Marrone Bio Innovations, Inc.
Q3 2017 Earnings Call Transcript

Published: 14 Nov 2017

[Operator:]

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

[Linda Moore:]

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 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 third 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 company's 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 hold a question-and-answer session. I will now turn the call over to our Founder and Chief Executive Officer, Pam Marrone. Pam?

[Pamela Marrone:]

Thank you, Linda. Good afternoon and thank you to everyone for joining us. With me today is Jim Boyd, our President and Chief Financial Officer; and as you just heard Linda Moore, our General Counsel. We experienced several noteworthy catalysts in the third quarter of 2017, such as, distribution agreements for Africa, exceptional field data in the largest global pesticide market Brazil as well as several other countries and the U.S., the completion of our Grandevo WDG granulation line, receiving EPA registration for MBI-110 product Stargus which is the seven products we've commercialized in eleven years, an unprecedented accomplishment in the Ag industry. One of our products was launched successfully, via our strategic partner Albaugh into the row crop seed treated market. Albaugh has announced that their BIOST treatment outperform the commercial standards and increased yields on corn and soybeans. In addition our own bio-stat feed treatment showed increased yields in the second year of field trials in soybeans and corn. We view all of these as major accomplishments. Despite these major events, unfavorable weather conditions reduced the number of expected sprays in several of our key markets. Historically the third quarter is the lowest quarter of the year in terms of sales and is the most unpredictable. This year it was no different as hurricanes Irma and Maria significantly impacted our sales in both Florida and Puerto Rico. Fortunately our portfolio approach to product development and marketing is designed to diversify our revenue base and reduce the impact of any one variable on the success of the company as a whole. This product portfolio approach allowed us to achieve year-to-date growth well above the industry average. We believe we are well positioned in the market and have made significant progress in penetrating the U.S. and abroad. As I noted briefly, we have expanded our reach to Africa through select partnerships with ELEPHANT VERT in North Africa and Kenya Biologics in Kenya and Tanzania. Additionally we have taken several steps to increase product awareness in the substantial central and South American markets such as sponsoring grower education events in Honduras and Chile. We also successfully advanced field trials in Brazil, which have shown tremendous progress to-date. Our continued advancements on the R&D front paired with the progress we have made in advancing distribution and product awareness are translating into greater market opportunities. But before going further, I would like to take a moment to discuss who we are, what we do, why are we the innovation leaders and why it's so very important for those of you who maybe new to Marrone Bio Innovations. Put simply, we develop natural products, commonly called biologicals for controlling pests and increasing crop yields and quality. Our products are all biologically based and fall into two category under the umbrella of biologicals. Bio-pesticides for crop protection and 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 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. First, our products can make pest management more effective than programs that only use synthetic chemical pesticides. Implementing biologicals as part of IPM and crop production programs, growers can improve yields and quality of their products creating a higher return on investments. Pest resistance, a common problem with synthetic chemicals is reduced or eliminated again increasing return on investments. Our products also do not harm the beneficial such as bees. Second our products are biodegradable offering environmentally friendly protection. Biologicals are generally safe for fieldworkers 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. Aside from the significant benefits to our 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. Our strategy is to uniquely take advantage of a capital light model given our experience it takes us less than five years and less than $10 million to get a new product to the U.S. market. We get into the market quickly with early adopter growers. The growers give us feedback that in turn helps us to develop consecutive versions, associated new uses of the products and crop and label expansions. This in turn expands our market opportunity. The global pesticide market is massive, totaling over $20 billion today and is growing at a compound annual growth rate of about 2%. While the newly emerging biological market is much smaller around $4 billion it is growing at a compound annual growth rate between 10% and 20%. The Bio-stimulant market, which MBI entered this year with Haven is growing about 10% to 15% annually. MBI's growth is significantly outpacing both of these markets. Currently we are focusing our marketing dollars on the biggest opportunities in specialty crops, berries, leafy greens, potatoes, corn fruit, fruiting vegetables, grapes and nuts. But a large opportunity exists in raw crops such as corn and soybeans, which we will penetrate through partnerships with larger players. In addition, organic is the highest growth segment in food and there are simply are not enough acres to meet the demand, so this continues to be a growth driver for us. We continue to prove inn field trials, on farm demos and customer adoption that we have great products that can perform as well as or in some cases better than chemicals alone and can also improve control, yields and quality when incorporated into integrated programs with chemicals, resulting in an increased return on investment. That said to reach our full potential, we need to continue to drive grower demand through demos, educational programs and increased awareness. 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 continue to make considerable progress in the quarter despite a challenging agricultural environment. We now have six EPA approved bio-pesticide products and one bio-stimulant product on the market. All of these products as well as other pipeline products are protected by a very robust patent portfolio of over 400 issued and pending patents covering microorganisms, natural product chemistry, mixtures, formulations and new uses and new pests. 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 is now becoming the recognized standard for biological control of powdery mildew a major crop disease. We continue to gain a better understanding of the plant health benefits of using Regalia to improve crop yields and quality. In the third quarter, EPA approved new Regalia 5% master label, which captures new uses for raw crops for Regalia RX such as cotton, forged grasses, peanuts, as well as cereal grains and sugar beans. The new label also has smaller container sizes and easier used instructions for crops related to home and garden uses as well as cannabis and hemp productions where authorized by state government. MBI's first field trials for Regalia on cannabis were completed in Canada to support label expansions. Results are imminent and the verbal report is positive. With regard to Regalia in the U.S., we received positive results in Oregon, California and New York across a variety of crops such as berries, nuts, grapes, tomatoes and fruits. Against mummy berry disease on blueberries in Oregon Regalia have the highest percent control, in terms of primary infection of flowers and shoots, outperforming two leading biological competitors. In California, in a trial with one of our retailers, Regalia bested the commercial standard mandate prostate plus copper against walnut blight in both blight rating, and number of blighted nuts. With the same retailer when Regalia was applied on the foliage, in addition to the chemical standards applied through droop irrigation, Regalia provided a higher return in marketable tons per acre of tomatoes, an increase of 5.3 to 6.5 tons per acre more or 12% to 17% better than the chemicals applied by the droop alone. This is the second year to achieve these excellent results. On California Citrus in a demo with one of our largest growers Regalia increased the number of beans per acre by two to three times in 2016 and 2017 when one core was applied just after pedal fall. Great powdery mildew, the most severe grapes disease in California is developing resistance to the leading chemicals. For the third year in a row, the leading California grape research conducted trials of Regalia in rotations with the Big Gun Chemicals. With Regalia in the rotation with these chemicals mildew severity was reduced the same as the chemical only programs. So grower should rotate Regalia into the programs to stop or delay resistance. In other trials that same researcher found that in rotation with the leading biopesticide, Regalia reduced the severity of powdery mildew better than all other treatments. Against Fire Blight in New York, the Regalia program outperformed all program for Shoot and Trauma [ph] blight on apples. Regalia used in an organic fungicide program outperformed the previous organic standard program making organic apples much more feasible in the Northeast, which has a heavy disease pressure, limiting the ability to grow organically. Looking at overseas growth and milestones, key highlights are as follows, infield trials in Brazil when applied twice to cotton crops, Regalia increased yield in average of 6.5% for all rate and timing combinations Regalia showed an impressive 71% win rate over the untreated cotton. Our Central America distributor reports higher yields and quality with Regalia on onion, melons, potatoes, sugarcane and tobacco. For example, Regalia increased onion yields by 33% in Honduras. Now turning to Grandevo and Venerate, our bio-insecticides, Grandevo continues to expand its uses in IPM programs across many fruits and vegetables. This product experienced volume growth year-over-year, but its growth was affected by lack of supply of Grandevo WDG. Grandevo is gaining momentum against the dreaded Spotted Wing Drosophila. This year Grandevo programs were as good as the chemical programs and better than the organic standard programs in Michigan State Blueberry trial. Grandevo was just for organic fruit, but can be used with chemicals for resistant management and less residue. Venerate, our second insecticide, which controls the wide spectrum of pest insects and mice with a novel but different mode of action than Grandevo is rapidly gaining uptake as growers experienced the improved control in their IPM programs with the added flexibility of labor and residue management. Our overall year-over-year growth was led by growth of Venerate. In insecticide trails in Brazil for the control of cotton bollworm, Grandevo performed equally well with both the biological and chemical standard in two to three locations on cotton crops and equally well in all three locations on soybean. Grandevo was as good as neonic Imidacloprid chemical standard to reduce Asian citrus psyllid, or ACP, Venerate yields were as good as the chemical as well. We now have data against ACP in Mexico, U.S. and Brazil, all showing their efficacy. The ACP has devastated Florida grove and has been recently found in California. In Central American trials, Venerate bio-insecticide used in IPM programs for managing the dreaded coffee berry borer, or Broca, successfully reduced the number of organophosphate insecticide applications by 50%, including that of the controversial and increasingly restricted chlorpyrifos by. The 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%. From University of Arizona trials on lattice the Venerate rotation for warm control was superior to the majority of treatments and similar to the chemicals known to be the very best of all insecticides. You see riverside data on tomatoes show that the Venerate rotation have overall lowest percent damage from all pests, worms and sucking insects and was superior to competitor chemicals in the study. Control of San Jose scale on apples in New York with Grandevo and Venerate was equal to two chemical standard programs and better than one of the chemicals considered to be the best in the industry. In order to expand Grandevo into various markets our R&D and manufacturing teams have been preparing technology packages for improved fermentation processes and in-house production of the WDG. We are fast tracking the first of the manufacturing improvements, which have the potential to reduced Grandevo cost of goods by more than 50%. Now turning to Majestene Bionematicide, Majestene controls roundworms, or nematodes that feed on the roots of plants and destroy crop yields. Majestene sales volumes grew significantly year-over-year. our Venerate Majestene microbe had good success in the market by our partner all by this year after having conducted hundreds of trials in 2016 confirming the yield increases when our microbe was incorporated into their bio-STC treatment. For soybean data thus far 70% is captured, the yield of bio-STE was 3.5 bushels per acre over the fungicide infected side standard and approximately a bushel above the nearest competitor. On corned with 10% of the data capture bio-STE yielded 10 to 20 bustles higher than the standard. In addition, initial reports from the 5 of the 15 of our biological stat-C treatment studies on soybeans and corn indicate performance equal to the chemical standards for control of corn root worm, soybean cyst nematode, corn lesion nematode and soya borne diseases in soybean. Treatments contained various combination of the microbe in Stargus or MBI-110 but not within Regalia which was tested for the first time the microbe in Grandevo and Groundwork BioAgs biostimulant mycorrhizal. In trials in Brazil, Majestene reduced burling nematode the most significant pest of banana as well as or better than the organophosphate, chlorpyrifos. The burling nematode destroys the root of bananas in planting so that the plant are starved of water, nutrients and lack support causing 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. On soybean trials in trail, Majestene yield was as good or better than the commercial chemical standards. In the U.S., grower usage this year, Majestene is showing good performance on potatoes, carrots, turnips [ph] and other crops. R&D continues to advance the next generation Majestene product that substantially amps up the nematicidal activity and reduces the field application rates 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 crop, reducing sun stress and water loss. We successfully scaled up, manufactured and shipped product in the three quarters targeting crop such as apples, onions, berries and grapes. In demos and trials in blackberries and grapes the products did a great job reducing sun damage. We will give an update as we get additional yield and quality data especially for nut crops in California. Due to the lower regulatory barriers for biostimulant, we are shipping product to international locations to get efficacy data needed to support sales as quickly as we can. Now let's talk about our new biofungicide MBI-110, which we called Stargus for specialty crops and amplitude for raw crops and which was recently approved by the EPA. We also submitted the registration to Mexico and Canada. This is the seventh EPA registered product we have commercialized from six new active ingredients, which we believe is an unmatched productivity. Against latus downy mildew, Stargus rotated with the chemical standards [indiscernible] provided a better reduction of disease incidence compared to all other treatments including [indiscernible] program without Stargus. A rotation program with Stargus would be good for resistance management a serious problem with downy mildews on leafy greens in California and Arizona. In the first comprehensive California trials against Botrytis bunch rot conducted by the leading grape disease researcher, Stargus showed exceptional control of Botrytis bunch rot. Stargus alone reduced percept severity similar to the elevate standard and the other highest performing materials. Stargus rotations were among the best treatments performing similarly to industry standard and outperforming some treatments. We think we have a real winner here. Stargus reduced white mold on snap bean plants in New York similarly to the chemical standards, but Stargus’ marketable yield was 40% better than the Chemical standards. MBI-601 a bio-fumigant is our newest product, which we have named Ennoble. Ennoble showed excellent results in field trials against latus white mold Sclerotinia, Sclerotium Ennoble had numerically the highest yield against the white mold Sclerotinia minor yields were the best when Ennoble is rotated with our own Stargus. The next spec yields were recorded for plods treated with Ennoble and Bio-tem 2.0 which we distribute for Isagro. Ennoble also have the best activity of all treatments against another serious disease, Fusarium [indiscernible]. Ennoble manufacturing is being scaled and we are in the process of arrangement fall demos with customers. Our R&D group is generally finished with their work for the EPA submission of MBI-014 bioherbicide. Toxicology studies are in progress and once those are finished we will submit the package. MBI-014 has always showed good activity against the pigweed family and new spectrum studies show more than expected activity against some grasses along with some control of the Malva and Astra families. The USVA doing work on the mode of action saw a complete and total refreshing of key genes in 5 minutes leading to plant stunting. The key herbicide compound in MBI-014 is active at 0.3 grams per acre, which is remarkably active compared to the leading herbicide, [indiscernible] which is active at 109 grams per acre and glufosinate, which is active at 348 grams per acre. And finally, an update on Zequanox, the industry's only biological solution for invasive muscles and the only low risk product registered by the EPA for open water use. We've continued working with large companies and government agencies for both open water and pipe treatments. For in-pipe treatments we have finalized a distribution agreement with a larger water treatment company who assisted with commercial applications to a power plant this year. Due to a confidential nature of the business, we cannot disclose the name of our partner right now. I’d also like to highlight our success 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 biological. Recently MBI's products have been added to cannabis approved listing by several states that have permitted the sale of Cannabis and hemp for either medicinal food, fiber or adult uses. We continue to work directly with states to ensure universal approval for cannabis and hemp production a legal. We have developed labels for all of our products in smaller package sizes with the suffix CG which stands for Cannabis and Garden such as Regalia CG, Grendevo CG and Venerate CG. We also have Regalia, Grendevo and Venerate on Amazon. We have completed the required efficacy studies for Regalia in Canada where Cannabis may soon be legal and we will submit the label as soon as the data are summarized. Worth noting, we have sales through our distributor who targeted the Cannabis market and that distributor is now one of our top customers. We have just signed and received an order with an even larger distributor to the hydroponic industry cannabis growers continue to ask for our products and technical support for our products for diseases in pest such as powdery mildew and [indiscernible] all the call and better support our customers we will be hiring the sales specialist for the cannabis market. To provide some scale of the market opportunity a study from UC Davis Graduate School of Management estimated the cannabis input markets in just Colorado, Oregon and Washington to be currently $91 million. The study estimates this pesticide and fertilizer inputs market including California due to recent changes in California legislation will grow to $1.4 billion within the next five years. I’d now like to speak briefly about some of the partnerships and collaborations. First, our Evogene collaboration. Transgenic plant containing MBI's insecticidal genes were developed and one candidate showed promising results with 100% kill against cabbage looper. Additional tests are in progress. In September, we announced a partnership with ÉLÉPHANT VERT, a Swiss firm that strives for healthy and sustainable agriculture in Africa. ÉLÉPHANT VERT is marketing two of MBI's products in Morocco, Tunisia and Algeria. Reysana, which is the local marketing and for Regalia and Majestene. We also recently signed an exclusive distribution agreement with Kenya Biologics to bring MBI's biopesticides to Kenya and Tanzania. Kenya is the second largest exporter of French beans and peas to the EU as well as the key supplier of roses globally. In addition, we are currently in discussions with several food companies about how to best transition growers to organic and help their grower suppliers with specific pest synthesis problems. We are also in discussions with both organic and non-organic consumer food products companies, who want to increase their sustainability. We look forward to updating you more on this in future calls. So before going further, I would now like 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 up the call with Q&A. Jim?

[James Boyd:]

Thank you, Pam. Good afternoon, everyone. I would like to walk you through our third quarter results. Our year-to-date GAAP revenues totaled $14.8 million, up 31% compared to the same nine-month period in 2016. We reported product shipments year-to-date of $15.2 million, up 36% compared to $11.2 million for the same nine-month period in the prior year. GAAP revenues for the third quarter of 2017 increased 16% to $4.2 million compared to $3.6 million in the third quarter of 2016. Product shipments for the third quarter were $3.1 million, which were flat with the third quarter of last year. Our revenues and product shipments in the third quarter were negatively impacted by hurricane weather conditions in key growing regions, which significantly delay planning our destroyed targeted across. Revenue growth in the third quarter was led by Venerate. Although revenues and product shipments were affected by the whether this quarter, we believe the company wide execution in our third quarter was strong. And we believe we are well-positioned for on growing growth opportunities. 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. As a result of this, we believe that product shipments are helpful measures for investors to understand operating results and track product adoptions. The company is in the process of access the impact on both revenues and deferred revenues related to the implementation of the new revenue accounting standards, commonly refer to as ASC-606 which take effect January 1, 2018. Now returning to GAAP reporting. Our gross margin in the quarter was 40.9%, a significant increase compared to the 31.4% gross margin for the third quarter of last year. Gross margins increased sequentially from Q2 to Q3, primarily due to product sales mix and manufacturing process improvements that we made both at our own facility in Michigan and at our third party manufacturers. We expect gross margin to continue to improved overtime. Operating expenses increased year-over-year from $6.4 million in the third quarter of 2016 to $8.3 million for the current quarter. Included in our $8.3 million of operating expenses are approximately $1.2 million of non-cash expenses including $369,000 of a non-cash loss related to an asset sale of some biodiesel at our Michigan facility that we're onsite when we purchased the facility. SG&A in the third quarter increased to $5.2 million, compared to $3.8 million in the same period last year. The increase from last year was largely due to $369,000 non-cash write-off on the sale of equipment mentioned earlier. Oracle cloud ERP implementation costs, financing related costs and a $1 million net difference in legal expenses. This change in legal expenses primarily related to a $700,000 credit related to DN&O [ph] coverage recognized in 2016. R&D cost which include manufacturing support and process improvements, patents, regulatory, field trails and new product development in the third quarter were $3.2 million, up relative to $2.7 million in the same quarter of last year. The increase was mainly due to an increase in field trial expenses. We remain intensely focused on managing operating expenses. We expect our operating expenses to remain flat, which we consider sufficient to support our growth. Now turning to the balance sheet. Inventory at the end of the third quarter was $9.3 million, as compared to $8.4 million last year, which is adequate to address near-term demand. Our year-to-date cash usage from operations was $14.4 million or an average of $4.8 million per quarter. The $14.4 million represents a 21% decrease when compared to the $18.4 million of cash used from operations in the same period of 2016. Third quarter 2017 cash usage from operation was $4.6 million versus $4.8 million for the third quarter of 2016, a 4% decrease. At the end of the third quarter, we reported total cash and cash equivalents including restricted cash of $6.2 million of which $2.5 million is restricted. In October 2017 we entered into an unsecured promissory note with an investor, which enable them to fund certain tranches at their sole discussion. To-date, we have received $2 million in funding under the note. 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. Pam.

[Pamela Marrone:]

Thanks, Jim. We've made great progress in key strategic goals and operations. We have a proven history of strong product shipment growth through eight quarters, our products have demonstrated exceptional results in both our U.S. and international field trials against key pest and diseases as I described previously. 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 that is focused on supporting sales and manufacturing and increasing gross margins through process improvements and also a small percentage on new product development. Since the fourth quarter of 2014 we had a goal to introduce four new products to the markets in the next three years and we remain on track to do so. We introduced one in 2016 and two in 2017 and also registered and demoed with customers a fourth product MBI-601 or Ennoble. We've done this all while keeping R&D flat for a little company it is truly impressive to have a portfolio of seven highly effective products in 11 years. Vertical integration continues to be a key focus as ours volumes increased. In 2012 we've purchased our own manufacturing facility and have since brought several products in house such as Regalia, Grendevo 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 scale up times, as well as better margins, cost controls and return on investments. Our Michigan facility has rapidly scaled with demand and has ample acreage for drawing and warehousing. The Grendevo granulations line is finished and the packaging line has been ordered. In summary, we are achieving short-term goals while building an organization that is positioned for continued success and growth. I'm extremely proud of our entire team for their hard work and dedication we remain keenly focused on execution to build shareholder value. With that, I'd now like to open the call for questions. Operator?

[Operator:]

Thank you. [Operator Instructions] And we'll take our first question Sameer Joshi with H.C. Wainwright. Please go ahead.

[Sameer Joshi:]

Good afternoon. Good, how are you?

[Pamela Marrone:]

Good.

[Sameer Joshi:]

So in terms of the weather impact, are you seeing any residual effect of that going into the fourth quarter?

[Pamela Marrone:]

We are assessing that right now. They had to replant some tomatoes and peppers and actually pick up the plants that were already there and try to restick them and see if they could save them. And then of course the citrus crop was really messed up and then all the ag in Puerto Rico. So we're assessing that now sprays are starting again. So we'll see.

[Sameer Joshi:]

Okay.

[Pamela Marrone:]

Sometimes when there is fewer crops out there they spray more because the value of the crop is higher. So that's often -- that maybe the case.

[Sameer Joshi:]

Okay. The reason for that question is should we see like sales -- the loss of sale recuperate only in the next year cycle or we should see some recovery or push out into fourth quarter from the third quarter?

[James Boyd:]

I think you'll see push out?

[Pamela Marrone:]

No, you won't see push out, I mean, in the third quarter we're lost sales, but we're operating Q4 as if it's going to be a somewhat normal vegetable and season, citrus probably not, because a lot of the crop is on the ground, but certainly on the vegetable side and fruits and things like blueberries.

[Sameer Joshi:]

Okay. Just a clarification on the bio-fumigant MBI-601, has that been approved and launched or is it that you are under trials at various sites?

[Pamela Marrone:]

We didn't have the resources to launch everything at the same time. So it is approved by the EPA, it's pending California approval. And we're sort -- we did Stargus first, and then what we're doing is putting in Ennoble in the hands of key customers that would be the first target early adopters that we normally go to when we place the product in the market. So that's the sequence, so that is the next one that we will be launching, but it's always on -- our products we always launch on a targeted basis. So the key early adopter growers and then launch bigger the next cycle.

[Sameer Joshi:]

Got it, understood. You mentioned Stargus and that's great. So what is the next steps for that, and what are the target markets and when do you see meaningful commercial revenues from Stargus as well as amplitude?

[Pamela Marrone:]

So we do expect meaningful revenues -- some meaningful revenues of Stargus next year. Because we're still late in the year got the EPA registration October 27th. What happens is you then apply for state approvals and those are generally a rubber stamp but you still got to send them the check. So by the time we have the state approvals we’ll have still some season left and shipped in this year in the Southeast. So, I mean, there is not a season for this year so next year we do think that there is an opportunity for some decent revenue and where well we have downy mildew on grapes in an East Coast market powdery mildew is a West Coast market and this is a downy mildew product. And then leafy greens, there is always a need for more leafy green products out here in Western California Arizona. And then Southeast, cucumbers and squash the curb at downy mildew big problem. And great in the West botrytis and strawberries on botrytis gray mold. And then for -- and then things like snap beans for white molds. Now for amplitude we don't have as much data, we have some good data. but it's not as broad of a dataset as we do on Stargus for specialty crops. But a data for amplitude which is the raw crop version allowed us certainly to submit to Mexico and Canada with soybeans on it. And the amplitude is already approved by the EPA it’s just that we're not launching that brand until the season next year. And we'd be focusing on white mold on soybeans. That is an emerging disease. Growers tell me they're seeing more and more of that. And so I think we've got a real strong product here for that.

[Sameer Joshi:]

And just a clarification, both of this is the same formulation. Is the application method the same?

[Pamela Marrone:]

It is the same formulation, but the label and the rates for use are different. So there is a -- you use a different number of quotes in for things like white molds versus the specialty crops. Just like the Regalia Rx. Regalia Rx use the different rate.

[Sameer Joshi:]

Okay. So this next question is sort of a longish question, but it covers the next 12 to 15 month in terms of product launches, I know you mentioned four new product launches over the next three years, but -- or the next 12 to15 months how does that look. And then part B of that question is how does your utilization of current capacity and future capacity expansion relate to new product launches and expansion of markets?

[Pamela Marrone:]

Okay. So we're -- so we said after the end of 2015 we said we were going to launch four new products in next three years. So we're done with the three of the four that's Haven – Majestene, Haven and Stargus, I mean, and shortly launching Stargus. So the next one up would be Ennoble that would make number four. And then after that would be our herbicide MBI-014 but that depends on when we launch -- when we get EPA that we have to submit it and that's near-term we're just finishing the tox studies, already done with their stuff. And then that will be the next one up. We have other things in development that are I said brand refresh and value creators to existing products for example Regalia Premixes with the [indiscernible] chemistry and Regalia and Stargus premixes to a create an even better product and brand segmentation in the market. And those are already completed by R&D. We haven’t set a target launched for that. We also have some seed treatment versions that would be near-term launch as well. We're looking at the go to market strategy for our bio-SST, bio stack seed treatment because second year in a raw and we did semi commercial trials this year, which are looking very good. So we're figuring out how to go to market and launch that in 2018 may be the first growers will be the organic ones who have the biggest need while we are looking for partners for the larger markets any way. Now, the second part of your question was, how much of the new products contributing to the growth.

[Sameer Joshi:]

Yes, contributing to the growth and also your manufacturing capacity versus utilization?

[Pamela Marrone:]

Okay. So, Stargus cannot be made in Michigan at this time because we don't have a setup for spore formers which are so Stargus has bacillus which has resting spores that are hard to get rid of. And so we don't want to kept them in the plant with our other products which don't make spores and then you’ll never -- every time you make a Grandevo, you’ll get some spores bacillus over running it, that I haven’t had a very much experience with that. So, we're going to continue this whole manufacturer Stargus for the time being and then same with Ennoble, we're contracting that, it's a completely different kind of manufacturing made in solid culture, which we don't have in Michigan. So, the near-term with Michigan would be bringing Haven -- we are contract manufacturer we could bring Haven heavy and also we have been working on bringing Majestene and Venerate in through some adjustment to some filtration on some tanks, which is not too expensive in the near-term.

[James Boyd:]

And we're going to be increasing Regalia production.

[Pamela Marrone:]

Yes, we're buying a bitter tank because Regalia, we need it, yes.

[Sameer Joshi:]

I know I said, my previous question was going to be last, just a curious question, are you seeing sequential growth from the Cannabis/hydroponic market or is it lumpy right now?

[Pamela Marrone:]

We are seeing sequential growth especially since the largest hydroponic distributor took in product, this actually it would be fourth quarter right. We are seeing sequential growth, there was a little fires burning in some of the crop in California for the medical crop. And there are estimates of 25% burned, but we don't know if that's going to affect anything right now. Certainly California is gearing up for January 1st recreational and California has partnered food and agricultural has hired 100 people to put in place “Cadillac Regulations that will regulate recreationally use.” So, that's why we're doing the small pack sizes because that's going to hit -- we think that's going to have an effect and hit pretty quickly.

[James Boyd:]

But we continue to see good...

[Pamela Marrone:]

Yes, yes.

[Sameer Joshi:]

Got it. Okay. Thanks a lot for taking my question.

[Pamela Marrone:]

Thank you, Sameer.

[Operator:]

[Operator Instructions] We'll take our next question from Laurence Alexander from Jefferies.

[Unidentified Analyst:]

Hi, this is Nick Patel [ph] on for Laurence. Thank you for taking my call.

[Pamela Marrone:]

Hi, Laurence. Who is on?

[Unidentified Analyst:]

Nick [indiscernible].

[Pamela Marrone:]

Hi, okay.

[Unidentified Analyst:]

Hi. So, I guess taking a look at over the next three to five years, what areas do you see you having the most opportunity for growth?

[Pamela Marrone:]

International is a big driver of growth, it's gated by regulatory but the growth of biological is actually higher on a growth rate basis outside the United States simply because the market is less penetrated then in the U.S. which has the best regulatory in the most mature market here. So, huge need internationally, Brazil will be -- we think is going to be a significant growth driver. Eventually China, I mean, if you look at the numbers of what our distributor partners in China telling us with the middle class wanting the growing middle class and more wealthier consumer, demanding safer food these types of products are going to be highly desired but it's not yet pent the biological market is very, very early in China but it is a growth driver over the long-term. Row crops will be growth driver for us over the long-term. We focused on specialty crops and then now -- and then with selected partners on row crops but now like we have Grandevo and Venerate could be used in for row we have the data irrefutable data for controlling nematodes in furrow, in row crops now we have amplitude for white mold in canola and soybeans, seed treatment. So we have really I would say one the best portfolios for row crops already registered products. And so we're really focusing on our go to market strategy of how to drive that growth in the row crops. We view selected partners and now we may go through that, but also some targeted grower activities. Also then the third bucket of growth is of course new products. We do see that as a growth driver especially when 014 gets to the market for glyphosate-resistant palmer pigweed and other pigweeds and lambsquarters and such. And Stargus, Stargus as I said in the script, we think is a winner the data is just coming back so strong. And it fills the need in the market. I mean, the whole point of what we do is finding an unmet need in the market and then using our R&D either in license discovery or discovered ourselves and then get it to market to fill that need. And Stargus is a great target example of how we identified that there were fewer biological and chemical products in the downy mildew and white mold market and botrytis market and now we have that product.

[Unidentified Analyst:]

Great, thank you very much.

[Pamela Marrone:]

Yes.

[Operator:]

And it appears there are no further questions. I'd like to turn the conference back over to Pam for any additional or closing remarks.

[Pamela Marrone:]

Thank you. In closing, I want to thank each of you for joining us today. We will be conducting several road shows and attending conferences on both Coasts. So if you're interested in the meeting, please contact management or our IR firm as we 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.

[Operator:]

And that concludes today's presentation. We thank you all for your participation. And you may now disconnect.