241
|
|
|
|
$
|
21,331
|
|
|
(1)
|
Due
to the debt extinguishment requirement, the Company as included both accrued interest and future interest in the debt balance
for certain outstanding debt as further discussed in Notes 6 and 9.
|
The
fair value of the Company’s outstanding debt obligations as of March 31, 2018 and December 31, 2017 was $12,315,000 and
$21,133,000, respectively, which as of March 31, 2018 was estimated based on a discounted cash flow model using an estimated market
rate of interest of 15% for the fixed rate debt and 6.5% for the variable rate debt, and is classified as Level 3 within the fair
value hierarchy. As of December 31, 2018, for the October 2012 and April 2013 Secured Promissory Notes, the debt was valued by
applying the ratio of the value of common stock the lender agreed to take as consideration in connection with the conversion to
equity and applying this ratio to the outstanding principal balance. The Company used 6.5%, the current interest rate, to value
the variable rate debt. This debt is classified as Level 3 within the fair value hierarchy. The debt entered into during 2017
was valued using the outstanding principal balance.
The following is a reconciliation of interest expense for the
debt outstanding during the three months ended (in thousands).
|
|
March 31, 2018
|
|
|
|
Interest
|
|
|
|
Expense
|
|
|
Related Party
|
|
|
Non cash
|
|
|
|
|
|
|
|
|
|
|
|
October 2012 and April 2013 Secured Promissory Notes
|
|
$
|
213
|
|
|
$
|
—
|
|
|
$
|
42
|
|
June 2014 Secured Promissory Note
|
|
|
152
|
|
|
|
—
|
|
|
|
6
|
|
December 2017 Convertible Note
|
|
|
529
|
|
|
|
—
|
|
|
|
322
|
|
LSQ Financing
|
|
|
152
|
|
|
|
—
|
|
|
|
54
|
|
August 2015 Senior Secured Promissory Notes
|
|
|
—
|
|
|
|
434
|
|
|
|
114
|
|
ASC 606 Financing Component
|
|
|
73
|
|
|
|
—
|
|
|
|
73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,119
|
|
|
$
|
434
|
|
|
$
|
611
|
|
|
|
March 31, 2017
|
|
|
|
Interest
|
|
|
|
Expense
|
|
|
Related Party
|
|
|
Non cash
|
|
|
|
|
|
|
|
|
|
|
|
October 2012 and April 2013 Secured Promissory Notes
|
|
$
|
483
|
|
|
$
|
—
|
|
|
$
|
46
|
|
June 2014 Secured promissory note
|
|
|
134
|
|
|
|
—
|
|
|
|
5
|
|
December 2017 Convertible Note
(1)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
LSQ Financing
(1)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
August 2015 Senior Secured Promissory Notes
|
|
|
—
|
|
|
|
1,074
|
|
|
|
286
|
|
ASC 606 Financing Component
(1)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Capital leases and other
|
|
|
19
|
|
|
|
—
|
|
|
|
—
|
|
|
|
$
|
636
|
|
|
$
|
1,074
|
|
|
$
|
337
|
|
|
(1)
|
There
were no outstanding borrowings under this debt instrument during the three months ended March 31, 2017.
|
Secured
Promissory Notes
On
October 2, 2012, the Company borrowed $7,500,000 pursuant to senior notes (“October 2012 Secured Promissory Notes”)
with a group of lenders. On April 10, 2013 (“Conversion Date”), the Company entered into an amendment to increase,
by up to $5,000,000, the amount available under the terms of the loan agreement with respect to the October 2012 Secured Promissory
Notes. Under this amendment, an additional $4,950,000 was issued in partial consideration for $3,700,000 in cash received and
in partial conversion for the cancellation of a $1,250,000 subordinated convertible note (collectively, “April 2013 Secured
Promissory Notes”). The total amount borrowed under the amended loan agreement for the October 2012 Secured Promissory Notes
and the April 2013 Secured Promissory Notes increased from $7,500,000 to $12,450,000 as of the Conversion Date. The October 2012
and April 2013 Secured Promissory Notes bore interest at 14% at until February 5, 2018.
On
February 5, 2018, the Company converted, pursuant to an amendment, dated December 15, 2017, to the October 2012 and April 2013
Secured Promissory Notes, $10,000,000 aggregate principal amount of indebtedness outstanding under the October 2012 and April
2013 Secured Promissory Notes to an aggregate of 5,714,285 shares of common stock and warrants to purchase 1,142,856 shares of
common stock (such conversion, the “Snyder Debt Conversion”), such that $2,450,000 of principal under the October
2012 and April 2013 Secured Promissory Notes is outstanding as of March 31, 2018. Simultaneously with the Snyder Debt Conversion,
the maturity of the October 2012 and April 2013 Secured Promissory Notes was extended to December 31, 2022 (“Maturity Date”),
the interest was reduced from 14% to 8% and all interest payments under the October 2012 and April 2013 Secured Promissory Notes
were deferred to the Maturity Date. This loan is collateralized by substantially all of the Company’s assets. The October
2012 and April 2013 Secured Promissory Notes contain representations and warranties by the Company and the lender, certain indemnification
provisions in favor of the lenders and customary covenants (including limitations on other debt, liens, acquisitions, investments
and dividends), and events of default (including payment defaults, breaches of covenants, a material impairment in the lender’s
security interest or in the collateral, and events relating to bankruptcy or insolvency). The October 2012 and April 2013
Secured Promissory Notes contain several restrictive covenants. The Company is in compliance with all related covenants, or has
received an appropriate waiver of these covenants.
In
conjunction with the Snyder Debt Conversion, the Company accounted for the partial debt extinguishment under the troubled debt
restructuring accounting guidance. The Company recognized a gain of $2,821,000 for the three months ended March 31, 2018 on partial
extinguishment of the October 2012 and April 2013 Secured Promissory Notes. Because the Company recognized a gain on the partial
extinguishment of debt, the Company was required to include all future interest and additional consideration, which included accrued
interest, under the terms of this agreement as a reduction of the gain. As a result, the amount of the debt on the Company’s
balance sheet related to the October 2012 and April 2013 Secured Promissory Notes is $3,411,000, as compared to $2,450,000 of
contractual principal outstanding thereunder. Going forward, subject to future amendments to debt agreement or costs, the Company
will not recognize future interest expense on the October 2012 and April 2013 Secured Promissory Notes.
The accounting for the change due to the
Snyder Debt Conversion is as follows (in thousands):
December 31, 2017
|
|
$
|
12,347
|
|
Conversion of debt into equity
|
|
|
(10,000
|
)
|
Change in discount, net
|
|
|
103
|
|
Future interest expense
|
|
|
961
|
|
March 31, 2018
|
|
$
|
3,411
|
|
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
(“Lender”) which bears interest at 6.5% as of March 31, 2018. The interest rate is subject to change and is based
on the prime rate plus 2.00% per annum. The June 2014 Secured Promissory Note is repayable in monthly payments of $71,051
and adjusted from time-to-time as the interest rate changes, with the final payment due in June 2036. Certain of the Company’s
deposit accounts and MMM LLC’s inventories, chattel paper, accounts, equipment and general intangibles have been pledged
as collateral for the promissory note. The Company is required to maintain a deposit balance with the Lender of $1,560,000, which
is recorded as restricted cash included in non-current assets. In addition, until the Company provides documentation that the
proceeds were used for construction of the Company’s manufacturing plant, proceeds from the loan will be maintained in a
restricted deposit account with the Lender. As of March 31, 2018, the Company had $487,000 remaining in this restricted
deposit account, which is recorded as restricted cash included in current assets. The June 2014 Secured Promissory Note contains
representations and warranties by the Company and the Lender, certain indemnification provisions in favor of the Lender and customary
covenants (including limitations on other debt, liens, acquisitions, investments and dividends), and events of default (including
payment defaults, breaches of covenants, a material impairment in the Lender’s security interest or in the collateral, and
events relating to bankruptcy or insolvency). The June 2014 Secured Promissory Note contains several restrictive covenants and
the most significant of which requires the Company to maintain a debt to net worth ratio of no greater than 4.0 to 1.0 at all
times. The Company is in compliance with all related covenants, or has received an appropriate waiver of these covenants.
Secured
Convertible Promissory Note
On
October 12, 2017, the Company and Dwight W. Anderson (“Anderson”) entered into a $1,000,000 convertible promissory
note, which was restated in its entirety by a convertible promissory note entered into by the Company and Anderson on October
23, 2017 (the “October 2017 Convertible Note”). The October 2017 Convertible Note was an unsecured promissory note
in the aggregate principal amount of up to $6,000,000. The Company’s ability to borrow under the October 2017 Convertible
Note was subject to Anderson’s approval and due on October 23, 2020 (the ” Anderson Maturity Date”). Under the
terms of the October 2017 Convertible Note, from the date of the closing through December 31, 2017, the October 2017 Convertible
Note bore interest at a rate of 1% per annum, payable in arrears on the Anderson Maturity Date, unless earlier converted into
shares of the Company’s common stock as described below. Thereafter, beginning January 1, 2018, the October 2017 Convertible
Note bore interest at a rate of 10% per annum, payable in arrears on the Anderson Maturity Date, unless earlier converted into
shares of the Company’s common stock as described below.
Any
or all of the principal or accrued interest under the October 2017 Convertible Note was convertible into shares of the Company’s
common stock at a rate of one share of common stock per $1.00 of converting principal or interest, rounded down to the nearest
share with any fractional amounts cancelled, at the election of Anderson by delivery of written notice to the Company. In addition,
upon the consummation of a qualified equity financing of the Company prior to the Anderson Maturity Date, the aggregate outstanding
principal balance of the October 2017 Convertible Note and all accrued and unpaid interest thereon could be converted, at the
option of Anderson, into that number of the securities issued and sold in such financing, determined by dividing (a) such aggregate
principal and accrued interest amounts, by (b) the purchase price per share or unit paid by the purchasers of the Company’s
securities issued and sold in such financing. Notwithstanding the foregoing, Anderson’s ability to affect any such conversions
was limited by applicable provisions governing issuances of shares of the Company’s common stock under the rules of The
Nasdaq Capital Market, subject to the Company’s receipt of any applicable waivers thereof, and any amounts not issuable
to Anderson in the Company’s equity securities as a result of this limitation will be payable in cash.
On
December 15, 2017, the Company entered into the Securities Purchase Agreement with an affiliate of Anderson and certain other
accredited investors (collectively, the “Buyers”). In conjunction with the transaction contemplated in the Securities
Purchase Agreement, Anderson was entitled to convert any portion of the balance outstanding under the October 2017 Convertible
Note and any accrued interest into shares of the Company’s common stock at a rate of one share of common stock per $0.50.
Anderson’s ability to affect conversions at the $0.50 rate was subject to, among other things, approval of the Company’s
shareholders, which was received on January 31, 2018.
On
December 22, 2017, the Company and Anderson amended and restated in its entirety the terms of the October 2017 Convertible Note
(“Secured December 2017 Convertible Note”). The Secured December 2017 Convertible Note was a secured promissory note
in the aggregate principal amount of up to $6,000,000, at Anderson’s sole discretion, due on October 12, 2020 (the “Maturity
Date”). As of February 5, 2018, the outstanding principal balance under the Secured December Convertible Note was $6,000,000.
The interest rate and conversion terms of the Secured December 2017 Convertible Note remained unchanged from the terms of the
October 2017 Convertible Note as described above.
On
February 5, 2018, the holder converted the outstanding principal of $6,000,000 under the Secured December 2017 Convertible Note
into common shares of the Company in accordance with the terms of the Securities Purchase Agreement which provided for conversion
of the outstanding balance at a rate of $0.50 per common share. After the conversion into common shares on February 5, 2018, there
was no outstanding balance under the Secured December 2017 Convertible Note.
The
Company accounted for the full conversion of the Secured December 2017 Convertible Note using the accounting guidance related
to an induced debt conversion of convertible notes. Under the induced conversion guidance, the Company recognized a loss on conversion
in the amount of $9,867,000 associated with the change between the debt’s original terms and the induced conversion terms.
This loss related to the induced conversion feature was partially offset by a gain on extinguishment of $6,424,000 of certain
other elements of the Secured December 2017 Convertible Note.
The accounting for the change due to the
Secured December 2017 Convertible Note is as follows (in thousands):
December 31, 2017
|
|
$
|
3,490
|
|
Increase in debt
|
|
|
2,000
|
|
Conversion of debt into equity
|
|
|
(6,000
|
)
|
Change in discount, net
|
|
|
510
|
|
March 31, 2018
|
|
$
|
-
|
|
LSQ
Financing
On
March 24, 2017, the Company entered into an Invoice Purchase Agreement (the “LSQ Financing”) with LSQ Funding Group,
L.C. (“LSQ”), pursuant to which LSQ may elect to purchase up to $7,000,000 of eligible customer invoices from the
Company. The Company’s 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 the Company’s accounts receivable, inventory, and related
property, pursuant to an intercreditor agreement, dated March 22, 2017 (the “Three Party Intercreditor Agreement”),
with Gordon Snyder, an individual, as administrative agent for the Snyder lenders (the “Snyder Agent”), on behalf
of the Snyder lenders, and the agent for the holders of the August 2015 Senior Secured Promissory Notes.
Advances
by LSQ may be made at an advance rate of 80% of the face value of the receivables being sold. The Company also pays to LSQ (i)
an invoice purchase fee equal to 1% of the face amount of each purchased invoice, at the time of the purchase, and (ii) a funds
usage fee equal to 0.035%, payable monthly in arrears. An aging and collection fee is charged at the time when the purchased invoice
is collected, calculated as a percentage of the face amount of such invoice while unpaid (which percentage ranges from 0% to 0.35%
depending upon the duration the invoice remains outstanding). The original LSQ Financing was effective for one year with automatic
one year renewals thereafter unless terminated within a 30-day window near the end of the then-effective term; a termination fee
is due upon early termination by the Company if such termination is not requested within such 30-day window. The agreement contains
representations and warranties by the Company and LSQ, certain indemnification provisions in favor of LSQ and customary covenants
(including limitations on other debt, liens, acquisitions, investments and dividends), and events of default (including payment
defaults, breaches of covenants, a material impairment in LSQ’s security interest or in the collateral, and events relating
to bankruptcy or insolvency). The Company is in compliance with all terms of the agreement,
In
January 2018, the Company notified LSQ that it would be terminating the LSQ Financing in March 2018. In March 2018, the Company
and LSQ amended the LSQ Financing agreement and extended the term for an additional 60 days. The events of default under the LSQ
Financing include failure to pay amounts due, failure to turn over amounts due to LSQ within a cure period, breach of covenants,
falsity of representations, and certain insolvency events. As of March 31, 2018, $1,604,000 was outstanding under the LSQ Financing.
7.
Warrants
The
following table summarizes information about the Company’s common stock warrants outstanding as of March 31, 2018 (in thousands,
except exercise price data):
|
|
|
|
|
|
NUMBER OF
|
|
|
|
|
|
|
|
|
|
|
SHARES
|
|
|
|
|
|
|
|
|
|
|
SUBJECT TO
|
|
|
|
|
|
|
|
|
EXPIRATION
|
|
WARRANTS
|
|
|
EXERCISE
|
|
DESCRIPTION
|
|
ISSUE DATE
|
|
DATE
|
|
ISSUED
|
|
|
PRICE
|
|
In connection with June 2013 Credit Facility (June 2013 Warrants)
|
|
June 2013
|
|
June 2023
(1)
|
|
|
27
|
|
|
$
|
8.40
|
|
In connection with August 2015 Senior Secured Promissory Notes (August 2015 Warrants)
|
|
August 2015
|
|
August 2023
|
|
|
4,000
|
|
|
$
|
1.91
|
|
In connection with October 2012 and April 2013 Secured Promissory Notes (November 2016 Warrants)
|
|
November 2016
|
|
November 2026
|
|
|
125
|
|
|
$
|
2.38
|
|
In connection with June 2017 Consulting Agreement (November 2017 Warrants)
|
|
June 2017
|
|
June 2027
|
|
|
80
|
|
|
$
|
1.10
|
|
In connection with February 2018 Financing Transaction (February 2018 Warrants 1)
|
|
February 2018
|
|
December 2020
|
|
|
43,350
|
|
|
$
|
1.00
|
|
In connection with February 2018 Financing Transaction (February 2018 Warrants 2)
|
|
February 2018
|
|
December 2020
|
|
|
5,143
|
|
|
$
|
1.25
|
|
|
|
|
|
|
|
|
52,725
|
|
|
|
|
|
As
of March 31, 2018, the weighted average remaining contractual life and exercise price for these warrants is 3.0 years and $1.10,
respectively.
(1)
|
The
June 2013 Warrants expire upon the earlier to occur of (i) the date listed above; (ii) the acquisition of the Company by another
entity by means of any transaction or series of related transactions (including, without limitation, any transfer of more
than 50% of the voting power of the Company, reorganization, merger or consolidation, but excluding any merger effected exclusively
for the purpose of changing the domicile of the Company); or (iii) a sale of all or substantially all of the assets of the
Company unless the Company’s stockholders of record as constituted immediately prior to such acquisition or sale will,
immediately after such acquisition or sale (by virtue of securities issued as consideration for the Company’s acquisition
or sale or otherwise), hold at least fifty percent (50%) of the voting power of the surviving or acquiring entity.
|
8.
Share-Based Plans
As
of March 31, 2018, there were 5,343,000 options outstanding, 931,000 restricted stock units outstanding and 4,883,000 share-based
awards available for grant under the outstanding equity incentive plans.
For
the three months ended March 31, 2018 and 2017, the Company recognized share-based compensation of $491,000 and $582,000, respectively.
During the three months ended March 31, 2018
and 2017, the Company granted options to purchase 2,396,000 and 31,000 shares of common stock, respectively, at a weighted-average
exercise price of $1.87 and $2.10, respectively. During the three months ended March 31, 2018 there were no options exercised.
During the three months ended March 31, 2017, options to purchase an aggregate of 14,000 shares were exercised at a weighted-average
exercise price of $1.21 per share.
The
following table summarizes the activity of restricted stock units from December 31, 2017 to March 31, 2018 (in thousands, except
weighted average grant date fair value):
|
|
|
|
|
WEIGHTED
|
|
|
|
|
|
|
AVERAGE
|
|
|
|
|
|
|
GRANT
|
|
|
|
SHARES
|
|
|
DATE FAIR
|
|
|
|
OUTSTANDING
|
|
|
VALUE
|
|
Nonvested at December 31, 2017
|
|
|
335
|
|
|
$
|
0.94
|
|
Granted
|
|
|
368
|
|
|
|
1.60
|
|
Vested
|
|
|
(283
|
)
|
|
|
1.54
|
|
Forfeited
|
|
|
(32
|
)
|
|
|
1.06
|
|
Nonvested at March 31, 2018
|
|
|
388
|
|
|
$
|
1.14
|
|
During the three months ended March 31,
2018, the Company granted 105,000 restricted stock units in partial satisfaction of incentive compensation due to certain executives
as of December 31, 2017. There were no such grants during the three months ended March 31, 2017. This grant resulted in reclass
of $205,000 from accrued liabilities to additional paid in capital as of March 31, 2018.
9.
Commitments and Contingencies
Operating
Leases
In
September 2013 and then amended in April 2014, the Company entered into a lease agreement for approximately 27,300 square feet
of office and laboratory space located in Davis, California. The initial term of the lease is for a period of 60 months and commenced
in August 2014. The monthly base rent is $44,000 per month for the first 12 months with a 3% increase each year thereafter. Concurrent
with this amendment, in April 2014, the Company entered into a lease agreement with an affiliate of the landlord to lease approximately
17,400 square feet of office and laboratory space in the same building complex in Davis, California. The initial term of the lease
is for a period of 60 months and commenced in August 2014. The monthly base rent is $28,000 with a 3% increase each year thereafter.
On
January 19, 2016, the Company entered into an agreement with a sublessee to sublease approximately 3,800 square feet of vacant
office space located in Davis, California pursuant to the terms of its lease agreement. The initial term of the sublease is for
a period of approximately 43 months and commenced on February 1, 2016. The monthly base rent is approximately $5,000 per month
for the first 12 months with a 5% increase each year thereafter.
Litigation
On
April 3, 2018, the Company was named as a defendant in a complaint filed by Piper Jaffray, Inc. (“Piper”) with the
Superior Court of the State of Delaware. The Company was informed of and received Piper’s complaint and related documents
on April 5, 2018, following the filing of the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.
Piper’s complaint alleges one breach of contract claim, specifically, that the Company breached an engagement letter with
Piper by failure to pay a $2,000,000 transaction fee, which Piper alleges is due under the engagement letter as a result of the
Company’s consummation of its private placement and debt refinancing transactions in February 2018. Piper’s complaint
includes a demand for payment the foregoing transaction fee, in addition to interest and costs and expenses incurred in pursuing
the action, including reasonable attorneys’ fees. While the Company believes Piper’s complaint is without merit, this
matter is at an early stage, and the outcome of this matter is not presently determinable
10.
Related Party Transactions
August
2015 Senior Secured Promissory Notes
On
August 20, 2015, the Company entered into a purchase agreement with Ivy Science & Technology Fund, Waddell & Reed Advisors
Science & Technology Fund and Ivy Funds VIP Science and Technology, each an affiliate of Waddell & Reed, which is a beneficial
owner of more than 5% of the Company’s common stock. Pursuant to such purchase agreement, the Company sold to such affiliates
senior secured promissory notes (“August 2015 Senior Secured Promissory Notes”) in the aggregate principal amount
of $40,000,000. The August 2015 Senior Secured Promissory Notes bear interest at a rate of 8% per annum. The first interest payment
was payable December 31, 2015 and until February 5, 2018, interest was payable semi-annually on June 30 and December 31. Until
February 5, 2018, principal payments of $10,000,000, $10,000,000, and $20,000,000 were payable on the third, fourth and fifth
anniversaries of the closing date of the August 2015 Senior Secured Promissory Notes. Debt due to related parties as of March
31, 2018 was $7,285,000. The fair value of the Company’s debt due to related parties was $3,588,000 and $21,714,000 as of
March 31, 2018 and December 31, 2017, respectively. This debt was valued by applying the same ratio of the value of common stock
the lender agreed to take as consideration for a reduction in the outstanding principal balance and applying this ratio to the
outstanding principal balance. The August 2015 Senior Secured Promissory Notes contain representations and warranties by the Company
and the lenders, certain indemnification provisions in favor of the lenders and customary covenants (including limitations on
other debt, liens, acquisitions, investments and dividends), and events of default (including payment defaults, breaches of covenants,
a material impairment in the Lender’s security interest or in the collateral, and events relating to bankruptcy or insolvency).
The August 2015 Senior Secured Promissory Notes contain several restrictive covenants and the most significant of which requires
the Company to maintain a minimum cash balance of $15,000,000. This covenant was waived in the second quarter of 2016. The Company
is in compliance with all other related covenants, or has received an appropriate waiver of these covenants.
On
February 5, 2018, the holders of the August 2015 Senior Secured Promissory Notes, pursuant to an amendment dated December 15,
2017, converted $35,000,000 of the then outstanding debt into 20,000,000 shares of common stock and warrants to purchase 4,000,000
shares of common stock (such conversion, the “Waddell Debt Conversion”). After the conversion, $5,000,000 in principal
remained outstanding. Simultaneously with the Waddell Debt Conversion, the maturity of the August 2015 Senior Secured Promissory
Notes was extended to December 31, 2022, and payment of all future interest was deferred to maturity on December 31, 2022, and
Ospraie was granted a right of first refusal to acquire the August 2015 Senior Secured Promissory Notes.
In
conjunction with the Waddell Debt Conversion, the Company accounted for the partial debt extinguishment under the troubled debt
restructuring accounting guidance. The Company recognized a gain of $9,622,000 for the three months ended March 31, 2018 on partial
extinguishment of the August 2015 Senior Secured Promissory Notes. Because the Company recognized a gain on the partial extinguishment
of debt, the Company was required to include all future interest and additional consideration, which included accrued interest,
under the terms of this agreement as a reduction of the gain. As a result, the amount of the debt on the Company’s balance
sheet related to the August 2015 Senior Secured Promissory Notes is $7,285,000, as compared to $5,000,000 of contractual principal
amount outstanding thereunder. Going forward, subject to future amendments to debt agreement or costs, the Company will not recognize
future interest expense on the August 2015 Senior Secured Promissory Notes.
The
accounting for the change due to the August 2015 Senior Secured Promissory Notes is as follows (in thousands):
December 31, 2017
|
|
$
|
37,822
|
|
Conversion of debt into equity
|
|
|
(35,000
|
)
|
Change in discount, net
|
|
|
2,178
|
|
Accrued and future interest expense
|
|
|
2,285
|
(1)
|
March 31, 2018
|
|
$
|
7,285
|
|
|
(1)
|
Includes
reclassification of $324 thousand in accrued interest to debt.
|
11.
Equity Offering and Related Transactions
On
February 5, 2018 pursuant to a private placement, the Company issued 70,514,000 shares of common stock and warrants to purchase
48,493,000 shares of common stock. Of the shares issued, 44,000,000, 25,714,000 and 800,000 shares were issued pursuant to the
Securities Purchase Agreement, certain debt agreement amendments (see Notes 6 and 10) and as part of a placement agent fee, respectively.
Of the warrants, warrants to purchase 41,333,000, 5,143,000 and 2,017,000 shares were issued pursuant to the Securities
Purchase Agreement, certain debt agreements (see Notes 6 and 10) and as part of a placement agent fee, respectively. For further
discussion of the warrants, see Note 7.
The
gross proceeds from the 44,000,000 shares issued under the Securities Purchase Agreement were $30,000,000 which included the conversion
of $6,000,000 in convertible under the then outstanding December 2017 Convertible Note. Also, the Company converted $10,000,000
in debt under the October 2012 and April 2013 Secured Promissory Notes and $35,000,000 in debt under the Senior Secured Promissory
Notes into a total of 25,714,000 shares. The estimated net proceeds from this private placement, inclusive of the cash received
from the December 2017 Convertible Note, was $27,300,000. The Company incurred $2,700,000 in expenses associated with the private
placement and debt conversion of which $2,180,000 was related to the equity component of these transactions.
The
Company classified the warrants issued in connection with the Securities Purchase Agreement and conversion of debt into equity
as equity. As a result of the financing transaction discussed above, the Company’s additional paid in capital and common
stock increased by $64,312,000 and $1,000, respectively. The Company allocated the value of the financing transaction to the common
shares issued in the amount of $53,385,000 and to the warrants issued in the amount of $10,928,000 based on the relative fair
values of each on the transaction date.
12.
Subsequent Events
Common
Stock Offering
In
April 2018, the Company completed an underwritten public offering of 8,366,250 registered
shares
of its common stock
. The public offering price of the shares sold in the offering was $1.65 per share. The total gross
proceeds to the Company from the offerings were $13,800,000. The estimated aggregate net proceeds to the Company from common stock
sold in the offering totaled approximately $12,700,000.
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, 2017, as filed with the Securities
and Exchange Commission (the “Annual Report”).
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 “believe,”
“will,” “may,” “estimate,” “continue,” “anticipate,” “intend,”
“should,” “plan,” “expect,” “predict,” “could,” “potentially”
or the negative of these terms or similar expressions. 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, our anticipated operations, financial position, revenues, costs or expenses, statements regarding future economic conditions
or performance, 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
make bio-based pest management and plant health products. Bio-based products are comprised of naturally occurring microorganisms,
such as bacteria and fungi, and plant extracts. Our current products target the major markets that use conventional chemical pesticides,
including certain agricultural and water markets, where our bio-based products are used as alternatives for, or mixed with, conventional
chemical products. We also target new markets for which (i) there are no available conventional chemical pesticides or (ii) the
use of conventional chemical pesticides may not be desirable or permissible either because of health and environmental concerns
(including for organically certified crops) or because the development of pest resistance has reduced the efficacy of conventional
chemical pesticides. Six of seven of our current products, including our newest biological fungicide, Stargus/Amplitude, are approved
by the United States Environmental Protection Agency (“EPA”) and registered as “biopesticides.” Our first
non-EPA product is Haven, a plant health product, is a “biostimulant” which requires state registrations, but does
not require EPA registration. We believe our current portfolio of products and our pipeline address the growing global demand
for effective, efficient and environmentally responsible products to control pests, increase crop yields and reduce crop stress.
The
agricultural industry is increasingly dependent on effective and sustainable pest management practices to maximize yields and
quality in a world of increased demand for agricultural products, rising consumer awareness of food production processes and finite
land and water resources. In addition, our research has shown that the global market for biopesticides is growing substantially
faster than the overall market for pesticides. This demand is in part a result of conventional growers acknowledging that there
are tangible benefits to adopting bio-based pest management products into integrated pest management (“IPM”) programs,
as well as increasing consumer demand for organic food. We seek to capitalize on these global trends by providing both conventional
and organic growers with solutions to a broad range of pest management 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. To that end, in March 2016 we entered into an agreement with Isagro
USA to distribute Bio-Tam 2.0, a biofungicide for soil-borne disease control and grapevine trunk disease control that complements
our existing products, particularly Regalia, in May 2017, we entered into an agreement with Jet Harvest Solutions to sell their
contact biofungicide, Jet-Ag, in most regions of the United States, and we continue to launch new product lines, with first sales
of Haven and Stargus/Amplitude in 2017. We believe this approach enables us to stay ahead of our competition in providing innovative
pest management solutions, enhances our sales process at the distributor level and helps us to capture additional value from our
products.
Our
research and development efforts are focused on supporting existing commercial products, including Regalia, Grandevo, Venerate
Majestene/Zelto, Haven and Stargus/Amplitude, 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 focused on two promising product candidates, MBI-601 (Ennoble) biofumigant, which is EPA-registered, and MBI-014 (formerly
MBI-010), a bioherbicide. 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
sell our crop protection products to leading agrichemical customers while also working directly with growers to increase existing
and generate new product demand. To date, we have marketed our bio-based pest management and plant health products for agricultural
applications to U.S. growers, through distributors and our own sales force, and we have focused primarily on high value specialty
crops such as grapes, citrus, tomatoes and leafy greens. A large portion of our sales are currently attributable to conventional
growers who use our bio-based pest management products either to replace conventional chemical pesticides or enhance the efficacy
of their IPM programs. In addition, a portion of our sales are attributable to organic farmers who cannot use conventional pesticides
and have few alternatives for pest management. As we continue to demonstrate the efficacy of our bio-based pest management and
plant health products on new crops or for new applications, we may either continue to sell our products through our in-house sales
force or collaborate with third parties for distribution to select markets.
Although
we have historically sold a significant majority of our products in the United States, expanding our international presence and
commercialization is an important component of our growth strategy. Regalia, Venerate and Grandevo are currently available in
select international markets under distribution agreements with major agrichemical companies or regional distributors. Currently,
our plan is to focus first on countries where we can gain the fastest registration approval to permit product launches while also
pursuing key countries and regions with the largest and fastest growing biopesticide and plant health product markets for specialty
crops and selected row crops. We are working with regional or national distributors in key countries who have brand recognition
and established customer bases and who can conduct field trials and grower demonstrations and lead or assist in regulatory processes
and market development.
We
currently market our water treatment product, Zequanox, directly to a selected group of U.S. power and industrial companies. Due
to our prioritization plan, we have not committed sufficient resources to Zequanox in order to market it full-scale. We signed
an exclusive distribution agreement with Solenis for in-pipe uses. In addition, we continue to work with state, federal and bi-national
partners to further develop Zequanox in the Great Lakes/Upper Mississippi River Basin as a habitat restoration tool and potential
harmful algal bloom management tool. We believe that Zequanox presents a unique opportunity for generating long-term revenue as
there are limited water treatment options available to date, most of which are time-consuming, costly or subject to high levels
of regulation. Our ability to generate significant revenues from Zequanox from in-pipe treatments is dependent on our ability
to persuade customers to evaluate the costs of our Zequanox products compared to the overall cost, and environmental impact, of
the chlorine treatment process, the primary current alternative to using Zequanox, rather than the cost of purchasing chemicals
alone. In the fourth quarter of 2015, we implemented a new process at our manufacturing plant that reduced the cost of product
revenues to be more competitive with other mussel treatment chemicals. Sales of Zequanox have remained lower than our other products
due to our prioritization of our crop protection business, the length of the treatment cycle, the longer sales cycle (the bidding
process with utility companies and governmental agencies occurs on a yearly or multi-year basis), the unique nature of the treatment
approach for each customer based on the extent of the infestation, and the design of their facility.
Although
our initial EPA-approved master labels cover our products’ anticipated crop-pest use combinations, we launch early formulations
of our pest management and plant health products to targeted customers under commercial labels that list a limited number of crops
and applications that our initial efficacy data can best support. We then gather new data from experiments, field trials and demonstrations,
gain product knowledge and get feedback to our research and development team from customers, researchers and agricultural agencies.
Based on this information, we enhance our products, refine our recommendations for their use in optimal IPM programs, expand our
commercial labels and submit new product formulations to the EPA and other regulatory agencies. For example, we began sales of
Regalia SC, an earlier formulation of Regalia, in the Florida fresh tomatoes market in 2008, while a more effective formulation
of Regalia with an expanded master label, including listing for use in organic farming, was under review by the EPA. In 2011,
we received EPA approval of a further expanded Regalia master label covering hundreds of crops and various new uses for applications
to soil and through irrigation systems, and we recently expanded sales of Regalia in large-acre row crops as a plant health product,
in addition to its beneficial uses as a fungicide. In January 2016, we launched a new formulation of Regalia that no longer contains
a solvent that is difficult to source and may experience future regulatory restrictions. This new formulation of Regalia disperses
better in water and is easier to mix and rinse from containers and spray equipment. In addition, in June 2016, we launched a new
formulation of Grandevo, Grandevo WDG, which offers improved handling and better, more convenient packaging. The water dispersible
granule mixes easily in spray tanks with no dust or foam, which saves valuable time in the preparation and application processes.
Similarly, ongoing field development research on the microbe used in Venerate, one of our insecticide products, led to our October
2015 registration of Majestene as a nematicide. We believe we have opportunities to broaden the commercial applications and expand
the use of our existing products lines to help drive significant growth for our company.
Our
total revenues were $4.3 million and $4.2 million for the three months ended March 31, 2018 and 2017, respectively. We generate
our revenues primarily from product sales, which are principally attributable to sales of our Regalia, Grandevo and Venerate product
lines, but which also included sales of Majestene, Zequanox, Bio-Tam 2.0, Haven, Stargus/Amplitude and Jet-Ag. We believe that
prior to our February Stock and Debt Conversion Transaction, concerns and rumors regarding our ability to continue operations
impacted our ability to grow more robustly. Going forward, we believe our revenues may largely be impacted by weather, natural
disasters 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.
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. Customers to which 10% or more of our total revenues are
attributable for any one of the periods presented consist of the following:
|
|
CUSTOMER
A
|
|
|
CUSTOMER
B
|
|
|
CUSTOMER
C
|
|
|
CUSTOMER
D
|
|
|
CUSTOMER
E
|
|
Three months ended March 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
23
|
%
|
|
|
14
|
%
|
|
|
0
|
%
|
|
|
9
|
%
|
|
|
6
|
%
|
2017
|
|
|
18
|
%
|
|
|
0
|
%
|
|
|
15
|
%
|
|
|
13
|
%
|
|
|
12
|
%
|
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.
Our
cost of product revenues was $2.2 million and $2.3 million for the three months ended March 31, 2018 and 2017, respectively. Cost
of product revenues consists principally of the cost of inventory, which includes the cost of raw materials, and third party services
and allocation of operating expenses of our manufacturing plant related to procuring, processing, formulating, packaging and shipping
our products. Cost of product revenues also include charges recorded for write-downs of inventory and idle capacity at our manufacturing
plant. 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 Regalia, Grandevo, Venerate, Majestene, Zequanox, Haven and Stargus. We expect to see a gradual
increase in gross margin over the life cycle of each of our products as we improve production processes, gain efficiencies and
increase product yields. These increases may be offset by additional charges for inventory write-downs and idle capacity at our
manufacturing plant until overall volume in the plant increases significantly, however we are expecting these charges to decrease
over time.
Our
research, development and patent expenses have historically comprised a significant portion of our operating expenses, amounting
to $2.5 million and $2.4 million for the three months ended March 31, 2018 and 2017, respectively. We are seeking collaborations
with third parties to develop and commercialize more early stage candidates, which we have elected not to expend significant resources
on given our reduced budget.
Selling,
general and administrative expenses incurred to establish and build our market presence and business infrastructure have generally
comprised the remainder of our operating expenses, amounting to $5.0 million and $5.3 million for the three months ended March
31, 2018 and 2017, respectively. We have been building a sales and marketing organization that provides for increased training
and 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. We expect that our selling, general and administrative
expenses to remain approximately flat in all departments with the exception of sales and marketing. In 2018, we are increasing
our marketing communications campaigns and putting more “boots on the ground”, which should increase grower demand,
or pull-through, and develop new customers, as well as expand business with existing customers.
Historically,
we have funded our operations from the issuance of shares of common stock, preferred stock, warrants and convertible notes, the
issuance of debt and entry into financing arrangements, product sales, payments under strategic collaboration and distribution
agreements and government grants, but we have experienced significant losses as we invested heavily in research and development.
We expect to incur additional losses related to our investment in the continued development, expansion and marketing of our product
portfolio.
On
December 15, 2017, we entered into a securities purchase agreement (the “Securities Purchase Agreement”) with certain
investors named therein, including Ospraie Ag Science LLC (“Ospraie”). On February 5, 2018, pursuant to the Securities
Purchase Agreement, we issued to these investors, an aggregate of 44,000,001 shares of common stock and warrants to purchase 41,333,333
of common stock for an aggregate purchase price of $30,000,000, including the conversion to units of $6,000,000 of principal amounts
outstanding under a series of debt agreements with a third party for the issuance of convertible debt (“Secured December
2017 Convertible Note”).
In
addition, on February 5, 2018, we converted, pursuant to an amendment, dated December 15, 2017, to the senior secured promissory
notes we had previously sold to affiliates of Waddell & Reed Financial, Inc. (“August 2015 Secured Promissory Notes”)
$35,000,000 aggregate principal amount of the August 2015 Senior Secured Promissory Notes into an aggregate of 20,000,000 shares
of common stock and warrants to purchase 4,000,000 shares of common stock (such conversion, the “Waddell Debt Conversion”),
such that $5,000,000 of principal under the August 2015 Senior Secured Promissory Notes is outstanding as of March 31, 2018. Also
on February 5, 2018, we converted, pursuant to an amendment, dated December 15, 2017, to various debt agreements entered into
in 2013 and 2014 (the “October 2012 and April 2013 Secured Promissory Notes”), $10,000,000 aggregate principal
amount of indebtedness outstanding under the October 2012 and April 2013 Secured Promissory Notes to an aggregate of 5,714,285
shares of common stock and warrants to purchase 1,142,856 shares of common stock (such conversion, the “Snyder Debt Conversion”),
such that $2,450,000 of principal under the October 2012 and April 2013 Secured Promissory Notes is outstanding as of March 31,
2018. Simultaneously with the Snyder Debt Conversion, the maturity of the October 2012 and April 2013 Secured Promissory Notes
was extended to December 31, 2022, the interest was reduced from 14% to 8% and all interest payments under the October 2012 and
April 2013 Secured Promissory Notes were deferred to the maturity of the October 2012 and April 2013 Secured Promissory Notes
on December 31, 2022.
In
April 2018, we completed an underwritten public offering of 8,336,250 registered
shares
of common stock
. The public offering price of the shares sold in the offering was $1.65 per share. The total gross proceeds
to the Company from the offerings were $13.8 million. The estimated aggregate net proceeds to the Company from common stock sold
in the offering totaled approximately $12.7 million.
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 revenue recognition, including assumptions and estimates used in determining
the timing and amount of revenue to recognize, inventory valuation and share-based compensation have the greatest potential impact
on our consolidated financial statements. Therefore, we consider these to be our critical accounting policies and estimates. In
May 2014, the FASB issued ASU 2014-09,
Revenue from Contracts with Customers (Topic 606)
, to clarify the principles of
recognizing revenue and create common revenue recognition guidance between U.S. GAAP and International Financial Reporting Standards.
Under ASU 2014-09, revenue is recognized when a customer obtains control of promised goods or services and is recognized at an
amount that reflects the consideration expected to be received in exchange for such goods or services. As documented in Note 2
of the condensed consolidated financial statements, the adoption of this standard had a material impact on these financial statements
and is expected to have a material impact on our future financial statements. During the three months ended March 31, 2018, our
revenues were $0.5 million greater than they would have been if we had accounting for revenue under the standard effective for
the three months ended March 31, 2018. We expect that the implementation of this new standard will continue to have a material
impact on our financial statements from quarter to quarter.
Key
Components of Our Results of Operations
Product
Revenues
Product
revenues consist of revenues generated primarily from sales to customers, net of rebates and cash discounts. Product revenues
constituted 98% and 99% of our total revenues for the three months ended March 31, 2018 and 2017, respectively. Product revenues
in the United States constituted 82% of our total revenues for each of the three months ended March 31, 2018 and 2017.
License
Revenues
License
revenues generally consist of revenues recognized under our strategic collaboration and distribution agreements for
exclusive distribution rights, either for Regalia, for other commercial products, or for our broader pipeline of products,
for certain geographic markets or for market segments that we are not addressing directly through our internal sales force.
Our strategic collaboration and distribution agreements generally outline overall business plans and include payments we
receive at signing and for the achievement of 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 the three months ended March 31, 2018 and 2017, license
revenues constituted 2% and 1%, respectively of total revenues. As of March 31, 2018, including agreements with related
parties discussed below, we had received an aggregate of $3.4 million in payments under our strategic collaboration and
distribution agreements. In addition, there will be an additional $0.3 million in payments due on certain anniversaries of
regulatory approval and an additional $0.8 million in payments under these agreements that we could potentially receive if
the testing validation, regulatory progress and commercialization events occur.
Cost
of Product Revenues and Gross Profit
Cost
of product revenues consists principally of the cost of raw materials, including inventory costs and third-party services related
to procuring, processing, formulating, packaging and shipping our products. 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, 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. 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
have entered into in-license technology agreements with respect to the use and commercialization of four of our commercially available
product lines, Regalia, Grandevo, Zequanox and Haven, and certain products under development. Under these licensing arrangements,
we typically make royalty payments based on net product revenues, with royalty rates varying by product and ranging between 2%
and 5% of net sales, subject in certain cases to aggregate dollar caps. These royalty payments are included in cost of product
revenues, but they have historically not been significant. The exclusivity and royalty provisions of these agreements are generally
tied to the expiration of underlying patents. The patents for Regalia and Zequanox expired in 2017 and the in-licensed U.S. patent
for Grandevo is expected to expire in 2024. There is, however, a pending in-licensed patent application relating to Grandevo,
which could expire later than 2024 if issued. The licensed patents for Haven begin to expire in 2019. After the termination of
these provisions, we may continue to produce and sell these products. While third parties thereafter may develop products using
the technology under expired patents, we do not believe that they can produce competitive products without infringing other aspects
of our proprietary technology, including pending patent applications related to Regalia, Grandevo, Zequanox, and Haven and we
therefore do not expect the expiration of the patents or the related exclusivity obligations to have a significant adverse financial
or operational impact on our business.
We
expect to see increases in gross profit over the life cycle of each of our products 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, our overall gross margins may vary as we introduce new products. In particular, we may
experience downward pressure on overall gross margins as we rollout Haven and Stargus/Amplitude and expand sales of Grandevo and
Zequanox. 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 mix and average selling prices.
In
July 2012, we acquired a manufacturing facility, which we repurposed for manufacturing operations. We began full-scale manufacturing
using this facility in 2014. We continue to use third party manufacturers for Venerate, Majestene, Haven, and Stargus/Amplitude,
and for spray-dried powder formulations of Grandevo and Zequanox. We expect gross margins to improve using this facility when
sales volumes recover enough to reduce overhead and idle capacity charges from our facility.
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 staff in support of product discovery and development 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.
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.
We
expect selling, general, and administrative expenses to remain approximately flat in all departments with the exception of sales
and marketing. In 2018, we are increasing our marketing communications campaigns and putting 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
We
recognize interest expense on notes payable and other debt obligations. In June 2014, we entered into a $10.0 million promissory
note with a variable interest rate that varies with the prime rate. Accordingly, our interest expense will increase as the prime
rate increases.
In
August 2015, we issued and sold the August 2015 Secured Promissory Notes to affiliates of Waddell & Reed Financial, Inc. in
the aggregate principal amount of $40.0 million with a fixed interest rate of 8%. In accordance with the related accounting guidance,
because we recognized a gain on the partial extinguishment of debt, we were required to include all future interest and additional
consideration, which included accrued interest, under the terms of this agreement as a reduction of the gain. As a result, the
amount of the debt on the Company’s balance sheet related to the August 2015 Senior Secured Promissory Notes is $7,285,000,
as compared to $5,000,000 of contractual principal amount outstanding thereunder. Going forward, subject to future amendments
to debt agreement or costs, we will not recognize future interest expense on the August 2015 Senior Secured Promissory Notes.
As
of December 31, 2017, we had $12,450,000 in outstanding principal related to the October 2012 and April 2013 Secured Promissory
Notes. In February 2018, $10,000,000 aggregate principal amount of indebtedness outstanding under the October 2012 and April 2013
Secured Promissory Notes was converted into an aggregate of 5,714,285 shares of common stock and warrants to purchase 1,142,856
shares of common stock in the Snyder Debt Conversion, such that $2,450,000 of principal under the October 2012 and April 2013
Secured Promissory Notes is outstanding as of March 31, 2018. Simultaneously with the Snyder Debt Conversion, the maturity of
the October 2012 and April 2013 Secured Promissory Notes was extended to December 31, 2022, the interest was reduced from 14%
to 8% due to the Snyder Debt Conversion and all interest payments were deferred to maturity. In accordance with the related accounting
guidance, because we recognized a gain on the partial extinguishment of debt, we were required to include all future interest
and additional consideration, which included accrued interest, under the terms of this agreement as a reduction of the gain. As
a result, the amount of the debt on our balance sheet related to the October 2012 and April 2013 Secured Promissory Notes is $3,411,000,
as compared to $2,450,000 of contractual principal amount outstanding thereunder. Going forward, subject to future amendments
to debt agreement or costs, we will not recognize future interest expense on the October 2012 and April 2013 Secured Promissory
Notes.
Starting
in October 2017, we entered into the Secured December 2017 Convertible Note. As of February 5, 2018, the outstanding principal
balance under the Secured December Convertible Note was $6,000,000. The interest rate from January 1, 2018 to February 5, 2018
was 10% per annum.
On
February 5, 2018, the holder converted the entire outstanding principal of $6,000,000 under the Secured December 2017 Convertible
Note into shares of our common stock at a rate of $0.50 per share. After the conversion into common stock on February 5, 2018,
there was no outstanding balance under the Secured December 2017 Convertible Note.
Interest
Income
Interest
income consists primarily of interest earned on cash balances. Our interest income will vary each reporting period depending on
our average cash balances during the period and market interest rates.
Income
Tax Provision
Since
our inception, we have been subject to income taxes principally in the United States. We anticipate that as we further expand
our sales into foreign countries, we will become subject to taxation based on the foreign statutory rates and our effective tax
rate could fluctuate accordingly.
Income
taxes are computed using the asset and liability method, under which deferred tax assets and liabilities are determined based
on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for
the year in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to
reduce deferred tax assets to the amount expected to be realized. As of March 31, 2018, based on the available information, it
is more likely than not that our deferred tax assets will not be realized, and accordingly we have taken a full valuation allowance
against all of our U.S. deferred tax assets.
Key
Components of Our Results of Operations
Results
of Operations
The
following table sets forth certain statements of operations and other financial and operating data:
|
|
THREE MONTHS ENDED
MARCH 31,
|
|
|
|
2018
|
|
|
2017
|
|
Revenues:
|
|
|
|
|
|
|
|
|
Product
|
|
$
|
4,224
|
|
|
$
|
4,096
|
|
License
|
|
|
100
|
|
|
|
58
|
|
Total revenues
|
|
|
4,324
|
|
|
|
4,154
|
|
Cost of product revenues
|
|
|
2,242
|
|
|
|
2,279
|
|
Gross profit
|
|
|
2,082
|
|
|
|
1,875
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
Research, development and patent
|
|
|
2,534
|
|
|
|
2,444
|
|
Selling, general and administrative
|
|
|
5,024
|
|
|
|
5,343
|
|
Total operating expenses
|
|
|
7,558
|
|
|
|
7,787
|
|
Loss from operations
|
|
|
(5,476
|
)
|
|
|
(5,912
|
)
|
Other income (expense):
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(1,119
|
)
|
|
|
(636
|
)
|
Interest expense, net to related parties
|
|
|
(434
|
)
|
|
|
(1,074
|
)
|
Change in fair value of financial instruments
|
|
|
(5,177
|
)
|
|
|
—
|
|
Loss on extinguishment of debt, net
|
|
|
(303
|
)
|
|
|
—
|
|
Gain on extinguishment of debt, related party
|
|
|
9,622
|
|
|
|
—
|
|
Other income (expense), net
|
|
|
(31
|
)
|
|
|
(7
|
)
|
Total other income (expense), net
|
|
|
2,558
|
|
|
|
(1,717
|
)
|
Net loss
|
|
$
|
(2,918
|
)
|
|
$
|
(7,629
|
)
|
The
following table sets forth certain statements of operations data as a percentage of total revenues:
|
|
THREE MONTHS ENDED
MARCH 31,
|
|
|
|
2018
|
|
|
2017
|
|
Revenues:
|
|
|
|
|
|
|
|
|
Product
|
|
|
98
|
%
|
|
|
99
|
|
License
|
|
|
2
|
|
|
|
1
|
|
Related party
|
|
|
—
|
|
|
|
—
|
|
Total revenues
|
|
|
100
|
|
|
|
100
|
|
Cost of product revenues
(1)
|
|
|
52
|
|
|
|
55
|
|
Gross profit
|
|
|
48
|
|
|
|
45
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
Research, development and patent
|
|
|
59
|
|
|
|
59
|
|
Selling, general and administrative
|
|
|
116
|
|
|
|
129
|
|
Total operating expenses
|
|
|
175
|
|
|
|
188
|
|
Loss from operations
|
|
|
(127
|
)
|
|
|
(143
|
)
|
Other income (expense):
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(26
|
)
|
|
|
(15
|
)
|
Interest expense to related parties
|
|
|
(10
|
)
|
|
|
(26
|
)
|
Change in estimated fair value of financial instruments
|
|
|
(120
|
)
|
|
|
—
|
|
Gain on extinguishment of debt, net
|
|
|
(7
|
)
|
|
|
—
|
|
Gain on extinguishment of debt, related party
|
|
|
223
|
|
|
|
—
|
|
Other income (expense), net
|
|
|
(1
|
)
|
|
|
—
|
|
Total other expense, net
|
|
|
59
|
|
|
|
(41
|
)
|
Loss before income taxes
|
|
|
(68
|
)
|
|
|
(184
|
)
|
Net loss
|
|
|
(68
|
)%
|
|
|
(184
|
)
|
Comparison
of Three Months Ended March 31, 2018 and 2017
Product
Revenues
|
|
THREE MONTHS ENDED MARCH 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(Dollars in thousands)
|
|
Product revenues
|
|
$
|
4,224
|
|
|
$
|
4,096
|
|
% of total revenues
|
|
|
98
|
%
|
|
|
99
|
%
|
Product
revenues increased by $0.1 million, or 3%, primarily due to an increase in shipments of our Venerate product. We
adopted ASC 606 during the three months ended March 31, 2018. The
product
revenue for the three months ended March 31, 2017 represents revenues on a sell-in and sell-through basis. As a result,
we recognized an additional $0.5 million in revenue for the three months ended March 31, 2018 beyond what we would
have had we used the sell-in and sell-through revenue recognition methods we used for the three months ended March 31, 2017.
License
Revenues
|
|
THREE MONTHS ENDED MARCH 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(Dollars in thousands)
|
|
License revenues
|
|
$
|
100
|
|
|
$
|
58
|
|
% of total revenues
|
|
|
2
|
%
|
|
|
1
|
%
|
We recognized an additional $42,000 in revenues during the three
months ended March 31, 2018 as a result of the adoption of ASC 606.
Cost
of Product Revenues and Gross Profit
|
|
THREE MONTHS ENDED MARCH 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(Dollars in thousands)
|
|
Cost of product revenues
|
|
$
|
2,242
|
|
|
$
|
2,279
|
|
% of total revenues
|
|
|
52
|
%
|
|
|
55
|
%
|
Gross profit
|
|
|
2,082
|
|
|
|
1,875
|
|
% of total revenues
|
|
|
48
|
%
|
|
|
45
|
%
|
Cost of product revenues were flat
and gross profit increased by $0.2 million. Gross margins increased from 45% to 48%. Cost of product revenues as a percentage
of revenue declined as favorable mix was realized during the quarter as compared to the first quarter of 2017. Gross margins increased
due to favorable product mix during the quarter ended March 31, 2018. We adopted ASC 606 during the three months ended March
31, 2018. The cost of product revenues for the three months ended March 31, 2017 represents costs of product revenues on a sell-in
and sell-through basis. As result, we recognized an additional $0.3 million in cost of product revenues beyond what we would have
had we used the sell-in and sell-through revenue recognition methods we used for the three months ended March 31, 2018.
Research,
Development and Patent Expenses
|
|
THREE MONTHS ENDED MARCH 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(Dollars in thousands)
|
|
Research, development and patent
|
|
$
|
2,534
|
|
|
$
|
2,444
|
|
% of total revenues
|
|
|
59
|
%
|
|
|
59
|
%
|
Research,
development and patent expenses increased by $0.1 million, or 4%, as we continued to focus our research and development resources
on margin improvement, improved formulations of already commercialized products and our focused pipeline of new products.
Selling,
General and Administrative Expenses
|
|
THREE MONTHS ENDED MARCH 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(Dollars in thousands)
|
|
Selling, general administrative expenses
|
|
$
|
5,024
|
|
|
$
|
5,343
|
|
% of total revenues
|
|
|
116
|
%
|
|
|
129
|
%
|
Selling, general and administrative expenses decreased by
$0.3 million or 6%, primarily due to a $0.2 million recover through insurance proceeds of previously expensed legal fees
related to activities as a result of our restatement of our financial statements and related investigation and litigation, conducted
during prior periods.
Other
Expense, Net
|
|
THREE MONTHS ENDED MARCH 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(Dollars in thousands)
|
|
Interest expense
|
|
$
|
(1,119
|
)
|
|
$
|
(636
|
)
|
Interest expense to related parties
|
|
|
(434
|
)
|
|
|
(1,074
|
)
|
Change in estimated fair value of derivative liability
|
|
|
(5,177
|
)
|
|
|
—
|
|
Loss on extinguishment of debt, net
|
|
|
(303
|
)
|
|
|
—
|
|
Gain on extinguishment of debt, related party, net
|
|
|
9,622
|
|
|
|
—
|
|
Other income (expense) net
|
|
|
(31
|
)
|
|
|
(7
|
)
|
|
|
$
|
2,558
|
|
|
$
|
(1,717
|
)
|
Interest expense increased by $0.5 million,
or 76%, primarily due to fees and discounts associated with the convertible debt that was converted into common stock during the
three months ended March 31, 2018 as further discussed in Note 6 to the condensed consolidated financial statements. We adopted
ASC 606 during the three months ended March 31, 2018. We recognized an additional $0.1 million in interest expense during the
three months ended March 31, 2018 as a result of the adoption. Related party interest expense decreased $0.6 million, or 60%,
primarily as a result of the reduction in the related party debt as a portion was converted into common stock as further discussed
in Note 11 to the condensed consolidated financial statements. During the fourth quarter of 2017 and January 2018, as further
discussed in Note 6 to the condensed consolidated financial statements, we made draws on a convertible note. There was a certain
feature of this note that was valued as a derivate. An expense of $5.2 million was recognized related to the change in the underlying
fair value of this feature from December 31, 2017 to February 5, 2018, the date this feature and the underlying note were extinguished
and converted, respectively. There was no comparable expense recognized during three months ended March 31, 2017. We recognized
a loss on extinguishment of debt during the three months ended March 31, 2018 as a result of the conversion of $10 million of
outstanding debt into common stock in partial extinguishment of this debt and extinguishment of $6 million in convertible debt.
See Note 6 of the condensed consolidated financial statements for further discussion. There was no comparable expense during the
three months ended March 31, 2017. For the three months ended March 31, 2018, we converted $35 million of related party debt into
common stock and recognized a gain on partial extinguishment of $9.6 million. See Note 11 of the condensed consolidated financial
statements for further discussion. There was no comparable gain during the three months ended March 31, 2017.
Seasonality
and Quarterly Results
The
level of seasonality in our business overall is difficult to evaluate as a result of our relatively short history of sales, our
relatively limited number of commercialized products, our expansion into new geographical territories, the introduction of new
products, the timing of introductions of new formulations and products and the impact of weather and climate change. It is possible
that our business may become more seasonal, or experience seasonality in different periods, than anticipated, particularly if
we expand into new geographical territories, add or change distributors or distributor programs or introduce new products with
different applicable growing seasons, or if a more significant component of our revenue becomes comprised of sales of Zequanox,
which has a separate seasonal sales cycle compared to our crop protection products.
Notwithstanding
any such seasonality, we expect substantial fluctuation in sales year over year and quarter over quarter as a result of a number
of variables on which sales of our products are dependent. Weather conditions, natural disasters and other factors affect planting
and growing seasons and incidence of pests and plant disease, and 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. For example, late
snows and cold temperatures in the Midwestern and Eastern United States in the first and second quarters of 2014 delayed planting
and pesticide and plant health applications, the California drought in 2015 and the Northeast U.S. drought in 2016 affected fungicide
sales and Hurricanes Irma and Maria affected Florida and Puerto Rico crops in the third quarter of 2017. 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.
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. We believe
that our existing cash and cash equivalents of $14.8 million at March 31, 2018, expected revenues and the net proceeds from equity
financing discussed in Note 12 will be sufficient to fund operations as currently planned through one year from the date of the
issuance of these financial statements. We believe that the actions discussed above are probable of occurring and mitigate the
substantial doubt raised by our historical operating results. However, we cannot predict, with certainty, the outcome of our actions
to grow revenues or manage or reduce costs. We have based this belief on assumptions and estimates that may prove to be wrong,
and we could spend its available financial resources less or more rapidly than currently expected. 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 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 I— Item 1A— “Risk Factors”, in our Annual Report.
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.
We have certain strategic collaboration and distribution agreements under which we receive payments for the achievement of certain
testing validation, regulatory progress and commercialization events. As of March 31, 2018, we had received an aggregate of $3.4
million in payments under these agreements. In addition, there will be an additional $0.3 million in payments due on certain anniversaries
of regulatory approval and an additional $0.8 million in payments under these agreements that we could potentially receive if
the testing validation, regulatory progress and commercialization events occur.
We
had the following debt arrangements in place as of March 31, 2018 (dollars in thousands):
|
|
|
|
|
PRINCIPAL
|
|
|
|
|
|
STATED ANNUAL INTEREST
|
|
|
BALANCE (INCLUDING ACCRUED
|
|
|
PAYMENT/
|
DESCRIPTION
|
|
RATE
|
|
|
INTEREST)
|
|
|
MATURITY
|
Promissory Notes
(1)
|
|
|
8.00
|
%
|
|
$
|
2,493
|
|
|
Due December
31, 2022
(3)
|
Promissory Note
(1)
|
|
|
6.25
|
%
|
|
|
9,059
|
|
|
Monthly/June 2036
|
Promissory Notes
(2)
|
|
|
8.00
|
%
|
|
|
5,398
|
|
|
Due December 31, 2022
(3)
|
Secured Borrowing
(1)
|
|
|
12.78
|
%
|
|
|
1,614
|
|
|
Varies
(4)
/May
2018
|
(1)
|
See
Note 6 of the condensed consolidated financial statements.
|
(2)
|
See
Note 10 of the condensed consolidated financial statements.
|
(3)
|
In
February 2018, the maturity date and all interest payments were extended to December
2022.
|
(4)
|
Payable
through the lender’s direct collection of certain accounts receivable through March
2018.
|
In February 2018, we
issued,
pursuant to the Securities Purchase Agreement entered into on December 15, 2017, 70,514,000 unregistered shares of our
common stock and we also converted $51,000,000 in outstanding debt principal (including $6,000,000 outstanding under the Secured
December 2017 Convertible Note and $45,000,000 outstanding under long-term senior secured debt instruments) into a portion of
the previously mentioned common shares (the “February Stock and Debt Conversion Transaction”). The gross proceeds
to us from the offering were approximately $24,000,000, and after deducting underwriting discounts and commissions and estimated
offering expenses payable by the Company, the aggregate net proceeds to the Company totaled approximately $21,800,000. Of the
$7,450,000 in principal that remained as of March 31, 2018 under these partially converted notes, the maturity dates and future
interest payments were extended until the amended maturity date of December 31, 2022. On an annualized basis through 2021, these
amendments are expected to save us approximately $4.9 million in cash interest payments. See Notes 6 and 10 of the condensed consolidated
financial statements for further discussion of February Stock and Debt Conversion Transaction.
As
part of the February Stock and Debt Conversion Transaction, we converted $45,000,000 in partial consideration for certain outstanding
debt as further discussed in Notes 6 and 10 of the condensed consolidated financial statements. Of the $7,450,000 in principal
that remained as of March 31, 2018 under these partially converted notes, the maturity dates and future interest payments were
extended until the amended maturity date of December 31, 2022. On an annualized basis through 2021, these amendments are expected
to save us approximately $4.9 million in cash interest payments.
In
April 2018, we completed an underwritten public offering of 8.3 million registered
shares
of our common stock
. The public offering price of the shares sold in the offering was $1.65 per share. The total gross
proceeds to the Company from the offerings were $13.8 million. The estimated aggregate net proceeds to the Company from common
stock sold in the offering totaled approximately $12.7 million.
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):
|
|
THREE MONTHS ENDED MARCH 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(Unaudited)
|
|
Net cash used in operating activities
|
|
$
|
(9,746
|
)
|
|
$
|
(7,550
|
)
|
Net cash used in investing activities
|
|
|
(362
|
)
|
|
|
(83
|
)
|
Net cash used in financing activities
|
|
|
24,079
|
|
|
|
(194
|
)
|
Net increase (decrease) in cash and cash equivalents
|
|
$
|
13,971
|
|
|
$
|
(7,827
|
)
|
Cash
Flows from Operating Activities
Net
cash used in operating activities of $9.7 million during the three months ended March 31, 2018 primarily resulted from our net
loss of $2.9 million and net non-cash gains on the extinguishment of debt of $9.3 million, and cash used by operating assets and
liabilities of $4.3. These uses were partially offset by non-cash of $6.8 million.
Net
cash used in operating activities of $7.6 million during the three months ended March 31, 2017 primarily resulted from our net
loss of $7.6 million and $1.4 million in cash used by operating assets and liabilities, which was partially offset by certain
non-cash charges consisting of share-based compensation of $0.6 million, depreciation and amortization of $0.5 million, $0.3 million
of non-cash interest expense,
Cash
Flows from Investing Activities
Net
cash used in investing activities were $0.4 million during the three months ended March 31, 2018 resulting from purchases of property,
plant and equipment to support our operations.
Net
cash used in investing activities were $0.1 million during the three months ended March 31, 2017 resulting from purchases of property,
plant and equipment to support our operations.
Cash
Flows from Financing Activities
Net
cash provided in financing activities of $24.1 million during the three months ended March 31, 2018 consisted primarily of $21.8
million in net proceeds from the issuance of common stock, $5.5 million in proceeds from the issuance of debt, and offset by reductions
and repayment of debt of $3.3 million.
Net
cash used in financing activities of $0.2 million during the three months ended March 31, 2017 consisted primarily $0.1 million
in payments under capital leases and $0.1 million in payments under debt obligations.
Contractual
Obligations
The
following is a summary of our contractual obligations as of March 31, 2018 (in thousands):
|
|
TOTAL
|
|
|
2018
|
|
|
2019-2020
|
|
|
2021-2022
|
|
|
2023 AND
BEYOND
|
|
|
|
(In thousands)
|
|
Operating lease obligations
|
|
$
|
1,329
|
|
|
$
|
714
|
|
|
$
|
615
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Debt
|
|
|
18,084
|
|
|
|
1,800
|
|
|
|
575
|
|
|
|
8,107
|
|
|
|
7,602
|
|
Interest payments
|
|
|
9,760
|
|
|
|
444
|
|
|
|
1,131
|
|
|
|
4,289
|
|
|
|
3,896
|
|
Total
|
|
$
|
29,173
|
|
|
$
|
2,958
|
|
|
$
|
2,321
|
|
|
$
|
12,396
|
|
|
$
|
11,498
|
|
Operating
leases consist of contractual obligations from agreements for non-cancelable office space and leases used to finance the acquisition
of equipment. Debt and capital equipment lease payments and the interest payments relating thereto include promissory notes and
capital lease obligations in accordance with the payment terms under the agreements.
In
September 2013 and then amended in April 2014, we entered into a lease agreement for approximately 27,300 square feet of office
and laboratory space located in Davis, California. The initial term of the lease is for a period of 60 months and commenced in
August 2014. The monthly base rent is $44,000 for the first 12 months with a 3% increase each year thereafter. Concurrent with
this amendment, in April 2014, we entered into a lease agreement with an affiliate of the landlord to lease approximately 17,400
square feet of office and laboratory space in the same building complex in Davis, California. The initial term of the lease is
for a period of 60 months and commenced in August 2014. The monthly base rent is $28,000 with a 3% increase each year thereafter.
In
January 2016, we entered into an agreement with a sublessee to sublease approximately 3,800 square feet of vacant office space
in the aforementioned building complex pursuant to the terms of our lease agreement. The initial term of the sublease is for a
period of approximately 43 months and commenced on February 1, 2016. The monthly base rent is approximately $5,000 per month for
the first 12 months with increases of approximately 5% each year thereafter.
Since
March 31, 2018, we have not added any additional leases that would qualify as operating leases.
Inflation
We
believe that inflation has not had a material impact on our results of operations for the three months ended March 31, 2018 and
2017.
Off-Balance
Sheet Arrangements
We
have not been involved in any material off-balance sheet arrangements.
Recently
Issued Accounting Pronouncements
See
Note 2 to the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q in Part I—Item
1— “Financial Information.”