Marrone Bio of Davis launches financial probe; stock is hammered

09/03/2014 8:27 AM

09/03/2014 8:31 AM

When a promising but still unproven company stumbles, it usually falls hard. Marrone Bio Innovations Inc., one of the bright lights of the Sacramento-area technology scene, is learning that difficult lesson in a big way.

Barely a year after making its public stock market debut, the respected Davis biotech company stunned investors Wednesday by announcing it has launched an internal probe after uncovering documents that could undermine some of its financial results from 2013.

The stock market was unforgiving. Marrone shares plunged $2.50 to close at $3.15 on the Nasdaq market. It represented a 44 percent drop and erased more than $50 million in the company’s total market value.

In a short press release, the company said the audit committee of its board of directors launched an in-house investigation “after management learned of documents calling into question the recognition of revenue in the fourth quarter of 2013 for an $870,000 transaction.” Because of that issue, the company also said its earnings reports for the first two quarters of 2014 “should no longer be relied upon as being in compliance with generally accepted accounting principles.”

Marrone, a maker of pesticides, gave no additional details. Company founder and Chief Executive Pam Marrone said she couldn’t discuss the matter, adding, “I’m hamstrung by lawyers.”

It was the company’s second unpleasant surprise for shareholders in less than a month. On Aug. 7, Marrone reported a surprising dip in second-quarter revenue, a rare setback for a company that had been growing steadily. The reason was severe weather, which hampered farmers’ planting operations, but investors weren’t pleased and the stock fell $2.56 a share that day.

Experts said investors are less tolerant of a young, relatively unknown company, and the back-to-back hiccups have cost Marrone a good deal of credibility with shareholders.

“Once you lose it, especially early on, it’s hard to get it back,” said Keith Springer of Springer Financial Advisors in Sacramento, referring to a company’s credibility.

Marrone, founded in 2006, has been one of the most well-regarded tech companies in Sacramento. When it completed its initial public stock offering in August 2013, it was the Sacramento area’s first IPO in seven years. Pam Marrone is one of the region’s leading entrepreneurs, and the IPO was a form of vindication. Another biotech company she founded in Davis years earlier was sold for $425 million, but she had left the company already and earned almost nothing from that big sale.

Her new company had made considerable strides in the field of environmentally friendly pesticides and other ag products.

Around Sacramento, “it’s a high-profile company,” said Jim McCarthy, president of Legacy Capital Management Inc. in Roseville. “There’s a lot of local money in this company.”

Marrone went public at $12 a share and peaked at $20 in late October.

Anna Scherbina, an associate management professor at UC Davis, said companies that are forced to revise their quarterly earnings almost always suffer a decline in stock price. But she said the 44 percent one-day decline in Marrone’s share price was far worse than typical.

Young companies “don’t have a track record,” she said. “They don’t have the margin for error.”

At this point, the company hasn’t yet had to revise its earnings. But investors tend to be wary any time a company discloses it might have problems with previously reported financial statements.

“When you start to see issues about accounting ... investors start to run,” McCarthy said.

The company has been on a growth trajectory for most of its young life, although its high startup costs have rendered it consistently unprofitable. In the fourth quarter of last year – the period now being called into question – the company reported a loss of $10 million on revenue of just under $6 million.

In the first six months of this year, Marrone said it lost $20.6 million on revenue of $6.4 million. Particularly distressing to shareholders was the news that revenue actually fell from a year earlier because of the weather problems.

Wednesday’s announcement could bring legal headaches. Within a few hours of the company’s disclosure, three East Coast law firms issued press releases announcing they were examining the possibility of filing class-action lawsuits on behalf of investors.

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