As management stated on the conference call, “This is by no means a cheap acquisition.” However, given Marrone Bio’s attractive fundamental attributes (strong position in of biological crop protection & plant health, R&D capabilities, fast-growing top-line growth, high gross margin and nearing adjusted EBITDA nearing breakeven), the price is reasonable for a strategic investment.

Overview of Marrone Bio Innovations

Marrone Bio Innovations is focused on the growing ag biologics space, a market that includes biopesticides, biostimulants, bionutrients, bio-disinfectants and plant health. The biologics market is the highest growth segment in the agricultural business with an expected CAGR in the 13%-to-18% range, and Marrone’s top-line growth has exceeded the industry’s average.

Marrone Bio’s growth strategy has been building the scope of the company’s biologicals platform to better address the higher growth segments in the biologicals space in order to drive revenue growth. This top-line growth (33%CAGR) was achieved through international expansion, the acquisition of new product lines and the in-house development of next-generation products. Also, Marrone Bio targeted and has achieved an annual gross margin in the high-50% range. Furthermore, adjusted EBITDA has improved to almost the breakeven point.

Bioceres successfully integrated and scaled up Rizobacter after acquiring a majority interest in October 2016. Certain attributes of Rizobacter facilitated its growth under Bioceres, including its agricultural biologic focus, product portfolio with proprietary flagship brands, strong R&D efforts, multiple partnerships, manufacturing capabilities and an extensive distribution network with strong customer relationships. Marrone Bio shares these same attributes, along with a track record of top-line growth and expanding margins.

Strategic Alliance with Rizobacter (a subsidiary of Bioceres Crop Solutions)

On September 15, 2020, Marrone Bio Innovations signed an exclusive agreement with Rizobacter to distribute a foliar fertilizer and plant health technology in Argentina, Uruguay, Paraguay and Bolivia. This strategic alliance created a platform from which Marrone Bio’s specific biologics can be deployed throughout the southern cone of South America, particularly for row crops.

During this collaborative effort, the similarities of corporate culture and shared goals became manifest. Both companies are devoted to sustainable agriculture, and seek growth through new products developed through internal R&D efforts, the global expansion of the company’s distribution network, strategic collaborations and selective acquisitions that add already commercialized products to the company’s portfolio.

Product Portfolio of Marrone Bio Innovations

Through internal R&D, Marrone Bio has commercially launched Regalia (2008), Grandevo (2011), Venerate (2014), Majestene (2015), Haven (2017) Stargus (2017), Zelto (2018), Zequanox (2018) and Pacesetter (2020). The product brands that are the major contributors to the company’s revenues are Regalia, Grandevo and Venerate, along with UBP Seed Treatment, which was acquired through the Pro Farm acquisition.

Regalia

Introduced in 2008, Regalia is a biofungicide that helps control plant disease and increase plant health, and as a result, promotes plant vigor, improves yield and harvest quality. The active ingredient of Regalia is an extract of giant knotweed (Reynoutria sachalinensis), which activates a plants natural defenses.

Grandevo and Venerate

Grandevo and Venerate are broad spectrum, microbial-based bioinsecticides for the control of insects and mites. The active ingredient of Grandevo is the dead bacteria (and cell-associated compounds) of the Chromobacterium subtsugae strain PRAA-T while Venerate is based on heat-killed cells of Burkholderia rinojensis spp. strain A396.

Grandevo affects sucking & chewing insects, flies and mites. Grandevo prompts many species of insects and mites to stop feeding and cease reproduction, thereby inducing death.

Venerate controls a wide variety of chewing & sucking insects, mites, certain weevils and soil dwelling nematodes, such as aphids, leafhoppers, lygus, stink bugs and thrips. Venerate has multiple modes of action: it reduces egg mass formation; it interferes with the molting process between the juvenile and adult stages; it degrades an insect’s exoskeleton; and in the free-living stage, it is toxic when ingested.

Acquired Products (Marrone Bio Innovations)

On September 13, 2019, Marrone Bio Innovations acquired Finland-based Pro Farm Technologies. Pro Farm develops and sells plant bionutrients and growth biostimulants that are based on lignin, a byproduct extracted from the pulp waste stream created during the paper production process. These bionutrients and biostimulants utilize (as its base) organic lignin polymers (in combination with other nutrients in a proprietary process) for both seed treatments and foliar (leaf) treatments. The Pro Farm acquisition included four biological products: two seed treatments (Foramin ST and UBP) and two foliar treatments (Foramin and UPB-110).

On September 9, 2019, Marrone Bio acquired the Jet-Ag® and Jet-Oxide® product lines from Austin Grant, Inc (d/b/a Jet Harvest Solutions). Jet-Ag and Jet-Oxide are broad-spectrum liquid formulations for use as biofungicides (to control fungal mold and bacteria on specialty agricultural and field crops) and as agricultural disinfectants (to sanitize greenhouse surfaces, agricultural equipment & machinery and post-harvest storage facilities as well as to disinfect irrigation systems and drainage ditches). Jet-Oxide is used to treat both raw, unprocessed fruits and vegetables and fruits & vegetables during storage. Jet-Oxide is environmentally friendly since the product biodegrades over time.

Jet-Oxide has been approved for use on non-porous (hard) surfaces, such as metal, plastics and glass, in the food and agricultural industries, such as food and beverage plants, dairies, wineries, breweries, poultry facilities etc. Jet-Oxide is also used in irrigation water systems and wastewater treatment plants. In addition, Jet-Oxide is used for the direct treatment of post-harvest, unprocessed fruit and vegetables to control the growth of microorganisms that can cause decay and spoilage.

2Q FISCAL 2022 RESULTS

Bioceres Crop Solutions generated very strong double-digit top-line growth in the second quarter of fiscal 2022, the fourth consecutive quarter that Bioceres has experienced top-line double-digit growth. Comparable revenues increased 89.3% to approximately $90.3 million from $47.7 million in the second quarter of fiscal 2021, which was depressed due to the severe droughts in Brazil and Argentina. Top-line growth was driven by increased sales of micro-beaded fertilizers, inoculants and seed treatment packs. Also, it appears that a milestone has been achieved with the company’s financial share of joint ventures having turned positive (profitable) in this seasonally strongest quarter (FY2Q) as well as during the prior second strongest quarter (FY4Q).

Four quarters ago, management implemented a new fertilizer pricing structure in order to stimulate sales of micro-bead fertilizer (Crop Nutrition segment) in Argentina. Lower competitive price points have driven increased volume, which has generated revenue growth and increased capacity utilization (and profitability) at the micro-bead fertilizer plant. Also, a supply shortage of nitrogen-based fertilizers and a high commodity price environment have contributed to increased demand for micro-bead fertilizer.

In the second fiscal quarter, adjusted EBITDA increased 37.8% YOY to $19.7 million in the second fiscal quarter versus $14.3 million in the second quarter of the prior fiscal year, primarily driven by increased gross profits from the Crop Nutrition and Seed Product segments.

Adjusted EBITDA (excluding HB4 pre-launch costs) over the trailing 12-month period reached $61.8 million, a 46% increase from a year-ago. The baseline Rizobacter business is financially supporting the HB4 seed roll-outs, which is a unique attribute and a competitive advantage of Bioceres Crop Solutions compared to other Ag- Biologic companies.

Details of Second Quarter of Fiscal 2022 Financial Results

Bioceres Crop Solutions reports financial results where its Argentinean operations are subject to IAS 29, since Argentina’s economy is currently classified as hyperinflationary. Under IAS-29, comparable financial information is provided so that investors can make better informed decisions. In order to adjust nominal cash flows in terms of purchasing power, prior-period accounting line items in the income statement are restated so that they are expressed on the basis of the purchasing power of the hyperinflationary functional currency at the end of the reporting period. In this manner, cash flows are adjusted for the effects of general inflationary price index changes, and investors are provided relevant and comparable information for a company’s operations.

On February 10, 2022, Bioceres Crop Solutions reported financial results for the second quarter of fiscal 2022 ending December 31, 2021. For the third consecutive quarter, management’s new fertilizer pricing structure stimulated sales of micro-bead fertilizer (along with a supply shortage of nitrogen-based fertilizers) and higher seed pack volumes. Consequently, total comparable revenues increased 89.3% to approximately $90.3 million from $47.7 million in the second quarter of fiscal 2021.

Comparable revenues of the Crop Nutrition segment increased 212% to approximately $28.4 million versus $9.1 million in the comparable quarter last year. A catalyst was micro-beaded fertilizer, where management has implemented a new commercial pricing strategy designed to utilize more of the installed operational capacity of 50,000 tonnes. The plant’s utilization rate on a 12-month trailing basis was 61% (30,500 tonnes) and increase from 48% (24,000 tonnes) in the prior sequential fiscal quarter. Inoculant sales also increased as growers continue to adopt high generation of long-life inoculants, which promotes greater microorganism survival and enhanced nitrogen fixation. The segment’s gross margin increased 340 bps from 50.7% to 54.1% due to economies of scale related to a higher capacity utilization rate at the micro-beaded fertilizer plant, the growth of inoculants in high-margin end markets.

In the Crop Protection segment, comparable revenues increased 75.8% to approximately $46.6 million versus $26.5 million in the comparable quarter last year due to increased sales of third-party products; therefore, the segment’s gross margin contracted 1,193 bps from 46.9% to 35.0%, primarily due to this increase in sales of lower-margin third-party products.

In the Seed and integrated products segment, comparable revenues increased 26% from $12.2 million to $15.3 million, primarily due higher seed pack volumes in Europe, United States, Uruguay and Argentina. The segment’s gross margin increased 344 bps from 65.5% to 68.9% due to the growth in seed treatment packs.

The comparable gross profit margin of total comparable revenues compressed 563 basis points from 52.4% in the second fiscal quarter last year to 46.7% in second quarter of fiscal 2022 primarily due to the change of product mix in the Crop Protection segment toward lower-margin third-party products.

Adjusted EBITDA increased 37.8% YOY to $19.7 million in the second fiscal quarter versus $14.3 million in the second quarter of the prior fiscal year, primarily driven by increased gross profits from the Crop Nutrition and Seed Product segments.

For the second fiscal quarter, Bioceres Crop Solutions reported a net profit attributable to equity holders of $3,427,093 (or $0.0808 per diluted share) versus $648,193 million (or $0.0166 per diluted share) in the second fiscal quarter last year. Working capital increased 49.9% to $91.9 million.

Regulatory Import Approval of HB4 Wheat Flour

On November 11, 2021, Bioceres Crop Solutions announced that the members of the Comissão Técnica Nacional de Biossegurança (National Technical Biosafety Commission aka CTNBio) unanimously approved the importation of HB4 drought-tolerant wheat flour for human and animal consumption in Brazil. After thoroughly investigating allergenic and safety concerns, the Commission’s panel unanimously endorsed HB4 wheat’s equivalence to conventional wheat.

The Brazilian approval is a milestone event that should generate major commercial demand for HB4 wheat seeds in Argentina where HB4 wheat was approved for growth and consumption in October 2020. In the Southern Cone, Argentina is the largest wheat producing country, and Brazil is Argentina’s main export market for wheat.

Based on feedback from growers, management estimates that the incremental demand for HB4 wheat should generate additional EBITDA between $15 million and $20 million during FY2024. Management believes the approval creates a market opportunity in the area of 2.3 million hectares, which at current prices would generate revenues in the $190 million to $200 million range. The current seed inventory is derived from the 53,000 hectares of HB4 wheat (which was planted during June and July 2021), which were harvested between November and December. The seed inventory only allows for a limited launch during the May-July 2022 planting season.

HB4 wheat continues to maintain a significant performance contribution as growers have experienced a 49% yield improvement in targeted low productivity environments (see image below). Across all environments, HB4 wheat outperformed non-HB4 varieties with an average 12.8% increase in yield. Even in high yielding environments, 2nd generation varieties of HB4 wheat out-yielded 1st generation varieties by 16%.

HB4 Soy

During the November-December 2021 HB4 soy planting season, the early season plantings were completed as usual; however, the late season plantings were affected by severe drought conditions during December, which impacted the rollout of new HB4 Soy varieties. 100% of the available inventory of top-performance 3rd generation HB4 varieties, which were sourced from the United States, was planted; however, only 60% of the 2nd generation materials were planted. The 1st generation varieties were fully discontinued with existing

inventories sold as grain.

Still Awaiting Regulatory Approval from China for HB4 Soy

The growing seed inventories for HB4 soy are laying the foundation for Bioceres to meaningfully launch HB4 soy in China, once the regulatory approval is granted. The Chinese regulatory authorities did not request any additional information regarding HB4 soy during the second fiscal quarter as they most recently have dealt only with domestic market issues. The HB4 Soy approval process in China was initiated in 2015.

Recent Financings

On December 23, 2021, Rizobacter Argentina S.A. (Bioceres 80%-owned subsidiary) completed a $20.0 million public corporate bond offering in the Argentine capital market. These Series VII 2-year corporate bonds mature in December 2024 with a nominal annual rate of 1.49%. The capital will be used to support working capital needs, build HB4 inventories, help extend the maturities of the company’s debt portfolio and reduce the company’s financing costs.

On September 3, 2021, Rizobacter Argentina S.A. completed a $16.1 million public corporate bond offering in the Argentine capital market. These Series VI bonds were issued in two classes: $12.7 million of 18-month bonds due March 2023 with a nominal annual rate of 3.75% and $3.4 million 3-year bonds due September 2024 with a nominal annual rate of 5.25%. The capital will be used to support working capital needs, extend the maturities of the company’s debt portfolio and reduce the company’s financing costs.

Valuation

For Bioceres Crop Solutions, a reasonable methodology is a discounted cash flow (DCF) model that estimates future cash flows and discounts them by using the cost of capital in order to attain a net present value. Our DCF model is arranged by expected revenue streams from the company’s revenue generating businesses, including those of Marrone Bio Innovations. The model (which applies a 14.5% discount rate and a terminal P/S ratio of 0.53) indicates a NAV share price target of $19.65 per share on a fully diluted basis.

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