Marrone Bio Innovations, Inc.
Q4 2017 Earnings Call Transcript

Published: 30 Mar 2018

[Operator:]

Please standby. Good day. And welcome to the Marrone Bio Innovations’ Fourth 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 2017 fiscal year 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 or 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?

[Pam 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. 2017 was a transformative year and one of continued execution. Today I am pleased to announce that the company is in healthier position than ever before. First, from a capital standpoint, we raise new equity and have eliminated the vast majority of our debt and deferred much of the remaining interest into maturity, which provides us with the resources to execute upon our business plan. Second, from a longevity standpoint, with the stronger balance sheet, customers, distributors and growers now have the confidence that we will be around tomorrow, the next day and years to come. As a result, our customers know that MBI’s product will always be available for use in their crop production program, which we expect to translate into more meaningful sale. Third, our customer base is growing and our relationships with distributors are stronger. We believe we are well-positioned in the marketplace and have made steady progress in penetrating target market in both the U.S. and abroad through our partnership. Some that we signed in 2017 or with Agri-Star in Mexico, DISAGRO in Central America, ÉLÉPHANT VERT in North Africa and Kenya Biologics in Kenya and Tanzania. Fourth, from a product standpoint, we launched two new products in 2017, Haven in March and Stargus in December. We now have six EPA approved biopesticide products and one biostimulant product on the market. MBI has commercialized seven products in only 11 years and unprecedented accomplishment in the ag industry. We expect more to follow. And finally from the data standpoint, global field trials which are required for registration have come back very promising as always. Key areas that are returning good data include the U.S., Canada, Central America, Europe and East and Southeast Asia, and notably, Brazil, which is a key target market and the largest pesticide market in the world. Now, before going any further, I would like to take a moment to discuss who we are, what we do, why we are the innovation leaders and why it’s a very important for those of you who may be new to Marrone Bio Innovations. Put simply, we develop natural products, commonly called biological for controlling pests and increasing crop yields and quality. Our products are all biologically based and fall into two categories under the umbrella of biological, biopesticide for crop protection and biostimulant for crop enhancement. There are many benefits to growers to implement biological as part of their integrated pest management program or IPM, whether they are organic, transitioning to organic or conventional and a spray our product in a tank mix in -- or in rotation with chemical. Although, our products are often used by organic farmers, conventional farmers who use synthetic chemical actually account for around 70% of our sales today. So why is the case? While the benefits are significant, first, our products can make pest management more effective than programs that only use synthetic chemical pesticide. Implementing biological as part of crop production program, growers can improve yields and quality of their crops, creating a higher return on investment. Pest resistance, a common problem with many synthetic chemical is reduced or eliminated, again increasing return on investment. Biologicals generally 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 is more quickly after spraying. Biologicals don’t leave synthetic chemical residues, 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 the growers, there are also major benefits to us as a company in producing these biological products. Our technology and science based approach has help led the way to mainstreaming biologicals. Biologicals have a much lower development cost and time to market than synthetic chemical. As a comparison, synthetic chemicals cost on average close to $300 million and take 11 years to develop and bring to market. Our strategy is to uniquely take advantage of a capital light model, given our experience it takes us less than five years and around $5 million to get a 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 product, and crop and label expansions. This in turn expands our market opportunity. The global pesticide market is massive, totaling approximately $50 billion today but recently growth has stagnated and projections of the synthetic pesticide market are less than 6% compounded annual growth rate. While the newly emerging biological market is much smaller around $3 billion it is growing at a compound annual growth rate of around 15%. The biostimulant market, which MBI entered in [2007] with Haven is growing about 10% to 15% annually. MBI’s growth is significantly outpacing all of these markets. Currently we are focusing our marketing dollars on the biggest opportunities in specialty crops, such as berries, leafy greens, potatoes, pome and stone fruit, fruiting vegetables, grapes and nuts. But a large new opportunity exists with the registration of Stargus and Amplitude in late 2017, which provide powerful products to combat downy mildews in great, leafy greens and vegetables, and white mold in leafy greens, succulent and dry beans and peas and lentil. These complement Regalia which is strongest on powdery mildew. Also a significant opportunity exists in row crops such as corn, cotton, wheat and soybeans, especially for seed treatment which we started to penetrate through a strategic partnership with a large agrichemical company Albaugh, LLC. Finally, another growth driver for us is organic, the fastest-growing segment in food. There are simply not enough acres to meet the demand. To help transitioning in current organic growers we have a product portfolio across the full range of pest implant disease need, with the exception of a herbicide, which we plan to launch in the future. We continue to prove in field trials, on farm demos and customer adoption that we have great products that on their own can perform as well as or in some cases better than chemical standards, and also improve control, yields and quality when incorporated into integrated programs of chemicals, resulting in an increased return on investment for the grower. That said, to reach our full potential, we need to continue to drive grower demand through increased awareness, demos and educational programs. With that, I’ll turn the presentation back to the quarter and full year 2017 to discuss some of the highlights within each product category. As I noted in my opening remarks, we continue to make considerable progress, despite a challenging agricultural environments and weather conditions. 2017 was a year of continued momentum and execution, which included several noteworthy events. I’d like to briefly highlight a few of these at a high level before jumping into the detail. We signed international distribution agreements for Central America, Morocco, North Africa, Kenya and Mexico. We signed a distribution agreement with a large water treatment company Solenis who assisted with the commercial application to a power plant in 2017. We are excited by the potential of Zequanox with an experienced large water treatment partner like Solenis. Two new commercial products were launched in 2017, Haven sun protectant in March and Stargus, our downy mildew and white mold biofungicide in December. More recently in January 2018, we launched our Majestene counterpart brand Zelto, our first segmented product into turf. One of our microbes has launched successfully via our strategic partner Albaugh into their row crop seed treatment market. Albaugh has announced that their BIOST seed treatment outperformed the commercial standards leading to increased yields on cotton, corn and soybean. In the next three years, we estimate that our partnership with Albaugh as part of their BIOST seed treatment could translate to $8 million to $10 million of revenue for MBI on an estimated 8 million to 9 million acres. Our field trial results around the globe were very positive. We completed the second year of successful field trials with MBI’s and Groundwork BioAg Bio-stacked Microbial Seed Treatments on corn and soybean, with yields as good or better than the commercial standards. Our biofumigant Ennoble or MBI-601 get higher marketable yield as good or better than the chemical standards on strawberries, lettuce and celery. We saw exceptional results from field trials in Brazil for Regalia, Grandevo, Majestene and Venerate. With these results, we anticipate a clear path to registering our products in Brazil, providing access to one of the largest commercial crop protection markets in the world. Other key areas with very good data for Regalia, Grandevo and Venerate are Europe, South Korea, Philippines and Vietnam. For example in the Philippines, Regalia delayed the onset of the worst banana disease, Black Sigatoka and was as good as the chemical standard. Haven increased yields of almonds and walnuts for the second season in a row, providing nut growers an ROI of 5x to 9x on almonds and 3x to 5x on walnuts, depending on the number of applications and amount of water used. From a manufacturing and R&D standpoint in 2017, we have completed installation of our Grandevo WDG granulation line which is now up and running at our Michigan manufacturing facility, which will improve margins and ensure consistent supply. We shortened the production cycle times of Venerate and Majestene, which improved our margins. We have developed a new process for Majestene that substantially increases the [namatoceto] compound which should improve margins. We made a substantial potency improvement in Grandevo, which should improve margins in our future product version. We successfully scaled up and manufactured Haven and Stargus. Together with our partner Evogene, we discovered an insecticidal protein from MBI’s bacteria, which was successful expressed in plants, resulting in 100% kill of pest caterpillars. We jointly filed a patent on this discovery. We completed development of MBI-014 bioherbicide and finished toxicology studies, and we are now preparing the EPA submission package. We view all of these as major accomplishment. Weather presented many challenges in 2017 to the entire ag industry, the unfavorable weather conditions reduce the number of expected sprays in several of our key markets, especially in the fourth quarter in the Southeast due to hurricanes and in parts of the west where the drought is still in effect. Fortunately, our portfolio approach to product development and marketing is designed to diversify our revenue base and reduce the impact of anyone approach -- of any -- of any one variable on the success of the company as a whole. This product portfolio approach allowed us to achieve 2017 growth above the industry average with all of our product lines showing growth. In addition to this portfolio approach, we also have worked diligently to grow our sales geographically, which should help to smooth out seasonal fluctuation in the longer term. As noted previously, we now have six EPA approved biopesticide products and one biostimulant 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. A significant patent in 2017 was from the U.S. Patent and Trademark Office on broad composition claims for the microbe in Majestene and Venerate, and another from the European Patent Office on broad plant health claims for the technology behind Regalia. 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 more quickly, while we wait for registrations in larger region such as Europe and Brazil. Regalia, our first product and the industry’s first effective plant extracted fungicide 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. For example, Regalia increased marketable yield in strawberries, with more than a 9x return on investment. In alfalfa, Regalia increased nutrient content and increased yield by nearly 1 ton more per acre, which results in an estimated ten-fold ROI. On potatoes in Guatemala, Regalia Maxx provided early preventative control of late blight under high disease pressure condition. These preventative sprays of Regalia Maxx allowed adoption of an IPM program to reduce the high number of chemical sprays. In young rubber plantations, Regalia Maxx can delay the onset of diseases like black stripe and moldy rot. On older disease plantation, Regalia Maxx performed as well as the standard, which was comprised of four different modes of action chemicals. Organic Grandevo continued to expand its uses in IPM programs across many fruits and vegetables. This product experience volume growth year-over-year, but its growth was affected by lack of supply of Grandevo WDG, for which we recently expanded our production capacity at MMM. We are fast tracking another new process improvement from R&D, which we estimate has the potential to significantly reduce Grandevo cost of goods. Grandevo is increasingly being recognized for its benefit in an IBM program for controlling the dreaded Spotted Wing Drosophila on soft fruit. UFDA trials continue to show outstanding control of pecan weevil. In Brazil, Grandevo was a good as the neonic standard for Asian citrus psyllid and in the Philippines was the best at reducing scale on mealy bug on bananas. Grandevo and Venerate outperformed the chemical standard on strawberries syrup in Europe. Venerate which controls the wide spectrum of pest, insects and mites was a novel but different mode of action than Grandevo is rapidly gaining uptick as growers experience the improved control in their IPM programs with the added flexibility of labor, residue and resistance management. Our overall year-over-year product growth was led by the growth of Venerate with an 80% increase. Off note, Venerate showed effective control as a dormant spray for control of scale on apple, which has historically been sprayed with controversial chemicals such as chlorpyrifos. Venerate Also control to two bad fly pests, walnut husk fly and olive fly, typically treated with toxic chemicals. Both Grandevo and Venerate gave approximately a 20x return on investment by stopping damage from naval orange worm on almond, which is becoming increasingly problematic due to resistance to conventional chemical. As mating disruption becomes the standard program for naval orange worm, Grandevo and Venerate are wonderful compliments to the pheromone program for extra assurance and lower risk of damage. In the Philippines Venerate controlled by banana stripes, as well as the chemical standard. Majestene, controls roundworms or nematodes that feed on the roots of plants and destroy crop yield. In 2017, U.S. grower usage, Majestene showed good performance on potato, carrots, turf and several other berry and vegetable crop. Trials in Brazil showed control of nematode and yield increases, as well as the chemical standards on soybean and banana. We saw control of nematode on black pepper trees in Vietnam and bananas in Central America and the Philippines. In South Korea, Majestene had good efficacy against root knot nematodes on tomato. R&D continues to advance the next-generation Majestene product that substantially [amps up nomatecidal] activity by more than 100-fold and will likely reduce the field application rate while increasing gross margin for MBI. We 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 the sunscreen for crop, reducing sun stress that affects yield and quality. We successfully scaled up, manufactured and shipped product targeting crop such as nuts, apple, onion, berries and grapes. Yield increases in nut trials have been positive for the second year in a row, showing an ROI of 5x to 9x on almonds and 3x to 5x on walnut, depending on the number of applications and amount of water used. Due to the lower regulatory barriers for biostimulant we are shipping product to international locations to get the efficacy data needed to support sales as quickly as we can. The active ingredient MBI-110 which we call Stargus for specialty crops and Amplitude for row crops and which was approved by the EPA in late October has shown outstanding efficacy on white mold, downy mildews and botrytis bunch rot. This is the seventh EPA registered product we have commercialized from six new active ingredients, which we believe is unmatched productivity. We also submitted the registration to Mexico and Canada. Stargus gained its access to the eastern grape mildew and bunch rot market. Amplitude gains us access to an intensive fungicide segment on dry beans, peas and lentil, where better solutions are needed. We are really excited about the future potential of these products. MBI-601, a biofumigant is our newest product, which we have named Ennoble. Ennoble showed excellent results in field trials, on strawberries Ennoble plot had 1,000 to 1,500 more pound of marketable berries than the chemical fumigants standard. Ennoble yielded 13% and 20% more than the best chemical standard against two types of lettuce white mold and against the dreaded Verticillium on lettuce achieved close to $8,000 greater return per acre. Against one of the very worst vegetable diseases, Fusarium Race 4, Ennoble outperformed the grower standard under severe disease conditions on celery. Ennoble manufacturing is being scaled and we have arranged demos with customers. Our R&D group had finished the development of MBI-014 herbicide for submission. Toxicology studies are complete -- completed and the package is in preparation for submission. MBI-014 has always show good activity against the scourge pig weed such as glyphosate-resistant Palmer Amaranth. New spectrum studies showed more than expected activity against some grasses along with some control in the Malva and Astra families. The USDA team doing work for us on the mode of action, so our complete and total repression of T-Weed gene in 5 minutes leading to plant stunting. In laboratory tests, the key herbicide compound in MBI-014 by itself is more than 300 times more active than glyphosate and more than 1,000 times more active than gluphosphonate on a per acre basis. Our 2018 goal for MBI-014 is to further design the art of use in combination with adjuvant and conventional chemical herbicides in a substantial field testing program. And finally, an update on Zequanox, the industry’s only biological solution for invasive mussel and the only low-risk product registered by the EPA for open water use. For in-pipe treatment, we announced a distribution agreement with a large water treatment company Solenis who assisted with a commercial application in a power plant in 2017. We are very excited by the potential of Zequanox with this experienced large water treatment partner. 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 chemical to biological. MBI’s products have been added to cannabis approved listings by several states. That has permitted the sale of cannabis and hemp for either medicinal, food, fiber or adult recreational uses. We have developed labels for all of our products in smaller packet sizes with the suffix CG, which stands for cannabis and garden, such as Regalia CG, Grandevo CG and Venerate CG. Colorado, Oregon, Washington and Nevada have approved the CG label and package for Regalia with other states spending. We are also selling Regalia, Grandevo and Venerate on Amazon. We have completed the required efficacy studies for Regalia in Canada where recreational cannabis may soon be legal throughout. Worth noting, we have sales through a distributor who targets the cannabis market and that distributor is now one of our top customers. In late 2017, we 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 mite. To field all the calls and better support our customers, we have hired a sales specialist for the cannabis market. Now before going further, I would now like to turn the call over to Jim to go through the numbers and provide additional details on our financial performance. Afterwards, I’ll walk you through some of our other strategic initiatives for 2018 before wrapping up the call with Q&A. Jim?

[Jim Boyd:]

Thank you, Pam. As noted, I would like to walk you through our fourth quarter and full year 2017 results. Our GAAP revenues for 2017 totaled $18.2 million, up 29.4%, compared to $14 million in 2016. We reported product shipments in 2017 of $19 million, up 16.2%, compared to 16.4%, up $1 million in the prior year. GAAP revenues for the fourth quarter of 2017 increased 23.3% to $3.3 million, compared to $2.7 million in the fourth quarter of 2016. Product shipments for the fourth quarter were $3.8 million, compared to $5.2 million in the fourth quarter of last year. The fourth quarter shipment decline was due to several factors including hurricanes in the southeast in Puerto Rico, continued drought in parts of the southwest, as well as hesitations in buying decisions from our customers prior to our comprehensive financing and debt restructuring. We believe we are now on firm financial footing which we expect will help sales moving forward. As a reminder, our GAAP revenue recognition policy requires us to defer some revenues 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 on 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 our product shipments are helpful measure for investors to understand operating results and track product adoption. However, starting January 1, 2018, we will be subject to the implementation of a new revenue accounting standard, commonly referred to as ASC 606. That’s our GAAP revenues on an on -- on a go-forward basis will essentially be the same as the old sell-in method, allowing us to recognize revenue upon product shipment to our distributors. We welcome this change as we feel revenue recognition upon product shipment more accurately reflects the performance of our company in a given quarter. Please note that an estimated $5.7 million of our 2017 deferred revenues will not be recognized as revenue in 2018 as it would have been in the past. Instead, the $5.7 million will be booked to the balance sheet as returned earnings and not run through our income statement in accordance with the guidance in ASC 606. Gross margins increased significantly year-over-year to 42% in 2017 from 32.2% in 2016. Gross margins in the fourth quarter were 46%, compared to 39% in the fourth quarter of 2016. Gross margins benefited from favorable product mix, the true-up of annual rebates, as well as some small capitalization of manufacturing variances. We expect to see gross margin increases over the lifecycle of each of our products as production processes improve and as we gain efficiencies and increase yields. Operating expenses in 2017 were $31.1 million, compared to $28.2 million in 2016. SG&A expenses in 2017 were $20.1 million, compared to $18.5 million in 2016. This increase was largely due to higher consulting expenses associated with our Oracle Cloud ERP implementation, general financing and marketing efforts, higher legal expenses associated with corporate financing activities and a non-cash write-off on the sale of equipment. SG&A in the fourth quarter decreased to -- $4.5 million, compared to $4.7 million in the same period last year. R&D expenses, which include manufacturing support and process improvements, patents, regulatory, field trials and new product development were $11 million for the full year 2017, compared to $9.7 million for 2016. R&D expenses in the fourth quarter of 2017 were $2.6 million, compared to $2.4 million in the fourth quarter of 2016. The increases were mainly due to an increase in field trial expenses. We remained focused on managing operating expenses. We expect operating expenses to remain approximately flat in all departments with the exception of our sales and marketing departments. In 2018 we are planning for growth by investing in sales and marketing resources. We are putting more boots on the ground, which should increase grower demand or pull-through, develop new customers, as well expand business with the existing grower customers. Investments in sales and marketing also strengthens our infrastructure and de-risks our business by allowing us to intensify our efforts in certain territories, cover for employee turnover, better educate our customer facing personnel and increased marketing and communications campaigns. Interest expense grew $360,000 year-over-year to $7.7 million, or an average of $1.9 million per quarter. However, with our recent debt restruction, our interest expense on long-term debt will decrease to less than $2 million in 2018 or $500,000 per quarter. Now, turning to the balance sheet. Inventory at the end of the fourth quarter was $9.8 million, as compared to $8.5 million last year, which is adequate to address near-term demand. Our 2017 cash usage from operations was $21.1 million or an average of $5.3 million per quarter. The $21.1 million represents a 13.4% decrease when compared to the $24.3 million of cash use from operations in 2016. Fourth quarter 2017 cash usage from operations was $6.6 million versus $6 million for the fourth quarter of 2016. This increase was primarily due to increased working capital. At the end of the fourth quarter, we reported total cash and cash equivalents, included -- including restricted cash of $2.8 million. Of note, in February 2018, we closed private placement equity transactions with certain institutional investors in tandem with the debt restructuring -- with debt restructuring transactions in which we sold $30 million of common stock with net proceeds of approximately $27.3 million. In addition, we converted $45 million in principal of our long-term debt at year end or 73% of our year end debt to common stock at an average price of $1.75 per share together with 20% warrant coverage. The restructuring included the extension of all maturities on the Waddell & Reed and Snyder notes until December 31, 2022, and the deferral of all remaining interest payments on those notes until maturity. The above numbers excludes the $4 million in bridge loans that were part of the new financing and also converted to common stock in the transaction. This reduction in debt -- this reduction in debt and the deferral of interest will reduce total cash burn for the company by approximately $1.3 million per quarter. This transaction was truly transformative and we are confident that it provides a solid foundation for our future. 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?

[Pam Marrone:]

Thank you, Jim. We thank our debt holders and our new and existing investors for their confidence they have placed in us. We recognized the tremendous responsibility we have to realize MBI’s potential as a significant force in ag biological and global crop production. We have made great progress in key strategic goals in operation. I want to now highlight where our focus will remain in 2018 and beyond. 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, the capable organizational structure and a highly targeted R&D approach that is focused on supporting sales and manufacturing, and increasing gross margins through process improvement, and also a small percentage on new product development. Our R&D, supply chain and manufacturing, margin enhancement efforts have been achieved through, potency improvement, achieving the same protection with less product, yield increases, which reduces our cost of goods sold, greater scale, which reduces overhead and improved operating efficiencies, and finally, continued focus on strain improvement technologies, such as the next generation processes of Venerate, Grandevo and Majestene. We will continue to also move forward with our selected pipeline product MBI-601 Ennoble biofumigant, as well as MBI-014 bioherbicide. Since late 2015 we had a goal to introduce four new products to the market in the next three years and have substantially accomplished this goal. We introduced Majestene in early 2016, Haven and Stargus in 2017 and our Majestene counterpart brand Zelto in 2018. We have done this all while keeping R&D flat, for our little company, it is truly impressive to have a portfolio of seven highly effective products in 11 years. We now focus on continued market penetration of our existing products. These include additional specialty crops, such as carrots, cannabis, mangoes, coffee and bananas, turf and ornamental, use in large row crops, like corn, cotton and soybeans, seed treatments and home and garden. There are two key areas we think we can improve and are actively working to do so. First, to continue our push pull strategy, working closely with distributors to identify their grower customer needs. And second, a renewed focus to create grower demand by increasing awareness, education and demos with top growers on our key target crops. We can significantly improve our execution in this area, especially with our stronger balance sheet. We have already seen positive reaction and increased interest by distributors and growers in existing and possible new strategic partners. We believe that hiring the right people is also a key component to our success moving forward. We are seeking entrepreneurs who are passionate believers in sustainable ag and biologicals, and who want to help growers increase their ROI. We are recruiting top tier industry talent to lead this charge by focusing our entire commercial team to add new customers, expand revenues of existing customers, enhance the grower demo program and launch new products in our target crops, where our portfolio has the best fit in integrated programs. We believe our product portfolio presents an excellent opportunity into row crops, led by seed treatment, where we are experiencing significant growth. As noted, we believe our recently closed private placement and debt restructuring transaction represents a significant milestone in our corporate history, putting us in a strong position to execute and focus on our core business. In summary, we remain focused on short-term goals, such as revenue and margin growth, working capital management, and building a high performance sales and marketing team. Although, while, building for our longer term vision of being the market leading biologicals company through our own products, combined with synergistic products and technologies. I am extremely proud of our employees for their hard work and dedication. We remain keenly focused on execution to build shareholder value. With that, I’d now like it to open up the call for questions. Operator?

[Operator:]

Thank you. [Operator Instructions] And we’ll go first to Amit Dayal with H.C. Wainwright.

[Amit Dayal:]

Thank you. Hi, everyone. Congratulations on all the progress.

[Pam Marrone:]

Hi.

[Amit Dayal:]

Just my first question, Pam, if you will on the gross margin side, as we saw substantially higher gross margins on slightly weaker revenues, what is the driver behind this, so was it certain products or certain customers that were not part of the sales this time that drove margins higher. Any color on clarifying what this delta was.

[Jim Boyd:]

Well, it really wasn’t what I mentioned in my script. It was mainly product mix. I’ll followed to a lesser extent with some capitalization of variances, and yes, we have some true-up of our rebates that we took earlier in the year.

[Amit Dayal:]

Got it. And then, I may have missed this, I apologize if am asking for information if you had already provided. The gross margin trends, are we looking at these fourth quarter levels in the future, are we looking at the levels prior to the fourth quarter?

[Pam Marrone:]

Well, we have a long-term gross margin target of around 50% and we have been very closely executing on towards that by upticking our margins through what I mentioned in the script, which was yields and potency, and strain improvements, and scale.

[Amit Dayal:]

Got it. Then in regards to your sort of sales and marketing efforts going forward or at least for the next few quarters, it looks like we don’t really have any new product launches planned for 2018. But we are focusing more on trying to just execute against products you already have in the market. So how will your sales and marketing department sort of evolved to facilitate that and in line with that, how should we look at expenses around these efforts to sort of scale up as we go through the year?

[Pam Marrone:]

Yes. Star -- we did launch Stargus in the fourth quarter, but it was -- we just gotten registration so it was really where we had gotten state registrations in a couple of state. So, really Stargus is new across the country in 2018, as well as we haven’t launched Amplitude yet. That will be launched soon as we get the product finished, the label on the job and into the bean segment, which I mentioned on the call, and so those will be in the focus. Yeah, you’re right, we don’t have any new active ingredients other than those for 2018, which because we had targeted four new and then launched two of those. We still have Ennoble and MBI-014 to go. We’d like to have a targeted placement of Ennoble in 2018, but we haven’t forecast a lot for that, because we are still scaling up the manufacturing on that. Now on the sales and marketing, they really -- we really are focusing on executing on increasing grower demand through a very tightly controlled demo program, as well as a focused on creating a crop focus, so it’s a key target -- a set of key target crops, as I mentioned. And then really getting the top growers to become aware of us and educate them, and have them try the product. Number one is product aware -- is product and company awareness. We are still -- we are small company and still have a lot of work to do on increasing the awareness of just who we are in this category, biological. And then educating on how you use these products and that’s really where we are focusing. Jim, do you have anything to add?

[Jim Boyd:]

Yeah. And we are going to really focus all the efforts of the company on ramping our current commercialized products.

[Pam Marrone:]

Right.

[Jim Boyd:]

Including those four new that we have had in the last couple years, we really need to ramp those up in volume.

[Pam Marrone:]

Now, the MBI-014 product, which we still are very have think got a lot of potential, the herbicide, because we’ll have a minimum of an 18-month once we submit approval timeline unless we can get some emergency uses for that, but we won’t know about that. There will be work to do on really defining, as I mentioned, the art of use of this first generation product and top -- there’s a lot to do on that art of use and there is a lot of chemical combinations with the product, as it synergizes glyphosate for a resistant weeds, getting adjuvant that are best use it and all the things that to do to really target into powerful commercial product when we launch version one.

[Jim Boyd:]

And we were -- we are really, as I said earlier, focusing on ramping the commercial -- our current commercial products.

[Pam Marrone:]

Yes.

[Jim Boyd:]

We have added one salesperson this year already in 2018, one sales position in the Southeast, one in the Pacific Northwest and one in California.

[Pam Marrone:]

Right.

[Jim Boyd:]

To really…

[Pam Marrone:]

Additionally.

[Jim Boyd:]

… really concentrate on ramping those products.

[Pam Marrone:]

Yeah.

[Amit Dayal:]

And then as you ramp the sales efforts, how does that equate to the existing capacity levels that we are running at versus what is available. Will you need to have more capacity? Will you need to do work on that front this year?

[Jim Boyd:]

Yeah. We actually added a fair amount to it…

[Pam Marrone:]

The manufacturing do you mean?

[Jim Boyd:]

… the manufacturing this year in that. We did spent about a $1 million in capital expenditures over the last 12 months, adding WDG and just improving the production and…

[Pam Marrone:]

Packaging line.

[Jim Boyd:]

Yeah. We are adding the packaging line now.

[Pam Marrone:]

Adding that, yeah.

[Jim Boyd:]

But that plan MMM can probably take us through the next year. We are also right now started an expansion of the plant. I think we could possibly get through 2018 and ‘19 with the existing capacity.

[Pam Marrone:]

Yeah.

[Jim Boyd:]

That will start building for 2020 soon.

[Pam Marrone:]

And when continue to maintain a select group of contract manufacturers to make sure that we have the flexibility and always continue -- not worry about product supply.

[Jim Boyd:]

Yeah. We keep back up vendors to be able to produce in case there is any downtime at MMM, but also to handle any peak demands.

[Amit Dayal:]

Got it. Just one last one for me, the revenue mix, international versus U.S., I don’t know if you provided any breakdown in commentary, but how do you see that sort of evolving over the next few years. Is international going to be as strong as the U.S. or do you expect sort of the U.S., North America, et cetera to dominate?

[Pam Marrone:]

So as you know the international business is gated by field trials, for efficacy trials first, official trials and then registration in each country. And we are -- as I mentioned as a number -- ticking those down using exclusive this regional or national distributors to do those for us and as those come in that drives growth. So we do see the growth outside the U.S. to be higher actually -- the highest, because it starts from a small base. So also as you tick down those countries to drive growth. And so we do in five years expect international to be a significant part of the business. And that’s by design, because our products fit in these markets where all the drivers are there, residue resistance, higher yields and quality, and so forth, and also the U.S. is a much more mature biologic -- biopesticide market whereas the markets outside the U.S. are not. The adoption of biologicals is early. So the growth is higher.

[Amit Dayal:]

Got it. That’s all I have. Thank you so much.

[Pam Marrone:]

Thank you.

[Operator:]

We’ll go next to Laurence Alexander with Jefferies.

[Nick Cecero:]

Hi. This is Nick Cecero on for Lawrence. How are you doing?

[Pam Marrone:]

Hi.

[Nick Cecero:]

So just a few quick questions, I was wondering, longer term, how do you think about your targets for the balance sheet and free cash flow generation?

[Jim Boyd:]

Well, I think -- we are making good progress on the sales front. We have several high value opportunities in the pipeline. We are increasing our gross margins. And although, we are a conservative management team, we are pretty comfortable with our cash position and balance sheet.

[Nick Cecero:]

Got you. And then maybe as products start ramping, will you sort of dialing up your R&D spend over the next few years or do you expect to just kind of keep it flat where is that right now?

[Pam Marrone:]

We have not planned on substantial R&D increases, because we are -- we as a management team want to get a breakeven in a reasonable period of time. So I should mention that in previous question -- previous questioner, Amit, asked about, we don’t have any new product launches this year. That doesn’t mean that R&D isn’t doing anything on new products. So we have actually got some interesting combo products that they are working on with the amount of the small amount that we have allocated for new product development. And we are looking at the pipeline of the next-generation of products. Now that we pretty much developed or closely developing that once we said, three years ago, it’s now time to refresh that R&D pipeline and we are in the strategic planning process to do just that. And we have a lot of assets. We have screened 18,000 microbes. We have got a lot of new microbes. We have got a lot of other companies, entrepreneurs and other small companies that have come to us with their products for development. So we are going to sort through those and pick the next four to five product in the -- for the pipeline for the future growth.

[Jim Boyd:]

But, in addition, I’d add that our current R&D team keeps impressing us…

[Pam Marrone:]

Yes.

[Jim Boyd:]

… with how much they can put out and every time we challenge them they rise to the occasion and when we think they will continue that going forward.

[Pam Marrone:]

Yeah.

[Nick Cecero:]

Great. Thank you very much.

[Operator:]

We’ll go next to Robert Smith with Center for Performance Investing.

[Robert Smith:]

Good afternoon and thanks for taking my question.

[Pam Marrone:]

Hi, Robert.

[Robert Smith:]

Hi, Pam and Jim. Pam can you discuss the potential market for the development of the chlorine substitute and what are the steps to that end?

[Pam Marrone:]

Good question. So you might recall since you have been following us a while Robert that at the end of, let’s say, was 2015, we had a 60% reduction in the cost of goods Zequanox, which allowed us to attract a partner like Solenis. And we are -- on a line item -- if you look at the total cost of treatment of Zequanox versus the total cost of chlorine, corrosion of the pipes and all that with chlorine, we are competitive. But if you just look at a line item on a plants budget with the chlorine cost versus the Zequanox costs and we are a lot higher. But we are still in generation one process of Zequanox in terms of the yield. So we could have a 10x fold -- 10-fold increase in yield. So we still -- we think we are over time really able to compete even on that line item cost of chlorine over time, which would really drive the growth of this product and checkout chlorine in the plant. We haven’t allocated any R&D time to do that right now. But as our partnership evolves with Solenis we hope that can be a goal and we have talked about that being a goal in the longer-term.

[Robert Smith:]

Is there anything within the product or ancillary products that might finally use is in general water treatment on the consumption?

[Pam Marrone:]

Of other products or Zequanox or other products we have?

[Robert Smith:]

Well, I am just looking as far down the road is I might want to or you might want to ask, in other words is there the possibility for developing a chlorine substitute to general public in the water supply?

[Pam Marrone:]

Okay. So we haven’t actually looked at that. But I would mention that we have screened about 5,000 microbes if I recall correctly, maybe it’s more against algae. And the Great Lakes and like area there is a crisis right now in algae caused, algae bloom caused by both carp and dreissenid mussel, and we do have two companies testing some of those candidates for algae. We haven’t -- we don’t know what those would be a disinfectant or replaced chlorine, it’s certainly possible, we haven’t tested. The other thing is we have our tested -- a whole -- almost a whole collection against bacteria for plant diseases -- for plant disease causing bacteria. So it makes sense that we could then try them against other types of bacteria outside of the agriculture arena. So, certainly possible and we would -- if that was an interest we would certainly with somebody find a partner for that. Solenis could be, if they want to expand their partnership in the future, yeah.

[Robert Smith:]

An interesting composition. Thanks so much.

[Pam Marrone:]

Yeah. Yeah.

[Operator:]

At this time, I would like to hand the call back over to Dr. Pam Marrone for any additional or closing remarks.

[Pam Marrone:]

Thank you, Operator. In closing I want to thank each of you for joining us today. We continue to conduct road shows and attend conferences on both coasts. So if you’re interested in a meeting, please contact management or 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 longer term. Thank you very much.

[Operator:]

That does conclude today’s conference. We thank you for your participation.