S-1 1 d329931ds1.htm S-1 S-1
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As filed with the Securities and Exchange Commission on July 1, 2013.

Registration No. 333-          

 

 

 

UNITED STATES SECURITIES AND EXCHANGE

COMMISSION

Washington, D.C. 20549

 

 

FORM S-1

REGISTRATION STATEMENT

Under

THE SECURITIES ACT OF 1933

 

 

Marrone Bio Innovations, Inc.

(Exact name of registrant as specified in its charter)

 

 

Delaware   2870   20-5137161
(State or other jurisdiction of
incorporation or organization)
  (Primary Standard Industrial
Classification Code Number)
  (I.R.S. Employer
Identification Number)

2121 Second St. Suite A-107

Davis, CA 95618

(530) 750-2800

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

Pamela G. Marrone, Ph.D.

President and Chief Executive Officer

Marrone Bio Innovations, Inc.

2121 Second St. Suite A-107

Davis, CA 95618

(530) 750-2800

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies to:

Charles S. Farman, Esq.

Andrew D. Thorpe, Esq.

Alfredo B. D. Silva, Esq.

Morrison & Foerster LLP

425 Market Street

San Francisco, CA 94105

Tel: (415) 268-7000

Fax: (415) 268-7522

 

Christopher M. Kelly, Esq.

Boris Dolgonos, Esq.

Jones Day

222 East 41st Street

New York, NY 10017

Tel: (212) 326-3939

Fax: (212) 755-7306

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box.  ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

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

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   x  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

 

 

CALCULATION OF REGISTRATION FEE

 

 

TITLE OF EACH CLASS

OF SECURITIES TO BE REGISTERED

 

PROPOSED

MAXIMUM

AGGREGATE
OFFERING PRICE (1)(2)

 

AMOUNT OF

REGISTRATION FEE

Common stock, $0.00001 par value

  $60,000,000.00   $8,184.00

 

 

(1)   

Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended.

(2)  

Includes offering price of shares that the underwriters have the option to purchase.

 

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


Table of Contents

The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

SUBJECT TO COMPLETION. DATED JULY 1, 2013.

 

PRELIMINARY PROSPECTUS

                 Shares

 

LOGO

Marrone Bio Innovations, Inc.

Common Stock

 

 

This is an initial public offering of shares of common stock of Marrone Bio Innovations, Inc. All of the shares of common stock are being sold by the company.

Prior to this offering, there has been no public market for the common stock. It is currently estimated that the initial public offering price per share will be between $             and $            . We intend to apply to have our shares of common stock listed on the Nasdaq Global Market, subject to notice of issuance, under the symbol “MBII.”

We are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act and, as such, may elect to comply with certain reduced reporting requirements after this offering.

Investing in our common stock involves a high degree of risk. Please read “Risk Factors” beginning on page 16 of this prospectus.

 

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

 

 

     PER SHARE      TOTAL  

Public offering price

   $                    $                

Underwriting discount and commissions

   $         $     

Proceeds to Marrone, before expenses

   $         $     

 

 

Delivery of the shares of common stock is expected to be made on or about                 , 2013. We have granted the underwriters an option for a period of 30 days to purchase an additional                 shares of our common stock. If the underwriters exercise the option in full, the total underwriting discounts and commissions payable by us will be $                 , and the total proceeds to us, before expenses, will be $                 .

Joint Book-Running Managers

 

Jefferies    Piper Jaffray

Co-Managers

Roth Capital Partners   Stifel

Prospectus dated                 , 2013.


Table of Contents

TABLE OF CONTENTS

 

 

 

     PAGE  

PROSPECTUS SUMMARY

     1   

RISK FACTORS

     16   

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

     33   

USE OF PROCEEDS

     35   

DIVIDEND POLICY

     36   

CAPITALIZATION

     37   

DILUTION

     39   

SELECTED FINANCIAL DATA

     41   

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     44   

BUSINESS

     71   

MANAGEMENT

     92   

EXECUTIVE COMPENSATION

     99   

PRINCIPAL STOCKHOLDERS

     107   

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

     110   

DESCRIPTION OF CERTAIN INDEBTEDNESS

     114   

DESCRIPTION OF CAPITAL STOCK

     119   

SHARES ELIGIBLE FOR FUTURE SALE

     125   

MATERIAL U.S. FEDERAL TAX CONSEQUENCES TO NON-U.S. HOLDERS

     127   

UNDERWRITING

     131   

LEGAL MATTERS

     137   

EXPERTS

     138   

WHERE YOU CAN FIND ADDITIONAL INFORMATION

     139   

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

     F-1   

 

 

 

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We and the underwriters have not authorized anyone to provide any information or to make any representations other than those contained in this prospectus or in any free writing prospectuses we have prepared. We and the underwriters take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. This prospectus is an offer to sell only the shares offered hereby, but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is current only as of its date.

Neither we nor any of the underwriters have done anything that would permit a public offering of the shares of our common stock or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. Persons outside the United States who come into possession of this prospectus must inform themselves about, and observe any restrictions relating to, the offering of the shares of common stock and the distribution of this prospectus outside of the United States.

 

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PROSPECTUS SUMMARY

This summary highlights information contained in greater detail elsewhere in this prospectus and does not contain all of the information that you should consider in making your investment decision. Before investing in our common stock, you should carefully read this entire prospectus, including our consolidated financial statements and the related notes included in this prospectus and the information set forth under the headings “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Unless otherwise indicated in this prospectus, “MBI,” “our company,” “we,” “us” and “our” refer to Marrone Bio Innovations, Inc.

Our Company

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. We target the major markets that use conventional chemical pesticides, including certain agricultural and water markets, where our bio-based products are used as substitutes for, or in conjunction with, conventional chemical pesticides. We also target new markets for which there are no available conventional chemical pesticides, the use of conventional chemical pesticides may not be desirable or permissible because of health and environmental concerns or the development of pest resistance has reduced the efficacy of conventional chemical pesticides. All of our current products are approved by the U.S. Environmental Protection Agency, or EPA, and registered as “biopesticides,” or biological pesticides based on microorganisms, plants and other natural products. We believe our current portfolio of products and our pipeline address the growing global demand for effective, efficient and environmentally responsible products.

Our products currently target two core end markets: crop protection and water treatment. Crop protection products consist of herbicides (for weed control), fungicides (for plant disease control), nematicides (for parasitic roundworm control), insecticides (for insect and mite control) and plant growth regulators that growers use to increase crop yields, improve plant health, manage pest resistance and reduce chemical residues. Our products can be used in both conventional and organic crop production. We currently sell our crop protection product lines, Regalia, for plant disease control and plant health, and Grandevo, for insect and mite control, to growers of specialty crops such as grapes, citrus, tomatoes, vegetables, nuts, leafy greens and ornamental plants. We have also initiated targeted sales of Regalia for large-acre row crops such as corn, cotton and soybeans. Water treatment products target invasive water pests across a broad range of applications, including hydroelectric and thermoelectric power generation, industrial applications, drinking water, aquaculture, irrigation and recreation. Our current water treatment product line, Zequanox, which is being marketed and sold directly to U.S. power and industrial companies, selectively kills invasive mussels that cause significant infrastructure and ecological damage.

In addition to our current two core end markets, we are also taking steps through strategic collaborations to commercialize products for other non-crop pest management markets. These products may be different formulations of our crop protection products that are specifically targeted for industrial and institutional, turf and ornamental, home and garden and animal health uses such as controlling grubs, cockroaches, flies and mosquitoes in and around schools, parks, golf courses and other public-use areas.

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. We believe that our competitive strengths, including our commercially available products, robust pipeline of novel product candidates, proprietary technology and product development process, commercial relationships and industry experience, position us for rapid growth by providing solutions for these global trends.

 

 

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Our Technology and Product Development Process

Our proprietary technology comprises a sourcing process for microorganisms and plant extracts, an extensive proprietary microorganism collection, microbial fermentation technology, screening technology and a process to identify and characterize natural compounds with pesticidal, or pest controlling, activity. Our technology enables us to isolate and screen naturally occurring microorganisms and plant extracts in a highly efficient manner and to identify those that may have novel, effective and safe pest management or plant health promoting characteristics. We then analyze and characterize the structures of compounds either produced by selected microorganisms or found in plant extracts to identify product candidates for further development and commercialization. As of March 31, 2013, we have screened more than 18,000 microorganisms and 350 plant extracts, and we have identified multiple product candidates that display activity against insects, nematodes, weeds, plant diseases and invasive species such as zebra and quagga mussels, aquatic weeds and algae. We also have produced a collection of microorganisms from taxonomic groups that research suggests may enhance nutrient uptake in plants, reduce stress and otherwise increase plant growth. Our product candidates come from our own discovery and development as well as in-licensed technology from universities, corporations and governmental entities.

Our proprietary product development process includes several important components. For all our product candidates, we develop an analytical method to detect the quantity of the active natural product compounds that are produced by the microorganism or that are extracted from plants. For microbial products, we develop unique proprietary fermentation processes that increase the active natural compounds produced by the microorganisms. We also scale-up fermentation volumes to maximize yields consistently in each batch. Similarly, for our plant extract-based products, we develop a manufacturing process that increases the amount of active natural compounds extracted from plant materials. Our deep understanding of natural product chemistry allows us to develop formulations that optimize the efficacy and stability of compounds produced by microorganisms or plants. Products are not released for sale unless the quantity of the compounds meets our desired efficacy specifications. These methods allow us to produce products that are highly effective and of a consistent quality on a commercial scale.

These product formulations are tailored to meet customers’ needs and display enhanced performance characteristics such as effectiveness, shelf life, compatibility with other pesticides and ease of use. Our senior management’s numerous years of experience in the development of commercial products and formulations have resulted in a highly efficient product development process, which allows us to rapidly commercialize new products.

 

 

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Our Products

The table below summarizes our current portfolio of EPA-approved bio-based pest management and plant health products, as well as products submitted to the EPA for registration.

 

NAME

 

MARKET

 

TARGET

 

USE

 

STAGE

Regalia   Crop Protection   Plant Disease/ Plant Health   Protects against fungal and bacterial diseases and enhances yields.   Commercially Available
Grandevo   Crop Protection   Insects and Mites   Kills a broad range of sucking and chewing insects through feeding.   Commercially Available
Zequanox   Water Treatment   Invasive Mussels   Kills invasive mussels that restrict critical “in-pipe” water flow in industrial and power facilities and harm recreational “open waters.”   Commercially Available for In-Pipe; Submitted for EPA Registration for Open Water
Opportune   Crop Protection, Home, Turf   Weeds   Controls weeds non-selectively pre-emergence and selectively post- emergence.   EPA-Approved; Not Yet Commercially Available
Venerate   Crop Protection, Home, Turf, Animal Health   Insects and Mites   Kills a broad range of sucking and chewing insects on contact.   Submitted for EPA Registration
MBI-011   Crop Protection, Home, Turf   Weeds   Kills a broad range of weeds and acts as a “burndown” herbicide (controls weed foliage)   Submitted for EPA Registration

In addition to the above products, our pipeline consists of product candidates in various stages of development, those close to EPA submission and early-stage discoveries.

The Value Proposition of Our Pest Management Products

Our products are highly effective and generally designed to be compatible with existing pest control equipment and infrastructure. This allows them to be used as substitutes for, or in conjunction with, conventional chemical pesticides. We believe that compared with conventional chemical pesticides, our products:

 

  n  

Are competitive in both price and efficacy;

 

  n  

Provide viable alternatives where conventional chemical pesticides and genetically modified crops are subject to regulatory restrictions;

 

  n  

Comply with market-imposed requirements for pest management programs by food processors and retailers;

 

 

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  n  

Are environmentally friendly;

 

  n  

Meet stringent organic farming requirements;

 

  n  

Improve worker productivity by shortening field re-entry times after spraying and allowing spraying up to the time of harvest;

 

  n  

Are exempt from residue restrictions applicable to conventional chemical pesticides in both the agriculture and water markets; and

 

  n  

Are less likely to result in the development of pest resistance.

In addition, our experience has shown that when our products are used in conjunction with conventional chemical pesticides, they can:

 

  n  

Increase the effectiveness of conventional chemical pesticides while reducing their required application levels;

 

  n  

Increase levels of pest control and consistency of control;

 

  n  

Increase crop yields;

 

  n  

Increase crop quality, including producing crops with higher levels of protein, better taste and color and more attractive flowers; and

 

  n  

Delay the development of pest resistance to conventional chemical pesticides.

Our Sales and Distribution Platform

We are currently selling our crop protection product lines, Regalia and Grandevo, in the United States through leading agricultural distributors such as Crop Production Services, Helena and Wilbur Ellis. These are the same distributors that the major agrichemical companies use for distributing conventional chemical pesticides.

We have entered into various strategic agreements to facilitate the distribution of our products in international markets. We have signed exclusive international distribution agreements for Regalia with FMC (for markets in Latin America) and Syngenta (for markets in Africa, Europe and the Middle East). We have also signed a technology evaluation and development agreement with Scotts Miracle-Gro under which we have granted Scotts Miracle-Gro first rights to negotiate for exclusive worldwide commercialization rights with respect to bio-based pest management and plant health products we jointly develop for the consumer lawn and garden market.

Our water treatment product line, Zequanox, is currently being marketed and sold directly to U.S. power and industrial companies. We are also in discussions with several leaders in water treatment technology and applications regarding potential arrangements to sell Zequanox in international markets.

Our Competitive Strengths

Commercially Available Products. We believe we have one of the leading portfolios of bio-based pest management products. We have three commercially available product lines, Regalia, Grandevo and Zequanox.

Robust Pipeline of Novel Product Candidates. Our pipeline of early stage discoveries and new product candidates extends across a variety of product types for different end markets, including herbicides, fungicides, nematicides, insecticides, algaecides (for algae control), molluscicides (for mussel and snail control) and plant growth regulators. Our product candidates are both developed internally and sourced from third parties.

Rapid and Efficient Development Process. We believe we can develop and commercialize novel and effective products faster and at a lower cost than many other developers of pest management products. For example, we have moved each of Regalia, Grandevo and Zequanox through development, EPA approval and U.S. market launch in approximately four years at a cost of $6 million or less. In comparison, a report from Phillips McDougall, an independent research firm, shows that the average cost for major agrichemical companies to

 

 

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bring a new crop protection product to market is over $250 million, and those products have historically taken an average of nearly ten years to move through development, regulatory approval and market launch.

Proprietary Discovery Process. Our discovery process allows us to efficiently discover microorganisms and plant extracts that produce or contain compounds that display a high level of pesticidal activity against various pests. We then use various analytical chemistry techniques to identify and characterize the natural product chemistry of the compounds, which we optimize and patent. As of March 31, 2013, we have identified over 25 candidates for product development from the more than 18,000 microorganisms and 350 plant extracts in our database. Three of our product candidates, one of which has been submitted to the EPA, are newly identified microorganism species, two of which produce novel compounds that we identified and one of which has a novel mode of action that we have identified. Our proprietary discovery process is protected by patents on the microorganisms, their natural product compounds and their uses for pest management, as well as a patent application we have filed on a screening process to identify enzyme-inhibiting herbicides. We also maintain trade secrets related to the discovery, formulation, process development and manufacturing capabilities.

Sourcing and Commercialization Expertise. We use our technical and commercial development expertise to evaluate early-stage discoveries by third parties to determine commercial viability, secure promising technologies through in-licensing and add considerable value to these in-licensed product candidates. Our efficient development process and significant experience in applying natural product chemistry has led universities, corporations and government entities to collaborate with us to develop or commercialize a number of their early-stage discoveries. As with our internally discovered products, early-stage products we source and commercialize are subject to our own patents and trade secrets related to our added value in characterizing, formulating, developing and manufacturing marketable products.

Existing Agreements with Global Market Leaders. We have strategic agreements with global market leaders across agricultural and consumer retail markets. We have signed exclusive international distribution agreements for Regalia with Syngenta in Africa, Europe and the Middle East and with FMC in Latin America. We also have a technology evaluation and development agreement with Scotts Miracle-Gro, which grants it a right of first access to the active ingredients in our full portfolio of bio-based pest management and plant health products for use in its consumer lawn and garden products.

Management Team with Significant Industry Experience. Our management team has deep experience in bio-based pest management products and the broader agriculture industry. Our executive officers and key employees average 28 years of experience and include individuals who have led sales and marketing organizations, top scientists and industry experts, some of whom have served in leadership roles at large multinational corporations and governmental agencies, commercialized multiple products, brought multiple products through EPA, state and foreign regulatory processes, filed and received patents, led groundbreaking research studies and published numerous scientific articles.

Our Growth Strategy

Continue to Develop and Commercialize New Products in Both Existing and New Markets. Our goal is to rapidly and efficiently develop, register and commercialize new products each year, with the goal of developing a full suite of pest management and plant health products. For example, while our current crop protection products address plant diseases and insects, we intend to provide products that can also control nematodes and weeds as well as products for improving fertilizer efficiency and reducing drought stress. We are also currently screening for water treatment products that control algae and aquatic weeds to complement Zequanox, our invasive mussel control product line.

Expand Applications of Our Existing Product Lines. We have identified opportunities to broaden the commercial applications and expand the use of our existing product lines into several key end markets, including large-acre row crop applications, seed treatment, irrigation, aquaculture and animal health. We believe these opportunities could help to drive significant growth for our company.

 

 

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Accelerate Adoption of New Products, Product Applications and Product Lines. Our goal is to provide growers with complete and effective solutions to a broad range of pest management needs that can be used individually, together and in conjunction with conventional chemical pesticides to maximize yield and quality. We believe we will be able to leverage relationships with existing distributors as well as growers’ positive experiences using our Regalia and Grandevo product lines to accelerate adoption of new products, product applications and product lines. We will also continue to target early adopters of new pest management technologies with controlled product launches and to educate growers and water resource managers about the benefits of bio-based pest management products through on-farm and in-facility demonstrations to accelerate commercial adoption of our products.

Leverage Existing Distribution Arrangements and Develop New Relationships. To expand the availability of our products, we intend to continue to use relationships with conventional chemical pesticide distributors in the United States and leverage the international distribution capabilities under our existing strategic collaboration and distribution agreements. We intend to form new strategic relationships with other market-leading companies in our target markets and regions to expand the supply of our products globally. For example, we have engaged new distributors to launch Regalia in Canada for specialty crops, in the United States for turf and ornamental plants and in parts of the Midwest United States for row crops. We have also engaged a distributor to launch Grandevo in the United States for turf and ornamental plants.

Develop and Expand Manufacturing Capabilities. We currently use third-party manufacturers to produce our products on a commercial scale. To date, these arrangements have allowed us to focus our time and direct our capital towards discovering and commercializing new product candidates. We are repurposing a manufacturing facility that we purchased in July 2012 and plan to further expand capacity at this facility using a portion of the proceeds from this offering. We believe there are considerable advantages in having our own manufacturing capabilities such as allowing us to better manage scale-up processes and institute process changes more efficiently, protecting our intellectual property and helping to lower our manufacturing costs.

Pursue Strategic Collaborations and Acquisitions. We intend to continue collaborating with chemical manufacturers to develop products that combine our bio-based pest management products with their technologies, delivering more compelling product solutions to growers. We also may pursue acquisition and in-licensing opportunities to gain access to later-stage products and technologies that we believe would be a good strategic fit for our business and would create additional value for our stockholders.

Industry Overview

Pest management is an important global industry serving the crop protection and water treatment markets that we currently target and the other non-crop markets that we plan to target such as industrial and institutional, professional turf and ornamental, home and garden and animal health. Today, most markets rely on conventional chemical pesticides. In agricultural markets, particularly large-acre row crops, conventional chemical pesticides are supplemented by the use of genetically modified crops that contain herbicide tolerance and pesticidal properties. Agranova, an independent market research firm, estimated that global agrichemical sales for the crop protection market were $50.0 billion in 2012, which represented an increase of 8.2% from 2011. Agrow, an independent market research firm, estimated that the global non-crop market for pesticides was $21.0 billion in 2009. The market for treatment of fruits and vegetables, the largest current users of bio-based pest management and plant health products, accounted for $16.2 billion of this total. Other agricultural applications, notably crops such as corn, soybeans, rice, cotton and cereals, which we expect will become increasingly important users of bio-based products, accounted for $24.7 billion of the total.

While conventional chemical pesticides are often effective in controlling pests, some of these chemicals are acutely toxic, some are suspected carcinogens and the use of some chemical pesticides has been shown to have other harmful effects on the environment, humans, animals and beneficial insects. These health and environmental concerns have prompted stricter legislation around the use of conventional chemical pesticides, particularly in Europe, where the use of some highly toxic chemical pesticides is banned or severely limited and the importation of produce is subject to strict regulatory standards on pesticide residues. In addition, the European Union has passed the Sustainable Use Directive, which requires EU-member countries to reduce the

 

 

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use of conventional chemical pesticides and to use alternative pest management methods, including bio-based pest management products. Over the past two decades, U.S. regulatory agencies have also developed stricter standards and regulations. Furthermore, a growing shift in consumer preference towards organic and sustainable food production has led many large, global food retailers to require their supply chains to implement these practices, including the use of bio-based pest management and fertilizer solutions, water and energy efficiency practices, and localized food product sourcing. For example, in 2010, Wal-Mart announced its global sustainable agriculture goals to require sustainable best practices throughout its global food supply chain. Aside from the health and environmental concerns, conventional chemical pesticide users face additional challenges such as pest resistance and reduced worker productivity, as workers may not return to the fields for a certain period of time after treatment. Similar risks and hazards are also prevalent in the water treatment market, as chlorine and other chemicals used to control invasive water pests contaminate and endanger natural waterways.

As the use of conventional chemical pesticides meets increased opposition from government agencies and consumers, and the efficacy of bio-based pest management products becomes more widely recognized among growers, bio-based pest management products are gaining popularity and represent a strong growth sector within the global pesticide market. Bio-based pest management products include “biopesticides,” which the EPA registers in two major categories: (1) microbial pesticides, which contain a microorganism such as a bacterium or fungus as the active ingredient; and (2) biochemical pesticides, which are naturally occurring substances with a non-toxic mode of action such as insect sex pheromones, certain plant extracts and fatty acids.

We believe many bio-based pest management products perform as well as or better than conventional chemical pesticides. When used in alternation or in spray tank mixtures with conventional chemical pesticides, bio-based pest management products can increase crop yields and quality over chemical-only programs. Agricultural industry reports, as well as our own research, indicate that bio-based pest management products can affect plant physiology and morphology in ways that may improve crop yield and can increase the efficacy of conventional chemical pesticides. In addition, pests rarely develop resistance to bio-based pest management products due to their complex modes of action. Likewise, bio-based pest management products have been shown to extend the product life of conventional chemical pesticides and limit the development of pest resistance, a key issue facing users of conventional chemical pesticides, by eliminating pests that survive conventional chemical pesticide treatments. Most bio-based pest management products are listed for use in organic farming, providing those growers with compelling pest control options to protect yields and quality. Given their generally lower toxicity compared with many conventional chemical pesticides, bio-based pest management products can add flexibility to harvest timing and worker re-entry times and improve worker safety. Many bio-based pest management products are also exempt from conventional chemical residue tolerances, which are permissible levels of chemical residue at time of harvest set by governmental agencies. Bio-based pest management products may not be subject to restrictions by food retailers and governmental agencies limiting chemical residues on produce, which enables growers to export to wider markets.

In addition to performance attributes, bio-based pest management products registered with the EPA as biopesticides can offer other advantages over conventional chemical pesticides. From an environmental perspective, biopesticides have low toxicity, posing low risk to most non-target organisms, including humans, other mammals, birds, fish and beneficial insects. Biopesticides are biodegradable, resulting in less risk to surface water and groundwater, and generally have low air-polluting volatile organic compounds content. Because biopesticides tend to pose fewer risks than conventional pesticides, the EPA offers a more streamlined registration process for these products, which generally requires significantly less toxicological and environmental data and a lower registration fee.

Summary of Risk Factors

Our business is subject to numerous risks, which are described in the section entitled “Risk Factors” immediately following this prospectus summary on page 16. You should carefully consider these risks before making an investment. In particular, the following considerations, among others, may offset our competitive

 

 

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strengths or have a negative effect on our growth strategy, which could cause a decline in the price of our common stock and result in a loss of all or a portion of your investment:

 

  n  

We have a limited operating history and number of commercialized products, have incurred significant losses to date and anticipate continuing to incur losses in the future, and we may not achieve or maintain profitability.

 

  n  

Our products are in the early stages of commercialization, and our business may fail if we are not able to successfully generate significant revenues from these products.

 

  n  

Adverse weather conditions and other natural conditions can reduce acreage planted or incidence of crop disease or pest infestations, which can adversely affect our results of operations.

 

  n  

If our ongoing or future field trials are unsuccessful, we may be unable to obtain regulatory approval of, or commercialize, our products on a timely basis.

 

  n  

Our inability to obtain regulatory approvals, or to comply with ongoing and changing regulatory requirements, could delay or prevent sales of the products we are developing and commercializing.

 

  n  

Customers may not adopt our bio-based pest management and plant health products as quickly as we are projecting.

 

  n  

The high level of competition in the market for pest management products may result in pricing pressure, reduced margins or the inability of our products to achieve market acceptance.

 

  n  

Our product sales are expected to be seasonal and subject to weather conditions and other factors beyond our control, which may cause our operating results to fluctuate significantly quarterly and annually.

 

  n  

We rely on third parties for the production of our products. If these parties do not produce our products at a satisfactory quality, in a timely manner, in sufficient quantities or at an acceptable cost, our development and commercialization efforts could be delayed or otherwise negatively impacted.

 

  n  

We rely on a single supplier based in China for a key ingredient of Regalia.

 

  n  

If we are unable to maintain and further establish successful relations with the third-party distributors that are our principal customers, or they do not focus adequate resources on selling our products or are unsuccessful in selling them to end users, sales of our products would decline.

 

  n  

Our intellectual property is integral to our business. If we are unable to protect our patents and proprietary rights in the United States and foreign countries, our business could be adversely affected.

Corporate Information

We were originally incorporated in the State of Delaware in June 2006 as Marrone Organic Innovations, Inc. Our principal executive offices are located at 2121 Second St. Suite A-107, Davis, CA 95618. Our telephone number is (530) 750-2800. Our website address is www.marronebioinnovations.com. The information that can be accessed through our website is not part of this prospectus, and investors should not rely on any such information in deciding whether to purchase our common stock.

Emerging Growth Company Status

We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act, which we refer to as the JOBS Act. For as long as we are an “emerging growth company,” we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies,” including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and exemptions from the requirements of holding advisory “say-on-pay” votes on executive compensation and shareholder advisory votes on golden parachute compensation.

 

 

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Under the JOBS Act, we will remain an “emerging growth company” until the earliest of:

 

  n  

the last day of the fiscal year during which we have total annual gross revenues of $1 billion or more;

 

  n  

the last day of the fiscal year following the fifth anniversary of the completion of this offering;

 

  n  

the date on which we have, during the previous three-year period, issued more than $1 billion in non-convertible debt; and

 

  n  

the date on which we are deemed to be a “large accelerated filer” under the Securities Exchange Act of 1934, or the Exchange Act (we will qualify as a large accelerated filer as of the first day of the first fiscal year after we have (i) more than $700 million in outstanding common equity held by our non-affiliates and (ii) been public for at least 12 months; the value of our outstanding common equity will be measured each year on the last day of our second fiscal quarter).

The JOBS Act also provides that an “emerging growth company” can utilize the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, or the Securities Act, for complying with new or revised accounting standards. However, we are choosing to “opt out” of such extended transition period, and, as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for companies that are not “emerging growth companies.” Section 107 of the JOBS Act provides that our decision to opt out of the extended transition period for complying with new or revised accounting standards is irrevocable.

Trade Names

Except as context otherwise requires, references in this prospectus to our product lines, such as Regalia, refer collectively to all formulations of the respective product line, such as Regalia Maxx or Regalia SC, and all trade names under which our distributors sell such product lines internationally, such as Sakalia.

Our logos, “Grandevo®,” “OpportuneTM,” “Regalia®,” “VenerateTM,” “Zequanox®” and other trade names, trademarks or service marks of Marrone Bio Innovations, Inc. appearing in this prospectus are the property of Marrone Bio Innovations, Inc. This prospectus contains additional trade names, trademarks and service marks of other companies. We do not intend our use or display of other companies’ trade names, trademarks or service marks to imply relationships with, or endorsement or sponsorship of us by, these other companies.

 

 

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The Offering

 

Common stock offered by us

            shares

 

Common stock to be outstanding after this offering

            shares (or             shares if the underwriters exercise their option to purchase additional shares in full)

 

Use of proceeds

We intend to use the net proceeds from this offering primarily for capital expenditures, including to further expand capacity at our manufacturing facility, working capital and other general corporate purposes. See “Use of Proceeds.”

 

Directed share program

The underwriters have reserved for sale, at the initial public offering price, up to approximately             shares of our common stock being offered for sale to certain persons and entities that have relationships with us. We will offer these shares to the extent permitted under applicable regulations in the United States and in various countries. The number of shares available for sale to the general public in this offering will be reduced to the extent these persons purchase reserved shares. These shares will not be subject to any lock-up arrangement with any underwriters, except to the extent purchased by any of our officers or directors. See “Shares Eligible for Future Sale—Lock-Up Agreements.” Any reserved shares not purchased will be offered by the underwriters to the general public on the same terms as the other shares.

 

Risk factors

See “Risk Factors” and the other information included in this prospectus for a discussion of the factors you should consider carefully before deciding to invest in our common stock.

 

Proposed Nasdaq symbol

MBII

The number of shares of our common stock to be outstanding after this offering is based on                 shares outstanding as of March 31, 2013, on an as-converted basis, and excludes:

 

  n  

6,403,688 shares of common stock issuable upon the exercise of outstanding options with a weighted-average exercise price of $1.27 per share;

 

  n  

600,000 shares of Series C convertible preferred stock issuable upon exercise of an outstanding warrant with an exercise price of $2.50 per share;

 

  n  

             shares of common stock issuable upon exercise of an outstanding warrant with an exercise price of $         per share, based upon an assumed initial public offering price equal to the midpoint of the range set forth on the cover of this prospectus; and

 

  n  

            shares of common stock that will be available for future grant under our 2013 Stock Incentive Plan, which will become effective on the date of the completion of this offering, and additional shares of common stock that will be available for future grant under the automatic increase provisions of our 2013 Stock Incentive Plan (see “Executive Compensation—Employee Benefit and Stock Plans—2013 Stock Incentive Plan”).

Except as otherwise indicated, all information in this prospectus assumes:

 

  n  

a             -for-             reverse stock split effective on                 , 2013;

 

  n  

the filing of our amended and restated certificate of incorporation immediately prior to the completion of this offering;

 

 

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  n  

the automatic conversion of all outstanding shares of our preferred stock into an aggregate of 26,689,339 shares of common stock immediately prior to the completion of this offering;

 

  n  

the issuance of             shares of common stock, based on an assumed initial public offering price equal to the midpoint of the price range set forth on the cover of this prospectus, upon the net exercise, at the completion of this offering, of outstanding warrants that would otherwise expire upon the completion of this offering, to purchase 48,157 shares of Series A and Series B convertible preferred stock;

 

  n  

the issuance of             shares of common stock, based on an assumed initial public offering price equal to the midpoint of the price range set forth on the cover of this prospectus, at the completion of this offering, upon the net exercise of outstanding warrants to purchase common stock automatically exercisable upon the completion of this offering in accordance with their terms;

 

  n  

the issuance of             shares of common stock, based on an assumed initial public offering price equal to the midpoint of the price range set forth on the cover of this prospectus, at the completion of this offering, upon the conversion of all outstanding convertible notes, including principal and interest accrued automatically convertible upon the completion of this offering in accordance with their terms;

 

  n  

no other exercise of options or warrants subsequent to March 31, 2013; and

 

  n  

no exercise of the underwriters’ option to purchase up to                     additional shares of common stock from us at the initial public offering price.

 

 

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Summary Financial Data

The following tables summarize the financial data for our business. You should read this summary financial data in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our Consolidated Financial Statements and related notes, all included elsewhere in this prospectus.

We have derived the statements of operations data for the fiscal years ended December 31, 2012 and 2011 from our audited consolidated financial statements and related notes included elsewhere in this prospectus. We have derived the statements of operations data for the fiscal year ended December 31, 2010 from our audited consolidated financial statements not included in this prospectus. We have derived the statements of operations data for the three months ended March 31, 2013 and 2012 and the balance sheet data as of March 31, 2013 from our unaudited interim condensed consolidated financial statements and related notes included elsewhere in this prospectus. Our historical results are not necessarily indicative of the results that may be expected in the future.

 

 

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Statements of Operations Data:

 

 

 

     FISCAL YEAR     THREE MONTHS
ENDED MARCH 31,
 
     2012     2011     2010     2013     2012  
    

(In thousands, except per share data)

 
                       (Unaudited)  

Revenues:

          

Product

   $ 6,961      $ 5,194      $ 3,697      $ 2,649      $ 1,956   

License (1)

     179        57               81        43   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     7,140        5,251        3,697        2,730        1,999   

Cost of product revenues

     4,333        2,172        1,738        1,795        860   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     2,807        3,079        1,959        935        1,139   

Operating expenses:

          

Research and development

     12,741        9,410        5,563        3,283        2,733   

Non-cash charge associated with a convertible note

    
3,610
  
   

  
   

  
   

  
   

  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Selling, general and administrative

     10,294        6,793        4,353        2,847        2,322   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     26,645        16,203        9,916        6,130        5,055   

Loss from operations

     (23,838     (13,124     (7,957     (5,195     (3,916

Other income (expense):

          

Interest income

     16        22        22        1        2   

Interest expense

     (2,466     (88     (102     (1,985     (56

Change in estimated fair value of financial instruments (2)

     (12,461     1               (3,563     (15

Other income (expense)

     (45     9        1        (7     1   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (expense), net

     (14,956     (56     (79     (5,554     (68
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income taxes

                                   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (38,794   $ (13,180   $ (8,036   $ (10,749   $ (3,984
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Deemed dividend, convertible notes

     (2,039                          (1,253
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to common shareholders

   $ (40,833   $ (13,180   $ (8,036   $ (10,749   $ (5,237
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per common share:

          

Basic and diluted

   $ (10.35   $ (3.39   $ (2.10   $ (2.70   $ (1.34
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average shares outstanding in computing net loss per common share:

          

Basic and diluted

     3,945        3,888        3,832        3,980        3,915   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma net loss per common share (3):

          

Basic and diluted

   $            $       
  

 

 

       

 

 

   

Weighted-average shares outstanding pro forma:

          

Basic and diluted

          
  

 

 

       

 

 

   

 

 

(1)   

We receive payments under strategic collaboration and distribution agreements under which we provide third parties with exclusive development, marketing and distribution rights. These payments are initially classified as deferred revenues and recognized as revenues over the exclusivity period. Please see Note 2 to our consolidated financial statements for an explanation of the method used to calculate license revenues.

(2)   

We account for the outstanding warrants exercisable into shares of our Series A, Series B and Series C convertible preferred stock and the outstanding warrants exercisable into a variable number of shares of common stock as liability instruments, as the Series A, Series B and Series C convertible preferred stock and the common stock into which these warrants are

 

 

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  convertible are contingently redeemable upon the occurrence of certain events or transactions. In addition, we account for our convertible notes at estimated fair value. We adjust the warrant instruments and convertible notes to fair value at each reporting period with the change in fair value recorded in the consolidated statements of operations. We do not expect these charges to continue after the completion of this offering because the Series A and Series B convertible preferred stock warrants, the common stock warrants and the convertible notes will automatically convert into common stock in accordance with their terms at such time and the Series C convertible preferred stock warrants will, if not otherwise exercised, automatically convert into warrants to purchase common stock. See “Management’s Discussion and Analysis of Financial Conditions and Results of Operations—Key Components of Our Results of Operations—Change in Estimated Fair Value of Financial Instruments and Deemed Dividend, Convertible Notes.”
(3)   

The pro forma net loss per common share data is computed using the weighted-average number of shares of common stock outstanding, after giving effect to the conversion (using the if-converted method) of all shares of our preferred stock and convertible notes into common stock as though the conversion had occurred on the original date of issuance and the exercise of warrants that would otherwise expire, or will be automatically exercisable, upon completion of this offering, using the treasury method. As we have losses in all periods presented, all potentially dilutive common shares, comprised of stock options, warrants, preferred stock and convertible notes, are anti-dilutive. Additionally, the net loss used to compute pro forma basic and diluted net loss per share includes: (i) adjustments related to changes in the fair value of financial instruments and (ii) adjustment to reflect the automatic conversion of all outstanding convertible notes into shares of our common stock.

Balance Sheet Data:

The balance sheet data as of March 31, 2013 in the table below is presented on an actual basis and on a pro forma basis, giving effect to (i) the automatic conversion of all outstanding shares of our preferred stock into shares of our common stock, (ii) the issuance of shares of common stock upon the net exercise, at the completion of this offering and based upon an assumed initial public offering price equal to the midpoint of the price range set forth on the cover of this prospectus, of all outstanding Series A and Series B convertible preferred stock warrants that would otherwise expire upon the completion of this offering, (iii) the issuance of shares of common stock, based on an assumed initial public offering price equal to the midpoint of the price range set forth on the cover of this prospectus, at the completion of this offering, upon the net exercise of outstanding warrants to purchase common stock automatically exercisable upon the completion of this offering in accordance with their terms, (iv) the issuance of shares of common stock, based on an assumed initial public offering price equal to the midpoint of the price range set forth on the cover of this prospectus, at the completion of this offering, upon the conversion of all outstanding convertible notes, including principal and interest accrued automatically convertible upon the completion of this offering in accordance with their terms, (v) the reclassification of the preferred stock warrant liability to total stockholders’ (deficit) equity, and (vi) our receipt of the estimated net proceeds from this offering, based on an assumed initial public offering price equal to the mid-point of the range set forth on the cover of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable to us, as if each of the above had occurred at March 31, 2013.

 

 

 

     AS OF MARCH 31, 2013  
     ACTUAL     PRO FORMA  (1)  
     (In thousands)  
     (Unaudited)  

Cash and cash equivalents

   $ 1,791      $                

Working capital (deficit) (2)

     (21,582  

Total assets

     17,839     

Debt and capital leases, net of unamortized debt discount of $237

     8,358     

Convertible notes

     46,037     

Common stock warrant liability

     316          

Preferred stock warrant liability

     1,883          

Total liabilities

     62,972     

Convertible preferred stock

     39,612          

Total stockholders’ (deficit) equity

     (84,745  

 

 

(1)   

A $1.00 increase or decrease in the assumed initial public offering price of $         per share, the midpoint of the price range set forth on the cover page of this prospectus, would increase or decrease, as applicable, cash and cash equivalents, total

 

 

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  assets and total stockholders’ (deficit) equity by $        , assuming the number of shares offered by us, as set forth on the cover of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and the estimated offering expenses payable by us. An increase or decrease of 100,000 shares in the number of shares sold in this offering by us would increase or decrease, as applicable, cash and cash equivalents, total assets and total stockholders’ (deficit) equity from this offering by $        , assuming an initial public offering price of $         per share, the midpoint of the price range set forth on the cover of this prospectus, and after deducting the estimated underwriting discounts and commissions and the estimated offering expenses payable by us.
(2)   

Working capital (deficit) is defined as total current assets minus total current liabilities.

 

 

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RISK FACTORS

Investing in our common stock involves a high degree of risk. You should carefully consider the following risk factors, as well as other information in this prospectus, before deciding whether to invest in shares of our common stock. The occurrence of any of the events described below could harm our business, financial condition, results of operations and growth prospects. In such an event, the trading price of our common stock may decline and you may lose all or part of your investment.

Risks Relating to Our Business and Strategy

We have a limited operating history and number of commercialized products, have incurred significant losses to date and anticipate continuing to incur losses in the future, and we may not achieve or maintain profitability.

We are an early stage company with a limited operating history, and we only recently began commercializing our products. We have incurred operating losses since our inception in June 2006, and we expect to continue to incur operating losses for the foreseeable future. At March 31, 2013, we had an accumulated deficit of $86.3 million. For the year ended December 31, 2012 and the three months ended March 31, 2013, we had a net loss of $38.8 million and $10.7 million, respectively. As a result, we will need to generate significant revenues to achieve and maintain profitability. If our revenues grow slower than anticipated, or if operating expenses exceed expectations, then we may not be able to achieve profitability in the near future or at all, which may depress our stock price.

Through March 31, 2013, we have derived substantially all of our revenues from sales of Regalia and Grandevo. In addition, we have derived revenues from strategic collaboration and development agreements for the achievement of testing validation, regulatory progress and commercialization events, and from sales of other products. Accordingly, there is only a limited basis upon which to evaluate our business and prospects. Our future success depends, in part, on our ability to market and sell other products, as well as our ability to increase sales of Regalia, Grandevo and Zequanox. An investor in our stock should consider the challenges, expenses, and difficulties we will face as a company seeking to develop and manufacture new types of products in a relatively established market. We expect to derive future revenues primarily from sales of Regalia, Grandevo, Zequanox and other products, but we cannot guarantee the magnitude of such sales, if any. We expect to continue to devote substantial resources to expand our research and development activities, further increase manufacturing capabilities and expand our sales and marketing activities for the further commercialization of Regalia, Grandevo, Zequanox and other product candidates. We expect to incur additional losses for the next several years and may never become profitable.

Our products are in the early stages of commercialization, and our business may fail if we are not able to successfully generate significant revenues from these products.

Our future success will depend in part on our ability to commercialize the bio-based pest management and plant health product candidates we are developing. Our initial sales of our latest formulation of Regalia and our initial formulation of Grandevo occurred in the fourth quarter of 2009 and the fourth quarter of 2011, respectively, and we began selling Zequanox in the second half of 2012. Our near-term development focus is on Opportune, which received EPA approval in April 2012, and Venerate, which has been submitted for EPA registration. In addition, as of March 31, 2013, we have identified over 25 additional product candidates using our proprietary discovery process, and we currently are focusing our development and commercialization efforts on three of these product candidates.

Successful development of our product candidates will require significant additional investment, including costs associated with research and development, completing field trials and obtaining regulatory approval, as well as the ability to manufacture our products in large quantities at acceptable costs while also preserving high product quality. Difficulties often encountered in scaling up production include problems involving production yields, quality control and assurance, shortage of qualified personnel, production costs and process controls. In addition, we are subject to inherent risks associated with new products and technologies. These risks include the possibility that any product candidate may:

 

  n  

be found unsafe;

 

  n  

be ineffective or less effective than anticipated;

 

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  n  

fail to receive necessary regulatory approvals;

 

  n  

be difficult to competitively price relative to alternative pest management solutions;

 

  n  

be harmful to consumers, growers, farm workers or the environment;

 

  n  

be harmful to crops when used in conjunction with conventional chemical pesticides;

 

  n  

be difficult or impossible to manufacture on an economically viable scale;

 

  n  

be subject to supply chain constraints for raw materials;

 

  n  

fail to be developed and accepted by the market prior to the successful marketing of similar products by competitors;

 

  n  

be impossible to market because it infringes on the proprietary rights of third parties; or

 

  n  

be too expensive for commercial use.

Adverse weather conditions and other natural conditions can reduce acreage planted or incidence of crop disease or pest infestations, which can adversely affect our results of operations.

Production of the crops on which our products are typically applied is vulnerable to extreme weather conditions such as heavy rains, hurricanes, hail, floods, tornadoes, freezing condition, drought, fires and floods. Weather conditions can be impacted by climate change resulting from global warming, including changes in precipitation patterns and the increased frequency of extreme weather events, or other factors. Unfavorable weather conditions can reduce both acreage planted and incidence (or timing) of certain crop diseases or pest infestations, each of which may reduce demand for our products. For example, in 2012, the United States experienced nationwide abnormally low rainfall or drought, reducing the incidence of fungal diseases such as mildews, and these conditions have been present in some of our key markets in 2013 as well. We believe these conditions have reduced industry-wide sales of fungicides in 2012 and 2013 relative to prior years, inhibiting growth in sales of Regalia, a biofungicide. These factors have created and can continue to create substantial volatility relating to our business and results of operations.

If our ongoing or future field trials are unsuccessful, we may be unable to obtain regulatory approval of, or commercialize, our products on a timely basis.

The successful completion of multiple field trials in domestic and foreign locations on various crops and water infrastructures is critical to the success of our product development and marketing efforts. If our ongoing or future field trials are unsuccessful or produce inconsistent results or unanticipated adverse side effects on crops or on non-target organisms, or if we are unable to collect reliable data, regulatory approval of our products could be delayed or we may be unable to commercialize our products. In addition, more than one growing or treatment season may be required to collect sufficient data and we may need to collect data from different geographies to prove performance for customer adoption. Although we have conducted successful field trials on a broad range of crops, we cannot be certain that additional field trials conducted on a greater number of acres, or on crops for which we have not yet conducted field trials, will be successful. Moreover, the results of our ongoing and future field trials are subject to a number of conditions beyond our control, including weather-related events such as drought or floods, severe heat or frost, hail, tornadoes and hurricanes. Generally, we pay third parties such as growers, consultants and universities, to conduct field tests on our behalf. Incompatible crop treatment practices or misapplication of our products by these third parties could impair the success of our field trials.

Our inability to obtain regulatory approvals, or to comply with ongoing and changing regulatory requirements, could delay or prevent sales of the products we are developing and commercializing.

The field testing, manufacture, sale and use of pest management products, including Regalia, Grandevo, Zequanox and other products we are developing, are extensively regulated by the EPA and state, local and foreign governmental authorities. These regulations substantially increase the time and cost associated with bringing our products to market. If we do not receive the necessary governmental approvals to test, manufacture and market our products, or if regulatory authorities revoke our approvals, do not grant approvals in a timely manner or grant approvals subject to restrictions on their use, we may be unable to sell our products in the United States or other jurisdictions, which would result in our future revenues being less than anticipated.

We have received approval from the EPA for the active ingredients and certain end product formulations for Regalia, Grandevo, Zequanox and Opportune. As we introduce new formulations of and applications for our products, we will need to seek EPA approval prior to commercial sale. For any such approval, the EPA may require us to fulfill certain

 

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conditions within a specified period of time following initial approval. We are also required to obtain regulatory approval from other state and foreign regulatory authorities before we market our products in their jurisdictions. Some of these states and foreign countries may apply different criteria than the EPA in their approval processes. Although federal pesticide law preempts separate state and local pesticide registration requirements to some extent, state and local governments retain authority to control pesticide use within their borders.

There can be no assurance that we will be able to obtain regulatory approval for marketing our additional products or new product formulations and applications we are developing. Although the EPA has in place a registration procedure for biopesticides like Regalia and Grandevo that is streamlined in comparison to the registration procedure for conventional chemical pesticides, there can be no assurance that all of our products or product extensions will be eligible for this streamlined procedure or that additional requirements will not be mandated by the EPA that could make the procedure more time consuming and costly for our future products.

Additionally, for California state registration and registration in jurisdictions outside of the United States, all products need to be proven efficacious, which can require costly field trial testing and a favorable result is not assured. Because many of the products that may be sold by us must be registered with one or more government agencies, the registration process can be time consuming and expensive, and there is no guarantee that the product will obtain all needed registrations. We have intentionally obtained registration in some jurisdictions and not in others. California is one of the largest and most important producers of agricultural products in the world. Because of its stringent regulation of pesticides and environmental focus, we also view California as one of the most natural and attractive markets for our products. Given California’s stringent regulations, it is possible that we may have products that have been registered by the EPA, in other states and in foreign countries, but which may not be sold in California. If this were to occur, our business would be harmed.

Even if we obtain all necessary regulatory approvals to market and sell our products, they will be subject to continuing review and extensive regulatory requirements, including periodic re-registrations. The EPA, as well as state and foreign regulatory authorities, could withdraw a previously approved product from the market upon receipt of newly discovered information, including an inability to comply with their regulatory requirements or the occurrence of unanticipated problems with our products, or for other reasons.

Customers may not adopt our bio-based pest management and plant health products as quickly as we are projecting.

Customers in the crop production sector and the water treatment sector are generally cautious in their adoption of new products and technologies. Growers often require on-farm demonstrations of a given pest management or plant health product. Initial purchases of the product tend to be conservative, with the grower testing on a small portion of their overall crop. As the product is proven, growers incorporate the product into their rotational programs and deploy it on a greater percentage of their operations. As a result, large scale adoption can take several growing seasons. Water treatment products must also pass efficacy and ecological toxicity tests. In addition, given the relative novelty of our water treatment products, consumers of those products will continue to require education on their use, which may delay their adoption.

The high level of competition in the market for pest management products may result in pricing pressure, reduced margins or the inability of our products to achieve market acceptance.

The markets for pest management products are intensely competitive, rapidly changing and undergoing consolidation. We may be unable to compete successfully against our current and future competitors, which may result in price reductions, reduced margins and the inability to achieve market acceptance for our products.

Many entities are engaged in developing pest management products. Our competitors include major multinational agrichemical companies such as BASF, Bayer, Dow Chemical, DuPont, Monsanto, Sumitomo Chemical, Syngenta and specialized biopesticide businesses such as Arysta, AgraQuest (now a part of Bayer), Certis USA (now a part of Mitsui) and Valent Biosciences (now a part of Sumitomo). Many of these organizations have longer operating histories, significantly greater resources, greater brand recognition and a larger base of customers than we do. As a result, they may be able to devote greater resources to the manufacture, promotion or sale of their products, receive greater resources and support from independent distributors, initiate or withstand substantial price competition or more readily take advantage of acquisition or other opportunities. Further, many of the large agrichemical companies have a more diversified product offering than we do, which may give these companies an advantage in meeting customers’ needs by enabling them to offer a broader range of pest management solutions.

 

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The market for our bio-based pest management and plant health products is underdeveloped, which may make it difficult to effectively market or price our products.

The market for bio-based pest management products is underdeveloped when compared with conventional chemical pesticides. Certain of our product lines, such as Zequanox, currently have few or no competitors, making it difficult to determine how we should determine their pricing. We may not be able to charge as much for such products as we currently plan. In addition, customers have historically perceived bio-based pest management products as more expensive and less effective than conventional chemical pesticides. To succeed, we will need to continue to change that perception. To the extent that the market for bio-based pest management products does not further develop or customers elect to continue to purchase and rely on conventional chemical pesticides, our market opportunity will be limited.

Public perception of consuming food with microbial residues and public perception of releasing microorganisms into the environment could damage our reputation and adversely impact sales of our microbial products.

We believe maintaining our strong reputation and favorable image with distributors, direct customers and end users will be a key component in our success. Although there has been a long history of safe use of bio-based pest management products based on microorganisms, adverse public reaction to the microbial nature of our products could harm our potential sales. In addition, perceptions that the products we produce and market are not safe could adversely affect us and contribute to the risk we will be subjected to legal action. For example, companies are frequently subject to litigation and negative press related to the release of chemicals into water systems, and our Zequanox water treatment product line may be subject to public scrutiny. Public perception that our products are not safe, whether justified or not, could impair our reputation, involve us in litigation, damage our brand names and have a material adverse effect on our business.

Our product sales are expected to be seasonal and subject to weather conditions and other factors beyond our control, which may cause our operating results to fluctuate significantly quarterly and annually.

Sales of our individual products are generally expected to be seasonal. Weather conditions and natural disasters affect decisions by our distributors, direct customers and end users about the types and amounts of pest management 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, we expect that Regalia, a fungicide, will be sold and applied to crops in greater quantity in the second and fourth quarters. These seasonal variations may be especially pronounced because sales of Regalia accounted for 84%, 95%, and 47% of our total revenues in the years ended December 31, 2012 and 2011 and the three months ended March 31, 2013, respectively. In addition, sales of products for treatment of invasive mussels are concentrated during periods of increased mussel growth and feeding activity, which occurs from June through September in the eastern United States, Canada and Europe and from April through October in the southwestern United States. However, planting and growing seasons, climatic conditions and other variables on which sales of our products are dependent vary from year to year and quarter to quarter. As a result, we have historically experienced substantial fluctuations in quarterly sales.

The level of seasonality in our business overall is difficult to evaluate, particularly as a result of our relatively early stage of development, our relatively limited number of commercialized products, our expansion into new geographical territories, the introduction of new products and the timing of introductions of new formulations and products. It is possible that our business may be more seasonal, or experience seasonality in different periods, than anticipated. For example, if sales of Zequanox become a more significant component of our revenue, the separate seasonal sales cycles of that product could cause further shifts in our quarterly revenue. Other factors may also contribute to the unpredictability of our operating results, including the size and timing of significant distributor transactions, the delay or deferral of use of our products and the fiscal or quarterly budget cycles of our distributors, direct customers and end users. Customers 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. For example, we believe that we experienced higher sales of Regalia in the first quarter of 2011 than in the second as a result of distributors ordering in advance of the application 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.

 

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If we are unable to identify new product candidates through our product development process, we may not achieve or maintain profitability.

Our future success will depend in part on our ability to improve our existing products and to utilize our product development process to identify and commercialize natural compounds with pesticidal activity. As of March 31, 2013, we have screened more than 18,000 microorganisms and 350 plant extracts, and we have identified multiple product candidates that display activity against insects, nematodes, weeds, plant diseases and invasive species such as zebra and quagga mussels, aquatic weeds and algae. Only a small number of these candidates are likely to provide viable commercial candidates and an even more limited number, if any, are likely to be commercialized by us. A failure by us to continue identifying natural compounds with pesticidal or plant health promoting activity could make it difficult to grow our business. In addition, we may continue to expand our product offerings through in-licensing of microorganisms and plant extracts. There is no assurance that these attempts will be successful. Licensing of products requires identification of new products or determination of new applications for existing products and a willingness on the product owner to license the product. If we are unable to identify or in-license additional microorganisms, natural product compounds or product candidates, we may be unable to develop new products or generate revenues.

Our results of operations will be affected by the level of royalty payments that we are required to pay to third parties.

We are a party to license agreements that require us to remit royalty payments related to in-licensed microorganisms and plant extracts for certain of our product lines such as Regalia, Grandevo and Zequanox. The amount of royalties that we could owe under these license agreements ranges from 2% to 5% of net product revenues. We cannot precisely predict the amount, if any, of royalties we will owe in the future, and if our calculations of royalty payments are incorrect, we may owe more royalties, which could negatively affect our results of operations. As our product sales increase, we may, from time-to-time, disagree with our third-party collaborators as to the appropriate royalties owed and the resolution of such disputes may be costly and may consume management’s time. Furthermore, we may enter into additional license agreements in the future, which may also include royalty payments.

We rely on third parties for the production of our products. If these parties do not produce our products at a satisfactory quality, in a timely manner, in sufficient quantities or at an acceptable cost, our development and commercialization efforts could be delayed or otherwise negatively impacted.

We cannot currently produce our microbial and plant extract-based products other than at a small scale using our own facilities. As such, we rely on third parties for the production of our products. While we intend to develop our own internal commercial-scale manufacturing capacity, we may from time to time utilize third-party manufacturers for supplemental production capacity of our products. Our reliance on third parties to manufacture our products presents significant risks to us, including the following:

 

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reduced control over delivery schedules, yields and product reliability;

 

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price increases;

 

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manufacturing deviations from internal and regulatory specifications;

 

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the failure of a key manufacturer to perform its obligations to us for technical, market or other reasons;

 

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challenges presented by introducing our fermentation processes to new manufacturers or deploying them in new facilities;

 

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difficulties in establishing additional manufacturers if we are presented with the need to transfer our manufacturing process technologies to them;

 

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misappropriation of our intellectual property; and

 

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other risks in potentially meeting our product commercialization schedule or satisfying the requirements of our distributors, direct customers and end users.

We have not yet entered into any long-term manufacturing or supply agreements for any of our products, and we will need to enter into additional agreements for the commercial development, manufacturing and sale of our products. There can be no assurance that we can do so on favorable terms, if at all.

Our products have been produced in quantities sufficient to meet commercial demand. However, our current dependence upon others for the production of all of our products, and our anticipated future dependence upon

 

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others for the production of a portion of our products, may adversely affect our ability to develop and commercialize any products on a timely and competitive basis. If manufacturing capacity is reduced or eliminated at one or more of our third-party manufacturers’ facilities, we could have difficulties fulfilling our customer orders, and our net revenues and results of operations could decline.

We must accurately forecast demand for our products to obtain adequate and cost-effective capacity from our third-party manufacturers and to purchase certain of the raw materials used in our products at cost-effective rates. Our third-party manufacturers are not required to supply us products until we place and they accept our purchase orders, which generally occurs approximately one month prior to the anticipated product delivery date based on our own rolling forecasts. Our purchase orders may not be accepted and our third-party manufacturers may not be willing to provide us with additional products on a timely basis if they prioritize orders placed by other companies, many of whom are more established than us and order larger volumes of products. In addition, while raw material orders are generally placed one month in advance, because certain of the raw materials used in our products are in short supply or are subject to capacity demands, we place some raw material orders approximately six months in advance to avoid paying higher prices. Accordingly, if we inaccurately forecast demand for our products, we may be unable to meet our customers’ delivery requirements, or we may accumulate excess inventories of products and raw materials.

We may experience significant delays in financing or completing the repurpose of our commercial manufacturing facility for producing some of our bio-based pest management and plant health products, which could result in harm to our business and prospects.

We acquired a manufacturing facility in July 2012, and our business plan contemplates completing an initial repurpose and upgrade of this facility to develop significant internal commercial manufacturing capacity. We believe we will commence production of our bio-based pest management and plant health products using this facility in the first half of 2013. After this initial repurpose, we intend to use a portion of the proceeds from this offering to further expand capacity at this facility. If we are unable to complete the repurpose, upgrade and expansion of this facility in a timely manner, we will need to otherwise secure access to capacity significantly greater than what we have previously used as we commercialize our products.

In order to bring our facility fully on line, we will need to complete design and other plans needed for the repurpose of the facility and secure the requisite permits, licenses and other governmental approvals, and we may not be successful in doing so. The repurpose will have to be completed on a timely basis and within an acceptable budget, which we currently anticipate will require approximately $10.0 million to $12.0 million of capital expenditures through 2013. In addition, to expand our facility to accommodate forecasted volumes and sales growth, we anticipate we will need to spend approximately $4.0 million to $6.0 million of additional funds in 2014. If we encounter significant delays, cost overruns, engineering problems, equipment supply constraints or other serious challenges in bringing the facility online, we may be unable to meet our production goals in the time frame we have planned. We may not be successful in producing the amount and quality of product we anticipate in the facility and our results of operations may suffer as a result. Further, we intend to continue to utilize various third party contract manufacturers, which will reduce our ability to control product quality and the speed and timing of manufacturing, protect our proprietary position in our products and lower our manufacturing costs.

Failure to achieve expected manufacturing yields for our products could negatively impact our operating results.

Low yields may result from product design, development stage or process technology failures. We do not know whether a yield problem exists until our products are manufactured based on our design. When a yield issue is identified, the product is analyzed and tested to determine the cause. As a result, yield deficiencies may not be identified until well into the production process. We are repurposing our manufacturing facility acquired in July 2012 for high volume production and anticipate further expanding capacity at this facility using a portion of the proceeds from this offering, and we may experience delays or product yield issues as this facility comes online. In the event we continue to rely on third party manufacturers, resolution of yield problems requires cooperation among, and communication between us and our manufacturers. We have limited experience producing a number of our products at commercial scale, and we will not succeed if we cannot maintain or decrease our production costs and effectively scale our technology and manufacturing processes.

 

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We rely on a single supplier based in China for a key ingredient of Regalia.

The active ingredient in our Regalia product line is derived from the giant knotweed plant, which we obtain from China. Our 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 our third party manufacturer in the United States. A disruption at our supplier’s manufacturing site or a disruption in trade between the United States and China could negatively impact sales of Regalia. We currently use one supplier and do not have a long-term supply contract with this supplier. There can be no assurance that we will continue to be able to obtain dried extract from China at a competitive price point.

We have limited experience in marketing and selling our products and will need to expand our sales and marketing infrastructure.

We currently have limited sales and marketing experience and capabilities. As of March 31, 2013, we employed 30 full-time sales and marketing personnel, 9 of which focus on technical support and demonstration and research field trials. We will need to further develop our sales and marketing capabilities in order to successfully commercialize Zequanox, Opportune, Venerate and other products we are developing, which may involve substantial costs. Our internal sales and marketing staff consists primarily of sales and marketing specialists and field development specialists who are trained to educate growers and independent distributors on the uses and benefits of our products. These specialists require a high level of technical expertise and knowledge regarding the capabilities of our products compared with other pest management products and techniques. There can be no assurance that our specialists and other members of our sales and marketing team will successfully compete against the sales and marketing teams of our current and future competitors, many of which may have more established relationships with distributors and growers. Our inability to recruit, train and retain sales and marketing personnel or their inability to effectively market and sell the products we are developing could impair our ability to gain market acceptance of our products and cause our sales to suffer.

If we are unable to maintain and further establish successful relations with the third-party distributors that are our principal customers, or they do not focus adequate resources on selling our products or are unsuccessful in selling them to end users, sales of our products would decline.

In the United States, we rely on independent distributors of agrichemicals such as Crop Production Services and Wilbur Ellis to distribute and assist us with the marketing and sale of Regalia, Grandevo and other products we are developing. These distributors are our principal customers, and our future revenues growth will depend in large part on our success in establishing and maintaining this sales and distribution channel. If our distributors are unable to sell our products, or receive negative feedback from end users, they may not continue to purchase or market our products. In addition, our products are often combined with other pesticides. If our products are improperly combined with other pesticides they may damage the treated plants, and, even when properly combined, our products may be blamed for damage caused by these other pesticides. Any such issues could damage our brands or reputation.

In addition, there can be no assurance that our distributors will focus adequate resources on selling our products to end users or will be successful in selling them. Many of our potential distributors are in the business of distributing and sometimes manufacturing other, possibly competing, pest management products. As a result, these distributors may perceive our products as a threat to various product lines currently being distributed or manufactured by them. In addition, these distributors may earn higher margins by selling competing products or combinations of competing products. If we are unable to establish or maintain successful relationships with independent distributors, we will need to further develop our own sales and distribution capabilities, which would be expensive and time-consuming and the success of which would be uncertain.

We depend on a limited number of distributors.

Our current revenues are derived from a limited number of key customers, each of which serves as a third-party distributor to our products’ end users. For the year ended December 31, 2012, our top three distributors accounted for 58% of our total revenues, with Crop Production Services, Engage Agro and Helena Chemical accounting for 33%, 13% and 12% of our total revenues, respectively. For the three months ended March 31, 2013, our top four distributors accounted for 56% of our total revenues, with Chem Nut, Engage Agro, Crop Production Services and Wilbur Ellis accounting for 17%, 15%, 13% and 11% of our total revenues, respectively. We expect a limited number of distributors to continue to account for a significant portion of our revenues for the foreseeable future. This customer concentration increases the risk of quarterly fluctuations in our revenues and operating results. The loss or

 

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reduction of business from one or a combination of our significant distributors could materially adversely affect our revenues, financial condition and results of operations.

We rely on the experience and expertise of our senior management team and other key personnel, and if we are unable to recruit or retain qualified personnel, our development and commercialization efforts may be significantly delayed.

We depend heavily on the principal members of our management, particularly Dr. Pamela G. Marrone, our founder, President and Chief Executive Officer, the loss of whose services might significantly delay or prevent the achievement of our scientific or business objectives. Although we maintain and are the beneficiary of $5.0 million in key person life insurance policies for the life of Dr. Marrone, we do not believe the proceeds would be adequate to compensate us for her loss.

As we expand our operations, we will need to hire additional qualified research and development and management personnel to succeed. The process of hiring, training and successfully integrating qualified personnel into our operation is a lengthy and expensive one. The market for qualified personnel such as experienced fermentation engineers and formulation chemists is very competitive because of the limited number of people available with the necessary technical skills and understanding of our technology and anticipated products. Our failure to hire and retain qualified personnel could impair our ability to meet our research and development and business objectives and adversely affect our results of operations and financial condition.

We also have relationships with scientific collaborators at academic and other institutions, some of whom conduct research at our request or assist us in formulating our research and development strategy. These scientific collaborators are not our employees and may have commitments to, or consulting or advisory contracts with, other entities that may limit their availability to us. We have limited control over the activities of these scientific collaborators and can generally expect these individuals to devote only limited amounts of time to our activities. The inability of any of these persons to devote sufficient time and resources to our programs could harm our business. In addition, these collaborators may have arrangements with other companies to assist those companies in developing technologies that may compete with our products.

Our intellectual property is integral to our business. If we are unable to protect our patents and proprietary rights in the United States and foreign countries, our business could be adversely affected.

Our success depends in part on our ability to obtain and maintain patent and other proprietary rights protection for our technologies and products in the United States and other countries. If we are unable to obtain or maintain these protections, we may not be able to prevent third parties from using our proprietary rights. As of March 31, 2013, we owned 1 and in-licensed 5 U.S. patents and we owned 30 and in-licensed 2 provisional and pending U.S. patent applications covering our products, including microorganisms and natural product compounds, uses and related technologies. Also, as of March 31, 2013, we had acquired ownership of 1 and in-licensed 23 foreign patents and owned 151 and in-licensed 6 pending foreign patent applications. We also rely on trade secrets, proprietary know-how and continuing technological innovation to remain competitive.

We have taken measures to protect our trade secrets and know-how, including the use of confidentiality agreements with our employees, consultants, advisors and third party manufacturers. It is possible that these agreements may be breached and that any remedies for a breach will not make us whole. We generally control and limit access to, and the distribution of, our product documentation and other proprietary information. Despite our efforts to protect these proprietary rights, our trade secret-protected know-how could fall into the public domain, unauthorized parties may copy aspects of our products and obtain and use information that we regard as proprietary. We also cannot guarantee that other parties will not independently develop our knowhow or otherwise obtain access to our technologies.

For certain of our products, we hold co-exclusive licenses to certain of the intellectual property used to create the product. For example, we entered into a co-exclusive license agreement with the USDA for the use in the United States of the U.S.-issued patents relating to the Chromobacterium substugae bacteria on which Grandevo is based. A second company has also licensed the USDA’s patent and could attempt to use this bacterium to produce a product that is competitive to ours. We do not believe this company has submitted a competing product to the EPA, and we believe it would be difficult for them to do so without licensing technology we have developed. Nevertheless, were this company, or any other that also has the ability to use our co-licensed intellectual property, to introduce a competing product, our ability to sell our products could be harmed.

 

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The laws of some foreign countries do not protect proprietary rights to the same extent as the laws of the United States, and we may encounter significant problems and costs in protecting our proprietary rights in these foreign countries. Our patents and those patents for which we have license rights may be challenged, narrowed, invalidated or circumvented. In addition, our issued patents may not contain claims sufficiently broad to protect us against third parties with similar technologies or products or provide us with any competitive advantage. We are not certain that our pending patent applications will be issued. Moreover, our competitors could challenge or circumvent our patents or pending patent applications. It is also not possible to patent and protect all knowledge and know-how associated with our products so there may be areas that are not protected such as certain formulations and manufacturing processes. Costly and time-consuming litigation could be necessary to enforce and determine the scope of our proprietary rights, and failure to obtain or maintain trade secret protection could adversely affect our competitive business position.

Third parties may misappropriate our microbial strains.

Third parties, including contract manufacturers, often have custody or control of our microbial strains. If our microbial strains were stolen, misappropriated or reverse engineered, they could be used by other parties who may be able to reproduce the microbial strains for their own commercial gain. If this were to occur, it would be difficult for us to challenge and prevent this type of use, especially in countries with limited intellectual property protection.

Other companies may claim that we infringe their intellectual property or proprietary rights, which could cause us to incur significant expenses or prevent us from selling our products.

Our success depends in part on our ability to operate without infringing the patents and proprietary rights of third parties. Product development is inherently uncertain in a rapidly evolving technological environment such as ours in which there may be numerous patent applications pending, many of which are confidential when filed, with regard to similar technologies. Patents issued to third parties may contain claims that conflict with our patents and that may place restrictions on the commercial viability of our products and technologies. Although we believe that our current products, product candidates and proprietary screening technology do not infringe the proprietary rights of any third parties, third parties could assert infringement claims against us in the future. Any litigation or interference proceedings, regardless of their outcome, would probably be costly and require significant time and attention of our key management and technical personnel. Litigation or interference proceedings could also force us to:

 

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stop or delay using our proprietary screening technology;

 

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stop or delay selling, manufacturing or using products that incorporate the challenged intellectual property;

 

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pay damages; or

 

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enter into licensing or royalty agreements that may be unavailable on acceptable terms.

If we fail to maintain and successfully manage our existing, or enter into new, strategic collaborations and other relationships, we may not be able to expand commercial development and sales of many of our products.

Our ability to enter into, maintain and manage collaborations and other relationships in our markets is fundamental to the success of our business. We currently have entered into various license agreements, research and development agreements, supply agreements and distribution agreements. We currently rely on our third parties for manufacturing and sales or marketing services and intend to continue to do so for the foreseeable future, and we intend to enter into other strategic agreements to produce, market and sell other products we develop. However, we may not be successful in entering into new arrangements with third parties for the production, sale and marketing of other products. Any failure to enter into new strategic arrangements on favorable terms or to maintain or manage our existing strategic arrangements could delay or hinder our ability to develop and commercialize our products and could increase our costs of development and commercialization.

We expect to derive a portion of our revenues from markets outside the United States, including Europe and Latin America, which will subject us to additional business risks.

Our success depends in part on our ability to expand internationally as we obtain regulatory approvals to market and sell our products in foreign countries. For the year ended December 31, 2012 and the three months ended March 31, 2013, international sales comprised 20% and 14% of total revenues, respectively, and we expect to increase the relative percentage of international sales in the future. We have been conducting field trials in Europe, Latin America, Africa and elsewhere. International expansion of our operations could impose substantial burdens on our resources, divert management’s attention from domestic operations and otherwise harm our business. Furthermore, international operations are subject to several inherent risks, especially different regulatory

 

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requirements and reduced protection of intellectual property rights that could adversely affect our ability to compete in international markets and have a negative effect on our operating results. Revenues generated outside the United States could also result in increased difficulty in collecting delinquent or unpaid accounts receivables, adverse tax consequences and currency fluctuations.

Our Zequanox product line requires additional development, and during the initial commercialization of Zequanox, we will be relying on successful bidding for government contracts, which could require a longer sales cycle than the private sector.

Our Zequanox product line is principally designed to kill invasive mussels that restrict critical water flow in industrial and power facilities and impinge on access to recreational waters. This product requires additional development to improve ease of application, and because this product will be used in open waters, it may also require additional ecological testing. We expect our near-term sales of Zequanox will continue to be to governmental agencies and regulated industries, which typically take longer to negotiate and approve contracts than the private sector. Further, we currently expect that our governmental sales may be subject to bidding procedures as well as uncertainties surrounding these agencies’ budget approval processes. Therefore, we anticipate that the sales cycle for Zequanox will continue to be longer than that for our pest management products sold into agricultural markets.

We may require additional financing in the future and may not be able to obtain such financing on favorable terms, if at all, which could force us to delay, reduce or eliminate our research and development activities.

We may need to raise more money to continue our operations, and we may make significant capital expenditures in connection with scaling up our operations, including, for example, the repurpose of our manufacturing facility. We may seek additional funds from public and private stock offerings, corporate collaborations and licenses, borrowings under lease lines of credit or other sources. Additional capital may not be available on terms acceptable to us, or at all. Any additional equity financing may be dilutive to stockholders, and debt financing, if available, may include restrictive covenants. If we cannot raise more money when needed, we may have to reduce our capital expenditures, scale back our development of new products, reduce our workforce or license to others products that we otherwise would seek to commercialize ourselves. Moreover, our cash used in operations has exceeded cash generated from operations in each period since our inception. We used approximately $22.4 million and $7.7 million of net cash used in operating activities for the year ended December 31, 2012 and the three months ended March 31, 2013, respectively. In addition, for the years ended December 31, 2012 and 2011 and the three months ended March 31, 2013, we incurred expenses of $12.7 million, $9.4 million and $3.3 million, respectively, for research and development. We expect that our current resources, together with the proceeds from this offering and future operating revenue, will be sufficient to fund operations for at least the next 24 months. We may attempt to raise additional capital due to market conditions or strategic considerations even if we have sufficient funds for planned operations.

We use hazardous materials in our business and are subject to potential liability under environmental laws. Any claims relating to improper handling, storage or disposal of hazardous materials could be time consuming and costly to resolve.

We are subject to federal, state and local laws and regulations governing the use, manufacture, storage, handling, disposal and release of hazardous materials and certain waste products. Our research and development and manufacturing activities involve the controlled use of hazardous materials and biological waste. Some of these materials may be novel, including bacteria with novel properties and bacteria that produce biologically active compounds. We cannot eliminate the risk of accidental contamination or discharge and any injury resulting from these materials. In addition, although we have not currently identified any environmental liabilities, the manufacturing facility we purchased in July 2012 may have existing environmental liabilities associated with it that may also result in successor liabilities for us, and we will be subject to increased exposure to potential environmental liabilities as we manufacture our products on a larger scale. We may also be held liable for hazardous materials brought onto the premises of our manufacturing facility before we acquired title, without regard for fault for, or knowledge of, the presence of such substances, as well as for hazardous materials that may be discovered after we no longer own the property if we sell it in the future. In the event of an accident, or if any hazardous materials are found within our operations or on the premises of our manufacturing facility in violation of the law at any time, we may be liable for all cleanup costs, fines, penalties and other costs. This liability could exceed our resources, and, if significant losses arise from hazardous substance contamination, our financial viability may be substantially and adversely affected.

 

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In addition, we may have to incur significant costs to comply with future environmental laws and regulations. In addition, we cannot predict the impact of new governmental regulations that might have an adverse effect on the research, development, production and marketing of our products. We may be required to incur significant costs to comply with current or future laws or regulations. Our business may be harmed by the cost of compliance.

Our collaborators may use hazardous materials in connection with our collaborative efforts. To our knowledge, their work is performed in accordance with applicable biosafety regulations. In the event of a lawsuit or investigation, however, we could be held responsible for any injury caused to persons or property by exposure to, or release of, hazardous materials used by these parties. Further, we may be required to indemnify our collaborators against all damages and other liabilities arising out of our development activities or products produced in connection with these collaborations.

Any decline in U.S. agricultural production could have a material adverse effect on the market for pesticides and on our results of operations and financial.

Conditions in the U.S. agricultural industry significantly impact our operating results. The U.S. agricultural industry can be affected by a number of factors, including weather patterns and field conditions, current and projected grain inventories and prices, domestic and international demand for U.S. agricultural products and U.S. and foreign policies regarding trade in agricultural products. State and federal governmental policies, including farm subsidies and commodity support programs, as well as the prices of fertilizer products and the prices at which produce may be sold, may also directly or indirectly influence the number of acres planted, the mix of crops planted and the use of pesticides for particular agricultural applications. There are various proposals pending before the U.S. congress to cut or eliminate various agricultural subsidies. If such proposals are implemented, they may adversely impact the U.S. agricultural industry and suppliers to that industry such as us.

Our headquarters and facility and certain manufacturers and suppliers are located in regions that are subject to natural disasters, as well as in some cases geopolitical risks and social upheaval.

Our Davis, California headquarters and facility is located near a known earthquake fault. The impact of a major earthquake or other natural disaster, including floods, on our facilities, infrastructure and overall operations is difficult to predict and any natural disaster could seriously disrupt our entire business process. In addition, Regalia is produced by a third party manufacturer in Florida in a location that could be impacted by hurricane activity, and certain of our raw materials are sourced in China, which is subject to risks associated with uncertain political, economic and other conditions such as the outbreak of contagious diseases, such as avian flu, swine flu and SARS, and natural disasters. The insurance we maintain may not be adequate to cover our losses resulting from natural disasters or other business interruptions. Although these risks have not materially adversely affected our business, financial condition or results of operations to date, there can be no assurance that such risks will not do so in the future.

Inability to comply with regulations applicable to our facilities and procedures could delay, limit or prevent our research and development or manufacturing activities.

Our research and development and manufacturing facilities and procedures are subject to continual review and periodic inspection. We must spend funds, time and effort in the areas of production, safety and quality control and assurance to ensure full technical compliance with the regulations applicable to these facilities and procedures. If the EPA or another regulatory body determines that we are not in compliance with these regulations, regulatory approval of our products could be delayed or we may be required to limit or cease our research and development or manufacturing activities or pay a monetary fine. If we are required to limit or cease our research and development activities, our ability to develop new products would be impaired. In addition, if we are required to limit or cease our manufacturing activities, our ability to produce our products in commercial quantities would be impaired or prohibited, which would harm our business.

We may be exposed to product liability and remediation claims, which could harm our business.

The use of certain bio-based pest management and plant health products is regulated by various local, state, federal and foreign environmental and public health agencies. These regulations may include requirements that only certified or professional users apply the product or that certain products be used only on certain types of locations, may require users to post notices on properties to which products have been or will be applied, may require notification to individuals in the vicinity that products will be applied in the future or may ban the use of certain

 

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ingredients. Even if we are able to comply with all such regulations and obtain all necessary registrations, we cannot provide assurance that our products will not cause injury to crops, the environment or people under all circumstances. For example, our products may be improperly combined with other pesticides or, even when properly combined, our products may be blamed for damage caused by these other pesticides. The costs of remediation or products liability could materially adversely affect our future quarterly or annual operating results.

We may be held liable for, or incur costs to settle, liability and remediation claims if any products we develop, or any products that use or incorporate any of our technologies, cause injury or are found unsuitable during product testing, manufacturing, marketing, sale or use. These risks exist even with respect to products that have received, or may in the future receive, regulatory approval, registration or clearance for commercial use. We cannot guarantee that we will be able to avoid product liability exposure.

We currently maintain product liability insurance at levels we believe are sufficient and consistent with industry standards for companies at our stage of development. We cannot guarantee that our product liability insurance is adequate and, at any time, it is possible that this insurance coverage may not be available on commercially reasonable terms or at all. A product liability claim could result in liability to us greater than our assets or insurance coverage. Moreover, even if we have adequate insurance coverage, product liability claims or recalls could result in negative publicity or force us to devote significant time and attention to those matters, which could harm our business

Our ability to use our net operating loss carry-forwards to offset future taxable income may be subject to certain limitations.

As of March 31, 2013, we had approximately $56.4 million of federal and $54.7 million state operating loss carry-forwards available to offset future taxable income, which expire in varying amounts beginning in 2026 for federal and 2016 for state purposes if unused. It is possible that we will not generate taxable income in time to use these loss carry-forwards before their expiration.

In addition, it is possible that this offering may cause a reduction in the value of our net operating loss carryforwards realizable for income tax purposes. Section 382 of the Internal Revenue Code imposes restrictions on the use of a corporation’s net operating losses, as well as certain recognized built-in losses and other carryforwards, after an “ownership change” occurs. A Section 382 “ownership change” occurs if one or more stockholders or groups of stockholders who own at least 5% of our stock increase their ownership by more than 50 percentage points over their lowest ownership percentage within a rolling three-year period. Even if this offering does not cause an “ownership change,” other future issuances or sales of our stock (including certain transactions involving our stock that are outside of our control) could also result in an ownership change under Section 382. If an “ownership change” occurs, Section 382 would impose an annual limit on the amount of pre-change net operating losses and other losses we can use to reduce our taxable income generally equal to the product of the total value of our outstanding equity immediately prior to the “ownership change” (subject to certain adjustments) and the applicable federal long-term tax-exempt interest rate for the month of the “ownership change.” The applicable rate for ownership changes occurring in the month of June 2013 is 2.70%.

Because U.S. federal net operating losses generally may be carried forward for up to 20 years, the annual limitation may effectively provide a cap on the cumulative amount of pre-ownership change losses, including certain recognized built-in losses, that may be utilized. Such pre-ownership change losses in excess of the cap may be lost. In addition, if an ownership change were to occur, it is possible that the limitations imposed on our ability to use pre-ownership change losses and certain recognized built-in losses could cause a net increase in our U.S. federal income tax liability and U.S. federal income taxes to be paid earlier than otherwise would be paid if such limitations were not in effect. Further, if the amount or value of these deferred tax assets is reduced, such reduction would have a negative impact on the book value of our common stock .

We completed a Section 382 analysis as of May 1, 2013 and concluded that approximately $0.5 million in federal net operating losses are expected to expire prior to utilization as a result of our previous ownership changes and corresponding annual limitations. Although an analysis has not been completed, we believe that a similar amount of state net operating losses would also expire prior to utilization. We have not updated our Section 382 analysis to consider events since May 1, 2013, including the effect of issuing common stock pursuant to this offering,

 

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the automatic conversion of all outstanding convertible notes as a result of this offering, and any other related transactions. Our existing net operating loss carry-forwards or credits may be subject to significant limitations due to these events. Our inability to use these net operating loss carry-forwards as a result of the Section 382 limitations could harm our financial condition.

Our business is subject to various governmental regulations, and compliance with these regulations may cause us to incur significant expenses. If we fail to maintain compliance with applicable regulations, we may be forced to recall products and cease their manufacture and distribution, which could subject us to civil or criminal penalties.

The complex legal and regulatory environment exposes us to compliance and litigation costs and risks that could materially affect our operations and financial results. These laws and regulations may change, sometimes significantly, as a result of political or economic events. They include environmental laws and regulations, tax laws and regulations, import and export laws and regulations, government contracting laws and regulations, labor and employment laws and regulations, securities and exchange laws and regulations, and other laws such as the Foreign Corrupt Practices Act. In addition, proposed laws and regulations in these and other areas could affect the cost of our business operations. We face the risk of changes in both domestic and foreign laws regarding trade, potential loss of proprietary information due to piracy, misappropriation or foreign laws that may be less protective of our intellectual property rights. Violations of any of these laws and regulations could subject us to criminal or civil enforcement actions, any of which could have a material adverse effect on our business, financial condition or results of operations.

Risks Related to this Offering and Ownership of our Common Stock

The concentration of our capital stock ownership with our executive officers and directors, and their respective affiliates, will limit your ability to influence corporate matters.

We anticipate that immediately following the completion of this offering, based on share ownership as of March 31, 2013, our executive officers and directors and their affiliates will beneficially own or control, directly or indirectly, an aggregate of                 shares, or     %, of our common stock. This concentrated control will limit your ability to influence some corporate matters and could result in some corporate actions that our other stockholders do not view as beneficial such as failure to approve change of control transactions that could offer holders of our common stock a premium over the market value of our company. As a result, the market price of our common stock could be adversely affected.

Our common stock may experience extreme price and volume fluctuations, and you may not be able to resell shares of our common stock at or above the price you paid.

Prior to this offering, our common stock has not been traded in a public market. In addition, we are an early stage company with a limited operating history and a history of losses. As a result, we cannot predict the extent to which a trading market will develop following this offering or how liquid that market might become. The trading price of our common stock following this offering is therefore likely to be highly volatile and could be subject to wide fluctuations in price in response to various factors, some of which are beyond our control. These factors include:

 

  n  

quarterly variations in our results of operations, those of our competitors or those of our customers;

 

  n  

announcements of technological innovations, new products or services or new commercial relationships by us or our competitors;

 

  n  

our ability to develop and market new products on a timely basis;

 

  n  

disruption to our operations;

 

  n  

media reports and publications about pest management products;

 

  n  

announcements concerning our competitors or the pest management industry in general;

 

  n  

our entry into, modification of or termination of key license, research and development or collaborative agreements;

 

  n  

new regulatory pronouncements and changes in regulatory guidelines or the status of our regulatory approvals;

 

  n  

general and industry-specific economic conditions;

 

  n  

any major change in our board of directors or management;

 

  n  

commencement of, or our involvement in, litigation;

 

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  n  

changes in financial estimates, including our ability to meet our future net revenues and operating profit or loss projections; and

 

  n  

changes in earnings estimates or recommendations by securities analysts.

In the past, securities class action litigation has often been brought against companies that experience volatility in the market price of their securities. Whether or not meritorious, litigation brought against us could result in substantial costs, divert management’s attention and resources and harm our business.

If securities or industry analysts do not publish research or reports about our business or our industry, or publish negative reports about our business or our industry, our stock price and trading volume could decline.

The trading market for our common stock will be influenced by the research and reports that securities or industry analysts publish about us, our business, our industry or our competitors. If one or more of the analysts who cover us change their recommendation regarding our stock adversely, change their opinion of the prospects for our company in a negative manner, or provide more favorable relative recommendations about our competitors, our stock price would likely decline. If one or more of these analysts cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which could cause our stock price or trading volume to decline.

Substantial future sales of our common stock, or the perception in the public markets that these sales may occur, may depress our stock price.

Sales of substantial amounts of our common stock in the public market after this offering, or the perception that these sales could occur, could adversely affect the price of our common stock and could impair our ability to raise capital through the sale of additional shares. Upon completion of this offering, we will have          million shares of common stock outstanding. The shares of common stock offered in this offering will be freely tradable without restriction under the Securities Act, except for any shares of our common stock that may be held or acquired by our directors, executive officers and other affiliates, as that term is defined in the Securities Act, which will be restricted securities under the Securities Act. Restricted securities may not be sold in the public market unless the sale is registered under the Securities Act or an exemption from registration is available. If our existing stockholders sell substantial amounts of our common stock in the public market, or if the public perceives that such sales could occur, this could have an adverse impact on the market price of our common stock, even if there is no relationship between such sales and the performance of our business.

We, our executive officers and directors, and our other existing security holders have agreed, subject to certain exceptions, not to sell or transfer any common stock, or securities convertible into, exchangeable for, exercisable for, or repayable with common stock, for 180 days after the date of this prospectus, without first obtaining written consent of each of Jefferies LLC and Piper Jaffray & Co., representatives of the underwriters. See “Underwriting.”

All of our shares of common stock outstanding as of the date of this prospectus may be sold in the public market by existing stockholders 180 days after the date of this prospectus, subject to applicable limitations imposed under federal securities laws. See “Shares Eligible for Future Sale” for a more detailed description of the restrictions on selling shares of our common stock after this offering.

 

 

 

Number of Shares and % of Total Outstanding

   Date Available for Sale into Public Market

             or         %

   Immediately after completion of this offering

             or         %

   180 days after the date of this prospectus

             or         %

   From time to time after the date 180 days after the date of this prospectus

 

 

In the future, we may also issue our securities in connection with a capital raise or acquisitions. The amount of shares of our common stock issued in connection with a capital raise or acquisition could constitute a material portion of our then-outstanding shares of our common stock, which would result in dilution.

 

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We will have broad discretion in how we use the net proceeds from this offering.

We currently intend to use the net proceeds from this offering for capital expenditures, including to further expand capacity at the manufacturing facility we acquired in July 2012, working capital and other general corporate purposes, including sales, general and administrative and research and development matters as described in the “Use of Proceeds” section of this prospectus. We may also use a portion of our net proceeds to repay certain outstanding debt, acquire or invest in other businesses or products or to obtain rights to other technologies. However, we do not have more specific plans for the net proceeds from this offering and will have broad discretion in how we use the net proceeds of this offering. These proceeds could be applied in ways that do not improve our operating results or increase the value of your investment. You may not have the opportunity to influence our decisions on how to use the net proceeds from this offering.

Purchasers in this offering will experience immediate and substantial dilution in the book value of their investment.

The initial public offering price of our common stock is substantially higher than the net tangible book value per share of our common stock immediately after this offering. Therefore, investors purchasing shares of common stock in this offering will contribute     % of the total amount invested to date to fund us, but will own only     % of the shares of common stock outstanding, based on the assumed initial public offering price of $         per share, which is the mid-point of the range listed on the cover of this prospectus. The exercise of outstanding options and warrants will result in further dilution. For a further description of the dilution that you will experience immediately after this offering, see “Dilution.”

Because we have no plans to pay dividends on our common stock, investors must look solely to stock appreciation for a return on their investment in us.

We have never declared or paid any cash dividends on our capital stock, and we do not anticipate paying any cash dividends on our common stock in the foreseeable future. We currently intend to retain all future earnings to fund the development and growth of our business. Any payment of future dividends will be at the discretion of our board of directors and will depend on, among other things, our earnings, financial condition, capital requirements, level of indebtedness, statutory and contractual restrictions applying to the payment of dividends and other considerations that the board of directors deems relevant. Investors must rely on sales of their common stock after price appreciation, which may never occur, as the only way to realize a return on their investment. Investors seeking cash dividends should not purchase our common stock.

We are an “emerging growth company” and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our common stock less attractive to investors.

We are an “emerging growth company” as defined in the JOBS Act. For as long as we continue to be an emerging growth company we may choose to take advantage of certain exemptions from various reporting requirements applicable to other public companies but not to emerging public companies, which includes, among other things:

 

  n  

exemption from the auditor attestation requirements under Section 404 of the Sarbanes-Oxley Act of 2002;

 

  n  

reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements;

 

  n  

exemption from the requirements of holding non-binding stockholder votes on executive compensation arrangements; and

 

  n  

exemption from any rules requiring mandatory audit firm rotation and auditor discussion and analysis and, unless the SEC otherwise determines, any future audit rules that may be adopted by the Public Company Accounting Oversight Board.

We could be an emerging growth company until the last day of the fiscal year following the fifth anniversary after our initial public offering, or until the earliest of (i) the last day of the fiscal year in which we have annual gross revenues of $1 billion or more, (ii) the date on which we have, during the previous three year period, issued more than $1 billion in non-convertible debt or (iii) the date on which we are deemed to be a large accelerated filer under the federal securities laws. We will qualify as a large accelerated filer as of the first day of the first fiscal year after we have (i) more than $700 million in outstanding common equity held by our non-affiliates and (ii) been public for at least 12 months. The value of our outstanding common equity will be measured each year on the last day of our second fiscal quarter.

 

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Under the JOBS Act, emerging growth companies are also permitted to elect to delay adoption of new or revised accounting standards until companies that are not subject to periodic reporting obligations are required to comply, if such accounting standards apply to non-reporting companies. We have made an irrevocable decision to opt out of this extended transition period for complying with new or revised accounting standards.

We cannot predict if investors will find our common stock less attractive if we rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.

We will incur significant increased costs as a result of operating as a public company, and our management will be required to devote substantial time to comply with the laws and regulations affecting public companies, particularly after we are no longer an “emerging growth company.”

We have never operated as a public company. As a public company, particularly after we cease to qualify as an emerging growth company, we will incur significant legal, accounting and other expenses that we did not incur as a private company, including costs associated with public company reporting and corporate governance requirements, in order to comply with the rules and regulations imposed by the Sarbanes-Oxley Act, as well as rules implemented by the SEC and Nasdaq. Our management and other personnel will need to devote a substantial amount of time to these compliance initiatives and our legal and accounting compliance costs will increase. It is likely that we will need to hire additional staff in the areas of investor relations, legal and accounting to operate as a public company. We also expect that these new rules and regulations may make it more difficult and expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, it may be more difficult for us to attract and retain qualified individuals to serve on our board of directors or as executive officers. We are currently evaluating and monitoring developments with respect to these rules, and we cannot predict or estimate the amount of additional costs we may incur or the timing of such costs.

For example, the Sarbanes-Oxley Act requires, among other things, that we maintain effective internal controls over financial reporting and disclosure controls and procedures. In particular, as a public company, we will be required to perform system and process evaluations and testing of our internal control over financial reporting to allow management and our independent registered public accounting firm to report on the effectiveness of our internal controls over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act. As described above, as an emerging growth company, we will not need to comply with the auditor attestation provisions of Section 404 for several years. Our testing, or the subsequent testing by our independent registered public accounting firm, may reveal deficiencies in our internal control over financial reporting that are deemed to be material weaknesses. Our compliance with Section 404 will require that we incur substantial accounting expense and management time on compliance-related issues. Moreover, if we are not able to comply with the requirements of Section 404 in a timely manner, or if we or our independent registered public accounting firm identify deficiencies in our internal control over financial reporting that are deemed to be material weaknesses, we could lose investor confidence in the accuracy and completeness of our financial reports, which could cause our stock price to decline.

When the available exemptions under the JOBS Act, as described above, cease to apply, we expect to incur additional expenses and devote increased management effort toward ensuring compliance with them. We cannot predict or estimate the amount of additional costs we may incur as a result of becoming a public company or the timing of such costs.

Provisions in our charter documents and under Delaware law could discourage a takeover that stockholders may consider favorable.

Provisions in our certificate of incorporation and bylaws, as amended and restated in connection with this offering, may have the effect of delaying or preventing a change of control or changes in our management. These provisions include the following:

 

  n  

the right of our board of directors to elect directors to fill a vacancy created by the expansion of our board of directors or the resignation, death or removal of a director, which prevents stockholders from being able to fill vacancies on our board of directors;

 

  n  

the establishment of a classified board of directors requiring that only a subset of the members of our board of directors be elected at each annual meeting of stockholders;

 

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  n  

the prohibition of cumulative voting in our election of directors, which would otherwise allow less than a majority of stockholders to elect director candidates;

 

  n  

the requirement that stockholders provide advance notice to nominate individuals for election to our board of directors or to propose matters that can be acted upon at a stockholders’ meeting. These provisions may discourage or deter a potential acquiror from conducting a solicitation of proxies to elect the acquiror’s own slate of directors or otherwise attempting to obtain control of our company;

 

  n  

the ability of our board of directors to issue, without stockholder approval, shares of undesignated preferred stock with terms set by the board of directors, which rights could be senior to those of our common stock. The ability to authorize undesignated preferred stock makes it possible for our board of directors to issue preferred stock with voting or other rights or preferences that could impede the success of any attempt to acquire us;

 

  n  

the ability of our board of directors to alter our bylaws without obtaining stockholder approval;

 

  n  

the inability of our stockholders to call a special meeting of stockholders and to take action by written consent in lieu of a meeting;

 

  n  

the required approval of the holders of at least two-thirds of the shares entitled to vote at an election of directors to adopt, amend, or repeal our bylaws;

 

  n  

the required approval of the holders of at least two-thirds of the shares entitled to vote at an election of directors to repeal or adopt any provision of our certificate of incorporation regarding the election of directors;

 

  n  

the required approval of the holders of at least 80% of such shares to amend or repeal the provisions of our bylaws regarding the election and classification of directors; and

 

  n  

the required approval of the holders of at least two-thirds of the shares entitled to vote at an election of directors to remove directors without cause.

As a Delaware corporation, we are also subject to certain Delaware anti-takeover provisions. Under Delaware law, a corporation may not engage in a business combination with any holder of 15% or more of its capital stock unless the holder has held the stock for three years or, among other things, the board of directors has approved the transaction. Our board of directors could rely on Delaware law to prevent or delay an acquisition of us. For a description of our capital stock, see “Description of Capital Stock.”

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus, particularly in the sections titled “Prospectus Summary,” “Risk Factors,” “Use of Proceeds,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business,” contains forward-looking statements that involve substantial risks and uncertainties. All statements other than statements of historical facts contained in this prospectus, including statements regarding our future financial position, business strategy and plans and objectives of management for future operations, are forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “believe,” “may,” “estimate,” “continue,” “anticipate,” “intend,” “should,” “plan,” “expect,” “predict,” “potential,” or the negative of these terms or other similar expressions. The statements we make regarding the following subject matters are forward-looking by their nature:

 

  n  

our plans to target our existing products for new markets and for new uses and applications;

 

  n  

our plans with respect to growth in sales of new product lines, including Grandevo and Zequanox;

 

  n  

our ability and plans to screen, source, in-license develop, register and commercialize additional new product candidates and bring new products to market across multiple categories faster and at a lower cost than other developers of pest management products, and in particular products that are allowed for use by organic farmers;

 

  n  

our expectations regarding registering new products and new formulations and expanded use labels for existing products, including submitting new products to the EPA;

 

  n  

our belief that challenges facing the use of conventional chemical pesticides will continue to grow;

 

  n  

our beliefs regarding the growth of markets for, and unmet demand for, biopesticides, and in particular, our beliefs that the current trends will continue and that Zequanox presents a unique opportunity for generating long term revenue;

 

  n  

our beliefs regarding market adoption for our products;

 

  n  

our intention to maintain existing and develop new, supply, sales and distribution channels and extend market access;

 

  n  

our anticipation that we will receive future payments under our strategic collaboration and development agreements for the achievement of testing validation, regulatory progress and commercialization events;

 

  n  

our plans regarding repurposing and expanding capacity at our manufacturing facility;

  n  

our plans to collaborate with chemical manufacturers to develop products that combine our bio-based pest management solutions with their technologies;

 

  n  

our plans to grow our business and expand operations, including plans to hire additional qualified personnel and expectations that we will generate a significant portion of our revenues from international sales of our products and that our revenues stream will be increasingly diversified;

 

  n  

our intention to continue to devote significant resources toward our proprietary technology and research and development and the potential for pursuing acquisition and collaboration opportunities to gain access to third-party products and technologies;

 

  n  

our expectations that sales will be seasonal and the impact of continued drought conditions;

 

  n  

our ability to protect our intellectual property in the United States and abroad;

 

  n  

our expectations regarding market risk, including interest rate changes, foreign currency fluctuations and commodity price changes.

 

  n  

our belief in the sufficiency of our cash flows to meet our needs for 24 months following completion of this offering; and

 

  n  

our future financial and operating results.

The preceding list is not intended to be an exhaustive list of all of our forward-looking statements. The forward-looking statements are based on our beliefs, assumptions and expectations of future performance, taking into account the information currently available to us. These statements are only predictions based upon our current expectations and projections about future events. There are important factors that could cause our actual results, level of activity, performance or achievements to differ materially from the results, level of activity, performance or achievements expressed or implied by the forward-looking statements. Other sections of this prospectus may include additional factors that could adversely impact our business and financial performance. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time and it is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which

 

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any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. Before investing in our common stock, investors should be aware that the occurrence of the events described under the caption “Risk Factors” and elsewhere in this prospectus could have a material adverse effect on our business, results of operations and financial condition.

You should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that the future results, levels of activity, performance and events and circumstances reflected in the forward-looking statements will be achieved or occur. Except as required by law, we undertake no obligation to update publicly any forward-looking statements for any reason after the date of this prospectus to conform these statements to actual results or to changes in our expectations.

This prospectus contains statistical data that we obtained from industry publications and reports. These publications generally indicate that they have obtained their information from sources believed to be reliable, but do not guarantee the accuracy and completeness of their information. Although we believe the publications are reliable, we have not independently verified their data.

You should read this prospectus and the documents that we reference in this prospectus and have filed as exhibits to the registration statement of which this prospectus is a part with the understanding that our actual future results, levels of activity, performance and achievements may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements.

 

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USE OF PROCEEDS

We estimate that the net proceeds we will receive from this offering will be $         million, at an assumed initial public offering price of $         per share, which is the mid-point of the range listed on the cover of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. A $1.00 increase or decrease in the assumed initial public offering price of $         per share, which is the midpoint of the range reflected on the cover of this prospectus, would increase or decrease the net proceeds from this offering by approximately $         million, assuming that the number of shares offered by us, as set forth on the cover of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. If the underwriters exercise their option to purchase additional shares in full, we estimate that our net proceeds will be approximately $         million, assuming an initial public offering price of $         per share and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. An increase or decrease of 100,000 shares in the number of shares sold in this offering by us would increase or decrease the net proceeds to us from this offering, after deducting assumed underwriting discounts and commissions, by $        , assuming an initial public offering price of $         per share, which is the midpoint of the range reflected on the cover of this prospectus.

We intend to use a portion of the net proceeds from this offering to expand capacity at the manufacturing facility we acquired in July 2012. In addition, we intend to use a portion of the net proceeds from this offering for other capital expenditures, including purchasing equipment to facilitate our research and development efforts, working capital and other general corporate purposes. We may also use a portion of the net proceeds to acquire complementary businesses, products or technologies. However, as of the date of this prospectus, we cannot estimate the amount of net proceeds that will be used for the other purposes described above. We do not have agreements reached or commitments made for any specific acquisitions of businesses, products or technologies at this time.

Based on forecasted volumes and sales growth, we currently anticipate making aggregate capital expenditures of $5.0 million to $7.0 million for the nine months ending December 31, 2013, in addition to using $19.0 million to $21.0 million to expand capacity at our manufacturing facility in 2014. We expect to fully fund such expenditures using both available cash and a portion of the net proceeds from this offering.

The amounts and timing of our actual expenditures, including expenditures related to our manufacturing facility, will depend on numerous factors, including the status of our product development efforts, our sales and marketing activities, the amount of cash generated or used by our operations and competitive pressures. We expect that our current resources, together with the proceeds from this offering and future operating revenue, will be sufficient to fund operations, including the expenditures described above, for at least the next 24 months.

Some of the other principal purposes of this offering are to create a public market for our common stock, increase our visibility in the marketplace and provide liquidity to existing stockholders. Creating a public market for our common stock will facilitate our ability to raise additional equity in the future and to use our common stock as a means of attracting and retaining key employees and as consideration for acquisitions.

We will have broad discretion in the way that we use the net proceeds of this offering. The amounts that we actually spend for the purposes described above may vary significantly and will depend, in part, on the timing and amount of our future revenues, our future expenses and any potential acquisitions that we may propose. Pending any use, as described above, we plan to invest the net proceeds in a variety of capital preservation instruments, including short- and long-term interest-bearing investments, direct or guaranteed obligations of the U.S. government, certificates of deposit and money market funds. We cannot predict whether the proceeds invested will yield a favorable return for us.

 

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DIVIDEND POLICY

We have never declared or paid any cash dividends on our capital stock. We currently anticipate that we will retain all of our future earnings for use in the expansion and operation of our business and do not anticipate paying any cash dividends in the foreseeable future. Any future determination to declare cash dividends will be made at the discretion of our board of directors, subject to applicable law and will depend on our financial condition, results of operations, capital requirements, general business conditions and other factors that our board of directors may deem relevant. In addition, an existing loan agreement restricts our ability to pay dividends on our capital stock in certain cases.

 

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CAPITALIZATION

The following table sets forth our capitalization as of March 31, 2013 on an actual basis and on a pro forma basis, giving effect to (i) the filing of our amended and restated certificate of incorporation, (ii) the automatic conversion of all outstanding shares of our preferred stock into shares of our common stock, (iii) the issuance of shares of common stock upon the net exercise, at the completion of this offering and based upon an assumed initial public offering price equal to the midpoint of the price range set forth on the cover of this prospectus, of all outstanding Series A and Series B convertible preferred stock warrants that would otherwise expire upon the completion of this offering, (iv) the issuance of shares of common stock, based on an assumed initial public offering price equal to the midpoint of the price range set forth on the cover of this prospectus, at the completion of this offering, upon the net exercise of outstanding warrants to purchase common stock automatically exercisable upon the completion of this offering in accordance with their terms, (v) the issuance of shares of common stock, based on an assumed initial public offering price equal to the midpoint of the price range set forth on the cover of this prospectus, at the completion of this offering, upon the conversion of all outstanding convertible notes, including principal and interest accrued automatically convertible upon the completion of this offering in accordance with their terms, (vi) the reclassification of the preferred stock warrant liability to additional paid-in capital, and (vii) the sale by us of                 shares of common stock in this offering at an assumed initial public offering price of $         per share, the mid-point of the range set forth on the cover of this prospectus, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us, as if each of the above had occurred at March 31, 2013.

You should read this table together with “Selected Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes appearing elsewhere in this prospectus.

 

 

 

     AS OF MARCH 31, 2013  
     ACTUAL     PRO FORMA (1)  
     (In thousands, except share
and per share data)
 
     (Unaudited)  

Cash and cash equivalents

   $ 1,791      $                    
  

 

 

   

 

 

 

Preferred stock warrant liability

     1,883          

Common stock warrant liability

     316          

Capital leases, including current portion

     454     

Total debt and convertible notes, including current portion (net of unamortized debt discount of $237)

     53,941     

Preferred stock:

    

Series A convertible preferred stock, $0.00001 par value; 4,673,827 shares authorized, 4,655,770 shares issued and outstanding, actual; no shares authorized, issued and outstanding, pro forma

     3,747          

Series B convertible preferred stock, $0.00001 par value; 7,066,565 shares authorized, 7,036,465 shares issued and outstanding, actual; no shares authorized, issued and outstanding, pro forma

     10,758          

Series C convertible preferred stock, $0.00001 par value; 15,950,000 shares authorized, 14,997,104 shares issued and outstanding, actual; no shares authorized, issued and outstanding, pro forma

     25,107          

Stockholders’ equity (deficit):

    

Preferred stock, $0.00001 par value; no shares authorized, issued and outstanding, actual;                 shares authorized, no shares issued and outstanding, pro forma

              

Common stock, $0.00001 par value; 40,600,000 shares authorized, 3,982,601 shares issued and outstanding, actual;                  shares authorized pro forma,                  shares issued and outstanding pro forma (2)

         

Additional paid-in capital

     1,573     

Accumulated deficit

     (86,318  
  

 

 

   

 

 

 

Total stockholders’ equity (deficit)

     (84,745  
  

 

 

   

 

 

 

Total capitalization

   $ 11,461      $     
  

 

 

   

 

 

 

 

 

 

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(1)   

A $1.00 increase or decrease in the assumed initial public offering price of $         per share, the midpoint of the price range set forth on the cover of this prospectus would increase or decrease, as applicable, cash and cash equivalents, additional paid-in capital, total stockholders’ (deficit) equity and total capitalization by $            , assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting assumed underwriting discounts and commissions and the estimated offering expenses payable by us. An increase or decrease of 100,000 shares in the number of shares sold in this offering by us would increase or decrease, as applicable, cash and cash equivalents, additional paid-in capital, total stockholders’ (deficit) equity and total capitalization by $        , assuming an initial public offering price of $         per share, the midpoint of the price range set forth on the cover of this prospectus, and after deducting assumed underwriting discounts and commissions and the estimated offering expenses payable by us.

(2)  

The number of shares of our common stock to be issued upon the conversion of our common stock warrants and all of our convertible notes depends on the initial public offering price in this offering. As further described in “Description of Capital Stock—Warrants,” the terms of the common stock warrants provide that the warrants will be automatically exercised by net exercise in connection with a qualified initial public offering, and as described in “Description of Certain Indebtedness,” the terms of the convertible notes provide that the convertible notes automatically convert into shares of our common stock in connection with a qualified initial public offering.

 

       The pro forma share information in the table above includes the issuance of                  additional shares of common stock in connection with the conversion of our convertible notes based on an assumed initial public offering price of $         per share, which is the midpoint of the price range set forth on the cover of this prospectus. In addition:

 

  n  

A $1.00 increase in the assumed initial public offering price would decrease the total number of shares issued upon the completion of this offering by                 shares;

 

  n  

A $1.00 decrease in the assumed initial public offering price would increase the total number of shares issued upon the completion of this offering by                  shares;

 

       The number of shares of our common stock to be outstanding after this offering is based on                  shares outstanding as of March 31, 2013, on an as-converted basis, and excludes:

 

  n  

6,403,688 shares of common stock issuable upon the exercise of outstanding options with a weighted-average exercise price of $1.27 per share;

 

  n  

600,000 shares of Series C convertible preferred stock issuable upon exercise of an outstanding warrant with an exercise price of $2.50 per share;

 

  n  

             shares of common stock issuable upon exercise of an outstanding warrant with an exercise price of $         per share, based upon an assumed initial public offering price equal to the midpoint of the range set forth on the cover of this prospectus; and

 

  n  

                 shares of common stock that will be available for future grant under our 2013 Stock Incentive Plan, which will become effective on the date of the completion of this offering, and additional shares of common stock that will be available for future grant under the automatic increase provisions of our 2013 Stock Incentive Plan (see “Executive Compensation—Employee Benefit and Stock Plans—2013 Stock Incentive Plan”).

 

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DILUTION

If you invest in our common stock, your interest will be diluted to the extent of the difference between the amount per share paid by purchasers of shares of our common stock in this offering and the pro forma net tangible book value per share of our common stock immediately after completion of this offering.

As of March 31, 2013, our pro forma net tangible book value was approximately $         million, or $         per share of common stock. Pro forma net tangible book value per share represents the amount of our tangible assets less our liabilities, divided by the pro forma shares of common stock outstanding as of March 31, 2013, including the effect of (i) the automatic conversion of all outstanding shares of our preferred stock into shares of our common stock, (ii) the issuance of shares of common stock upon the net exercise, at the completion of this offering and based upon an assumed initial public offering price equal to the midpoint of the price range set forth on the cover of this prospectus, of all outstanding Series A and Series B convertible preferred stock warrants that would otherwise expire upon the completion of this offering, (iii) the issuance of shares of common stock, based on an assumed initial public offering price equal to the midpoint of the price range set forth on the cover of this prospectus, at the completion of this offering, upon the net exercise of outstanding warrants to purchase common stock automatically exercisable upon the completion of this offering in accordance with their terms, (iv) the issuance of shares of common stock, based on an assumed initial public offering price equal to the midpoint of the price range set forth on the cover of this prospectus, at the completion of this offering, upon the conversion of all outstanding convertible notes, including principal and interest accrued automatically convertible upon the completion of this offering in accordance with their terms, (v) the reclassification of the preferred stock warrant liability to additional paid-in capital, as if each of the above had occurred at March 31, 2013 and (vi) the impact of our sale of          shares of common stock in this offering at an assumed initial public offering price of $         per share, the mid-point of the price range set forth on the front cover of this prospectus, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. Our pro forma net tangible book value at March 31, 2013 would have been $         million, or $         per share of common stock. This represents an immediate increase in pro forma net tangible book value of $         per share to existing stockholders and an immediate dilution of $         per share to new investors (in $         millions, except per share amounts):

 

 

 

Assumed initial public offering price per share of common stock

      $                    

Pro forma net tangible book value per share as of March 31, 2013, before giving effect to this offering

   $                       

Increase in pro forma net tangible book value per share attributable to investors purchasing shares in this offering

   $        
  

 

 

    

Pro forma net tangible book value per share after giving effect to this offering

      $     
     

 

 

 

Dilution in pro forma net tangible book value per share to investors purchasing shares in this offering

      $     
     

 

 

 

 

 

A $1.00 increase in the initial public offering price of $         per share, the midpoint of the price range set forth on the cover of this prospectus, would increase our pro forma net tangible book value per share after this offering by approximately $         and would increase dilution per share to new investors by approximately $        , assuming that the number of shares offered by us, as set forth on the cover of this prospectus, remains the same.

A $1.00 decrease in the initial public offering price of $         per share, the midpoint of the price range set forth on the cover of this prospectus, would decrease our pro forma net tangible book value per share after this offering by approximately $         and would decrease dilution per share to new investors by approximately $        , assuming that the number of shares offered by us, as set forth on the cover of this prospectus, remains the same.

If the underwriters exercise their option to purchase additional shares in full, the pro forma net tangible book value per share after giving effect to this offering would be $         per share, and the dilution in pro forma net tangible

 

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book value per share to investors in this offering would be $         per share. Further, if all outstanding options and warrants were also exercised in full, the pro forma net tangible book value per share after giving effect to this offering would be $         per share, and the dilution in pro forma net tangible book value per share to investors in this offering would be $         per share.

The following table summarizes on a pro forma basis as of March 31, 2013:

 

  n  

the total number of shares of common stock purchased from us by our existing stockholders and by new investors purchasing shares in this offering;

 

  n  

the total consideration paid to us by our existing stockholders and by new investors purchasing shares in this offering, assuming an initial public offering price of $         per share (before deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us in connection with this offering); and

 

  n  

the average price per share paid by existing stockholders and by new investors purchasing shares in this offering.

 

 

 

     SHARES PURCHASED     TOTAL CONSIDERATION     AVERAGE PRICE
PER SHARE
 
     NUMBER      PERCENT     AMOUNT      PERCENT    

Existing stockholders

     30,671,940         %      $ 40,289,639         %      $ 1.31   

New investors

             $     
  

 

 

    

 

 

   

 

 

    

 

 

   

Total

        100.0   $           100.0   $     
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

A $1.00 increase or decrease in the assumed initial public offering price of $         per share, the midpoint of the price range set forth on the cover of this prospectus, would increase or decrease the total consideration paid to us by new investors by $         million and increase or decrease the percent of total consideration paid to us by new investors by approximately     %, assuming that the number of shares offered by us, as set forth on the cover of this prospectus, remains the same.

If the underwriters exercise their option to purchase additional shares in full, the number of shares held by the existing stockholders after this offering would be reduced to     % of the total number of shares of our common stock outstanding, and the number of shares held by new investors would be or     % of the total number of shares of our common stock outstanding. In addition, if all outstanding options and warrants were also exercised in full, the number of shares held by the existing stockholders after this offering would be or     % of the total number of shares of our common stock outstanding, and the number of shares held by new investors would be or     % of the total number of shares of our common stock outstanding.

Except as otherwise indicated, the amounts set forth above are based on                 shares of common stock outstanding as of March 31, 2013, on an as-converted basis, and excludes:

 

  n  

6,403,688 shares of common stock issuable upon the exercise of outstanding options with a weighted-average exercise price of $1.27 per share;

 

  n  

600,000 shares of Series C convertible preferred stock issuable upon exercise of an outstanding warrant with an exercise price of $2.50 per share;

 

  n  

             shares of common stock issuable upon exercise of an outstanding warrant with an exercise price of $         per share, based upon an assumed initial public offering price equal to the midpoint of the range set forth on the cover of this prospectus; and

 

  n  

                 shares of common stock that will be available for future grant under our 2013 Stock Incentive Plan, which will become effective on the date of the completion of this offering, and additional shares of common stock that will be available for future grant under the automatic increase provisions of our 2013 Stock Incentive Plan (see “Executive Compensation—Employee Benefit and Stock Plans—2013 Stock Incentive Plan”).

 

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SELECTED FINANCIAL DATA

We have derived the selected statement of operations data for the fiscal years ended December 31, 2012 and 2011 and the selected balance sheet data as of December 31, 2012 and 2011 from our audited consolidated financial statements and related notes included elsewhere in this prospectus. We have derived the selected statements of operations data for the fiscal year ended December 31, 2010 and the selected balance sheet data as of December 31, 2010 from our audited consolidated financial statements not included in this prospectus. We have derived the statements of operations data for the three months ended March 31, 2013 and 2012 and the balance sheet data as of March 31, 2013 from our unaudited interim condensed consolidated financial statements and related notes included elsewhere in this prospectus. Our historical results are not necessarily indicative of the results that may be expected for any future period. The following selected financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this prospectus.

 

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Statements of Operations Data:

 

 

 

     FISCAL YEAR     THREE MONTHS ENDED
MARCH 31,
 
     2012     2011     2010     2013     2012  
     (In thousands, except per share data)  
                       (Unaudited)  

Revenues:

      

Product

   $ 6,961      $ 5,194      $ 3,697      $ 2,649      $ 1,956   

License (1)

     179        57               81        43   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     7,140        5,251        3,697        2,730        1,999   

Cost of product revenues

     4,333        2,172        1,738        1,795        860   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     2,807        3,079        1,959        935        1,139   

Operating expenses:

      

Research and development

     12,741        9,410        5,563        3,283        2,733   

Non-cash charge associated with a convertible note

    
3,610
  
   

  
   

  
   

  
   

  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Selling, general and administrative

     10,294        6,793        4,353        2,847        2,322   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     26,645        16,203        9,916        6,130        5,055   

Loss from operations

     (23,838     (13,124     (7,957     (5,195     (3,916

Other income (expense):

      

Interest income

     16        22        22        1        2   

Interest expense

     (2,466     (88     (102     (1,985     (56

Change in estimated fair value of financial instruments (2)

     (12,461     1               (3,563     (15

Other income (expense)

     (45     9        1        (7     1   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (expense), net

     (14,956     (56     (79     (5,554     (68
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income taxes

                                   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (38,794   $ (13,180   $ (8,036   $ (10,749   $ (3,984
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Deemed dividend, convertible notes

     (2,039                          (1,253
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to common stockholders

   $ (40,833   $ (13,180   $ (8,036   $ (10,749   $ (5,237
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per common share:

      

Basic and diluted

   $ (10.35   $ (3.39   $ (2.10   $ (2.70   $ (1.34
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average shares outstanding in computing net loss per common share:

      

Basic and diluted

     3,945        3,888        3,832        3,980        3,915   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma net loss per common share (3):

      

Basic and diluted

   $                       $                         $                      
  

 

 

       

 

 

   

Weighted-average shares outstanding pro forma:

          

Basic and diluted

          
  

 

 

       

 

 

   

 

 

(1)  

We receive payments under strategic collaboration and distribution agreements under which we provide third parties with exclusive development, marketing and distribution rights. These payments are initially classified as deferred revenues and recognized as revenues over the exclusivity period. Please see Note 2 to our consolidated financial statements for an explanation of the method used to calculate license revenues.

(2)   

We account for the outstanding warrants exercisable into shares of our Series A, Series B and Series C convertible preferred stock and the outstanding warrants exercisable into a variable number of shares of common stock as liability instruments, as the Series A, Series B and Series C convertible preferred stock and the common stock into which these warrants are convertible are contingently redeemable upon the occurrence of certain events or transactions. In addition, we account for our convertible notes at estimated fair value. We adjust the warrant instruments and convertible notes to fair value at each reporting period with the change in fair value

 

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  recorded in the consolidated statements of operations. We do not expect these charges to continue after the completion of this offering because the Series A and Series B convertible preferred stock warrants, the common stock warrants and the convertible notes will automatically convert into common stock in accordance with their terms at such time and the Series C convertible preferred stock warrants will, if not otherwise exercised, automatically convert into warrants to purchase common stock. See “Management’s Discussion and Analysis of Financial Conditions and Results of Operations—Key Components of Our Results of Operations—Change in Estimated Fair Value of Financial Instruments and Deemed Dividend, Convertible Notes.”
(3)   

The pro forma net loss per common share data is computed using the weighted-average number of shares of common stock outstanding, after giving effect to the conversion (using the if-converted method) of all shares of our preferred stock and convertible notes into common stock as though the conversion had occurred on the original date of issuance and the exercise of warrants that would otherwise expire, or will be automatically exercisable, upon completion of this offering, using the treasury method. As we have losses in all periods presented, all potentially dilutive common shares, comprised of stock options, warrants, preferred stock and convertible notes, are anti-dilutive. Additionally, the net loss used to compute pro forma basic and diluted net loss per share includes: (i) adjustments related to changes in the fair value of financial instruments and (ii) adjustment to reflect the automatic conversion of all outstanding convertible notes into shares of our common stock.

Balance Sheet Data:

 

 

 

     AS OF DECEMBER 31,     AS OF MARCH 31,  
     2012     2011     2010     2013  
     (In thousands)  
                       (Unaudited)  

Cash and cash equivalents

   $ 10,006      $ 2,215      $ 4,287      $ 1,791   

Short-term investments

            2,000                 

Working capital (deficit) (1)

     (11,468     5,030        4,935        (21,582

Total assets

     33,778        9,818        7,937        17,839   

Debt and capital leases (net of unamortized discount)

     16,740        806        1,106        8,358   

Convertible notes

     41,860                      46,037   

Preferred stock warrant liability

     1,884        27        28        1,883   

Common stock warrant liability

     301                      316   

Total liabilities

     68,413        4,306        2,689        62,972   

Convertible preferred stock

     39,612        39,612        26,452        39,612   

Total stockholders’ deficit

     (74,247     (34,100     (21,204     (84,745

 

 

(1)   

Working capital (deficit) is defined as total current assets minus total current liabilities.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read together with our consolidated financial statements and the other financial information appearing elsewhere in this prospectus. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of various factors, including those discussed below and those discussed in the section entitled “Risk Factors” included elsewhere in this prospectus.

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. We target the major markets that use conventional chemical pesticides, including agricultural and water markets, where our bio-based products are used as substitutes for, or in conjunction with, conventional chemical pesticides. We also target new markets for which there are no available conventional chemical pesticides, the use of conventional chemical pesticides may not be desirable or permissible because of health and environmental concerns or the development of pest resistance has reduced the efficacy of conventional chemical pesticides. Our current portfolio of EPA-approved and registered “biopesticide” products and our pipeline address the growing global demand for effective, efficient and environmentally responsible products.

Our goal is to provide growers with solutions to a broad range of pest management needs by adding new products to our product portfolio, continuing to broaden the commercial applications of our existing product lines, leveraging relationships with existing distributors and growers’ positive experiences with existing product lines, and educating growers with on-farm product demonstrations and controlled product launches with key target customers and other early adopters. 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.

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 natural pest management products into integrated pest management (IPM) programs. We believe that our competitive strengths, including our commercially available products, robust pipeline of novel product candidates, proprietary technology and product development process, commercial relationships and industry experience, position us for rapid growth by providing solutions for these global trends.

We currently offer three product lines for commercial sale: Regalia, an initial formulation of which we began selling in the fourth quarter of 2008, Grandevo, an initial formulation of which we began selling in the fourth quarter of 2011, and Zequanox, which we began selling in the second half of 2012. In addition, we have one product candidate, Opportune, an herbicide, which received EPA approval in April 2012, and we submitted Venerate, an insecticide, and MBI-011, another herbicide to the EPA for registration. A large portion of our sales are currently attributable to conventional growers who use our natural 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. We intend to continue to develop and commercialize natural pest management and plant health products that are allowed for use by organic farmers.

We sell our crop protection products to leading agrichemical distributors 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, leafy greens and ornamental plants. As we continue to demonstrate the efficacy of our bio-based pest management and plant health

 

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products on new crops or for new applications, we may either continue to sell our product through our in-house sales force or collaborate with third parties for distribution to select markets. For example, we anticipate that there may be a significant opportunity for selling Regalia as a yield enhancer for large-acre row crop markets such as corn, cotton and soybeans, and we have engaged third party distributors for these sales.

We have historically sold the significant majority of our products in the United States, although we have strategically launched Regalia in select international markets. For example, we launched Regalia in the United Kingdom in 2009, Turkey in 2010, Mexico in 2011 and Canada in 2012. We are continuing to form strategic collaborations with major agrichemical companies such as FMC (for markets in Latin America) and Sygnenta (for markets in Africa, Europe and the Middle East) to accelerate our entry into certain international markets where these distributors are already selling Regalia, as well as in Asia Pacific markets. In addition to engaging these large-scale international distributors, we intend to form new strategic collaborations with other market-leading companies in our target markets and regions to expand the supply of our products globally, particularly in markets for which our products fall under exemptions from registration. In the longer term, when we launch Grandevo and other products internationally, we expect to generate a significant portion of our revenues from international sales of our products.

We currently market our water treatment product, Zequanox, through our sales and technical workforce to hydroelectric power generation companies, combustion power generation companies and industrial facilities at various geographical sites. We are also in discussions with several potential leaders in water treatment technology and applications regarding potential arrangements to sell Zequanox in the United States and international markets to supplement the efforts of our sales force. We intend to enter into distribution arrangements with third parties to market Zequanox internationally. We may enter into similar arrangements for distribution of Zequanox for use in certain applications such as treatment of lakes, aqueducts and drinking water facilities in the United States. 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 biopesticide products cannot be sold in the United States except under an EPA-approved use label. As such, we launch early formulations of our products to targeted customers under EPA-approved use labels, which list a limited number of crops and applications, to gather field data, gain product knowledge and get feedback to our research and development team while the EPA reviews new product formulations and expanded use labels for already approved formulations covering additional crops and applications. Based on these initial product launches, sales and demonstrations in additional regions and other tests and trials, we continue to enhance our products and submit product formulations and expanded use labels 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 use label, including listing for use in organic farming, was under review by the EPA. When approved, we launched this new formulation into the Southeast United States in 2009 and nationally in 2010. In 2011, we received EPA approval of a newly expanded Regalia label covering hundreds of crops and various new uses for applications to soil and through irrigation systems. Likewise, in May 2013, we received approval for an improved Grandevo label, and have submitted the revised label for individual U.S. state approval.

Our total revenues were $7.1 million and $5.3 million in the years ended December 31, 2012 and 2011 respectively, and have risen as growers have increasingly adopted our products. We generate our revenues primarily from product sales, which historically were principally attributable to sales of Regalia and are now increasingly attributable to Grandevo. Since 2011, we have also recognized revenues from our strategic collaboration and distribution agreements, which amounted to $0.2 million and $0.1 million for the years ended December 31, 2012 and 2011, respectively.

We currently sell our crop protection products through the same leading agricultural distributors used by the major agrichemical companies. Three of these distributors accounted for 58% and 66% of our total revenues in the years ended December 31, 2012 and 2011, respectively. While we expect product sales to a limited number of distributors 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 revenues stream will be diversified over a broader product portfolio and customer base.

 

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Our cost of product revenues was $4.3 million and $2.2 million in the years ended December 31, 2012 and 2011, respectively. 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. We expect our cost of product revenues to increase as we expand sales of Regalia, Grandevo and Zequanox.

Our research and development expenses have historically comprised a significant portion of our operating expenses, amounting to $12.7 million and $9.4 million in the years ended December 31, 2012 and 2011, respectively. We intend to continue to devote significant resources toward our proprietary technology and adding to our pipeline of natural pest management and plant health products using our proprietary discovery process, sourcing and commercialization expertise and rapid and efficient development process.

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 $10.3 million and $6.8 million in the years ended December 31, 2012 and 2011, respectively. We expect that in the future, our selling, general and administrative expenses will increase due to our expanded product portfolio.

In addition, in the year ended December 31, 2012, in connection with a convertible note, we incurred a non-recurring, non-cash charge of $3.6 million as operating expenses. We also recognized a $12.5 million non-cash charge attributable to a change in estimated fair value of financial instruments.

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.

Key Components of Our Results of Operations

Product Revenues

Product revenues consist of revenues generated from sales to distributors and from sales of our products to direct customers, net of rebates and cash discounts. Our product revenues historically were primarily derived from sales of Regalia, but now are increasingly attributable to Grandevo. We elected to discontinue marketing GreenMatch, our first product, an organic herbicide in 2011 to focus on more attractive opportunities and products. We continued to sell our remaining inventory of GreenMatch to a limited number of existing customers, but terminated such sales upon the exhaustion of product inventory in July 2012. Product revenues in the United States constituted 80%, 93% and 86% of our total product revenues in years ended December 31, 2012 and 2011 and the three months ended March 31, 2013, respectively. Product revenues constituted 97%, 99% and 97% of our total revenues in the years ended December 31, 2012 and 2011 and the three months ended March 31, 2013, respectively.

License Revenues

License revenues generally consist of revenues recognized under our strategic collaboration and distribution agreements for exclusive distribution rights, either for Regalia 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 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 years ended December 31, 2012 and 2011 and the three months ended March 31, 2013, license revenues constituted 3%, 1% and 3% of total revenues, respectively. As of March 31, 2013, we had received an aggregate of $2.4 million in payments under these agreements, and there were up to $4.9 million in payments under these agreements that we could potentially receive if the testing validation, regulatory progress and commercialization events occur. See “Business—Strategic Collaborations and Relationships.”

 

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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. Cost of product revenues also may include charges due to inventory adjustments. Gross profit is the difference between total revenues and the cost of product revenues. Gross margin is the gross profit as expressed as a percentage of revenues.

We have entered into in-license technology agreements with respect to the use and commercialization of our three commercially available product lines, including Regalia, Grandevo and Zequanox, 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. In addition, costs associated with license revenues have been included in cost of product revenues, as they have not been significant. The exclusivity and royalty provisions of these agreements are generally tied to the expiration of underlying patents, which will expire in 2017 for Regalia and Zequanox and in 2024 for Grandevo, subject to extensions in certain cases. 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 the expired patents, we do not believe that they can produce competitive products without infringing other aspects of our proprietary technology, 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. See “Business—Intellectual Property Rights” for a more detailed description of these in-license agreements.

We expect to see increases in gross profit over the life cycle of each of our products because gross margin will be increased over time as production processes improve and gain efficiencies and we increase product yields. While we expect margins to improve on a product-by-product basis, our overall gross margins may vary from time to time as we introduce new products. In particular, we are experiencing and expect further near-term declines in overall gross margins as we expand sales of Grandevo and Zequanox and if we introduce Opportune, our EPA-approved bioherbicide. Gross profit has been and will continue to be affected by a variety of factors, including product manufacturing yields, changes in product production processes, new product introductions, product mix and average selling prices.

To date, we have relied on third parties for the production of our products. This production arrangement has allowed us to achieve attractive gross margins for Regalia, a plant extract-based product. However, we believe reliance on third parties have resulted in lower gross margins for Grandevo, a fermentation-based product. Accordingly, in July 2012, we acquired a manufacturing facility, which we are repurposing for manufacturing operations, and we plan to further expand capacity at this facility using a portion of the proceeds from this offering.

Research and Development

Research and development expenses principally consist of personnel costs, including wages, benefits and share-based compensation, related to our research and development staff in support of product discovery and development activities. Research and development expenses also include costs incurred for laboratory supplies, field trials and toxicology tests, quality control assessment, consultants and facility and related overhead costs. We have received grants and funding for our research from federal governmental entities. We recognize amounts under these grants as an offset to our overall research and development expenses as services under the grant are performed. These grant offsets totaled $0.2 million for each of the years ended December 31, 2012 and 2011, and there were no grants for the three months ended March 31, 2013.

We expect to increase our investments in research and development by hiring additional research and development staff, increasing the number of third-party field trials and toxicology tests for developing additional products and expanding uses for existing products. As a result, we expect that our research and development expenses will increase in absolute dollars for the foreseeable future. As our sales increase, we expect our research and development expenses to decrease as a percentage of total revenues, although, we could experience quarterly fluctuations.

 

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Non-Cash Charge Associated with a Convertible Note

In December 2012, we issued a $12.5 million convertible note to Syngenta Ventures Pte. LTD., an affiliate of one of our distributors, and incurred charges of $3.9 million representing the excess of the estimated fair value of the convertible note on the date of issuance compared to the cash received. Because the holder of this convertible note is an affiliate of one of our distributors, we recorded $0.3 million of the charges as a reduction of revenues recognized under our agreements with the affiliated distributor through the date of issuance of the convertible note in December 2012. We recorded the remaining $3.6 million of the charges in operating expenses as a non-recurring non-cash charge associated with a convertible note. See Note 7 in the accompanying audited consolidated financial statements for further discussion.

Selling, General and Administrative

Selling, general and administrative expenses consist primarily of personnel costs, including 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. Our administrative expenses have increased in recent periods in preparation for becoming a public company.

We expect our selling expenses to increase in the near term, both in absolute dollars and as a percent of revenue, particularly as we market and sell new products or product formulations to the marketplace. In the long term, we expect our selling, general and administrative expenses to decline as a percent of revenue. We expect our overall selling, general and administrative expenses to increase in absolute dollars in order to drive product sales, and we will incur significant additional expenses associated with operating as a public company. Such increases may include increased insurance premiums, investor relations expenses, legal and accounting fees associated with the expansion of our business and corporate governance, financial reporting expenses, expenses related to Sarbanes-Oxley and other regulatory compliance obligations. We expect to hire additional personnel, particularly in the area of general and administrative activities to support the growth of the business.

Interest Expense

We recognize interest expense on notes payable, convertible notes and other debt obligations. During 2012, we entered into a $0.5 million term loans and issued $24.1 million in convertible notes and $17.5 million in promissory notes, including a $10 million promissory note paid off prior to its maturity date. Accordingly, our interest expense increased both in absolute terms and as a percentage of revenues. In October 2012, we issued a $2.5 million convertible note, and we incurred $0.2 million of interest expense for the year ended December 31, 2012 as a result of the excess in the $2.7 million estimated fair value of the convertible note on the date of issuance compared to the cash received. Immediately following the completion of this offering, the convertible notes will convert into shares of our common stock. Accordingly, we will cease to incur the interest expense associated with these convertible notes. Please see “—Liquidity and Capital Resources” for a discussion of the term loan, convertible notes and promissory notes.

Interest Income

Interest income consists primarily of interest earned on investments and cash balances. Our interest income will vary each reporting period depending on our average investment and cash balances during the period and market interest rates.

Change in Estimated Fair Value of Financial Instruments and Deemed Dividend on Convertible Notes

We account for the outstanding warrants exercisable into shares of our Series A, Series B and Series C convertible preferred stock as liability instruments, as the Series A, Series B and Series C convertible preferred stock into which these warrants are convertible upon the occurrence of certain events or transactions. We also account for the outstanding warrants exercisable into a variable number of common shares at a fixed monetary amount as liability instruments. Our convertible notes are recorded at estimated fair value on a recurring basis as the predominant settlement feature of the convertible notes is to settle a fixed monetary amount in a variable number of shares. We adjust the warrants and the convertible notes to fair value at each reporting period with the change in estimated fair value recorded in the consolidated statements of operations. See “—Critical Accounting Policies” for further detail.

 

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Based on our operating performance (including the closing of several debt financings) and the increased likelihood of completing an initial public offering or a merger between April 18, 2012 (the issuance date of the warrants to purchase shares of Series C convertible preferred stock) and December 31, 2012, the estimated fair value of the warrant liability increased by $1.6 million, which was recognized as a loss in the change in estimated fair value of financial instruments for the year ended December 31, 2012. There were no material changes to the estimated fair value of warrants for the three months ended March 31, 2013.

We issued $24.1 million in convertible notes during the year ended December 31, 2012. Based on our operating performance and the increased likelihood of completing an initial public offering or a merger between the issuance dates of these convertible notes and the respective fiscal period ends, we recognized a loss due to the change in estimated fair value of financial instruments of $10.9 million and $3.5 million for the year ended December 31, 2012 and for the three months ended March 31, 2013, respectively. In addition to the ongoing adjustments to the estimated fair value of our convertible notes, we also recognized a one-time deemed dividend in connection with the issuance of certain convertible notes to preferred shareholders because we estimated the fair value of the convertible notes as of the issuance dates to be $11.1 million whereas we received cash proceeds of $9.1 million. Accordingly, we determined that the $2.0 million excess of the estimated fair value of the convertible notes on the dates of issuance over cash proceeds to us represents a deemed dividend to preferred stockholders, and this amount was reflected in the net loss attributable to common stockholders during the year ended December 31, 2012.

We do not expect any adjustments relating to these warrants and convertible notes to continue upon the completion of this offering because the Series A and Series B convertible preferred stock warrants, the common stock warrants and the convertible notes will automatically convert into common stock in accordance with their terms at such time, and the Series C convertible preferred stock warrants will, if not otherwise exercised, automatically convert into warrants to purchase common stock.

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, 2013, 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 United States deferred tax assets.

As of March 31, 2013, we had net operating loss carry-forwards for federal income tax reporting purposes of $56.4 million, which begin to expire in 2026, and state net operating loss carry-forwards of $54.7 million, which begin to expire in 2016. Additionally, as of March 31, 2013, we had federal research and development tax credits carry-forwards of $1.0 million, which begin to expire in 2026, and state research and development tax credit carry-forwards of $1.0 million, which have no expiration date.

Federal and state laws impose substantial restrictions on the utilization of net operating loss and tax credit carry-forwards in the event of an “ownership change,” as defined in Section 382 of the U.S. Internal Revenue Code of 1986, as amended. We have completed a Section 382 analysis as of May 1, 2013, and have concluded that $0.5 million in limitations are expected to be placed on these carry-forwards as a result of our previous ownership changes. We have not updated our Section 382 analysis to consider events since May 1, 2013, including the effect of issuing common stock pursuant to this offering, the automatic conversion of all outstanding convertible notes as a result of this offering, and any other related transactions. Our existing net operating loss carry-forwards or credits may be subject to significant limitations due to these events. Our inability to use these net operating loss carry-forwards as a result of the Section 382 limitations could harm our financial condition.

 

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Results of Operations

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

 

 

 

     FISCAL YEAR     THREE MONTHS
ENDED MARCH 31,
 
     2012     2011     2013     2012  
                 (Unaudited)  

Revenues:

        

Product

     97     99     97     98

License

     3        1        3        2   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     100        100        100        100   

Cost of product revenues

     61        41        66        43   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     39        59        34        57   

Operating expenses:

        

Research and development

     178        179        120        137   

Non-cash charge associated with a convertible note

     51                        

Selling, general and administrative

     144        129        104        116   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     373        308        224        253   

Loss from operations

     (334     (249     (190     (196

Other income (expense)

        

Interest income

                            

Interest expense

     (34     (2     (73     (3

Change in estimated fair value of financial instruments

     (175            (131       

Other income (expense)

                            
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (expense), net

     (209     (2     (204     (3
  

 

 

   

 

 

   

 

 

   

 

 

 

Income taxes

                            
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

     (543 )%      (251 )%      (394 )%      (199 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

 

 

Comparison of Three Months Ended March 31, 2013 and 2012

Product Revenues

 

 

 

     THREE MONTHS ENDED
MARCH 31,
 
     2013     2012  
     (Dollars in thousands)  
     (Unaudited)  

Product revenues

   $ 2,649      $ 1,956   

    % of total revenues

     97     98

 

 

Product revenues increased by approximately $0.7 million, or 35%, due to increased acceptance of our products, offset by a negative impact on Regalia sales of unseasonal widespread drought in the three months ended March 31, 2013 compared to same period in 2012.

License Revenues

 

 

 

     THREE MONTHS ENDED
MARCH 31,
 
     2013     2012  
     (Dollars in thousands)  
     (Unaudited)  

License revenues

   $ 81      $ 43   

    % of total revenues

     3     2

 

 

 

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License revenues related to certain strategic collaboration and distribution agreements increased by 88% but do not comprise a significant portion of our total revenues.

Cost of Product Revenues and Gross Profit

 

 

 

     THREE MONTHS ENDED
MARCH 31,
 
     2013     2012  
     (Dollars in thousands)  
     (Unaudited)  

Costs of product revenues

   $ 1,795      $ 860   

    % of total revenues

     66     43

Gross profit

   $ 935      $ 1,139   

    % of total revenues (gross margin)

     34     57

 

 

Our cost of product revenues increased by $0.9 million, or 109%, and our gross margins declined from 57% to 34%, in each case primarily due to an increase in sales of Grandevo products, which have lower gross margins than our Regalia products, and a decrease in sales of Regalia products.

Research and Development

 

 

 

     THREE MONTHS ENDED

MARCH 31,
 
     2013     2012  
     (Dollars in thousands)  
     (Unaudited)  

Research and development

   $ 3,283      $ 2,733   

    % of total revenues

     120     137

 

 

 

Research and development expense increased by $0.6 million, or 20%, attributable primarily to an increase of $0.4 million in employee-related expenses, which consisted primarily of salaries and wages, and $0.2 million in expenses related primarily to outside expenses, fixed expenses and general expenses, which are made up of items such as depreciation, rent and laboratory fees.

Selling, General and Administrative Expenses

 

 

 

     THREE MONTHS ENDED

MARCH 31,
 
     2013     2012  
     (Dollars in thousands)  
     (Unaudited)  

Selling, general and administrative

   $ 2,847      $ 2,322   

    % of total revenues

     104     116

 

 

Selling, general and administrative expenses increased by $0.5 million, or 23%. Of the increase, $0.3 million was employee-related, driven by increased headcount, which primarily related to salaries and wages, and $0.2 million was attributable to outside services such as consulting, accounting and tax fees, as well as other professional services.

 

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Other Expense, Net

 

 

 

     THREE MONTHS ENDED
MARCH 31,
 
     2013     2012  
     (In thousands)  
     (Unaudited)  

Interest income

   $ 1      $ 2   

Interest expense

     (1,985     (56

Change in estimated fair value of financial instruments

     (3,563     (15

Other income (expense)

     (7     1   
  

 

 

   

 

 

 

Total other expense, net

   $ (5,554   $ (68
  

 

 

   

 

 

 

 

 

Interest expense increased primarily as a result of the increased borrowings under notes payable, convertible notes and capital lease agreements.

The change in the estimated fair value of financial instruments was associated with outstanding warrants and convertible notes issued subsequent to March 31, 2012. After such date, we issued $16.1 million in convertible notes, warrants to purchase 600,000 shares of Series C convertible preferred stock and warrants for the issuance of a variable number of shares of common stock based on a fixed monetary amount. See “—Critical Accounting Policies” below for further discussion.

Comparison of Twelve Months Ended December 31, 2012 and 2011

Product Revenues

 

 

 

     FISCAL YEAR  
     2012     2011  
     (Dollars in thousands)  

Product revenues

   $ 6,961      $ 5,194   

    % of total revenues

     97     99

 

 

Product revenues increased by approximately $1.8 million, or 34%, as a result of a $1.9 million increase in Regalia and Grandevo sales, including $0.9 million related to an increase in international sales. Grandevo was introduced in 2011, and the year ended December 31, 2012 represented the first full year of sales of this product. The increased revenues due to sales of Regalia and Grandevo were partially offset by a $0.1 million decrease in sales of our GreenMatch product, which we elected to discontinue marketing in mid-2011 to focus on more attractive opportunities and products.

License Revenues

 

 

 

     FISCAL YEAR  
     2012     2011  
     (Dollars in thousands)  

License revenues

   $ 179      $ 57   

    % of total revenues

     3     1

 

 

License revenues increased by $0.1 million related to certain strategic collaboration and distribution agreements which were in effect for only a portion of 2011.

 

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Cost of Product Revenues and Gross Profit

 

 

 

     FISCAL YEAR  
     2012     2011  
     (Dollars in thousands)  

Costs of product revenues

   $ 4,333      $ 2,172   

    % of total revenues

     61     41

Gross profit

   $ 2,807      $ 3,079   

    % of total revenues (gross margin)

     39     59

 

 

Our cost of product revenues increased by $2.2 million, or 99%, due to a $0.9 million charge in 2012 due to inventory write-off of an early formulation of our Zequanox line of products that was not suitable for sale, and a $1.4 million increase in product costs, consisting of $0.4 million and $0.6 million associated with higher revenues from Regalia and Grandevo, respectively, $0.3 million associated with increased royalties and purchase incentives and $0.1 million of other product costs, primarily associated with Zequanox. These higher product costs were offset by a $0.1 million decrease in GreenMatch product costs.

Gross profit decreased by $0.3 million, or 9%, due primarily to the inventory write-off on Zequanox.

Research and Development

 

 

 

     FISCAL YEAR  
     2012     2011  
     (Dollars in thousands)  

Research and development

   $ 12,741      $ 9,410   

    % of total revenues

     178     179

 

 

Research and development expense increased by $3.3 million, or 35%, attributable to an increase of approximately $1.3 million in direct testing costs, $1.1 million in employee-related expenses driven by increased headcount, $0.2 million in supplies and materials, $0.2 million in fixed expenses primarily related to rent and depreciation, $0.2 million in outside consulting services and $0.3 million in travel expenses and general costs. Our direct testing costs in fiscal year 2012 were primarily driven by testing of Regalia and Zequanox for foreign markets.

Non-Cash Charge Associated with a Convertible Note

 

 

 

     FISCAL YEAR  
     2012     2011  
     (Dollars in thousands)  

Non-cash charge associated with a convertible note

   $ 3,610      $   

    % of total revenues

     51    

 

 

This charge was associated with the issuance of a convertible note during 2012 for which the estimated fair value at the date of issuance was greater than the proceeds received from the convertible note. Because the holder of this convertible note is one of our existing preferred stockholders and is an affiliate of one of our distributors as of the date of issuance, we recorded $0.3 million of the expense as a reduction to the revenues associated with the affiliated distributor from inception through the date of issuance, and the remaining $3.6 million was recorded in operating expenses as a non-recurring non-cash charge associated with a convertible note.

Selling, General and Administrative Expenses

 

 

 

     FISCAL YEAR  
     2012     2011  
     (Dollars in thousands)  

Selling, general and administrative

   $ 10,294      $ 6,793   

    % of total revenues

     144     129

 

 

 

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Selling, general and administrative expenses increased by $3.5 million, or 52%. Of the increase, $2.0 million was employee-related driven by increased headcount, $1.1 million was attributable to marketing and professional services and overhead costs and $0.4 million was travel-related.

Total Other Expense, Net

 

 

 

     FISCAL YEAR  
     2012     2011  
     (In thousands)  

Interest income

   $ 16      $ 22   

Interest expense

     (2,466     (88

Change in estimated fair value of financial instruments

     (12,461     1   

Other income (expense)

     (45     9   
  

 

 

   

 

 

 

Total other expense, net

   $ (14,956   $ (56
  

 

 

   

 

 

 

 

 

Interest income for fiscal year 2012 and fiscal year 2011, consisting primarily of interest on cash and short-term investments, was largely unchanged. Interest expense increased significantly in fiscal year 2012 due to the issuance of new debt totaling $18.0 million and convertible notes totaling $24.1 million.

The change in estimated fair value of financial instruments was associated with outstanding warrants and convertible notes. In fiscal year 2012, we issued $24.1 million in convertible notes, warrants to purchase 600,000 shares of Series C convertible preferred stock and warrants for the issuance of a variable number of shares of common stock based on a fixed monetary amount. We are required to assess the fair value of the outstanding financial instruments at every reporting period. The change in estimated fair value of the financial instruments is the result of the changing probability weighted expected returns associated with the specific financial instrument. See “—Critical Accounting Policies” below for further discussion.

Other expense in 2012 primarily reflects foreign currency transaction expenses incurred during the year.

Seasonality and Quarterly Results

Our sales of individual products are generally expected to be seasonal. For example, we expect that Regalia, a fungicide, will be sold and applied to crops in greater quantity in the second and fourth quarters. These seasonal variations may be especially pronounced because sales of Regalia accounted for 84%, 95%, and 47% of our total revenues in the years ended December 31, 2012 and 2011 and the three months ended March 31, 2013, respectively. As we expand the registration and commercialization of Regalia into the southern hemisphere, where seasonality of sales should be counter cyclical to the northern hemisphere, we expect Regalia’s worldwide sales volatility to decrease over time. In addition, we expect that our sales of Zequanox will be seasonal. Invasive zebra and quagga mussels typically feed and reproduce at water temperatures above 59°F. Treatments to kill these mussels are therefore most effective from June through September in the eastern United States, Canada and Europe and from April through October in the southwestern United States along the mussel-infested lower Colorado River. We expect that until we initiate sales of Zequanox in the southern hemisphere, sales of Zequanox will not be significant during the months of November through March.

However, planting and growing seasons, climatic conditions and other variables on which sales of our products are dependent vary from year to year and quarter to quarter. As a result, we have historically experienced substantial fluctuations in quarterly sales. In particular, weather conditions and natural disasters such as heavy rains, hurricanes, hail, floods, tornadoes, freezing conditions, drought or fire, affect decisions by our distributors, direct customers and end users about the types and amounts of pest management products to purchase and the timing of use of such products. For example, in 2012, the United States experienced nationwide abnormally low rainfall or drought, reducing the incidence of fungal diseases such as mildews, and these conditions have been present in some of our key markets in 2013 as well. We believe these conditions have reduced industry-wide sales of

 

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fungicides in 2012 and 2013 relative to prior years, inhibiting growth in sales of Regalia, a biofungicide. On the other hand, drought may increase the incidence of pest insect infestations, and therefore we believe sales of insecticides, including Grandevo, which we introduced in 2012, are likely to increase if these current drought conditions persist. 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.

The level of seasonality in our business overall is difficult to evaluate as a result of our relatively early stage of development, our relatively limited number of commercialized products, our expansion into new geographical territories, the introduction of new products and the timing of introductions of new formulations and products. It is possible that our business may be more seasonal, or experience seasonality in different periods, than anticipated. For example, if sales of Zequanox become a more significant component of our revenue, the separate seasonal sales cycles could cause further shifts in our quarterly revenue. Other factors may also contribute to the unpredictability of our operating results, including the size and timing of significant distributor transactions, the delay or deferral of use of our products and the fiscal or quarterly budget cycles of our distributors, direct customers and end users. Customers 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. For example, we believe that we experienced higher sales of Regalia in the first quarter of 2011 than in the second as a result of distributors ordering in advance of the application season.

The following tables set forth our unaudited consolidated statements of operations for the first quarter of fiscal year 2013 and for each of the four quarters covering fiscal year 2012 and fiscal year 2011, both in terms of dollars and as a percentage of revenues. The quarterly data have been prepared on the same basis as the audited consolidated financial statements included elsewhere in this prospectus and include all adjustments consisting only of normal recurring adjustments that we consider necessary for a fair presentation of the consolidated financial information set forth below. You should read this information together with our consolidated financial statements and the related notes included elsewhere in this prospectus. Historical results are not necessarily indicative of the operating results expected in future reporting periods.

 

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Fiscal Year 2011:

 

 

 

     MARCH 31,
2011
    JUNE 30,
2011
    SEPTEMBER 30,
2011
    DECEMBER 31,
2011
 
     (In thousands)  
     (Unaudited)  

Revenues:

        

Product

   $ 1,934      $ 1,070      $ 993      $ 1,197   

License

                   13        44   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     1,934        1,070        1,006        1,241   

Cost of product revenues

     777        462        401        532   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     1,157        608        605        709   

Operating expenses:

        

Research and development

     1,641        2,547        2,542        2,680   

Selling, general and administrative

     1,471        1,642        1,699        1,981   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     3,112        4,189        4,241        4,661   
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     (1,955     (3,581     (3,636     (3,952

Other income (expense):

        

Interest income

     1        2        7        12   

Interest expense

     (23     (25     (15     (25

Change in estimated fair value financial instruments

     4        2        (2     (3

Other income, net

     1        2        2        4   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other expense, net

     (17     (19     (8     (12
  

 

 

   

 

 

   

 

 

   

 

 

 

Income taxes

                            
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (1,972   $ (3,600   $ (3,644   $ (3,964
  

 

 

   

 

 

   

 

 

   

 

 

 

 

 

 

 

 

      MARCH 31,
2011
    JUNE 30,
2011
    SEPTEMBER 30,
2011
    DECEMBER 31,
2011
 
     (Unaudited)  

Revenues:

        

Product

     100     100     99     96

License

                   1        4   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     100        100        100        100   

Cost of product revenues

     40        43        40        43   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     60        57        60        57   

Operating expenses:

        

Research and development

     85        238        253        216   

Selling, general and administrative

     76        154        169        160   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     161        392        422        376   
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     (101     (335     (362     (319

Other income (expense):

        

Interest income

                   1        1   

Interest expense

     (1     (2     (1     (1

Change in estimated fair value of financial instruments

            1                 

Other income, net

                            
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other expense, net

     (1     (1              
  

 

 

   

 

 

   

 

 

   

 

 

 

Income taxes

                            
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

     (102 )%      (336 )%      (362 )%      (319 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

 

 

 

 

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Table of Contents

Fiscal Year 2012 and First Quarter of Fiscal Year 2013:

 

 

 

     THREE MONTHS ENDED  
     MARCH 31,
2012
    JUNE 30,
2012
    SEPTEMBER 30,
2012
    DECEMBER 31,
2012
    MARCH 31,
2013
 
     (In thousands)  
     (Unaudited)  
  

Revenues (1):

          

Product

   $ 1,956      $ 1,421      $ 662      $ 2,922      $ 2,649   

License

     43        88        76        (28     81   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     1,999        1,509        738        2,894        2,730   

Cost of product revenues

     860        684        521        2,268        1,795   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     1,139        825        217        626        935   

Operating expenses:

          

Research and development

     2,733        2,415        3,350        4,243        3,283   

Non-cash financing costs associated with a convertible note

                          3,610          

Selling, general and administrative

     2,322        2,166        2,617        3,189        2,847   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     5,055        4,581        5,967        11,042        6,130   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     (3,916     (3,756     (5,750     (10,416     (5,195

Other income (expense):

          

Interest income

     2        4        10               1   

Interest expense

     (56     (601     (593     (1,216     (1,985

Change in estimated fair value of financial instruments (2)

     (15     435        (7,473     (5,408     (3,563

Other income (expense), net

     1        6        4        (56     (7
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other expense, net

     (68     (156     (8,052     (6,680     (5,554
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income taxes

                                   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (3,984   $ (3,912   $ (13,802   $ (17,096   $ (10,749
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

 

 

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     THREE MONTHS ENDED  
     MARCH 31,
2012
    JUNE 30,
2012
    SEPTEMBER 30,
2012
    DECEMBER 31,
2012
    MARCH 31,
2013
 
     (Unaudited)  

Revenues (1):

          

Product

     98     94     90     101     97

License

     2        6        10        (1     3   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     100        100        100        100        100   

Cost of product revenues

     43        45        71        78        66   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     57        55        29        22        34   

Operating expenses:

          

Research and development

     137        160        454        147        120   

Non-cash financing charges associated with a convertible note

                          125          

Selling, general and administrative

     116        143        355        110        104   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     253        303        809        382        224   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     (196     (248     (780     (360     (190

Other income (expense):

          

Interest income

                   1                 

Interest expense

     (3     (40     (80     (42     (73

Change in estimated fair value of financial instruments (2)

            29        (1,013     (187     (131

Other income (expense), net

                   1        (2       
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (expense), net

     (3     (11     (1,091     (231     (204
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income taxes

                                   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

     (199 )%      (259 )%      (1,871 )%      (591 )%      (394 )% 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

(1)   

We also receive payments under strategic collaboration and distribution agreements under which we provide third parties with exclusive development, marketing and distribution rights. These payments are initially classified as deferred revenues and recognized as revenues over the exclusivity period. During the three months ended December 31, 2012, we recorded a reduction of revenue of $0.3 million associated consideration provided to an affiliate of a distributor. Of this, $0.2 million related to product and $0.1 million related to license. Please see Note 2 to our consolidated financial statements for an explanation of the method used to calculate license revenues and Note 7 to our consolidated financial statements related to the reduction of revenues.

(2)   

Refers to the change in fair value of financial instruments. We account for the outstanding warrants exercisable into shares of our Series A, Series B and Series C convertible preferred stock as liability instruments, as the Series A, Series B and Series C convertible preferred stock into which these warrants are convertible upon the occurrence of certain events or transactions. We also account for the outstanding warrants exercisable into a variable number of common shares at a fixed monetary amount as liability instruments. In addition, we account for our convertible notes at estimated fair value. We adjust the warrant instruments and convertible notes to fair value at each reporting period with the change in fair value recorded in the statements of operations. We do not expect these charges to continue after the completion of this offering because the Series A and Series B convertible preferred stock warrants, the common stock warrants and the convertible notes will automatically convert into common stock in accordance with their terms at such time and the Series C convertible preferred stock warrants will, if not otherwise exercised, automatically convert into warrants to purchase common stock. See “Management’s Discussion and Analysis of Financial Conditions and Results of Operations—Key Components of Our Results of Operations—Change in Estimated Fair Value of Financial Instruments and Deemed Dividend, Convertible Notes.”

Liquidity and Capital Resources

From our inception through March 31, 2013, our operations have been financed primarily by net proceeds from the private placements of convertible preferred stock, convertible notes, promissory notes, term loans, as well as proceeds from the sale of our products and payments under strategic collaboration and distribution agreements and government grants. As of March 31, 2013, our cash and cash equivalents totaled $1.8 million. In addition, subsequent to March 31, 2013, as of June 17, 2013, we received gross proceeds of $10.2 in connection with the sale of convertible notes and promissory notes, and entered into a credit facility with a group of lenders under which such lenders have committed to permit us to draw an aggregate of up to $5.0 million (subject to our obtaining

 

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additional commitments from lenders, such amount may be increased to up to $7.0 million). We believe our current cash and cash equivalents and short-term investments, along with the proceeds from this offering and cash from revenues, will be sufficient to satisfy our liquidity requirements for the next 24 months.

Since our inception, we have incurred significant net losses, and, as of March 31, 2013, we had an accumulated deficit of $86.3 million, 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 and higher than anticipated costs incurred in connection with repurposing our manufacturing facility acquired in July 2012. We have certain strategic collaboration and distribution agreements under which we receive payments for the achievement of testing validation, regulatory progress and commercialization events. As of March 31, 2013, we had received an aggregate of $2.4 million in payments under these agreements, and there were up to $4.9 million in payments under these agreements that we could potentially receive if the testing validation, regulatory progress and commercialization events occur.

For the years ended December 31, 2012 and 2011 and the three months ended March 31, 2013, we used $2.8 million, $0.4 million, and $0.4 million, respectively, in cash to fund capital expenditures. In July 2012, we acquired a manufacturing facility, including associated land, property and equipment, located in Bangor, Michigan, for approximately $1.5 million. Our business plan contemplates developing significant internal commercial manufacturing capacity using this facility, and we are repurposing the facility to commence manufacturing our natural pest management and plant health products in the first half of 2013. We currently anticipate that this upgrade and preparation of the facility will require between $5.0 million and $7.0 million of capital expenditures during the nine months ending December 31, 2013. In addition, should we expand our facility to accommodate higher volumes, we anticipate we will need to spend $19.0 million to $21.0 million of additional funds in 2014. We anticipate that these additional expenditures will be in part funded using a portion of the proceeds from this offering.

We had various convertible note and debt arrangements in place as of March 31, 2013, in each case as discussed further in “Description of Certain Indebtedness” and below, consisting of the following (dollars in thousands):

 

 

 

DESCRIPTION

   STATED ANNUAL
INTEREST RATE
    PRINCIPAL AMOUNT
BALANCE (INCLUDING
ACCRUED INTEREST)
    

PAYMENT/MATURITY

Promissory Note (1)

     6.25   $ 13       Monthly/May 2013

Promissory Note (1)

     7.00   $ 231       Monthly/November 2014

Term Loan (1)

     7.00   $ 397       Monthly/April 2016

Convertible Notes (2)

     10.00   $ 9,999       September 2013

Promissory Notes (3)

     12.00   $ 7,500       Monthly  (6)/October 2015

Convertible Note (4)

     12.00   $ 2,639       October 2015

Convertible Note (5)

     10.00   $ 12,903       October 2015

 

 

(1)  

See “—Five Star Bank.”

(2)   

See “—March and October 2012 Convertible Notes.”

(3)  

See “—October 2012 Junior Secured Promissory Notes.”

(4)   

See “—October 2012 Subordinated Convertible Note.”

(5)  

See “—December 2012 Convertible Note.”

(6)   

Monthly payments are interest only until maturity.

 

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Five Star Bank:

We have entered into two promissory notes with Five Star Bank: in May 2008, we entered into a promissory note that we repaid at a rate of approximately $8,000 per month through maturity in May 2013, and in March 2009, we entered into a promissory note that we repay at a rate of approximately $13,000 per month through maturity in November 2014. In addition, in March 2012, we entered into a term loan agreement with Five Star Bank, which replaced our existing revolving line of credit with the bank. Under the term loan agreement, we are obligated to repay the loan at a rate of approximately $12,000 per month through maturity.

Under the terms of the promissory notes and the term loan agreement, all of our outstanding debt to Five Star Bank is secured by all of our inventory, chattel paper, accounts, equipment and general intangibles (excluding certain financed equipment and any intellectual property). Among other things, a payment default with respect to each of the promissory notes and the term loan, as well as other events such as a default under other loans or agreements that would materially affect us, constitute events of default. Upon an event of default, Five Star Bank may declare the entire unpaid principal and interest immediately due and payable.

March and October 2012 Convertible Notes:

From March 2012 through October 2012, we completed the sale of convertible notes in the aggregate principal amount of $9.1 million to 38 existing investors, including certain holders of more than 5% of our capital stock, in a private placement. We are not obligated to pay interest or principal on the convertible notes, but all principal and accrued interest become convertible into a new class of preferred stock at maturity in September 2013, unless the convertible notes have previously converted into other equity securities. The convertible notes and all principal and accrued interest will automatically convert into shares of our common stock upon completion of this offering at a conversion price equal to 70% of the initial public offering price, with respect to $8.1 million in principal of the notes, and 80% of the initial public offering price, with respect to $1.0 million in principal of the notes. Among other things, an acceleration of the maturity of our other indebtedness, if not cured, may result in an event of default.

October 2012 Junior Secured Promissory Notes:

In October 2012, we completed the sale of promissory notes in the aggregate principal amount of $7.5 million to 12 lenders in a private placement. We are only obligated to pay interest on the promissory notes on a monthly basis until maturity, when the remaining interest and all principal become due. Maturity, currently October 2015, may be extended in one year increments for a period of no more than two years. In the event the maturity date is extended, the interest rate increases to 13% in the first year of the extension and the note matures in October 2016, and if extended for an additional year thereafter, the interest rate increases to 14% in the second year of extension and the note matures in October 2017. These promissory notes are secured by a security interest in all of our present and future accounts, chattel paper, commercial tort claims, goods, inventory, equipment, personal property, instruments, investment properties, documents, letter of credit rights, deposit accounts, general intangibles, records, real property, appurtenances and fixtures, tenant improvements and intellectual property, which consists in part of its patents, copyrights and other intangibles.

October 2012 Subordinated Convertible Note:

In October 2012, we completed the sale of a convertible note in the amount of $2.5 million to a lender in a private placement. We are not obligated to pay interest or principal on the convertible note until maturity, when all interest and principal become due. Maturity, currently October 2015, may be extended in one year increments for a period of no more than two years. In the event the maturity date is extended, the interest rate increases from 12% to 13% in the first year of the extension and the notes mature in October 2016, and if extended for an additional year thereafter, the interest rate increases to 14% in the second year of extension and the notes mature in October 2017. The convertible note and all principal and accrued interest will automatically convert into shares of our common stock upon completion of this offering at a conversion price equal to 85% of the initial public offering price.

The convertible note is subordinate to the October 2012 Junior Secured Promissory Notes and is secured by a security interest in all of our present and future accounts, chattel paper, commercial tort claims, goods, inventory, equipment, personal property, instruments, investment properties, documents, letter of credit rights, deposit accounts, general intangibles, records, real property, appurtenances and fixtures, tenant improvements and intellectual property, which consists in part of its patents, copyrights and other intangibles.

 

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Table of Contents

December 2012 Convertible Note:

In December 2012, we completed the sale of a convertible note in the amount of $12.5 million in a private placement to Syngenta Ventures Pte. LTD., a holder of more than 5% of our capital stock. We are not obligated to pay interest or principal on the convertible note until maturity, when all interest and principal become due. Maturity, currently October 2015, may be extended in one year increments for a period of no more than two years. In the event the maturity date is extended, the interest rate increases from 10% to 12% in the first year of the extension and the note matures in October 2016, and if extended for an additional year thereafter, the interest rate increases to 14% in the second year of extension and the note matures in October 2017. The convertible note and all principal and accrued interest will automatically convert into shares of our common stock upon completion of this offering at a conversion price equal to 70% of the initial public offering price.

See also “Description of Certain Indebtedness” for a summary of the material terms of our term loan, promissory notes credit facility and convertible notes outstanding as of June 17, 2013, including those issued subsequent to March 31, 2013.

In addition, on June 13, 2013, we entered into a factoring and security agreement with a third-party that will enable us to sell the entire interest in certain accounts receivable up to $5.0 million. Under the agreement, 15% of the sales proceeds will be held back by the purchaser until collection of such receivables. Upon the sale of the receivable, we will not maintain servicing, but the purchaser may require us to repurchase accounts receivable if (i) the payment is disputed by the account debtor, with the purchaser being under no obligation to determine the bona fides of such dispute, (ii) the account debtor has become insolvent or (iii) upon the effective date of the termination of the agreement. The agreement is secured by all of our personal property and fixtures, and proceeds thereof, including accounts, inventory, equipment and general intangibles other than intellectual property, and the purchaser will retain its security interest in any accounts repurchased by us.

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

 

 

 

     FISCAL YEAR     THREE MONTHS
ENDED

MARCH 31,
2013
 
     2012     2011    
           (In thousands)        
                 (Unaudited)  

Net cash used in operating activities

   $ (22,425   $ (12,425   $ (7,675

Net cash used in investing activities

     (757     (2,423     (432

Net cash provided by (used in) financing activities

     30,973        12,776        (108
  

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

   $ 7,791      $ (2,072   $ (8,215
  

 

 

   

 

 

   

 

 

 

 

 

Cash Flows from Operating Activities

Net cash used in operating activities of $22.4 million during the twelve months ended December 31, 2012 primarily resulted from our net loss of $38.8 million, which included non-cash charges of $12.5 million in connection with a change in fair value of financial instruments, $3.9 million in connection with the issuance of a convertible note, $1.2 million of interest expense, $0.7 million in share-based compensation and $0.6 million in depreciation and amortization. In addition, net cash used in operating activities resulted from net changes in operating assets and liabilities of $2.5 million, primarily due to increases in inventory of $1.6 million, $2.5 million in accounts receivable and $2.1 million in prepaid expenses and other assets, offset by increase of $1.2 million in deferred revenue and $2.6 million in accounts payable, accrued liabilities, and other liabilities.

Net cash used in operating activities of $12.4 million during the twelve months ended December 31, 2011 primarily resulted from our net loss of $13.2 million and increases in inventory of $1.7 million and net increases in prepaid expenses and other assets and other liabilities of $0.6 million. This was offset by $0.5 million in depreciation and amortization expense, $0.3 million in share-based compensation expense, an increase of $0.8 million in deferred revenue, an increase of $0.7 million in accrued liabilities, an increase of $0.4 million in accounts payable and a decrease $0.4 million in accounts receivable.

 

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Net cash used in operating activities of $7.7 million during the three months ended March 31, 2013 primarily resulted from our net loss of $10.7 million and increases of $0.5 million in prepaid expenses and other assets, inventory of $0.5 million, a decrease in deferred revenues of $0.1 million and a decrease of $1.2 million in accounts payable and accrued liabilities. This was offset by $3.6 million in change in fair value of financial instruments, $1.5 million in non-cash interest expense, $0.2 million in share-based compensation expense, and $0.2 million in depreciation and amortization expense.

Cash Flows from Investing Activities

Net cash used in investing activities was $0.8 million during the twelve months ended December 31, 2012, consisting of approximately $2.8 million used for purchase of property, plant and equipment, primarily associated with a manufacturing plant and its subsequent improvement, offset by $2.0 million provided from the maturity of a short term investment.

Net cash used in investing activities was $2.4 million during the twelve months ended December 31, 2011. Of these amounts, we used $0.4 million for the purchases of property and equipment to support growth in our operations. We used $2.0 million in cash for the purchase of short-term investments.

Net cash used by investing activities was $0.4 million during the three months ended March 31, 2013, and was comprised of the purchase of property and equipment to support growth in our operations.

Cash Flows from Financing Activities

Net cash provided by financing activities of $31.0 million during the twelve months ended December 31, 2012 consisted primarily of $24.1 million from the issuance of convertible notes, $17.4 million from the issuance of debt, net of financial costs and $0.5 million in draws on our line of credit, partially offset by $9.1 million transferred from cash to restricted cash as part of our obligations under a debt agreement to repay a then-outstanding note payable and $1.9 million in payments on our line of credit, debt and capital lease obligations.

Net cash provided by financing activities of $12.8 million during the twelve months ended December 31, 2011 consisted primarily of $13.2 million from the issuance of preferred stock and $0.5 million in draws on our line of credit, partially offset by $0.9 million in payments on our line of credit, debt and capital lease obligations.

Net cash used by financing activities of $0.1 million during the three months ended March 31, 2013 consisted primarily of $9.2 million in in payments on our debt and capital lease obligations, $9.1 million of which was funded with restricted cash.

Contractual Obligations

The following is a summary of our contractual obligations as of March 31, 2013:

 

 

 

     TOTAL      2013      2014-2015      2016-2017      2018
AND BEYOND
 
     (In thousands)  
     (Unaudited)  

Operating lease obligations

   $ 947       $ 350       $ 554       $ 43       $   

Debt and capital leases

     8,596         397         8,144         55           

Interest payments relating to debt and capital leases

     2,380         736         1,643         1           
  

 

 

    

 

 

    

 

 

    

 

 

    

Total

   $ 11,923       $ 1,483       $ 10,341       $ 99       $   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

 

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 leases and the interest payments relating thereto include promissory notes and capital lease obligations.

Since March 31, 2013, we have not added any leases that would qualify as operating leases, and there have been no material changes to our contractual obligations except the issuance of $10.2 million of additional debt in April and May 2013. See “Description of Certain Indebtedness.”

 

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Inflation

We believe that inflation has not had a material impact on our results of operations for the years ended December 31, 2012 through 2011 and the three months ended March 31, 2013.

Off-Balance Sheet Arrangements

We have not been involved in any material off-balance sheet arrangements.

Critical Accounting Policies and Estimates

Inventories

Inventories are stated at the lower of cost or market (net of realizable value or replacement cost) and include the cost of material and external labor and manufacturing costs. Cost is determined on the first-in, first-out basis. We provide for inventory reserves when conditions indicate that the selling price may be less than cost due to physical deterioration, obsolescence, changes in price levels, or other factors. Additionally, we provide reserves for excess and slow-moving inventory to its estimated net realizable value. The reserves are based upon estimates about future demand from our customers and distributors and market conditions.

Fair Value of Financial Instruments

Fair value is defined as an exit price that would be received from the sale of an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. A three-tier fair value hierarchy has been established, which prioritizes the inputs used in measuring fair value as follows: Level 1, observable inputs such as quoted prices in active markets; Level 2, inputs other than the quoted prices in active markets that are observable either directly or indirectly; and Level 3, unobservable inputs in which there is little or no market data, which requires that we develop our own assumptions. This hierarchy requires the use of observable data, when available, and minimizes the use of unobservable inputs when determining fair value.

We account for the outstanding warrants exercisable into shares of our Series A, Series B and Series C convertible preferred stock as liability instruments, as the Series A, Series B and Series C convertible preferred stock into which these warrants are convertible upon the occurrence of certain events or transactions. We also account for the outstanding warrants exercisable into a variable number of shares of common stock at a fixed monetary amount as liability instruments. Our convertible notes are recorded at estimated fair value on a recurring basis as the predominant settlement feature of the convertible notes is to settle a fixed monetary amount in a variable number of shares. We adjust the warrants and the convertible notes to estimated fair value at each reporting period with the change in estimated fair value recorded in the consolidated statements of operations.

For the year ended December 31, 2011, we estimated the fair value of our financial instruments, including our outstanding warrants, utilizing the option pricing method, which we refer to as the “option method.” The option method treats each class of equity securities as if it were an option to purchase common stock, with an exercise price based on the value of the enterprise and based further on the liquidation preference and rights of the relevant class of equity. While this method relies on certain key assumptions, it is best used when the range of possible future outcomes and the corresponding time frames are highly uncertain.

Starting with fiscal year 2012, due to our closing several debt financings and an initial public offering becoming more probable as we began investing significant time and resources into the initial public offering process, we changed our valuation methodology to estimate the fair value of our financial instruments, including our outstanding warrants and convertible notes, from the option method to the probability weighted expected return method, which we refer to as the “expected return method.” The expected return method analyzes the returns afforded to common equity holders under multiple possible future scenarios. Under the expected return method, share value is based upon the probability-weighted present value of expected future net cash flows (distributions to shareholders) under each of the possible scenarios, giving consideration to the rights and preferences of each share class. This method is most appropriate when the long-term outlook for an enterprise is largely known and multiple possible future scenarios can be reasonably estimated. As the expected return method estimates the fair value of our warrants and convertible notes using unobservable inputs, they are both considered to be Level 3 fair value measurements. Changes in the probability weights and discount rates used in the expected return method valuation model and the estimated time to a liquidity event may have a significant impact on the estimated fair value of the preferred and common stock warrant liabilities and the convertible notes.

 

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Revenue Recognition

We recognize revenues when persuasive evidence of an arrangement exists, delivery and transfer of title has occurred or services have been rendered, the price is fixed or determinable and collectability is reasonably assured, unless contractual obligations, acceptance provisions or other contingencies exist. If such obligations or provisions exist, revenues is recognized after such obligations or provisions are fulfilled or expire.

Product revenues consist of revenues generated from sales to distributors and from sales of our products to direct customers, net of rebates and cash discounts. For sales of products made to distributors, we consider a number of factors in determining whether revenue is recognized upon transfer of title to the distributor, or when payment is received. These factors include, but are not limited to, whether the payment terms offered to the distributor are considered to be non-standard, the distributor history of adhering to the terms of its contractual arrangements with us, whether we have a pattern of granting concessions for the benefit of the distributor and whether there are other conditions that may indicate that the sale to the distributor is not substantive. We currently recognize revenues primarily on the sell-in method with our distributors. Distributors do not have price protection or return rights.

We offer certain product rebates, which are recorded as reductions to product revenues. An accrued liability for these product rebates is recorded at the time the revenues are recorded.

We recognize license revenues pursuant to strategic collaboration and distribution agreements under which we receive fees for the achievement of testing validation, regulatory progress and commercialization events. As these activities and payments are associated with exclusive rights that we provide in connection with strategic collaboration and distribution agreements over the term of the agreements, revenues related to the payments received are deferred and recognized as revenues over the term of the exclusive period of the respective agreement.

During the year ended December 31, 2012, we received payments under these agreements totaling $1.5 million. During the three months ended March 31, 2013, we received no payments under these agreements. For the year ended December 31, 2012 and the three months ended March 31, 2013, we recognized $0.2 million and $0.1 million, respectively, as license revenues in the consolidated statements of operations from these payments. At December 31, 2012 and March 31, 2013, we had recorded current deferred license revenues of $0.3 million and $0.3 million, respectively, and noncurrent deferred license revenues of $1.7 million and $1.6 million, respectively, related to payments received under these agreements.

Share-Based Compensation

We recognize share-based compensation expense for all stock options made to employees and directors based on estimated fair values.

We estimate the fair value of stock options on the date of grant using an option-pricing model. The value of the portion of the stock options that is ultimately expected to vest is recognized as expense over the requisite service periods using the straight-line method. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

The estimated fair value of options vested during the years ended December 31, 2012 and 2011, and the three months ended March 31, 2013 was $0.5 million, $0.2 million and $0.1 million, respectively. The weighted-average estimated fair value of options granted during the years ended December 31, 2012 and 2011 and the three months ended March 31, 2013 was $1.35, $0.25, and $2.51, respectively. During the years ended December 31, 2012 and 2011 and the three months ended March 31, 2013, we recorded share-based compensation expense of $0.7 million, $0.3 million, and $0.2 million, respectively. As of March 31, 2013, the total share-based compensation expense related to unvested stock options granted to employees under our share-based compensation plans but not yet recognized was $3.3 million. These costs will be amortized to expense on a straight-line basis over a weighted-average remaining term of 3.4 years. We expect that $0.8 million of these compensation costs will be amortized during the remaining nine months ending December 31, 2013.

 

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For purposes of determining our historical share-based compensation expense, we used the Black-Scholes-Merton option-pricing model to calculate the estimated fair value of stock options on the measurement date (generally, the grant date). This model requires inputs for the expected life of the stock option, estimated volatility factor, risk-free interest rate and expected dividend yield. Our estimates of forfeiture rates also affect the amount of aggregate compensation expense. These inputs are subjective and generally require significant judgment. For the years ended December 31, 2012 and 2011 and the three months ended March 31, 2013, we calculated the fair value of stock options granted using the following assumptions:

 

 

 

     FISCAL YEAR     THREE MONTHS
ENDED

MARCH  31,
2013
 
     2012     2011    
                 (Unaudited)  

Expected life (years)

     5.00-6.08        5.00-6.28        7.71   

Estimated volatility factor

     .72-.76        .70        .75   

Risk-free interest rate

     0.74-1.16     0.86-2.40     1.42-1.43

Expected dividend yield

     0     0     0

 

 

Expected Life—Our expected life represents the period that our share-based payment awards are expected to be outstanding. We use the “simplified method” in accordance with Staff Accounting Bulletin (SAB) No. 107, Share-Based Payment, and SAB No. 110, Simplified Method for Plain Vanilla Share Options, to develop the expected term of an employee stock option. Under this approach, the expected term is presumed to be the midpoint between the vesting date and the contractual end of the option grant. During the three months ended March 31, 2013, stock options were granted with an exercise price not equal to the determined fair market value. For these options, we estimated the expected life based on historical data and management’s expectations about exercises and post-vesting termination behavior.

Estimated Volatility Factor—We use the calculated volatility based upon the trading history and calculated volatility of the common stock of comparable but publicly traded agricultural biotechnology companies in determining an estimated volatility factor.

Risk-Free Interest Rate—We base the risk-free interest rate on the implied yield currently available on U.S. Treasury constant-maturity securities with the same or substantially equivalent remaining term.

Expected Dividend Yield—We have not declared dividends nor do we expect to in the foreseeable future. Therefore, a zero value was assumed for the expected dividend yield.

Estimated Forfeitures—When estimating forfeitures, we consider voluntary and involuntary termination behavior and actual option forfeitures.

If in the future we determine that other methods are more reasonable, or other methods for calculating these assumptions are prescribed by authoritative guidance, the fair value calculated for our stock options could change significantly. Higher volatility and longer expected lives result in an increase to share-based compensation expense determined at the grant date. Share-based compensation expense affects our research and development expense and selling, general and administrative expense.

The Black-Scholes-Merton option-pricing model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferrable, characteristics not present in our stock options. Existing valuation models, including the Black-Scholes-Merton option-pricing model, may not provide reliable measures of the fair values of our stock options. Consequently, there is a risk that our estimates of the fair values of our stock options on the grant dates may bear little resemblance to the actual values realized upon exercise. Stock options may expire or otherwise result in zero intrinsic value as compared to the fair values originally estimated on the grant date and reported in our consolidated financial statements. Alternatively, value may be realized from these instruments is significantly higher than the fair values originally estimated on the grant date and reported in our consolidated financial statements.

 

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Income Taxes

We use the asset and liability method of accounting for income taxes. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to the differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. To the extent deferred tax assets cannot be recognized under the preceding criteria, we establish valuation allowances as necessary to reduce deferred tax assets to the amounts expected to be realized. As of December 31, 2012 and 2011 and March 31, 2013, all deferred tax assets were fully offset by a valuation allowance. Realization of deferred tax assets is dependent upon future federal, state and foreign taxable income. Our judgments regarding deferred tax assets may change as we expand into international jurisdictions, due to future market conditions, changes in U.S. or international tax laws and other factors. These changes, if any, may require possible material adjustments to these deferred tax assets, resulting in a reduction in net income or an increase in net loss in the period when such determinations are made.

We recognize liabilities for uncertain tax positions based upon a two-step process. To the extent a tax position does not meet a more-likely-than-not level of certainty, no benefit is recognized in the consolidated financial statements. If a position meets the more-likely-than-not level of certainty, it is recognized in the consolidated financial statements at the largest amount that has a greater than 50% likelihood of being realized upon ultimate settlement. Our policy is to analyze our tax positions taken with respect to all applicable income tax issues for all open tax years (in each respective jurisdiction). As of December 31, 2012 and 2011 and March 31, 2013, we have concluded that no uncertain tax positions were required to be recognized in our consolidated financial statements. It is our practice to recognize interest and penalties related to income tax matters in income tax expense. No amounts were recognized for interest and penalties during the years ended December 31, 2012 and 2011 and the three months ended March 31, 2013.

Significant Factors, Assumptions and Methodologies Used in Determining the Fair Market Value of our Common Stock

Given the absence of a public market for our common stock, the fair values of our common stock underlying stock option grants were estimated by our board of directors, which intended all stock options granted to be exercisable at a price per share not less than the per share fair market value of our common stock underlying those options on the date of grant. Our board of directors estimated the fair value of our common stock utilizing methodologies, approaches and assumptions consistent with the American Institute of Certified Public Accountants Practice Aid, “Valuation of Privately-Held-Company Equity Securities Issued as Compensation,” or the AICPA Practice Aid, based upon several factors, including its consideration of input from management and, beginning in May 2011, reports of a third-party valuation firm, along with other relevant objective and subjective factors it deemed important in each valuation, exercising significant judgment and reflecting the board of directors’ best estimates at the time of each grant. These factors included:

 

  n  

the nature and history of our business;

 

  n  

EPA approvals and introductions of new products;

 

  n  

our operating and financial performance;

 

  n  

general economic conditions and the specific outlook for our industry;

 

  n  

the lack of liquidity and marketability for our common stock;

 

  n  

the market price of companies engaged in the same or similar businesses with equity securities that are publicly traded;

 

  n  

the differences between the terms of our preferred and common stock related to liquidation preferences, conversion rights, dividend rights, voting rights and other features; and

 

  n  

the likelihood of achieving, and timing and pricing with respect to, various exit scenarios, including an initial public offering and sale liquidity events.

In these valuations, our aggregate equity value was estimated first and then allocated to our outstanding classes of equity securities. Aggregate equity value was estimated using a combination of the income approach, which incorporated a discounted cash flow valuation, and the market approach. Until March 2012, the option method was used to allocate our aggregate equity value to the underlying classes of equity securities for all valuations, as discrete exit scenarios were unknown at the time of valuation. An allocation utilizing the option method was performed

 

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because the preferred stockholders are entitled to certain rights and preferences over common stockholders, which resulted in a greater percentage of the aggregate equity value being allocated to the preferred stockholders than common stockholders. In early 2012, we began to significantly increase efforts in preparation for a potential initial public offering. Accordingly, beginning with our March 2012 common stock valuation, we have used an expected return method to allocate our aggregate equity value to the underlying classes of equity securities.

The table below sets forth information regarding stock option grants between January 1, 2012 and the date of this prospectus:

 

 

 

GRANTS BY MONTH

   NUMBER OF
SHARES
     EXERCISE
PRICE ($)
     ESTIMATED
FAIR VALUE OF
COMMON
STOCK ($)
 

January 2012

     75,000         0.45         0.45   

February 2012

     698,080         0.99         0.95   

April 2012

     136,000         2.00         2.00   

May 2012

     115,000         2.00         2.00   

June 2012

     166,000         2.00         2.00   

July 2012

     105,000         2.00         2.00   

August 2012

     79,000         2.00         2.00   

September 2012

     417,000         2.00         2.00   

October 2012

     838,750         3.85         3.85   

November 2012

     72,000         3.85         3.85   

December 2012

     128,000         3.85         3.85   

January 2013

     62,000         4.25         4.25   

February 2013

     48,000         3.37         3.37   

March 2013

     44,000         3.37         3.37   

 

 

The table below sets forth the estimated fair value of our common stock at each valuation date since December 31, 2011:

 

 

 

DATE

   ESTIMATED
FAIR VALUE OF
COMMON  STOCK($)
 

December 31, 2011

     0.45   

March 16, 2012

     0.95   

July 2, 2012

     1.71   

September 30, 2012

     2.53   

December 31, 2012

     3.37   

March 31, 2013

     3.76   

 

 

Valuation as of December 31, 2011

We obtained the assistance of a third-party valuation firm in estimating the fair market value of $0.45 per share of our common stock as of December 31, 2011 using an option method. We first estimated our aggregate equity value of $55 million, based on equal weightings of valuations derived from a comparable public company analysis and a discounted cash flow analysis. We then allocated the aggregate equity value to the underlying classes of equity using the option method, estimating a time until liquidity event of one year, a risk-free rate of 0.1% and a volatility input of 55%, applying a 20% adjustment for the lack of marketability of our common stock. The increase in our valuation was due to increased long-term revenues and cash flow projections, as compared to our prior forecasts, as a result of execution of exclusive distribution agreements in the fourth quarter of fiscal 2011 and an increase in revenues from the sale of our Regalia products.

 

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Valuation as of March 16, 2012

We obtained the assistance of a third-party valuation firm in estimating the fair market value of $0.95 per share of our common stock as of March 16, 2012 using a probability-weighted expected return method, under which we estimated the probability of six future scenarios for our business. We utilized the expected return method to estimate the fair value of our common stock as of March 16, 2012 instead of the option method because we believe the probability-weighted expected return method is more appropriate when discrete future scenarios become more certain. The scenarios that we used in the expect return method, and the associated probabilities, consisted of the following: executing an initial public offering prior to December 31, 2012 at a high and a lower valuation (2% and 5% probabilities, respectively), executing an initial public offering prior to December 31, 2013 (30% probability), high and low valuation merger scenarios (35% and 23% probabilities, respectively) and a dissolution scenario (5% probability). The results from the probability-weighted expected return method were then discounted by a 20% marketability discount to determine the fair value of our common stock. The increase in the fair value of our common stock from December 31, 2011 was attributable to a number of factors. During the period from January 1, 2012 through March 16, 2012, an initial public offering scenario became more probable as we began investing significant time and resources into the initial public offering process. In addition, we achieved significant business milestones, including EPA approval of our new formulation of Zequanox, we closed on a substantial portion of our $8.1 million convertible note financing, putting us in an improved capital position, and our board considered the fact that we were proceeding in negotiations with other investors for additional financings, which would support our longer term capital requirements.

In April, May and June 2012, our board of directors determined the fair value of our common stock with input from management and based on prior third-party valuations up to and including the March 16, 2012 valuation. Based on factors following the date of this valuation, including increased sales, the closing of our $10.0 million promissory note financing and the remainder of our $8.1 million convertible note financing, our anticipation that the EPA would approve a new label for Grandevo (subsequently approved in May 2012), and the commencement of marketing Zequanox, our board of directors determined that our fair value had increased compared to March 16, 2012, and granted options in April, May and June 2012 at an exercise price of $2.00 per share.

Valuation as of July 2, 2012

We obtained the assistance of a third-party valuation firm in estimating the fair value of $1.71 per share of our common stock as of July 2, 2012 using an expected return method, under which we estimated the probability of six future scenarios for our business. The scenarios that we used in the expected return method, and the associated probabilities, consisted of the following: executing an initial public offering in 2012, in early 2013 and in the middle of 2013 (2%, 30% and 20% probabilities, respectively), high and low valuation merger scenarios (20% and 23% probabilities, respectively) and a sale of intellectual property scenario (5% probability). The results from the expected return method were then discounted by a 20% marketability discount to determine the fair value of our common stock. The increase in the third-party valuation of our common stock from March 16, 2012 was attributable to a number of factors. During the period from March 16, 2012 through July 2, 2012, an initial public offering scenario became more probable as we confidentially submitted a draft registration statement to the Securities and Exchange Commission. In addition, we achieved significant business milestones, including receiving the EPA approvals discussed above, the closings of debt financings discussed above, and negotiations with other investors for additional financings, which would support our longer term capital requirements, and progress in negotiations regarding the acquisition of a manufacturing facility.

Although the estimated fair value of our common stock under this expected return scenario was determined as of July 2, 2012 to be $1.71, the report was not available at the time of our July and August 2012 grant dates. Our board of directors therefore decided, based on the March 16, 2012 third-party valuation, the factors discussed above and additional input from management regarding the impact of the closing of the acquisition of our manufacturing facility and commencement of commercial sales of Grandevo to issue options in July and August 2012 with an exercise price of $2.00 per share. In addition, based on these factors, and the July 2, 2012 third party valuation, our board of directors granted options in September 2012 at an exercise price of $2.00 per share.

 

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Valuation as of September 30, 2012

We obtained the assistance of a third-party valuation firm in estimating the fair value of $2.53 per share of our common stock as of September 30, 2012 using an expected return method, under which we estimated the probability of six future scenarios for our business. The scenarios that we used in the expected return method, and the associated probabilities, consisted of the following: executing an initial public offering in 2012, in the latter half of 2013 and in the early in 2014 (2%, 20% and 30% probabilities, respectively), high and low valuation merger scenarios (30% and 15% probabilities, respectively) and a sale of intellectual property scenario (3% probability). The results from the expected return method were then discounted by a 20% marketability discount to determine the fair value of our common stock. The increase in the third-party valuation of our common stock from July 2, 2012 was attributable to a number of factors. During the period from July 2, 2012 through September 30, 2012, we achieved significant business milestones, including the closing of the acquisition of our manufacturing facility and the commencement of commercial sales of Grandevo, as discussed above, as well as the negotiation of term sheets for various debt financings to support our longer term capital requirements and the submission of a first amended confidential draft registration statement to the Securities and Exchange Commission.

In October, November and December 2012, our board of directors determined the fair value of our common stock with input from management and based on prior third-party valuations up to and including the September 30, 2012 valuation. Based on factors following the date of this valuation, including the closing of $3.5 million of convertible notes and $7.5 million of promissory notes during October 2012 and the negotiation of term sheets for an additional $12.5 million in financing, our board of directors determined that our fair value had increased compared to September 30, 2012, and granted options in October, November and December 2012 at an exercise price of $3.85 per share.

Valuation as of December 31, 2012

We obtained the assistance of a third-party valuation firm in estimating the fair value of $3.37 per share of our common stock as of December 31, 2012 using an expected return method, under which we estimated the probability of six future scenarios for our business. The scenarios that we used in the expected return method, and the associated probabilities, consisted of the following: executing an initial public offering in the first half of 2013, in the latter half of 2013 and in the early in 2014 (2%, 20% and 30% probabilities, respectively), high and low valuation merger scenarios (30% and 15% probabilities, respectively) and a sale of intellectual property scenario (3% probability). The results from the expected return method were then discounted by an 18% marketability discount to determine the fair value of our common stock. The increase in the third-party valuation of our common stock from September 30, 2012 was attributable to a number of factors. During the period from September 30, 2012 through December 31, 2012, we achieved significant business milestones, including the closing of $23.5 million of debt financing to support our longer term capital requirements as discussed above, as well as above-plan sales during the fourth quarter of fiscal 2012 and the submission of a second amended confidential draft registration statement to the Securities and Exchange Commission.

Although the estimated fair value of our common stock under this expected return scenario was determined as of December 31, 2012 to be $3.37, the report was not available at the time of our January 2013 grant dates. Our board of directors therefore decided, based on the September 30, 2012 third-party valuation and additional input from management regarding the business milestones achieved subsequent to September 30, 2012, discussed above to issue options in January 2013 with an exercise price of $4.25 per share. In addition, based on these factors but also including their review of the December 31, 2012 third party valuation, our board of directors granted options in February and March 2013 at an exercise price of $3.37 per share.

Valuation as of March 31, 2012

We obtained the assistance of a third-party valuation firm in estimating the fair value of $3.76 per share of our common stock as of March 31, 2013 using an expected return method, under which we estimated the probability of six future scenarios for our business. The scenarios that we used in the expected return method, and the associated probabilities, consisted of the following: executing an initial public offering in the first half of 2013, in the latter half of 2013 and in the early in 2014 (30%, 20% and 30% probabilities, respectively), high and low valuation merger scenarios (2% and 15% probabilities, respectively) and a sale of intellectual property scenario (3%

 

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probability). The results from the expected return method were then discounted by 18% marketability discount to determine the fair value of our common stock.

Quantitative and Qualitative Disclosures about Market Risk

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

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

Interest Rate Risk

We had cash and cash equivalents of $10.0 million at December 31, 2012, which was held for working capital purposes. We do not enter into investments for trading or speculative purposes. We do not have any variable debt and a 10% change in market interest rates will not have a significant impact on our future interest expense.

Foreign Currency Risk

Revenue and expenses have been primarily denominated in U.S. dollars and foreign currency fluctuations have not had a significant impact on our historical results of operations. In addition, our strategic collaboration and distribution agreements for current products provide for payments in U.S. dollars. As we market new products internationally, our product revenues and expenses may be in currencies other than U.S. dollars, and accordingly, foreign currency fluctuations may have a greater impact on our financial position and operating results.

Commodity Risk

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

Recently Issued Accounting Pronouncements

In May 2011, the Financial Accounting Standards Board (“FASB”) issued additional guidance on fair value disclosures. This guidance contains certain updates to the measurement guidance as well as enhanced disclosure requirements. The most significant change in disclosures is an expansion of the information required for “Level 3” measurements including enhanced disclosure for: (1) the valuation processes used by the reporting entity; and (2) the sensitivity of the fair value measurement to changes in unobservable inputs and the interrelationships between those unobservable inputs, if any. This guidance is effective for interim and annual periods beginning on or after December 15, 2011, with early adoption prohibited. We adopted this guidance for fiscal year 2012 and have enhanced our fair value disclosures in Note 2 to our consolidated financial statements.

In September 2011, the FASB issued guidance on the presentation of comprehensive income. This guidance eliminates the current option to report other comprehensive income and its components in the statement of changes in equity. The guidance allows two presentation alternatives: (1) present items of net income and other comprehensive income in one continuous statement, referred to as the statement of comprehensive income; or (2) in two separate, but consecutive, statements of net income and other comprehensive income. This guidance is effective for annual periods beginning after December 15, 2011 and interim periods within that year. Early adoption is permitted, but full retrospective application is required under both sets of accounting standards. The guidance also previously required the presentation of adjustments for items that are reclassified from other comprehensive income to net income in the statement where the components of net income and the components of other comprehensive income are presented; however, this portion of the guidance has been deferred. We adopted this guidance for fiscal year 2012 and have presented the net income and other comprehensive income in two separate consecutive statements.

 

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BUSINESS

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. We target the major markets that use conventional chemical pesticides, including certain agricultural and water markets, where our bio-based products are used as substitutes for, or in conjunction with, conventional chemical pesticides. We also target new markets for which there are no available conventional chemical pesticides, the use of conventional chemical products may not be desirable or permissible because of health and environmental concerns or the development of pest resistance has reduced the efficacy of conventional chemical pesticides. All of our current products are EPA-approved and registered as “biopesticides.” We believe our current portfolio of products and our pipeline address the growing global demand for effective, efficient and environmentally responsible products.

Our products currently target two core end markets: crop protection and water treatment. Crop protection products consist of herbicides (for weed control), fungicides (for plant disease control), nematicides (for parasitic roundworm control), insecticides (for insect and mite killers) and plant growth regulators that growers use to increase crop yields, improve plant health, manage pest resistance and reduce chemical residues. Our products can be used in both conventional and organic crop production. We currently sell our crop protection product lines, Regalia, for plant disease control and plant health, and Grandevo, for insect and mite control, to growers of specialty crops such as grapes, citrus, tomatoes, vegetables, nuts, leafy greens and ornamental plants. We have also initiated targeted sales of Regalia for large-acre row crops such as corn, cotton and soybeans. Water treatment products target invasive water pests across a broad range of applications, including hydroelectric and thermoelectric power generation, industrial applications, drinking water, aquaculture, irrigation and recreation. Our current water treatment product line, Zequanox, which we began selling in the second half of 2012, selectively kills invasive mussels that cause significant infrastructure and ecological damage.

In addition to our current two core end markets, we are also taking steps through strategic collaborations to commercialize products for other non-crop pest management markets. These products will be different formulations of our crop protection products that are specifically targeted for industrial and institutional, turf and ornamental, home and garden and animal health uses such as controlling grubs, cockroaches, flies and mosquitoes in and around schools, parks, golf courses and other public-use areas.

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. We believe that our competitive strengths, including our commercially available products, robust pipeline of novel product candidates, proprietary technology and product development process, commercial relationships and industry experience, position us for rapid growth by providing solutions for these global trends.

Industry Overview

Pest management is an important global industry. Most of the markets we currently target or plan to target primarily rely on conventional chemical pesticides, supplemented in certain agricultural markets by the use of genetically modified crops. Conventional chemical pesticides are generally synthetic materials that directly kill or inactivate pests. Agranova estimated that global agrichemical sales for the crop protection market were $50.0 billion in 2012, which represented an increase of 8.2% from 2011. Agrow estimated that the global non-crop market for pesticides was $21.0 billion in 2009. The market for treatment of fruits and vegetables, the largest current users of bio-based pest management and plant health products, accounted for $16.2 billion of this total. Other agricultural applications, notably crops such as corn, soybeans, rice, cotton and cereals, which we expect will become increasingly important users of bio-based products, accounted for $24.7 billion of the total.

Demand for effective and environmentally responsible bio-based products for crop protection and water treatment continues to increase. The global market for biopesticides, which control pests by non-toxic mechanisms such as attracting pests to traps or interfering with their ability to digest food, was valued at $1.6 billion for 2009 and is expected to reach $3.3 billion by 2014, with a 15.6% compound annual growth projected during that period, according to BCC Research, an independent market research firm. In comparison, global agrichemical sales were valued at $42.5 billion for 2010, with a 5.5% compound annual growth projected during the period from 2011

 

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through 2016, according to AgroPages, an independent market research firm. We believe these trends will continue as the benefits of using bio-based pest management and plant health products become more widely known.

Crop Protection

Conventional Production. Growers are constantly challenged to supply the escalating global demand for food, while reducing the negative impact of crop protection practices on consumers, farm workers and the environment. The dominant technologies for crop protection are conventional chemical pesticides and genetically modified crops. Major agrichemical companies have invested billions of dollars to develop genetically modified crops that resist pests or have high tolerance to conventional chemical pesticides. The market for genetically modified crops was estimated at $12 billion in 2011 and is predicted to grow 5% annually through 2015, according to Phillips McDougall, an independent advisory firm. In addition, according to the International Service for the Acquisition of Agri-biotech Applications, a third-party not-for-profit organization, in 2012, 170 million hectares (420 million acres) were planted with genetically modified crops. Soybean, corn and cotton plantings have made the greatest inroads, accounting for 47%, 32% and 15% respectively of genetically modified seeds planted globally, respectively.

Conventional chemical pesticides and genetically modified crops have historically been effective in controlling pests. However, there are increasing challenges facing the use of conventional chemical pesticides such as pest resistance and environmental, consumer and worker safety concerns. Governmental agencies are further pressuring growers by restricting or banning certain forms of conventional chemical pesticide usage, particularly in the European Union, as some conventional chemical pesticide products are being phased out. At the same time, a number of supermarket chains and food processors, key purchasers of specialty fruits, nuts and vegetables, are imposing synthetic chemical residue restrictions, limiting options available to growers close to harvest. Consumers, scientists and environmental groups have also voiced concerns about the unintended effects of genetically modified crops, including pest resistance and contamination of non-genetically modified crops. In response to consumer and environmental group concerns and restrictions by importing countries, several large-scale food purchasers have demanded that their contracted growers supply them only non-genetically modified crops.

These factors are significant market drivers for conventional producers, and their impact is continuing to grow. An increasing number of growers are implementing integrated pest management (IPM) programs that, among other things, combine bio-based pest management products and crop cultivating practices and techniques such as crop rotation, with conventional chemical pesticides and genetically modified crops. Bio-based pest management products are becoming a larger component of IPM programs due in part to the challenges associated with conventional chemical pesticides and genetically modified crops.

Organic Production. Certified organic crops such as food, cotton and ornamental plants, are produced without the use of synthetic chemicals, genetic modification or any other bioengineering or adulteration. As such, organic growers are limited in the number of alternatives for pest management. The U.S. Department of Agriculture, or the USDA, approved national production and labeling standards for organic food marketed in the United States in late 2000. These standards have contributed to the growth of organic food consumption in the United States, and other countries have implemented similar programs. The global market for organic food and beverages is projected to grow to $105 billion by 2015, a 67% increase from 2011, according to the United Nations Environment Program. We believe this growth is primarily driven by concerns about food safety and the adverse environmental effects of conventional chemical pesticides and genetically modified crops. Large food processors and agricultural businesses such as Dole, General Mills, Gerber, H.J. Heinz and Kellogg have developed products aimed at organic food consumers. Major supermarket chains in the United States such as Krogers, Safeway and Wal-Mart and in Europe such as Marks & Spencer, Sainsbury and Tesco offer a wide selection of organic food products.

Water Treatment

Global demand for water treatment products was estimated to be $48 billion in 2012, according to Freedonia, and the global market for specialty biocide chemicals for water treatment is projected to be $5.2 billion in 2013, according to BCC Research, an independent market research firm. Invasive and native pest species are increasingly a concern in diverse applications such as hydroelectric and thermoelectric power generation, industrial applications, drinking water, aquaculture, irrigation and recreation. However, discharge of water treatment chemicals to target these pests is highly regulated, and in many cases, such as with management of open waters and sensitive environmental habitats, use of conventional chemicals is prohibited.

 

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One particular area of concern has been the damage caused by invasive zebra and quagga mussels, which clog pipes, disrupt ecosystems, encrust infrastructure and blanket beaches with razor-sharp shells. These species initially infested the Great Lakes region and spread across the United States. Industry reports estimate that these mussels cause approximately $1 billion in damage and associated control costs annually in parts of the United States alone. There are limited treatment options available, many of which are toxic to aquatic flora and fauna. To date, most treatment options have been focused either on manual removal of the mussels, which is time consuming and costly, or conventional chemical treatments, which potentially jeopardize the environment and are thus controlled tightly by regulatory agencies.

The water treatment market also includes products to control algae, aquatic weeds and unwanted microorganisms. For example, one of the most effective and popular methods for controlling algae and unwanted microorganisms is chlorination. One of the major concerns in using chlorination in surface water supplies is that chlorine combines with various organic compounds to form by-products, some of which are considered possible carcinogens.

Other Target Markets

Although conventional chemical pesticides have traditionally serviced the industrial and institutional, professional turf and ornamental, home and garden and animal health markets, governmental regulations are restricting their use, and reports indicate that end users increasingly value environmentally friendly products; with some households willing to forego pest control treatments entirely if alternatives to conventional chemical pesticides are not available.

Industrial and Institutional. Significant amounts are spent annually worldwide on conventional chemical pesticide products to control pests such as cockroaches, flies and mosquitoes in the institutional market, including in and around schools, parks, golf courses and other public-use areas.

Professional Turf and Ornamental. Manufacturer sales of pesticides for use on turf and ornamental plants in the United States rose by 4.9% to $737 million in 2012, continuing a 3.1% sales growth trend for 2011, according to Specialty Products Consultants. Insecticides and pre-emergence herbicides were the fastest growing product category within this market. Historically, nearly half of sales for this market have been fungicides, herbicides, insecticides and plant growth regulators for use in golf courses.

Home and Garden. U.S. demand for home and garden pesticides is projected to be $1.7 billion in 2013, according to The Freedonia Group. The number of U.S. households that use only all-natural or organic fertilizer, insect controls and weed controls increased from an estimated 5 million households in 2004 to 12 million in 2008, according to the National Gardening Association. We believe this trend reflects the increasing importance people attribute today to maintaining lawns and gardens in an environmentally friendly way.

Animal Health. Homes with pets and producers of livestock such as cattle, swine and poultry use pest management products to control fleas, ticks and other pests and parasites.

Benefits of Bio-Based Pest Management

While conventional chemical pesticides are often effective in controlling pests, some of these chemicals are acutely toxic, some are suspected carcinogens and some can have other harmful effects on the environment and other animals. Health and environmental concerns have prompted stricter legislation around the use of conventional chemical pesticides, particularly in Europe, where the use of some highly toxic or endocrine-disrupting chemical pesticides is banned or severely limited and the importation of produce is subject to strict regulatory standards on pesticide residues. In addition, the European Union has passed the Sustainable Use Directive, which requires EU-member countries to reduce the use of conventional chemical pesticides and to use alternative pest management methods, including bio-based pest management products. Over the past two decades, U.S. regulatory agencies have also developed stricter standards and regulations. Furthermore, a growing shift in consumer preference towards organic and sustainable food production has led many large, global food retailers to require their supply chains to implement these practices, including the use of bio-based pest management and fertilizer solutions, water and energy efficiency practices, and localized food product sourcing. For example, in 2010, Wal-Mart announced its global sustainable agriculture goals to require sustainable best practices throughout its global food supply chain.

Aside from the health and environmental concerns, conventional chemical pesticide users face additional challenges such as pest resistance and reduced worker productivity, as workers may not return to the fields for a certain period

 

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of time after treatment. Similar risks and hazards are also prevalent in the water treatment market, as chlorine and other chemicals used to control invasive water pests contaminate and endanger natural waterways. Costs of using conventional chemical pesticides are also increasing due to a number of factors, including raw materials costs such as rising costs of petroleum, stringent regulatory requirements and pest resistance to conventional chemical pesticides, which requires increasing application rates or the use of more expensive substitute products.

As the cost of conventional chemical pesticides increases and the use of conventional chemical pesticides and genetically modified crops meets increased opposition from government agencies and consumers, and the efficacy of bio-based pest management products becomes more widely recognized among growers, bio-based pest management products are gaining popularity and represent a strong growth sector within the market for pest management technologies. Growers are increasingly incorporating bio-based pest management products into IPM programs, and bio-based pest management products help create the type of sustainable agriculture programs that growers and food companies increasingly emphasize.

Bio-based pest management products include biopesticides, as well as minerals such as copper and sulfur. The EPA registers biopesticides in two major categories: (1) microbial pesticides, which contain a microorganism such as a bacterium or fungus as the active ingredient; and (2) biochemical pesticides, which are naturally occurring substances such as insect sex pheromones, certain plant extracts and fatty acids.

We believe many bio-based pest management products perform as well as or better than conventional chemical pesticides. When used in alternation or in spray tank mixtures with conventional chemical pesticides, bio-based pest management products can increase crop yields and quality over chemical-only programs. Agricultural industry reports, as well as our own research, indicate that bio-based pest management products can affect plant physiology and morphology in ways that may improve crop yield and can increase the efficacy of conventional chemical pesticides. In addition, pests rarely develop resistance to bio-based pest management products due to their complex modes of action. Likewise, bio-based pest management products have been shown to extend the product life of conventional chemical pesticides and limit the development of pest resistance, a key issue facing users of conventional chemical pesticides, by eliminating pests that survive conventional chemical pesticide treatments. Most bio-based pest management products are listed for use in organic farming, providing those growers with compelling pest control options to protect yields and quality. Given their generally lower toxicity compared with many conventional chemical pesticides, bio-based pest management products can add flexibility to harvest timing and worker re-entry times and can improve worker safety. Many bio-based pest management products are also exempt from conventional chemical residue tolerances, which are permissible levels of chemical residue at time of harvest set by governmental agencies. Bio-based pest management products may not be subject to restrictions by food retailers and governmental agencies limiting chemical residues on produce, which enables growers to export to wider markets.

In addition to performance attributes, bio-based pest management products registered with the EPA as biopesticides can offer other advantages over conventional chemical pesticides. From an environmental perspective, biopesticides have low toxicity, posing low risk to most non-target organisms, including humans, other mammals, birds, fish and beneficial insects. Biopesticides are biodegradable, resulting in less risk to surface water and groundwater and generally have low air-polluting volatile organic compounds content. Because biopesticides tend to pose fewer risks than conventional pesticides, the EPA offers a more streamlined registration process for these products, which generally requires significantly less toxicological and environmental data and a lower registration fee. As a result, both the time and money required to bring a new product to market are reduced.

Our Solution

Our technology platform produces bio-based pest management and plant health products that are highly effective and generally designed to be compatible with existing pest control equipment and infrastructure. This allows them to be used as substitutes for, or in conjunction with, conventional chemical pesticides, as well as in markets for which there are no available conventional chemical pesticides or the use of conventional chemical products may not be desirable or permissible because of health and environmental concerns. We believe that compared with conventional chemical pesticides, our products:

 

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Are competitive in both price and efficacy;

 

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Provide viable alternatives where conventional chemical pesticides and genetically modified crops are subject to regulatory restrictions;

 

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Comply with market-imposed requirements for pest management programs by food processors and retailers;

 

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Are environmentally friendly;

 

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Meet stringent organic farming requirements;

 

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Improve worker productivity by shortening field re-entry times after spraying and allowing spraying up to the time of harvest;

 

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Are exempt from residue restrictions applicable to conventional chemical pesticides in both the agriculture and water markets; and

 

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Are less likely to result in the development of pest resistance.

In addition, our experience has shown that when our products are used in conjunction with conventional chemical pesticides, they can:

 

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Increase the effectiveness of conventional chemical pesticides while reducing their required application levels;

 

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Increase levels of pest control and consistency of control;

 

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Increase crop yields;

 

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Increase crop quality, including producing crops with higher levels of protein, better taste and color and more attractive flowers; and

 

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Delay the development of pest resistance to conventional chemical pesticides.

We believe that the benefits of our products will encourage sustained adoption by end users. For example, we have seen that growers that have used our products on a trial basis in one year have generally continued to use our products in higher levels in subsequent years.

Our Competitive Strengths

Commercially Available Products. We believe we have one of the leading portfolios of bio-based pest management products. We have three commercially available product lines, Regalia, Grandevo and Zequanox. In conjunction with our progress in solving the issues facing growers of conventional and organic crops, our products aimed at solving pest issues for water treatment provide us with access to several distinct multibillion dollar markets subject to different market forces, diversifying our revenues portfolio.

Robust Pipeline of Novel Product Candidates. Our pipeline of early-stage discoveries and new product candidates extends across a variety of product types for different end markets, including herbicides, fungicides, nematicides, insecticides, algaecides (for algae control), molluscicides (for mussel and snail control) and plant growth regulators. Our product candidates are both developed internally and sourced from third parties. Our research and development process enables us to discover, source and develop multiple products in parallel, which keeps our pipeline robust. For example, we received EPA approval for Opportune, an herbicidal biopesticide, or “bioherbicide,” in April 2012. Venerate, an insecticidal biopesticide, or “bioinsecticide,” and MBI-011, a weed-controlling bioherbicide, have been submitted for EPA registration. These products are still undergoing commercialization, and we have additional product candidates at various other stages of development. In addition, while we expect individual product sales to remain seasonal and impacted by weather as a result of certain of our products being targeted to specific pests and geographic areas, as we develop and commercialize additional product candidates we believe these effects will have a reduced impact on our overall operating results. For example, during periods of hot, dry weather, sales of biofungicides such as Regalia, may decline, but we expect that our revenues may be offset by increased sales of bioinsecticides such as Grandevo.

Rapid and Efficient Development Process. We believe we can develop and commercialize novel and effective products faster and at a lower cost than many other developers of pest management products. For example, we have moved each of Regalia, Grandevo and Zequanox through development, EPA approval and U.S. market launch in approximately four years at a cost of $6 million or less. In comparison, a report from Phillips McDougall shows that the average cost for major agrichemical companies to bring a new crop protection product to market is over $250 million, and these products have historically taken an average of nearly ten years to move through development, regulatory approval and market launch.

 

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Proprietary Discovery Process. Our discovery process allows us to efficiently discover microorganisms and plant extracts that produce or contain compounds that display a high level of pesticidal activity against various pests. We then use various analytical chemistry techniques to identify and characterize the natural product chemistry of the compounds, which we optimize and patent. Our research has shown that on average, major agrichemical companies synthesize approximately 108 thousand chemicals to yield each candidate for crop protection product development. In contrast, with 25 candidates identified for product development, we have identified more than one potential bio-based pest management product for every thousand microorganisms or plant extracts in our database. Three of our product candidates, one of which has been submitted to the EPA, are newly identified microorganism species, two of which produce novel compounds that we have identified and one of which has a novel mode of action that we have identified. Our proprietary discovery process is protected by patents on the microorganisms, their natural product compounds and their uses for pest management, as well as a patent application we have filed on a screening process to identify enzyme-inhibiting herbicides. We also maintain trade secrets related to the discovery, formulation, process development and manufacturing capabilities. By conducting our own discovery as well as working with outside collaborators, we are able to access the broadest range of products for commercialization, giving us an advantage over other natural bio-based pest management companies.

Sourcing and Commercialization Expertise. We use our technical and commercial development expertise to evaluate early-stage discoveries by third parties to determine commercial viability, secure promising technologies through in-licensing and add considerable value to these in-licensed product candidates. Our efficient development process and significant experience in applying natural product chemistry has led universities, corporations and government entities to collaborate with us to develop or commercialize a number of their early-stage discoveries. As with our internally discovered products, early-stage products we source and commercialize are subject to our own patents and trade secrets related to our added value in characterizing, formulating, developing and manufacturing marketable products. For example, we developed an analytical method to measure and characterize the major compounds in the extract we licensed to produce Regalia, and we enhanced these compounds several times in new formulations, providing Regalia with a broader spectrum of activity and better efficacy than the original licensed product.

Existing Agreements with Global Market Leaders. The markets for pest management products are intensely competitive. This has presented a significant challenge for biopesticide companies looking to enter these markets, which are typically dominated by major multinational agrichemical companies with significant resources, brand recognition and established customer bases. To help address this challenge, we have entered into strategic agreements with global market leaders across agricultural and consumer retail markets. For example, we have signed exclusive international distribution agreements for Regalia with Syngenta in Africa, Europe and the Middle East and with FMC in Latin America. We also have a technology evaluation and development agreement with Scotts Miracle-Gro, which grants it a right of first access to the active ingredients in our full portfolio of bio-based pest management and plant health products for use in its consumer lawn and garden products. We believe we will be able to further leverage these distribution channels to gain robust geographic market penetration, particularly in the highly competitive European and Latin American markets, with modest sales and marketing expenditures.

Management Team with Significant Industry Experience. Our management team has deep experience in bio-based pest management products and the broader agriculture industry. Our executive officers and key employees average 28 years of experience and include individuals who have led agrichemical sales and marketing organizations, top scientists and industry experts, some of whom have served in leadership roles at large multinational corporations and governmental agencies, commercialized multiple products, brought multiple products through EPA, state and foreign regulatory processes, filed and received patents, led groundbreaking research studies and published numerous scientific articles.

Our Growth Strategy

Continue to Develop and Commercialize New Products in Both Existing and New Markets. Our goal is to rapidly and efficiently develop, register and commercialize new products each year, with the goal of developing a full suite of pest management and plant health products. For example, while our current crop protection products address plant diseases and insects, we intend to provide products that can also control nematodes and weeds as well as products for improving fertilizer efficiency and reducing drought stress. We are also currently screening for water treatment products that control algae and aquatic weeds to complement Zequanox, our invasive mussel control product line.

 

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Expand Applications of Our Existing Product Lines. Biopesticide products, including our bio-based pest management and plant health products, are generally initially approved for use in a limited number of applications. However, we have identified opportunities to broaden the commercial applications and expand the use of our existing products lines into several key end markets, including large-acre row crop applications, seed treatment, irrigation, aquaculture and animal health. We believe these opportunities could help to drive significant growth for our company.

Accelerate Adoption of New Products, Product Applications and Product Lines. Our goal is to provide growers with complete and effective solutions to a broad range of pest management needs that can be used individually, together and in conjunction with conventional chemical pesticides to maximize yield and quality. We believe we will be able to leverage relationships with existing distributors as well as growers’ positive experiences using our Regalia and Grandevo product lines to accelerate adoption of new products, product applications and product lines. We will also continue to target early adopters of new pest management technologies with controlled product launches and to educate growers and water resource managers about the benefits of bio-based pest management products through on-farm and in-facility demonstrations to accelerate commercial adoption of our products. We believe that these strategies and the strength of our products has led to a recent quarterly adoption rate in U.S. specialty crops for Grandevo that would outpace that of leading chemical insecticides on an annual basis, which our research has shown to be approximately $5.0 million per year on average from 2005 to 2010.

Leverage Existing Distribution Arrangements and Develop New Relationships. To expand the availability of our products, we intend to continue to use relationships with conventional chemical pesticide distributors in the United States and leverage the international distribution capabilities under our existing strategic collaboration and distribution agreements. We intend to form new strategic relationships with other market-leading companies in our target markets and regions to expand the supply of our products globally. For example, we have engaged new distributors to launch Regalia in Canada for specialty crops, in the United States for turf and ornamental plants and in parts of the Midwest United States for row crops. We have also engaged a distributor to launch Grandevo in the United States for turf and ornamental plants.

Develop and Expand Manufacturing Capabilities. We currently use third-party manufacturers to produce our products on a commercial scale. To date, these arrangements have allowed us to focus our time and direct our capital towards discovering and commercializing new product candidates. We are repurposing a manufacturing facility that we purchased in July 2012 and plan to further expand capacity at this facility using a portion of the proceeds from this offering. We believe there are considerable advantages in having our own manufacturing capabilities such as allowing us to better manage scale-up processes and institute process changes more efficiently, protecting our intellectual property and helping to lower our manufacturing costs.

Pursue Strategic Collaborations and Acquisitions. We intend to continue collaborating with chemical manufacturers to develop products that combine our bio-based pest management products with their technologies, delivering more compelling product solutions to growers. We also may pursue acquisition and in-licensing opportunities to gain access to later-stage products and technologies that we believe would be a good strategic fit for our business and would create additional value for our stockholders.

Our Products

We produce both microorganism-based and plant extract-based products. Our technology platform enables us to develop bio-based pest management and plant health products that offer customers an attractive value proposition when compared against conventional chemical pesticide and genetically modified crop alternatives alone. We are focused on producing bio-based products that we sell into the crop protection, water treatment and other target markets. We believe that we should be able to continue to develop products in our product pipeline in a manner consistent with our historical experience. We have historically been able to move our products through development, EPA approval and U.S. market launch in four years or less and at a cost of under $6 million. We currently believe that we can obtain similar results for our other product candidates, such as Opportune, Venerate, MBI-011, MBI-010, MBI-302, MBI-303, MBI-601 and MBI 110, but we cannot assure you that this will be true for each product and that we will not encounter unexpected delays or cost overruns.

Regalia

 

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Biofungicide

 

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Crop Protection: Targets Plant Disease, Improves Plant Health

 

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Commercially Available

 

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Regalia, a plant extract-based fungicidal biopesticide, or “biofungicide,” is EPA-registered for crop and non-crop uses and approved for use on foliage and roots in all states in the United States, including California and Florida, where the majority of the specialty crops are grown. It is also approved for sale in Ecuador (flowers), Mexico (vegetables and grapes), Turkey (covered vegetables) and Canada (tomatoes, grapes, strawberries, cucurbits, ornamental plants and wheat) and Panama (cane, tobacco, rice, coffee, avocado, dried beans, cucurbits, citrus and papaya). University researchers have extensively tested the product against several important plant diseases, especially against mildews. We have also conducted hundreds of trials in the United States and abroad, including four years of crop trials in Europe. The data show that Regalia is an effective addition to a disease management program against a broad range of diseases and can increase yields in crops such as strawberries, tomatoes, potatoes, soybeans and corn.

Regalia is made from an extract of the giant knotweed plant and acts by turning on a plant’s “immune system,” a process called induced systemic resistance. Regalia also enhances the efficacy of major conventional chemical fungicides, and we have filed a patent on this synergism. Regalia is also effective for seed treatment of soybean, corn and cotton, for which we have filed a patent, and we have filed a patent on the effects on root growth and yield when Regalia is applied to the seed or as a root stimulant. For example, in field tests and in actual grower use, Regalia has shown significant yield increases on strawberries, tomatoes, potatoes, soybeans and corn.

We obtained an exclusive license relating to the technology used in our Regalia product line while Regalia was in the process development and formulation stage of product development. In addition to developing the supply chain to commercially market the product, using our natural product chemistry expertise, we developed an analytical method to measure and characterize the major compounds in the plant extract, and we enhanced these compounds several times in new formulations, providing Regalia with a broader spectrum of activity and better efficacy than the original licensed product. In addition, we improved the physical properties of our Regalia formulations and developed four formulations that meet organic farming standards. We have filed several patent applications with respect to these innovations.

We launched Regalia SC, an earlier formulation of Regalia, into the Florida fresh tomatoes market in December 2008. This formulation had a limited label with a few crops and uses on the label and it was not compliant for organic listing. In 2009, we began sales of Regalia in the United Kingdom and Ecuador, and we received a revised, broader label with hundreds of crops for a new organic formulation, which we subsequently launched into the Florida vegetables and Arizona leafy greens markets. In January 2010, we received state approval in California and immediately launched Regalia into the leafy greens and walnuts markets. Key markets include vegetables in the southeast, citrus in Florida, leafy greens and vegetables in California and Arizona, walnuts and stone fruit in California and pome fruit and grapes in California and the Pacific Northwest. In December 2011 and August 2012, we received EPA approval and California regulatory approval, respectively, for an expanded label that includes new soil applications, instructions for yield improvement in corn and soybeans and additional crops and target pathogens. We submitted Regalia for registration in the European Union, which according to our research has recently been the largest fungicide market in the world, and in Brazil, and we received completeness checks with respect to such submissions in March 2012 and May 2012, respectively.

Grandevo

 

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Bioinsecticide

 

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Crop Protection: Targets Insects and Mites

 

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