Good day, everyone and welcome to the Marrone Bio Innovations Third Quarter 2019 Earnings Conference. Today's call is being recorded. At this time, I would like to turn the conference over to Ms. Linda Moore, General Counsel. Please go ahead.

Good afternoon, everyone and thank you for joining our call. Welcome to the 2019 Third Quarter Earnings Conference Call for Marrone Bio Innovations. On the call today are CEO, Pam Marrone; President and CFO, Jim Boyd; and Chief Commercial Officer, Kevin Hammill. If you would please refer to Slide 2, I would like to remind you that this conference call may contain statements regarding management's expectations, hopes, beliefs, intentions or strategies regarding the future as well as projections, forecasts or other characterizations of future events or circumstances. Such statements are based on management's current expectations and beliefs concerning future developments and their potential effects on the company. There can be no assurance that future developments affecting the company will be those that management has anticipated. Such statements involve a number of risks and uncertainties, some of which are beyond management's control or other assumptions that may cause actual results or performance to be materially different from those expressed or implied by these statements. Important factors that could cause differences are contained in the reports filed by the company with the Securities and Exchange Commission, including under the heading Risk Factors, and elsewhere in the company's annual report on Form 10-K for the year ended 2018 and in our earnings release posted on the company's website. Should one or more of these risks and uncertainties materialize, or should any of management's assumptions prove incorrect, actual results may vary in material respects from those discussed today. Any guidance that management may offer in 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 President and CFO, Jim Boyd. Jim?

Thank you, Linda. And thank you to everyone for joining us on this call. In the third quarter, we continued to drive revenue growth in margin expansion. We continued to build upon our platform with recent acquisitions that offer near-term accretion and expand our global reach. In addition, we continued to make strategic investments in our R&D pipeline and commercial team, while also establishing a new financing facility that gives us cost-effective and flexible options, all of which accelerate our path to breakeven. As I'll discuss in more detail, some of these strategic investments had non-reoccurring operating expenses associated with them, but they are an important investment in our long-term growth. We have a firm view of what our underlined expense structure should be and have invested in our commercial team to deliver our growth potential. If you would turn to Slide 3, let's start with the third quarter results. As expected, third quarter sales were driven primarily by our specialty crop and cultivated garden businesses. Revenues rose 28% to $7 million on strength in both areas. Our top performing products in the quarter were Venerate, Regalia and Grandevo. We saw a strong uptick in such crops as berries, grapes, tomatoes, rice, and hops as well as tree nuts and fruits. Our largest sales geographically were in the Western United States, including California and the Pacific Northwest. Additionally, we saw an increase in our cultivated garden business, including sales to hemp growers. The acquisition of Pro Farm as well as the acquisition of our Jet-Ag and Jet-Oxide product lines added some modest sales in the last few weeks of the quarter. A favorable product mix drove a 37% increase in gross profit, which reached $3.6 million. Gross margins were 51.5% and marked our fourth consecutive quarter of gross margins above…

Thank you, Jim. The third quarter has been an exceptionally important one for Marrone Bio. As Jim noted, we've continued our growth in the third quarter, increasing revenues 28% with the yet another quarter of gross margin of 50-plus percent. Year-to-date, we achieved record 9-month sales with revenue growth of 46% and gross margins of 54.6%. On top of the sales performance, we closed both the Pro Farm in the Jet-Ag and Jet-Oxide product line acquisitions, and are excited about their additions to the Marrone Bio portfolio. We also announced a new warrant financing facility that enhances flexibility to fund our current operating plan to a breakeven level as well as take advantage of the near-term strategic opportunities like Pro Farm and Jet-Ag. Behind the scenes, work continues in the lab, in the field and with our partners to generate the next wave of growth from Marrone Bio. The progress here has been equally impressive. As we announced today, we have seen positive results from the additional investments we made this year in our novel bioherbicide. If you turn to Slide 6, I'd like to focus on the expansion side of our strategy and give you updates on our recent acquisitions, our newest research partnerships and the newest field results for the MBI-014 and 015 herbicides. As we show on Slide 7, both of our recent acquisitions are off to a good start, and we had an initial third quarter sales from both. We continue to believe that each will be accretive to net income in 2020 given their sales potential and gross margin profiles. The critical work of integrating and educating the commercial organizations and establishing key customer support are already well in hand. We expect sales from Pro Farm to accelerate through the fourth and first quarters, consistent…

[Operator Instructions] We'll hear first today from Sameer Joshi with H.C. Wainwright.

So in terms of your acquisition strategy. Have you identified the candidates and are these candidates more in the nutrient side of the business, or more around the same herbicides, fungicide kind of business?

So you're asking if we're going to continue to do M&A?

Yes.

Okay. So right now, we're focused on integrating Pro Farm and Jet-Ag, Oxide acquisitions and that's an important task. That said, if there are acquisitions or candidates that are accretive to net income and accelerate revenue growth with attractive -- at attractive multiple, then we will consider them.

But you are not specifically targeting a particular kind of market? Like I think Pro Farm has some new nutrient uptake kind of applications.

Right, they do. They have bionutrient and biostimulant. So we're looking at the entire biologicals arena, so that it would be bioprotection, biostimulant and bionutrition. If something came along, again, we're focused right now on integrating our acquisitions.

Okay. And then on the herbicides front, it's great to see the progress on 014 and 015. Do you have a time line on when we can start seeing commercial sales from this?

Well, it's really hard to predict how things go through the EPA. We have additional questions on 014. We're thinking about a possible or hoping for an approval in 2021 for 014. But we're really excited -- like you, we're really excited about the results and the potential market as we discussed today. So stay tuned on that.

And then just -- well can you just provide some more color on the litigation expenses for the 9 months, now they amount to $1.9 million? How should we see those continuing disappearing in the future?

Litigation expenses you said?

Yes, litigation.

Litigations. So that would be for Linda.

Sure. We settled some litigation, the outstanding litigation at the beginning of October under the terms of the settlement agreement, I can't really discuss too much detail about it. It is done and evaluating those kinds of things is always a difficult proposition.

But you don't -- there's no -- but there's nothing -- litigation-related expenses going forward?

Nothing going forward. We're done.

Okay.

Yes. This is Jim. I would add that I think we've got all the expenses related to that one litigation item included in the third quarter expenses, and we don't expect any more, and we don't expect any more litigation.

There you go.

Okay. One last one. Sorry about this. The last one was about Pro Farm margins and Jet-Ag margins. Are those comparable, better or lower than the 50% that we see otherwise?

I would -- this is Jim. I would say that they are comparable or better, and we have very high expectations for both Pro Farm and Jet-Ag, both in terms of margin contribution and in revenue growth, and we expect them to be accretive -- both of them to be accretive to net income in 2020.

And from National Securities we will hear from Ben Klieve.

First, a couple of questions, I guess for anybody but about Jim's comments. This quarter and last quarter on the inventory control measures taken by your distributors. I'm curious to what degree you think that kind of mentality is going to impact the upcoming season for the seed treatment business?

I think we'll let Kevin take that answer. Kevin? Did we lose them?

Kevin is a conference in Chicago.

There he is.

I apologize I had my speaker on mute. Yes. Ben, it's Kevin here. I do not seen a significant impact to our seed treatment business because it's more of a just in time approach and the cadence of that is this kind of like a more upstream feature of the business that historically been more on demand seed treatment. So right after -- basically, right after harvest, the product comes in, it gets treated and that treatment goes starts in, let's say, October normally and goes all the way to April and then a seed is planted. So you have your customary inventory, which we have but we do not see the inventory situation that's planned in the foyer and in-furrow market, really impacting the seed treatment market per se.

Got it. Got it. That's helpful. Another question in your press release that announced the closing of the Pro Farm transaction in like late September I believe it was, you announced an agreement that, that was reached between Pro Farm and Corteva on European business. Can you elaborate on that agreement at all and provide us any details there?

Due to confidentiality reasons, we don't -- we won't provide any detail. But Kevin I don't know if you have any color on -- the press release did talk about the number of factors that was going to be treated in the future,

Yes. So Pro Farm is working in Europe to expand our footprint in terms across the multiple crops and even downstream in Europe. And then we continue with that platform to work with various seed providers in Latin America and less so in North America and also Asia Pacific. So the Pro Farm will really see getting a strong foothold our beachhead in Europe, Middle East and Africa, secondary in Latin America and then we see being able to utilize their technology in the U.S. to complement our already strong portfolio in seed treatment, and then we will expand that into Latin America. -- I mean into Asia Pacific.

Okay. Perfect. I guess one last one for me here and then I'll off. I know went over per the guideline, so I apologize for that. But one last one and I'll get back in the queue. I appreciate the granularity you provided on the efficacy of 015. I'm curious is the efficacy of 014 and 015 effectively the same or they different? And then when the -- when you compare the organic formulation to alternatives in the organic market, can you talk a bit about the efficacy of your product versus those organic alternatives?

So the organic alternatives in the market today and burned down. So they burn the weed, and then it doesn't go down to the row and it regrows. The difference with this is that we have molecules produced by the bacteria that are systemic, so that would yield longer control and better control. These -- the formulations are different between the 014 and 015, and we're looking at a single shot for 015, which is the conventional market, so you spray once and then you get all the weed, which is what you saw in the press release on the slide. With organic, it may require multiple applications, at least 2 or 1 -- 2, depending on the weeds or more, and we're working that used pattern out right now. Kevin do you have anything you want to add to that?

No. It's an exciting year in terms of evaluating the performance and getting the overall performance ready for market acceptance. So it's been a good year for most of the field and from the lab's perspective.

[Operator Instructions] We'll hear next from Laurence Alexander with Jefferies.

I guess two questions. First of all, can you talk a little bit about how the cadence of market acceptance? I mean as you get the data for each of your products, the cadence of market acceptance is being affected by the farmer use of the new digital platforms or the digital advice platforms. Is there -- are you seeing any changes that are accelerating adoption because it's easier for you to see how to mix things? Or is it -- or are you finding it harder because you have to get onto the platform so to speak?

Kevin, you want to take that one?

Yes. That's an interesting question. And I'll just relate to some work we're doing now in the Midwest. As mentioned, as Pam mentioned in her section that we have a BioUnite strategy and from the Midwest row crop farmer, it's looking at combining our Regalia with the growers fungicide they use for plant health. And what the concept is, you put in the Regalia to the current growers plant helps products and they get a yield bump, which gives the 4 to 1 or 5 to 1 return on investment. But what we want to do this year is refresh our data in terms of some trialing, and what's interesting is using the digital platform, we're able to see the various soil sections across -- different soil infections across the field to measure our performance of our Regalia with the standard fungicide versus the standard fungicide and we have to drive that down into even different soil types to see if our performance is equal or similar or better on different soil types. So it's interesting in the latest result I got in just last week, and so that, yes, we have yield bump over the standard fungicide program, but we also were able to track back a fair yield was better in each of the different soil types our farmer had in that field, whereby we measured by our performance with the standard and our program of adding Regalia to it.

That helps. And then I guess secondly, with respect to sort of large grower complexes outside the U.S I'm thinking like down in Latin America or in Asia. Are you running into our seeing in some of the applications the growers preferring to grow their own biologicals even though they are like less effective but just sort of a bit of -- they see it as bringing the skill set in-house?

Yes. There was an interesting -- I was just reading an article of that type yesterday, how a few years back there was an outbreak in soybeans, and where the only option was some biological products such as the BTs. And at that time, it was so hard to track because they were -- there were so many different options in the marketplace because all those made at home brews, but since then, since that market was backed up, just because trait-resistant soybeans coming in, we've seen a lot less of those made at home different biologicals. But if you look at other products specifically, ours is -- all ours is nonliving microbes. So we got a competitive advantage and that it's extremely hard to make it. It takes the scientists at Marrone Bio and their insights and their ability to produce these nonliving microbes. What the benefit of the nonliving microbes is that you get very much better shelf stability, seed stability and seed letting stability and we're also able to get a very good cost effective way with them. Pam, you might want to add more from a technical standpoint.

Sure. I also want to mention that puts us on a regulatory front, except there's a number of regulatory bodies, Europe and U.S. and industry coalitions that are working to change this back to brew or budge and jug thing, because you could -- some of these you good put out with no quality control and then there might be human pathogens in them. So this is changing and there is regulatory frameworks that are harmonizing global regulations and so in the future, you're going to see that change a bit more and ultimately growers will benefit because they will have higher-quality products.

And then just lastly, if you bear with me, so with respect to the yield trial data, can you speak a little bit to put percentages of gains are really sort of what your audience are for the farmer audience, are we all like sort of wake up and take notice?

I'm going to -- before I turn it over to Kevin, I'm going to start by saying that Pro Farm said to us is that there is a lot of products out there now and everybody and their brothers claiming a certain percent yield bump, okay? So it's hard for the customer to distinguish, and what's the difference though is price and application rates. And that's where the Pro Farm technology distinguishes and then Kevin you might want to add to that.

Yes. So this is -- if you -- it's by -- crop by crop, it's interesting how they measure a little bit different. For example, when we do the BioUnite strategy in almond so a 2% damage is significant because it's worth $180, but if you go to corn and soybeans, you would be probably looking for at least more 4% to 5% yield for foyer product, probably a little bit less for a maybe a 1% or 2% yield increase if it's seed treatment product. But Pam is right, if you look at the Pro Farm portfolio, it's a great portfolio, and it's always up there in the top, top, top tiers of biosimulants, bionutritions that are applied to the seed, but the difference it has is that it consistently performs trial in and trial out, field in field out, but also when you put on the seed, it's very low usage rate, which is critical in seed treatment, and it consistently gives you a great return on investment. So the new standards for biostimulants in the marketplace, it's become as a -- not only you have to show a good increase, but you have to show it consistently across many years and many trails and also you have to ensure a positive return on investment and an easy-to-use formulation.

And from Zacks Investment research, we will hear from Ian Gilson.

On the basis of the acquisition expenses, are there any more than will be moving over into the fourth quarter? Or is the $2.7 million basically is...

I would expect to see some expenses but proportionately less in Q4. We had -- we were still wrapping up things and investing in the audit that we needed and the valuations that we needed to do the accounting for the acquisition.

On the $10 million to $12 million OpEx number going forward per quarter, how much of that is R&D? And how much is SG&A?

It would be the same ratio that we have had in the past. I don't know that number specifically off the top of my head, but the ratio won't differentiate.

And at this time, I'd like to turn things back to Pam Marrone, CEO and Founder of Marrone Bio for closing remarks.

Thank you, again, for joining us today and for your interest in Marrone Bio. The first 9 months of 2019 have marked a strategic turning point for our company. We believe we are uniquely positioned to meet grower demands for new solutions for their Integrated Pest Management and Plant Health programs for greater returns and increased sustainability. Our revenue growth underscores the value of our BioUnite integrated program approach, which combines the power of biology with the performance of chemistry. And our recent strategic acquisitions in R&D investments, have the potential to greatly expand our opportunity into the biostimulant and bionutrition markets. Again, our thanks, and we look forward to speaking with you further about the future of Marrone Bio Innovations.

And that will conclude today's conference. Again, thank you all for joining us.