Business & Real Estate

Davis biotech firm plants seeds of revival after accounting scandal

This is all Pam Marrone has ever wanted to do: Develop natural pesticides and other products to help crops flourish without wrecking the environment. “My life’s work,” she said, more than once, during a recent interview.

Good thing she feels passionate about it. Otherwise she might not have persevered when her young company, Marrone Bio Innovations Inc. of Davis, got hit with an accounting scandal and found itself deserted by investors and customers alike.

“We believe in what we are doing … and this is my life’s mission,” said Marrone, the company’s founder and chief executive. “That’s what kept us going.”

After more than a year of investigations, Marrone said the worst is over. Her former chief operating officer, Hector Absi, was indicted on fraud charges in February for allegedly inflating the company’s revenue. Marrone Bio paid a $1.75 million fine to settle an investigation by the Securities and Exchange Commission. Marrone Bio, having cut its payroll in half to save money, is ready to move forward with a portfolio of promising products designed to protect strawberries, potatoes, grapes and other crops against all manner of insects and bacteria.

“The fundamentals are there,” Marrone said. “I think the company now is stronger than it has ever been.”

The toll has been considerable, though. The company spent $13.5 million on legal fees and other expenses related to the investigation over a two-year period, a substantial sum for a firm with less than $10 million in annual revenue.

“It was very expensive, obviously – astronomically expensive, I would say, for a small company,” Marrone said. The CEO, as part of a settlement with the SEC, personally reimbursed the company $15,234 worth of incentive pay she received during the period when revenue was inflated.

Marrone Bio is still dealing with other effects of the scandal. Its stock price has sunk, closing Wednesday at 82 cents a share, and the company has been warned it could lose its prestigious Nasdaq listing because the total share value fell below the $15 million minimum. Investor class-action lawsuits are pending.

Beyond those lingering issues, Marrone Bio also is still working to regain favor with customers, some of whom left when the troubles hit.

“Competitors took advantage of our distraction, no question,” Marrone said. “We had an almost complete turnover of our sales and marketing (staff). When you have nobody in the field doing the sales, of course your sales are going to drop.”

She said Marrone Bio has been able to recapture some lost business. Revenue actually increased by nearly 8 percent last year, to $9.8 million, despite the cloud over the company.

Marrone Bio, despite a decade in business, is still essentially a startup. Naturally occurring pesticides and fungicides, while increasingly popular, still aren’t mass-market products in the farming business, and the costs of launching new products can be prohibitive. Marrone Bio lost $43.7 million last year, including some of the costs related to the accounting scandal.

Marrone Bio also needs to build back its research and development team, which took the brunt of the downsizing. Some 26 employees work in R&D, about one-third as many as before. All told, the company employs 80 workers, including 10 at a production plant in Michigan.

The cutbacks in R&D and other departments have forced Marrone Bio to slow its efforts to bring new products to market. Some ideas have been put on the back burner. “There’s lots and lots of early-stage (product) candidates there, and someday we’ll get back to those, I’m sure,” Marrone said.

Marrone said the case for “biologicals” – natural pesticides and fungicides – is obvious. Government agencies are cracking down on chemicals, while consumers are increasingly drawn toward organic and sustainably grown foods. “We believe that this is the future,” she said.

Marrone, 59, was raised on a 40-acre farm in southern Connecticut, where she developed a fascination with bugs. She vividly recalls the time her father bought a traditional chemical pesticide to deal with an infestation of gypsy moths.

“It killed everything besides the gypsy moths – lady beetles, lacewings, honeybees – and my mom was furious,” she said.

After earning undergraduate and graduate entomology degrees, Marrone worked for a while in St. Louis and moved to Davis in 1990 to start a biotech subsidary for pharmaceutical maker Novo Nordisk. A few years later, she founded a company called AgraQuest that made environmentally safe pesticides and fungicides.

AgraQuest made Marrone something of a rising star in the Sacramento-area tech community, even if things didn’t end well. Marrone was forced out in a power play by the company’s investors, and she didn’t earn a dime when AgraQuest was sold for a hefty $425 million in 2012 to Bayer CropScience.

By then, her new endeavor was well under way: Marrone Bio.

Like her old company, Marrone Bio is in the business of making eco-friendly farm products. One of its earliest offerings, Grandevo, protects strawberries and other berries against a wide variety of insects. Its Regalia product wards off fungal diseases found in grapes, lettuce and tomatoes.

The company raised $57 million in a 2013 initial public stock offering. It was the Sacramento region’s first IPO in seven years, and validated Marrone Bio’s status as a leader of a small but growing cluster of agricultural-tech companies in the area.

Then disaster struck. In September 2014 the company announced it had launched an in-house investigation of its accounting procedures. While few details were released right away, it was enough to prompt stockholders to dump their shares.

Marrone Bio was left in a kind of financial limbo. It periodically updated investors on the investigation, including the revelation that unidentified employees had secretly given certain outside distributors “inventory protection” that allowed them to return unsold goods. Aside from that, however, Marrone Bio was largely in a silent mode and went more than a year without releasing any quarterly earnings statements.

Finally, last November, the company released financial results, including the findings of its internal probe. The numbers weren’t pretty: In 2013 and the first six months of 2014, revenue had been overstated by a total of $6.7 million.

The full flavor of the scandal unfolded when U.S. prosecutors announced the indictment of Absi in February. A federal grand jury in Sacramento said the former COO, anxious to meet Marrone Bio’s sales goals and fatten his performance bonuses, made a habit of giving outside distributors the right to return products, while keeping the arrangements a secret from the accounting department. As a result, the accountants recorded millions in sales that should have been kept off the books.

Absi has pleaded not guilty to the charges, which could earn him 25 years in prison and a $5 million fine.

Marrone said the indictment, along with the settlement with the SEC, gave employees a sense of “closure” and enabled the company to emerge from its cocoon. Marrone Bio has begun hiring again, albeit slowly. It brought on three new sales people earlier this week, one in Washington state and two in Florida.

During a tour of headquarters with a Sacramento Bee reporter and photographer, Marrone met a new insect technician she hadn’t realized had been hired. Joking that “nobody ever tells me anything,” she said the hiring is one more piece of evidence that Marrone Bio is getting back on track –and headed in the right direction.

“Consumers are driving sustainable food production,” Marrone said. “Governments and regulatory bodies are continuing to restrict chemical pesticides. … This is, I believe firmly, the future.”

Dale Kasler: 916-321-1066, @dakasler

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