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Edited Transcript of MBII earnings conference call or presentation 14-Aug-17 8:30pm GMT

Q2 2017 Marrone Bio Innovations Inc Earnings Call

Davis Oct 4, 2017 (Thomson StreetEvents) -- Edited Transcript of Marrone Bio Innovations Inc earnings conference call or presentation Monday, August 14, 2017 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* James B. Boyd

Marrone Bio Innovations, Inc. - CFO, Senior VP & Assistant Secretary

* Linda V. Moore

Marrone Bio Innovations, Inc. - Chief Compliance Officer, Senior VP, General Counsel & Secretary

* Pamela G. Marrone

Marrone Bio Innovations, Inc. - Founder, CEO & Director

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Conference Call Participants

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* Michael Brcic

National Securities Corporation - SVP of Investments

* Robert Smith

Center for Performance Investing - Analyst

* Sameer S. Joshi

Rodman & Renshaw Research - Associate

* Tyler Lee Etten

Piper Jaffray Companies, Research Division - Research Analyst

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Presentation

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Operator [1]

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Good day, and welcome to the Marrone Bio Innovations Second Quarter 2017 Earnings Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Linda Moore, General Counsel. Please go ahead.

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Linda V. Moore, Marrone Bio Innovations, Inc. - Chief Compliance Officer, Senior VP, General Counsel & Secretary [2]

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Good afternoon everyone and thank you for joining our call. Before beginning, I would like to remind you that this conference call may contain statements regarding management's expectations, hopes, beliefs, intentions or strategies regarding the future, as well as projections, forecasts, or other characterizations of future events or circumstances. Such statements are based on management's current expectations and beliefs concerning future developments and their potential effects on the company. There can be no assurance that future developments affecting the company will be those that management has anticipated.

Such statements involve a number of risks and uncertainties, some of which are beyond management's control, or other assumptions that may cause actual results or performance to be materially different from those expressed or implied by these statements. Important factors that could cause differences are contained in the reports filed by the company with the Securities and Exchange Commission, including under the heading, risk factors, and elsewhere in the company's annual report on Form 10-K for the 2016 fiscal year and the company's Form 10-Q to be filed for the second quarter of 2017, and in our earnings release posted on the company's website. Should one or more of these risks or uncertainties materialize or should any of management's assumptions prove incorrect, actual results may vary in material respects from those discussed today.

Additionally, the company will be making reference to certain non-GAAP financial measures on this call. The reconciliation of these non-GAAP measures to the most directly comparable GAAP measures can be found in the company's earnings press release published today, which is posted on the Investor Relations website. Any guidance that management may offer on this conference call represents a point in time estimate. The company expressly disclaims any obligation to revise or update any guidance or other forward-looking statements to reflect events or circumstances that may arise after the date of this call.

After our remarks, we will answer your questions.

Now I will turn the call over to our Chief Executive Officer, Pam Marrone. Pam?

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Pamela G. Marrone, Marrone Bio Innovations, Inc. - Founder, CEO & Director [3]

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Thank you, Linda. Good afternoon, and thank you to everyone for joining us. With me today is Jim Boyd, our Chief Financial Officer; and as you just heard Linda Moore, our General Counsel. We've continued our steadfast progress in the second quarter of 2017, and despite some challenges, such as unfavorable weather that reduced the number of sprays typically observed and expected across all of our product line, we managed to grow shipments by 36.1% to $5.7 million, and GAAP revenue by 28.3% to $6.5 million. This marks 7 consecutive quarters of consistent year-over-year growth and solid progress.

In the first half of 2017, we grew product shipments to $12.1 million, a 50.6% increase over the first half of 2016. Similarly, GAAP revenues in the first half of the year grew to $10.6 million, a 37.7% increase over the prior-year period.

So we've built on our momentum, established in 2016, and continue to enjoy above industry average growth for our entire product portfolio. Our efforts to grow revenues in all areas, from existing products to new products, as well as strategic partnerships here in the United States and internationally, are paying off.

Our broad-based growth is due to our portfolio approach to product development, which promotes significant opportunity for each of our products. We believe our brand tagline, Marrone on the acre, which we continue to leverage and expand successfully, reflects our focus on addressing unmet market needs through biological solutions.

But before going further, for those of you who may be new to Marrone Bio Innovations, I would like to take a moment to discuss who we are, what we do, why we are innovation leaders and why it's so very important. Put simply, we develop natural products, commonly called biologicals, for controlling pests and increasing crop yield and quality. Our products are all biologically based and fall into 2 categories under the umbrella of biologicals: one, biopesticides for crop protection; and two, biostimulants for crop enhancement. There are many benefits to growers who implement biologicals as part of their Integrated Pest Management programs, or IPM, whether they are organic, transitioning to organic, or conventional, and spray our products in a tank mix, just like you would with chemicals.

Although our products are often used by organic farmers, conventional farmers who use synthetic chemicals actually account for around 70% of our sales today. So why is that? Well, the benefits are significant, our products can make pest management more effective than programs that use only synthetic chemical pesticides. Implementing biologicals as part of an IPM program, growers can improve yields and quality of their crops, creating a higher return on investment. Pest-resistance, a common problem with synthetic chemicals, is reduced or eliminated, again, increasing return on investment. Our products also do not harm the beneficials such as bees.

Our products are natural and biodegradable, offering environmentally friendly protection; biologicals are generally safe for field workers to handle, so farmers can manage their labor more efficiently as work crews can enter the field more quickly after spraying; biologicals don't leave residues as synthetic chemicals do, which is particularly important for branded food, retail and export markets with very strict MRL, or maximum residue level standards, which have become the industry norm.

Aside from the significant benefits to the growers, there are also major benefits to us as a company, in producing these biological products. Our technology and science-based approach has led the way to mainstreaming biologicals. Biologicals have a much lower development cost and time-to-market than a synthetic chemical. As a comparison, synthetic chemicals cost, on average, close to $300 million to develop and also take about 12 years to enter the market.

For a biopesticide, often developed by smaller companies, there is a different capital-light model applied. Today, biologicals cost less than $10 million to develop, and with experienced biological companies like MBI, only take about 4 years to enter the U.S. market. Therefore, in our experienced hands, biologicals can get into the market quickly with early adopter growers who are entrepreneurial and seek new market opportunities. These leading-edge growers give us feedback that in turn helps us shape consecutive versions and associated new uses of the products, which in turn expands the market opportunities.

The global pesticide market is massive, totaling about $55 billion today, and is growing at a compound annual growth rate of about 2%. The newly emerging biological market itself is much smaller, around $3 billion, but it is growing at a compound annual growth rate of about 17%. The biostimulant market, which MBI entered this year with Haven, is growing at about 12% to 15% annually. Marrone Bio is significantly outpacing both of these markets.

Organic is the highest growth segment in food, and there simply are not enough acres to meet the demand. Currently, we are particularly strong in high-value crops such as berries, leafy greens and grapes. However, a large opportunity exists for us to further penetrate other specialty crops, as well as large row crops, such as corn and soybeans, through partnerships with larger players. The size of these opportunities and the partnerships we are building to enter the row crop sector are groundbreaking, compelling and growing.

With that, I'll turn the presentation back to the quarter and discuss some of the highlights within each product category.

As I noted in my opening remarks, we continued to grow in the second quarter, despite a challenging environment. A very wet spring affected the sprays this year all around and cold wet weather in the Pacific Northwest further affected the potato sprays, truncating the application season.

The year-over-year sales decline for a peer group of our comps was about 1.7% this quarter, compared to the 36.1% growth in product shipments we experienced. So again, we're still significantly outpacing the overall industry.

While our overall company headcount remains flat, to further drive sales, we created a new sales territory and hired a territory manager to cover the Southwest, including California's Imperial Valley, Arizona, New Mexico and Texas.

We currently have 5 EPA-approved commercial products and 1 biostimulant product on the market. All of these products, as well as other pipeline products are protected by a strong patent portfolio of over 400 issued and pending patents covering microorganism, natural product chemistry, mixtures, formulations and new uses and new pests.

Our intellectual property is critical to our business and is industry-leading. We do not know of anyone else that has commercialized as many new active ingredients in such a short period of time.

I'd now like to touch on each product specifically. Note that our international strategy is to first focus on countries with intense pesticide sprays and export markets where we can get registrations quickly, while we wait for registrations in larger regions such as Europe and Brazil.

Regalia, the first MBI product to enter the market, is the industry's first effective plant-extracted fungicide and it now has become the recognized standard for biological control of powdery mildew, a major crop disease. This year, Regalia is now being sold into the row crops market as Regalia Rx through our partner Koch Agronomic Services, marketed as a plant health or biostimulant product that significantly increases yields and enhances quality on multiple crops.

Year-over-year, Regalia experienced more than 50% volume growth in California, more than 40% volume growth in the Pacific Northwest, more than 70% volume growth in Florida, and more than 80% in the Great Lakes and Northeast.

In the second quarter, EPA approved a new Regalia 5% master label, which captures new uses for row crops for Regalia Rx, such as cotton, forage grasses, peanuts, as well as some cereal grains and sugar beets. The new label also has small container sizes and easier use instructions for crops related to home and garden uses, as well as cannabis and hemp production, where authorized by state government.

Looking at overseas growth and milestones, key highlights are as follows: Regalia, MBI shipped Reysana to Morocco for use by growers on tomatoes, grapes and cucurbits. Reysana is Regalia's brand name in certain countries and contains the same ingredients as Regalia, which is now marketed and sold in more than 10 countries worldwide.

In Central America trials, the addition of Regalia enhanced existing industry programs for controlling coffee rust. Coffee rust causes $1 billion annually in damage to coffee plants across Latin America and the Caribbean.

In Asia, Regalia is advancing in banana trials in the Philippines, showing good activity against Black Sigatoka, the most serious disease this crop faces globally.

In previous trials in Costa Rica, Regalia, combined with the standard chemical program, increased banana yields by 27%, compared to the standard chemical program alone. Conventional sprays for this disease are 15% to 20% of the cost of bananas at $1,000 per hectare, with 25 to 40 sprays per season.

In Vietnam, MBI's distribution partner has completed initial trials with Regalia, showing a 20% increase in rice yields and a concurrent reduction in discolored and unfilled grain caused by rice neck blast disease. Also in Vietnam, Regalia decreased bacterial canker in citrus trials by more than 70%.

Now turning to Grandevo. Grandevo continues to expand its uses in IPM programs across many fruits and vegetables. This product experienced more than 20% volume growth year-over-year in California. Grandevo is gaining momentum in IPM programs against the dreaded Spotted Wing Drosophila. In insecticide trials in Vietnam, Regalia performed under intense pest pressure, reducing pest populations for control of red mites, thrips and mealybugs on strawberry, pumpkin, custard apple, oranges and dragon fruit. We remain on track to bring the granulation of Grandevo for Grandevo WDG in-house in the fourth quarter. I recently visited our Bangor, Michigan plant to see their work in progress. We also have plans for a packaging line, which we think will improve margins.

Our Davis R&D team has developed improved fermentation and granulation processes that can be implemented in the short and medium-term that also have the potential to reduce Grandevo cost of goods by more than 50%.

Venerate, our second insecticide, which controls a wide spectrum of pests, insects and mites, with a novel but different mode of action than Grandevo experienced more than 150% volume growth in California, close to 40% in Oregon, 400% volume growth in the Southeast, and new usage in the Carolinas. We also saw first sales of our large pack size for in-furrow soil treatment.

In South Africa, a key agricultural market that relies on exports to the EU, both Grandevo and Venerate bioinsecticides have generated positive trial results in citrus. MBI products reduce citrus mite populations more than 96% and offer fruit a comparable level of protection as commonly used chemical products. Both Grandevo and Venerate provided effective control of citrus fruit damage caused by false codling moth. This pest bores into the citrus fruit, making them unmarketable.

In Mexico, both Grandevo and Venerate bioinsecticides have demonstrated effective and reliable control of the Asian citrus psyllid, or ACP, a serious pest that transmits citrus HLB disease. Field trial data supporting the use of these 2 MBI-developed bioinsecticides to control ACP is now being submitted to support label amendments, adding ACP control to existing Grandevo and Venerate registration and labels in Mexico.

Note, both products are already registered in the U.S. for key citrus states for ACP, and we have data from Florida, showing that biological solutions that included Grandevo and Venerate in an organic-only IPM program, or in a Grandevo or Venerate rotation with chemicals, can reduce ACP populations as effectively as the chemical-only programs. ACP has devastated Florida groves and has been recently found in California.

Venerate bioinsecticide used in IPM programs for managing the dreaded coffee berry borer, or Broca, successfully reduced the number of organophosphate insecticide applications, including that of the controversial and increasingly restricted chlorpyrifos by 50% in Central American trials. This program with Venerate reduced boring damage by almost 70%, and was 40% more effective than the chemical-only program. Broca can cause coffee farmers to lose up to 20% of a crop and reduce the crop's marketable price by 30% to 40%.

Now turning to Majestene Bionematicide. Majestene controls roundworms, or nematodes, that feed on the roots of plants and destroy crop yields. Majestene volumes grew by more than 180% year-over-year. In trials in Central America, Majestene reduced burrowing nematodes, the most significant pest of bananas, as well as or better than the organophosphate chlorpyrifos. The burrowing nematode destroys the roots of bananas and plantains, so that the plants are starved of water, nutrients and lack support, causing a 30% to 60% yield loss. The use of Majestene to control nematodes would be a major step forward in reducing exposure risks to pesticide applicators as well.

Now onto R&D advancement. The Davis R&D team has already developed a prototype next-generation Majestene product that substantially amps up nematocidal activity and reduces the field application rate, while increasing gross margin for MBI. They are working to rapidly scale this exciting new process.

Haven is our first non-pesticidal product and is an extract of coconut oil. This product is a sunscreen for crops, reducing sun stress and water loss. We successfully scaled up, manufactured and shipped product in the first and second quarters, targeting crops such as apples, onions and grapes. To fill the grower demand for this product, we had to manufacture approximately 10x more product than we expected. In blackberries, a crop new to Haven, the product did a great job reducing sun damage.

And finally, Zequanox, the industry's only biological solution for invasive mussels and the only low-risk product registered by the EPA for open water use. We've continued working with large companies for both open water and pipe treatment. As discussed last quarter, we received a grant from the Great Lakes Restoration Initiative, which is administrated through the EPA, to do some work in the Great Lakes region for a project called the Round Lake Restoration Project.

In early August, we hosted an information fair at North Central Michigan College in Petoskey, Michigan. The fair highlighted the recent completion of the Round Lake Native Mussel Restoration Research Project, which included applications of Zequanox. There are a significant number of lakes with invasive mussels in the Great Lakes area. And more states are being affected all the time, as these invasive mussels often enter new bodies of water by attaching themselves to boats. The large scale of this global problem could provide rather notable future revenue potential for MBI. As part of the Round Lake Restoration product -- Project, Zequanox was applied in open water to evaluate new application methods against zebra and quagga mussels, as well as its ability to protect native freshwater mussels and other native aquatic species.

The zebra and quagga mussel treatment market is being developed through partnerships with larger companies to help with the distribution for industrial pipe uses and open water treatment.

We also have a pipeline of potential opportunities over the near-term, which I'd like to briefly touch on. First, our MBI-601 product, branded Ennoble, is a biofumigant that is already EPA-approved. We are currently finishing up collecting data from our 2016 California False field trials on strawberries, a crop with the most critical need for alternatives to toxic chemical fumigants. We look forward to announcing the results which thus far show comparable or better marketable yields than the chemical fumigant, which is under increased regulatory pressure for use reduction or elimination in many regions.

MBI-601 also showed good results against the virulent Fusarium Race 4 in celery. We are ramping up the ability to manufacture this project -- product at larger scale for a small targeted commercial release in the fourth quarter of 2017.

Another product in our pipeline is MBI-110, branded Stargus, for specialty crops and amplitude for row crops. 110 controls difficult plant diseases such as white mold, downy mildews and Botrytis gray mold, where there are fewer alternatives. We are on track for EPA registration in the second half of this year, which will be followed by a targeted commercial release.

MBI-014, formerly known as 010, is one of our bioherbicide developments and it is on track for EPA submission later this year. This product addresses the #1 need of organic farming controlling weeds. This product continues to show exciting results against difficult weeds such as the scourge, palmer amaranth, lambsquarter and waterhemp that are resistant to glyphosate and other chemical herbicides.

In addition, we have combined 014 with glyphosate, known commercially as Roundup, and shown the ability to kill weeds that would not be killed by glyphosate alone because they have developed resistance to glyphosate. The Davis MBI R&D team has done an excellent job of developing high-yield, economical fermentation processes and a granular formulation for MBI-014.

I'd also like to highlight our growth in the rapidly growing cannabis industry. MBI's products are impacting cannabis production, through the reduction of toxic chemicals and pesticide residues that are harmful to both the environment and to consumers.

Additionally, the intensity of cannabis production requires heavier use of inputs relative to traditional agriculture, increasing the urgency for growers to switch from toxic chemicals to biologicals. Recently, MBI's products have been added to cannabis-approved listings by several states that have permitted the sale of cannabis and hemp for either medicinal, food, fiber and adult uses.

We continue to work directly with states to ensure universal approvals where cannabis and hemp production are legal. To provide some scale of the market opportunity, a recent study we commissioned from UC Davis Graduate School of Management estimated the cannabis market in just Colorado, Oregon and Washington to be currently $91 million. The study estimates that this pesticide and fertilizer inputs market, including California, due to recent changes in legislation, will grow to $1.4 billion within the next 5 years.

Worth noting, we have sales through a distributor who targets the cannabis market, and that distributor is now one of our top 5 customers. They saw potential of our products for powdery mildew, Botrytis gray mold and mites, and the growers have been nonstop in chat rooms and walk-ins on our customer service line and calling our sales team asking for our products and technical support.

Regalia, Venerate and Grandevo are now sold on Amazon. Our small pack project team continues to drive forward packaging and labels in smaller sizes more appropriate for cannabis and home gardeners where we have pent-up demand.

In conjunction with our internally developed products, we have also become a master distributor for 2 companies, Isagro and Jet Harvest Solutions, and this quarter, their products contributed modestly to our revenue. In May, we announced an agreement with Jet Harvest Solutions to be the master distributor for Jet-Ag, their organic agricultural sanitizer, which controls disease-causing bacteria and fungi. Many farmers already use this product, and Jet-Ag is an excellent tank mix product that combines well with our biofungicide, Regalia, and soon, our second biofungicide MBI-110. We are excited to market a coordinated regime of Grandevo, Venerate and Jet-Ag as an effective solution in the fight against the ongoing invasion of the dreaded Spotted Wing Drosophila.

Similarly, we are a master distributor of Isagro's Bio-tam 2.0. Our local California trials show promising efficacy in celery, lettuce and strawberries. We also have a number of trials and demos for grapevine trunk disease, one of the worst, if not the worst, grape diseases in California and worldwide.

Before going further, I would like now to turn the call over to Jim, to go through the numbers and provide additional detail on our financial performance.

Afterwards, I'll walk you through some of our other strategic initiatives for the remainder of the year before wrapping the call up with Q&A. Jim?

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James B. Boyd, Marrone Bio Innovations, Inc. - CFO, Senior VP & Assistant Secretary [4]

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Thank you, Pam. Good afternoon, everyone. I'd like to walk you through our solid second quarter results. We reported GAAP revenue in the second quarter of $6.5 million, up 28.3% compared to $5 million in the second quarter of last year. Our revenues in the second quarter were negatively impacted due to cold wet weather in key growing areas, which contributed to an absence of pest and a delayed planting season.

Product revenue growth was led by Majestene, then Venerate, Regalia and finally, Grandevo. Sales from Haven launch and contributions from Bio-tam and Jet-Ag altogether were slow -- small, rather, but helped results. Revenue for the first half of 2017 grew 38% to $10.6 million, compared to $7.7 million in the first half of 2016.

Product shipments for the second quarter were $5.7 million, up 36.1% compared to $4.2 million in the second quarter of last year. Product shipments for the first half of 2017 increased 50.6% to $12.1 million, compared to $8.1 million in the first half of 2016. We believe this continued growth illustrates the strength and momentum in our business. Although product shipments were affected by weather this quarter, our first half was strong and we believe we are well-positioned for ongoing growth opportunities.

Our products experienced good growth year-over-year. For example, as Pam mentioned, Majestene's volumes grew 180% year-over-year and 63% quarter-over-quarter. Our new formulation of Grandevo WDG was supply constrained in the second quarter, which is why we are currently installing a granulation line at our Michigan plant. We are expected to be in production of Grandevo WDG later this year.

As a reminder, our GAAP revenue recognition policy requires us to defer some revenue to certain customers on the sell-through revenue recognition method. We do not grant any return rights to these customers and deferred revenues are recognized over time. Cash is collected under normal terms, exactly the same as with our sell-in customers, and is not affected by this revenue recognition methodology.

Now returning to GAAP reporting. Our gross margin in the quarter was 38.8%, an increase compared to the 38.2% gross margin for the second quarter of last year. Gross margins decreased sequentially, primarily due to a higher sales mix of one of our lower margin products.

Operating expenses increased year-over-year from $6.8 million to $7.9 million. Included in our $7.9 million of operating expenses are approximately $1.7 million of noncash expenses.

SG&A in the second quarter increased to $5.1 million, compared to $4.5 million in the same period last year. The increase from last year was largely due to one-time expenses, including consulting and legal fees, our implementation of an Oracle cloud ERP system and the purchase of an electronic data information system, giving us access to data and grower purchases of our products.

R&D costs in the second quarter were $2.9 million, also up relative to $2.3 million in the same quarter of last year. Approximately $300,000 of this increase was in field trial expenses, giving us valuable data to enter new markets.

We remain intensely focused on managing our operating expenses. We expect our operating expenses to remain flat, which we consider sufficient to support our high growth.

Now turning to the balance sheet. Inventory at the end of the second quarter was $8.4 million, as compared to $8 million last year, which we consider adequate to address near-term demand.

At the end of the second quarter, we reported total cash and cash equivalents of $13.2 million, including restricted cash of $3 million. This cash balance includes net proceeds from our last offering of approximately $8.2 million, as well as borrowings under our $7 million working capital line.

Our year-to-date 6-month cash usage from operations was $9.8 million, or an average of $4.9 million per quarter. The $9.8 million represents a 27.4% decrease when compared to the $13.5 million of cash used from operations in the first half of 2016. Second quarter 2017 cash usage from operations was $2.3 million versus $3.8 million for the second quarter of 2018 -- '16 rather, a 40.4% decrease.

I'd now like to turn the call back to Pam for a discussion on some of our initiatives for the remainder of the year.

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Pamela G. Marrone, Marrone Bio Innovations, Inc. - Founder, CEO & Director [5]

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Thanks, Jim. We've made great progress in key strategic goals and operations. First off, we now have 7 consecutive quarters of strong year-over-year product shipment growth. We've also seen exceptional results in international field trials against key pests and diseases, as I described previously.

Next, we continue to focus on those products in our pipeline with the best near-term commercial opportunities, and our R&D expenses continue to reflect a lean but capable organizational structure and a highly targeted R&D approach. Our R&D to date has paid off significantly. For example, R&D has developed a 4x improvement in Grandevo fermentation and approximately -- an approximate 40% improvement in drying cost. So we are fast tracking these benefits into our production process.

With Majestene, R&D has developed improvements that increase the main nematicidal activity 50-fold, and we'll implement this into future production processes as well. These types of improvements have continuing increased gross margins for our existing products. The benefits of this form of R&D can be realized rather rapidly when compared to other R&D projects such as new product development.

We also continue to move forward with our near-term product discussed earlier such as MBI-601 biofumigant, MBI-110 biofungicide and MBI-014 bioherbicide. Albaugh, a major row crop seed treatment provider, had a successful launch of their BIOST seed treatment containing one of our microorganisms. Our collaborations with Evogene and Groundwork BioAg are progressing extremely well. With Evogene, we are testing plants containing insecticidal proteins found from our microorganisms. With Groundwork BioAg, we have large-scale grower demonstration trials with our all-biological seed treatment.

Finally, vertical integration continues to be a key focus of ours as our volumes increase. In 2012, we purchased our own manufacturing facility and have since brought several products in-house such as Regalia, Grandevo and Zequanox. We expect to bring Venerate and Majestene production in-house in the future. Key benefits include controlled intellectual property and flexible and faster scaleup times as well as better margins, cost controls and ROI.

Our facility is rapidly scalable with demand and has ample acreage for drying and warehousing. Potential future additions to the facility include packaging and granulation capabilities, larger fermentation tanks and full-scale drying for granules.

We are achieving short-term goals while building an organization poised for continued success. I'm extremely proud of our entire team for their hard work and execution.

With that, I'd now like to open up the call for questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) We'll take a question from Sameer Joshi with H.C. Wainwright.

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Sameer S. Joshi, Rodman & Renshaw Research - Associate [2]

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So my first question relates to the R&D effort and then increasing your gross margin. Will you be able to quantify what those gross margin improvements are?

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Pamela G. Marrone, Marrone Bio Innovations, Inc. - Founder, CEO & Director [3]

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In the future? I think we will. Like I mentioned in the script, we have a new drying process with Grandevo that reduces the cost of drying by 40%. We have a 4x improvement in potency of the fermentation of Grandevo. And that certainly will translate to gross margin but I didn't say exactly how much. And the Majestene, 50-fold improvement of the nematicidal activity. It will definitely increase gross margin but I haven't quantified that yet.

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Sameer S. Joshi, Rodman & Renshaw Research - Associate [4]

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Okay. So the next question is about the Michigan facility. I know you are going to improve the packaging, the drying and fermentation tank. What is the time line for this? And what is the additional CapEx required?

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James B. Boyd, Marrone Bio Innovations, Inc. - CFO, Senior VP & Assistant Secretary [5]

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Actually, the CapEx is rather modest, a few hundred thousand dollars. We'll be adding granulation for WDG. We'll be adding a packaging line and automated fill line.

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Pamela G. Marrone, Marrone Bio Innovations, Inc. - Founder, CEO & Director [6]

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And the Regalia mix tank.

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James B. Boyd, Marrone Bio Innovations, Inc. - CFO, Senior VP & Assistant Secretary [7]

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We're increasing Regalia capability in the plant to handle increased design. That's about it for the first phase.

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Pamela G. Marrone, Marrone Bio Innovations, Inc. - Founder, CEO & Director [8]

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And the time line, as I mentioned in the call, for the Grandevo granulation will be...

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James B. Boyd, Marrone Bio Innovations, Inc. - CFO, Senior VP & Assistant Secretary [9]

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Before the end of the year.

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Pamela G. Marrone, Marrone Bio Innovations, Inc. - Founder, CEO & Director [10]

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Before the end of the year, yes.

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James B. Boyd, Marrone Bio Innovations, Inc. - CFO, Senior VP & Assistant Secretary [11]

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And beyond that, we're studying further increases in the plant that would have us actually have to expand the building. And we'll probably do that as we get more heavily into Venerate and Majestene production. I'd like to add that those capital expenditures that we're planning in the near term, at least through the balance of this year, will all come from the restricted cash, the loan that we -- the guaranteed loan by the USDA that we got last year.

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Sameer S. Joshi, Rodman & Renshaw Research - Associate [12]

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Understood. Just one last one from me. For the Zequanox, were you looking for a U.S. partnership for distribution? What is the status on that?

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Pamela G. Marrone, Marrone Bio Innovations, Inc. - Founder, CEO & Director [13]

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Yes, we are. And yes, we've mentioned that a number of times. And it's going well. So we are in a draft distribution agreement at this time. And they've been observing some of our treatments in power plants. So we're aiming to finish that off.

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Operator [14]

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We'll take our next question from Tyler Etten with Piper Jaffray.

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Tyler Lee Etten, Piper Jaffray Companies, Research Division - Research Analyst [15]

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I had a couple questions here. When we're talking about product shipments being up 56% year-over-year, obviously a nice milestone. I was wondering if you could split out the differences between penetration in previous regions and what shipments are going into the new regions.

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Pamela G. Marrone, Marrone Bio Innovations, Inc. - Founder, CEO & Director [16]

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Okay. So we have continued strong growth in all of our regions. But we've been in California the longest. And despite being in California the longest, we're still increasing quite dramatically in California. Pacific Northwest, we've seen dramatic growth. I would say we had salespeople in the Southeast. So the hiring of the salespeople in the Southeast was not until like April or May of last year. So now we're just starting to see -- I mean, it usually takes some time to see the effect of having the people in place. And so now we're seeing the dramatic contribution of those guys being hired in the Southeast.

So we also added last year, if you recall, a person to Michigan. And that Great Lakes region is turning out to be a really nice -- he's doing a great job. It's going to be a really nice territory for us because of the high amount of fruit and potatoes and other -- and vegetables production there, which has a real great fit for something like Haven. We saw beautiful control of bitter pit, which is beyond just sunscreen. It's actually a really good quality thing with Haven, and so the apple growers there are really keen on using it. And we've got -- we just keep continuing to get really good results from our grower demos there.

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Tyler Lee Etten, Piper Jaffray Companies, Research Division - Research Analyst [17]

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Got it. That's helpful. And I mean, over the last, I would say, year or so, you've really revamped the sales team in advance into these new regions such as the Southeast and Michigan. Not to sound rushed or anything, but are there any other regions that you have identified that you would like to get these products into as you gain traction in these established regions?

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Pamela G. Marrone, Marrone Bio Innovations, Inc. - Founder, CEO & Director [18]

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Yes. As I mentioned in the call, the southern -- the Fresno person we have, it's tough for him to serve the whole Arizona, New Mexico, Texas, Imperial Valley market. So we did add a sales rep this quarter, wasn't it? And so that's one we expanded into. At some point, we'll look to address the mid-Atlantic and expand eastward at some point into Eastern Washington, Idaho, where we have a good fit for [pulses] and more potatoes and such.

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James B. Boyd, Marrone Bio Innovations, Inc. - CFO, Senior VP & Assistant Secretary [19]

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I think we're expecting good growth out of the Southeast, especially in the spring time -- or fall, rather.

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Pamela G. Marrone, Marrone Bio Innovations, Inc. - Founder, CEO & Director [20]

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Yes, we are, yes. So we're not going add a lot of salespeople. But we're -- as our -- as progress comes on, we may add a couple more.

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James B. Boyd, Marrone Bio Innovations, Inc. - CFO, Senior VP & Assistant Secretary [21]

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Don't forget international.

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Pamela G. Marrone, Marrone Bio Innovations, Inc. - Founder, CEO & Director [22]

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International.

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James B. Boyd, Marrone Bio Innovations, Inc. - CFO, Senior VP & Assistant Secretary [23]

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You always have comments on international.

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Pamela G. Marrone, Marrone Bio Innovations, Inc. - Founder, CEO & Director [24]

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We do -- well, we have a very small international team. And our strategy with international is continue to use our distributors to do the bulk of the work internationally. So they pay for the -- they do the field trials and do -- and often submit the registration, and we support them with that.

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Tyler Lee Etten, Piper Jaffray Companies, Research Division - Research Analyst [25]

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Excellent. Maybe speaking on the subject of distributors, I was wondering how the Jet Harvest Solutions is expected to fit into the distribution model. And I know Jim said, it didn't significantly impact this quarter's. But do you expect this addition to significantly impact future quarters?

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Pamela G. Marrone, Marrone Bio Innovations, Inc. - Founder, CEO & Director [26]

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Well, we hope so. It's a good product. And it's a category, the sanitizer category where Regalia is preventative and MBI-110 is preventative where this one is a little more curative where you can zap the leaves and it will reduce it even if some of the disease is there. So it's a nice one-two punch. And this category of the sanitizer is pretty well known by growers. And so as our sales team meets with growers, so we -- being the master distributor, we sell to our distribution channel who then sell to growers. So it's adding a layer in there, but it's -- because we don't have all the R&D cost and we get it fully, the products fully -- packaged -- developed and packaged. It's still a good business for MBI.

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James B. Boyd, Marrone Bio Innovations, Inc. - CFO, Senior VP & Assistant Secretary [27]

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We see efficiencies of being able to send more products down the same sales channel.

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Pamela G. Marrone, Marrone Bio Innovations, Inc. - Founder, CEO & Director [28]

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Exactly, exactly, yes. Continue to broaden the suite of products and have more products contributing to that sale. It really derisks the business model.

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Tyler Lee Etten, Piper Jaffray Companies, Research Division - Research Analyst [29]

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Excellent, yes. That's helpful. I guess just one more from me. It was an interesting comment you made about registering on Amazon. I was wondering if you had done any research about the retail market and what's potential of the products that you have could -- or what the potential would be when you sell into -- in a smaller form and not to these commercial -- or the traditional commercial customers.

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Pamela G. Marrone, Marrone Bio Innovations, Inc. - Founder, CEO & Director [30]

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I have experience in this market because in my past life, I actually got the first organically listed product into Walmart stores in the garden section. And the fungicide category, which was that product is actually a small category, so we have products that fit the largest category, which is insect control, bugs is what homeowners want to control. And so we have continual questions and -- I mean, requests from homeowners, and they certainly don't want to buy 1 and 2 gallon quantities. So we -- the home and garden market is quite large, although the markup is more by the companies in that.

So a good portion of the margin into the home and garden market is taken by the Scotts Miracle-Gro and those types of people or the retailer -- and the retailer. But it still could be a nice contributor to revenue based on my experience and not just stores but also through catalogs, online. We have -- in my past life, we had a significant amount of sales through even just online catalogs, the garden catalogs. So it's not -- we don't have the -- we have to focus our resources and be mindful of really focusing and executing on our plan. So it's a nice upside. We actually have not even forecast anything much in the business for that, but it's a great upside for us in the future.

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Operator [31]

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(Operator Instructions) We'll next go to Robert Smith with Center for Performance Investing.

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Robert Smith, Center for Performance Investing - Analyst [32]

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So Pam, could you characterize the results of the Great Lakes study? In other words, this is an open water study. How can you put a framework around this? I mean, what is the opportunity?

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Pamela G. Marrone, Marrone Bio Innovations, Inc. - Founder, CEO & Director [33]

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Yes, yes. So we have already treated lakes with Zequanox. So we know that it works. So this was less about does it work on mussels. We already proved that in a lake. It was more about how to apply it because in the past treatments, it was -- we would put barriers down, what are called water curtains. And so then that was to keep the Zequanox in the mussel area. And this one was without the barriers. It was right out there in the open water. And we got some beautiful drone footage, and we can actually see from the drone footage, tracking where the product went.

So because Zequanox is slow kill, it kills a few over a month period, we'll know in about 30 days whether this application method, which was without the water curtains and much larger scale, and how -- and if that application method works. So we're optimistic and we'll see. But lake treatments right now, there's nothing really useful for lake treatment. So this is the beginning of the test of how we can reduce the mussel populations in the Great Lakes and tributaries and other lakes because they have done such -- the mussels have done such devastation to the ecosystem and native mussel populations, which is why we have this partnership. It is about consumers walking on the beaches and cutting their feet, but it's actually really about saving space -- saving native species as well.

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Robert Smith, Center for Performance Investing - Analyst [34]

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So is this application methodology, it does work? I mean, you said within 30 days you'd kind of have a handle on? What's the next step? How do you take this to the bank so to speak?

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Pamela G. Marrone, Marrone Bio Innovations, Inc. - Founder, CEO & Director [35]

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I think that we'll then start looking at finding partners. We can't -- since we're focused on our ag business, we can't do this on our own. So we do have companies that treat for algae and weeds and aquatic weeds, and they know how to go out in boats and deliver products. In that case, it would be more like chemicals and dust to control weeds and algae. And so we have a number of possibilities for partners to help broaden and expand it into other lakes. We get a lot...

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Robert Smith, Center for Performance Investing - Analyst [36]

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Are these prospective partners awaiting the results of this trial?

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Pamela G. Marrone, Marrone Bio Innovations, Inc. - Founder, CEO & Director [37]

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No. It's not dependent on that. So it's in parallel. We can go out to private lakes with other partners.

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Robert Smith, Center for Performance Investing - Analyst [38]

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Can you put a dollar value on the opportunity?

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Pamela G. Marrone, Marrone Bio Innovations, Inc. - Founder, CEO & Director [39]

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We haven't said that. Because nothing is used for native -- nothing is used for invasive zebra and quagga mussels right now in lakes, so we have done the math and said okay, how many lakes are infested, what would a shoreline treatment -- you can't treat the whole lake because Zequanox right now is too expensive, but what would a shoreline treatment be in cost and revenue to MBI. We've done that math. So we'll see.

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Robert Smith, Center for Performance Investing - Analyst [40]

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Can you share that?

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Pamela G. Marrone, Marrone Bio Innovations, Inc. - Founder, CEO & Director [41]

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No. I haven't -- we haven't actually put out a number on that.

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Robert Smith, Center for Performance Investing - Analyst [42]

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All right. I'd like to move on to the cannabis market. So you mentioned some numbers, $91 million going to $1.4 billion in 5 years. So what is your target within those numbers? I mean, the $1.4 billion, what do you have a shot at?

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Pamela G. Marrone, Marrone Bio Innovations, Inc. - Founder, CEO & Director [43]

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So that $1.4 billion includes the pesticide and fertilizer markets. So we -- because right now, we have one major distributor and they've become our top 5 distributor, when setting up more distributors into that market and as it becomes legal in other areas, it can be a significant -- we haven't -- again, we haven't guided to a quantification of what we can do but it could be a significant driver. But we have actually included it once again as compared -- like the home and garden as an upside to our plan. So we're not dependent on the cannabis market for our growth. We're executing just well and growing very well in our target crops, our 6 target specialty crops. And so the cannabis makes a really nice upside.

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Robert Smith, Center for Performance Investing - Analyst [44]

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So just moving on to MBI-014. So how was this redesignated? Was it a significant improvement in product from 010?

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Pamela G. Marrone, Marrone Bio Innovations, Inc. - Founder, CEO & Director [45]

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Yes it was. Hence, the name. Yes, exactly. So they had versions 12, 13 and so -- yes. So they decided that because it was such a significant improvement that they wanted -- they really needed to give it a codename from the original -- new codename from the original, yes, dramatic improvement in herbicidal potency and reduction of cost. And the reduction of the amount of pounds per acre is around between a 10- and 20-fold reduction in poundage per acre. It's really very exciting, what our R&D has done with this product.

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Robert Smith, Center for Performance Investing - Analyst [46]

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So what do you feel the opportunity is with that product?

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Pamela G. Marrone, Marrone Bio Innovations, Inc. - Founder, CEO & Director [47]

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Well, we have said in the past that this is -- the herbicide market -- so if you have a $55 billion chemical pesticide market, 40% of that total global pesticide market is herbicide. So 40% of $55 billion is a very large opportunity. I estimate that the organic market in the -- is about a $100 million opportunity in the U.S. So it's smaller but easier to get and then a large chemical opportunity. So it over time becomes probably one of our largest opportunities.

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Robert Smith, Center for Performance Investing - Analyst [48]

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And any time line on that?

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Pamela G. Marrone, Marrone Bio Innovations, Inc. - Founder, CEO & Director [49]

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Well, we're submitting to EPA -- we hope to -- before the end of the year, if all goes well, in the late fourth quarter. And then it takes about 18 months for approval. There are growers who are -- would love to get it on an emergency use basis and -- sooner. So if we have the opportunity, we'll try to have the growers petition for a faster track. We'll see, but we're planning for '19 launch.

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Robert Smith, Center for Performance Investing - Analyst [50]

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Okay. And the Roundup controversy framework, I mean, on glyphosate, especially in California, what is your view on that?

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Pamela G. Marrone, Marrone Bio Innovations, Inc. - Founder, CEO & Director [51]

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I'll let the regulators deal with that. It's just -- I don't comment on things like that. It's too controversial. But I do know that it's -- I just focus on the -- there's a significant market opportunity with an unmet need there for this product, 014.

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Robert Smith, Center for Performance Investing - Analyst [52]

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Okay. And if you were to take a shot, what might be a breakout product for you guys?

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Pamela G. Marrone, Marrone Bio Innovations, Inc. - Founder, CEO & Director [53]

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That one. That one.

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Robert Smith, Center for Performance Investing - Analyst [54]

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That one. Okay. And so during the call today, you went over the product lines and there were very handsome percentage increases, I assume, from lower numbers so to speak.

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Pamela G. Marrone, Marrone Bio Innovations, Inc. - Founder, CEO & Director [55]

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Yes, coming from a small base, yes.

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Robert Smith, Center for Performance Investing - Analyst [56]

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Yes. So with new products entering the market pretty much on a regular basis, looking out a couple of years, 2 or 3 years or something, so what might growth rates be like? It seems like you really could grow the company very, very significantly.

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James B. Boyd, Marrone Bio Innovations, Inc. - CFO, Senior VP & Assistant Secretary [57]

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Well, I -- we agree.

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Pamela G. Marrone, Marrone Bio Innovations, Inc. - Founder, CEO & Director [58]

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We agree.

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James B. Boyd, Marrone Bio Innovations, Inc. - CFO, Senior VP & Assistant Secretary [59]

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We agree. We have always characterized the company as a high-growth opportunity. And especially when we're coming from a small absolute number, we think the percentages can be quite high.

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Robert Smith, Center for Performance Investing - Analyst [60]

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So in other words, you were running at 50 and then you drop down to maybe 25, 30 because of weather conditions, this and that. But at some point in the future, with these products each contributing, I mean, it's -- there really are little excuses so to speak for a much higher growth rate.

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Pamela G. Marrone, Marrone Bio Innovations, Inc. - Founder, CEO & Director [61]

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So the strategy, as you mentioned, is a portfolio approach, yes. So it's no -- although I think 014 could be a significant product, we're characterizing -- we have all of our products growing in parallel. So there's no -- it's not a blockbuster drug strategy. At the same time, as we get international registrations, international does become a driver of growth in the longer term -- the medium to longer term. So all the parallel -- in parallel, growth efforts, getting into more uses, more sprays on the acre, more crops, new uses of our existing products, launching new products and international growth, all, we believe, contributes to significant growth. And I would say we're modeling growth the way we -- kind of the way -- yes, it could be substantially higher, but we're modeling it in a way that we have seen.

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James B. Boyd, Marrone Bio Innovations, Inc. - CFO, Senior VP & Assistant Secretary [62]

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We're modeling it the way we believe it will grow.

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Pamela G. Marrone, Marrone Bio Innovations, Inc. - Founder, CEO & Director [63]

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The way it will grow, yes.

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James B. Boyd, Marrone Bio Innovations, Inc. - CFO, Senior VP & Assistant Secretary [64]

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Yes. We have our own beliefs. We believe in the company. We believe in the products. We think there's a bright future ahead.

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Operator [65]

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And we'll take a question from Michael Brcic with National Securities.

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Michael Brcic, National Securities Corporation - SVP of Investments [66]

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I have 2 quick questions. One is on the weather delays in this last quarter. Does that -- is there any spillover into the next quarter? Or is that just gone until next year?

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Pamela G. Marrone, Marrone Bio Innovations, Inc. - Founder, CEO & Director [67]

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A little bit of both. Some spillover and some gone, yes, because the Pacific Northwest, right, some of them were so truncated, they could only get out 1 spray instead of 2 or 3, and that's lost. And then others, the bugs pick up and then moved out into the next quarter.

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Michael Brcic, National Securities Corporation - SVP of Investments [68]

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Great. Finally, can we talk about when and maybe what revenue levels we're talking about to get to cash flow breakeven?

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Pamela G. Marrone, Marrone Bio Innovations, Inc. - Founder, CEO & Director [69]

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I knew someone was going to ask that. All right.

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James B. Boyd, Marrone Bio Innovations, Inc. - CFO, Senior VP & Assistant Secretary [70]

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Let's focus on EBITDA breakeven. And I think we had operating expenses of $6.8 million last quarter. We mentioned that we had several non-reoccurring type of expenses or special projects, if you will. Let's just call that $0.5 million. So you're looking at $6 million, $6.25 million in terms of operating expenses. I always just think of the company as 50% margins. And if you do that, you just double that revenue to get to a breakeven revenue figure -- or product shipments rather, figure. And we think that we can do that in a reasonable amount of time.

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Pamela G. Marrone, Marrone Bio Innovations, Inc. - Founder, CEO & Director [71]

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Yes, yes. We got to back out stock comp, yes.

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James B. Boyd, Marrone Bio Innovations, Inc. - CFO, Senior VP & Assistant Secretary [72]

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Just let me add and point out that when I talk about EBITDA, I am excluding stock comp.

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Michael Brcic, National Securities Corporation - SVP of Investments [73]

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Right. So a reasonable amount of time, is that within 4 quarters, 2 quarters, 8 quarters?

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James B. Boyd, Marrone Bio Innovations, Inc. - CFO, Senior VP & Assistant Secretary [74]

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Well, I think we talked about the earlier question and said we see ourselves as a high-growth company. We're not going to make any projections.

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Operator [75]

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That concludes today's question-and-answer session. At this time, I'll turn the conference over to Pam Marrone, for any additional or closing remarks.

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Pamela G. Marrone, Marrone Bio Innovations, Inc. - Founder, CEO & Director [76]

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Thank you. In closing, I want to thank each of you for joining us today. We will be conducting several roadshows and attending conferences on both coasts in the second half of 2017. So if you're interested in a meeting, please contact our management of our IR firm, MZ Group, to arrange. We look forward to updating you on our progress as we move forward with a number of key initiatives to build shareholder value over the long term. Thank you.

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Operator [77]

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That concludes today's conference, and thank you for your participation.