Good day, and welcome to the Marrone Bio Innovations First Quarter 2018 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.

Good afternoon, everyone, and thank you for joining our call. Before beginning, I would like to remind you that this conference call may contain statements regarding management's expectations, hopes, beliefs, intentions or strategies regarding the future as well as projections, forecasts or other characterizations of future events or circumstances. Such statements are based on management's current expectations and beliefs concerning future developments and their potential effects on the company. There can be no assurance that future developments affecting the company will be those that management has anticipated. Such statements involve a number of risks and uncertainties, some of which are beyond management's control, or other assumptions that may cause actual results or performance to be materially different from those expressed or implied by these statements. Important factors that could cause differences are contained in the reports filed by the company with the Securities and Exchange Commission, including under the heading Risk Factors and elsewhere in the company's quarterly report on Form 10-Q for the first quarter of 2018 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. Any guidance that management may offer in this conference call represents a point-in-time estimate. The company expressly disclaims any obligations 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?

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. The first quarter of 2018 was highlighted by our comprehensive capital raise and debt refinancing initiatives, which dramatically improved our balance sheet and allow us to aggressively execute upon our business plan. As the CEO and Founder of Marrone Bio Innovations, I can confidently say that I've never been more optimistic than I'm today about the growth opportunities of the company. The health of our business is seen in several ways. First, in connection with these financing, we have raised $40 million in net proceeds to the company from the sale of our common stock and converted $45 million in principle of our long-term debt, which provides us with sufficient resources to fund operations as currently planned for the foreseeable future. With our stronger balance sheet, customers, distributors and growers can purchase our products with confidence. Second, we launched two new products in 2017: Haven sun protectant in March and Stargus biofungicide in December. And we've already launched Zelto bioinsecticide/nematicide, our first turf brand in January of 2018. Third, global field trials have come back very promising in key areas, including U.S., Europe, Brazil, Vietnam, the Philippines and other large pesticide markets worldwide. Fourth, we really -- we recently announced the hire of Kevin Hammill as Chief Commercial Officer to develop MBI's commercial team and presence into a leadership position within the industry. Kevin has 25 years of commercial and managerial, agrichemical and biologicals experience. As you can see, we are clearly a much stronger company today than we were even a year ago. In the first quarter of 2018, we continued our momentum and…

Thank you, Pam. As noted, I would like to walk you through our first quarter 2018 results. GAAP revenues for the first quarter of 2018 increased to $4.3 million compared to $4.2 million in the first quarter of 2017. Revenues in the first quarter were affected by a lack of rain during the Pacific Northwest and California's typical spray season as well as turnover in our sales force. Our revenues and sales force were impacted by perceived uncertainties regarding our business, which we believe we have addressed by strengthening our balance sheet in the first quarter and during April 2018. Starting January 1, 2018, we adopted the new revenue accounting standard commonly referred to as ASC 606. GAAP revenues on a go-forward basis will be similar to the old sell-in method, generally allowing us to recognize revenues upon product shipment to our distributors. As a result, we will no longer be reporting our non-GAAP product shipments number starting this quarter. Please note that an estimated $5.9 million of our 2017 deferred revenues will not be recognized as GAAP revenue in 2018 under ASC 606. Instead, the $5.9 million in 2017 deferred revenues will be booked to the balance sheet as retained earnings and not run through our income statement in accordance with ACS 606. Gross margins in the first quarter were 48.1% compared to 45.1% in the first quarter of 2018 -- '17, I mean. First quarter gross margins benefited from a favorable product mix and improvements in production efficiencies. We expect to see gross margins increases over the life of each of our products as production processes improve and as we continue to increase yields and potencies and implement efficiencies in manufacturing. SG&A in the first quarter decreased to $5 million compared to $5.3 million in the same period…

Thank you, Jim. We have made great progress on key strategic goals and operations. I want to now highlight where our focus will remain for the balance of 2018. On the product front, we expect the targeted placement of MBI-601 biofumigant, Ennoble, with early adopter growers; significant growth in our seed treatment business with our partner, Albaugh; targeted placement with leading organic seed companies of our bio-stacked seed treatment with Groundwork BioAg; the launch of Amplitude biofungicide into large acre crops, including dry beans, a new market segment for MBI; the launch of the CG brand of Regalia, Venerate, Grandevo into the cannabis and home garden market, which we expect to represent a significant growth driver for us on a go-forward basis; growth in Zequanox sales as we continue to build our sales pipeline of potential industrial and power plant customers with our partner, Solenis. And in international, we expect approval for the use of Regalia on cannabis in Canada to sign at least three more international distribution agreements in key global markets; several international regulatory submissions, such as South Africa, Kenya, Europe, Brazil, Ecuador, Canada, Australia and New Zealand; several international regulatory approvals, including Morocco, Philippines and Canada. Operationally, we anticipate adding Venerate and Majestene production to our Michigan facility; and continued gross margin improvement as R&D and manufacturing initiatives continued to increase efficiencies. In 2018 with our company stronger than ever, we remain laser focused on commercial execution and building a high-performance sales and marketing team around the hire of our new Chief Commercial Officer, Kevin Hammill. We also are focused on increasing our presence with key large growers and strengthening our channel partnerships, all the while building our longer-term vision of being the market leading biologicals company through our own products, combined with other synergistic products and technologies. I'm extremely proud of our employees for their hard work and dedication. We recognize the tremendous responsibility we have to realize MBI's significant potential as a leading force in ag biologicals and global crop production. We thank our debt holders and our new and existing investors for the confidence they have placed in us. With that, I'd like to now open the call up for questions. Operator?

[Operator Instructions] And we'll go first to Sameer Joshi with H.C. Wainwright.

The first question relates to your recent hire. It's great to see experienced person in that role, and you mentioned you will be building a sales team around that. Can you give us some more light on that in terms of where these will be distributed geographically or if there are going to be any international hires?

Sure. We do have in the budget an additional Latin America resource. We have added Eastern Washington to serve the considerable fruit -- tree fruit market, particularly apples, and there are significant acres of organic apples there. We have added a territory in Idaho to service the dry beans market, which now we have Amplitude for that, which is a new segment, and also the large potato market. We have had some offerings for potatoes like Majestene and Regalia, but now Amplitude gets the lot of the soil diseases as well. And then we have -- we are already in California, but we are adding -- we added -- or adding an additional person in California, and we added additional person in the Southeast. Did I miss anything, Jim? No. I think that's it, right? Okay.

Okay. So in terms of international, your approach is going to be just signing up with distributors. The only hire you mentioned in this list was one Latin American hire. Is that correct?

Right. We -- right. That's correct. Our strategy for international is to use exclusive regional -- or national distributors and then have people in territory to manage those distributors and help them. Now we see a considerable opportunity in the banana market, so we'd really like to add someone in Latin America to help us in the -- we have a full offering in bananas, and that's a very intensive market where they spray even more than once a week to control the various diseases. And then there's also Black Sigatoka which Regalia gets, and then there's Grandevo and Venerate for thrips and other pests above ground, and then there is Majestene for below ground. And we have good data on all of that for a beautiful banana package.

Thanks for that color. In the prepared remarks, you mentioned the unfavorable weather in the West. Is there -- have you -- are you seeing rebound already in 2Q? Or do you see some lingering effects of that, which may impact your 2Q topline?

Well, we are looking for a stronger Q2 and then momentum growing in the second half of the year.

You are. Okay. In terms of product launches, you mentioned you're on like a homestretch of MB-014. Can you give us idea of the actual timing of filing and then expected approval time line?

Well, the team is working hard on finishing up the dossier. The tox studies took longer than we had expected, but I think in the next couple of months we're targeting. And then under the PRIA, the Pesticide Registration Improvement Act, there's a statutory time frame of 18 months. They're typically taking 18 months to 2 years or so, but we do have a lot of grower groups that are keen on getting this product because it controls resistant pigweed. And so we will look at potentially looking at having them petition for an emergency use which could get it sooner, but we're planning on the more conservative time line.

My last question, I guess the most important, I guess, for you guys going forward is about the cannabis announcement. Can you give us more color of what it actually means to your top line? Do you think it is going to be in the near term like in the third quarter, fourth quarter? Or do you see this from the 4 different states orders materializing over the next year or so?

So we got Colorado, Oregon and Washington. We are now approved CG brand for Regalia, Grandevo and Venerate. We are now approved in those 3 states. California, still pending. So -- and then Canada, we think Canada is going to be even bigger than the U.S. because you have this patchwork of state rules in U.S., whereas Canada, late summer supposed to go commercial when they have one whole federal regulatory framework across the whole country will be a significant business. And there's a lot of big row operations going in, and we have really nice products. So -- but Canada requires efficacy data. We are completing the efficacy data on Grandevo and Venerate. We already have the efficacy data and made the submission in Canada for Regalia. And therefore, we expect Regalia -- first approval of Regalia in the summer as well. So we will continue to have sales based on the existing registrations in the U.S. And then when Canada kicks in, that will uptick the -- certainly uptick the sales. So the...

Do you want to talk about the size of the market...

Yes. Well, the -- we did a study with the Graduate School of Management UC Davis. It's now about 18 months old, but -- and they had said that the growth by 2021 of California, Oregon, and Washington and Colorado, plus the input segment, which is fertilizers and pesticides, was going to grow from $91 million to $1.4 billion over that time frame. That was before Vermont and Massachusetts and several other states went legal, but $1.4 billion is already pretty sizable. But then you add Canada to that, so the TAM is looking higher than $2 billion now. So we certainly believe that our products are great to be there to manage the pest and diseases more sustainably than with some of the more toxic products that have been used.

Just a quick follow-up. So you are saying the distributor you have for cannabis product lines, is that still one of your significant distributors? I think you had mentioned fifth largest.

Yes. They are one of our significant -- I don't know if they're number five, but they are number five, but they are significant. We are setting up additional distributors and making our way around how we're going to do Canada as well. But we did add like late last year, we did add another large hydroponic distributor who did place a significant order already.

And the calls into the company are quite voluminous, so we've actually hired a dedicated sales rep to just address the cannabis market and influences in that market.

[Operator Instructions] We'll go next to Laurence Alexander of Jefferies.

This is Nick Cecero on for Laurence. So I guess my first question there's been more press about health risk concerns related to crop protection, chemical formulations rather than just the APIs. If this becomes a real trend, are biologicals differentiated? Or do they use the same kind of surfactants and other additives?

Oh, that's a beautiful question. I love it because all of our products are listed for organic production. We like to have one product that goes to both conventional and organic. And as a reminder, about 70% of our sales are for conventional. So conventional growers are seeing the benefits of these types of products. But because we have an organic formulation that's under the National Organic Program, we have much lower risk in our ingredients that we use in our products because they're typically very food grade, low risk in our ingredients because they are the ones that are allowed in organic, and it's a pretty small list. So we do not have the advantage that chemical companies do to use the large number of chemicals that they can and inert. So our scientists have to be quite creative in coming up with ways to stabilize our products and preserve our products using what's on the organic list.

And then I guess as you look at the field trial data over the past few years, are performance spread against commercial products stable or changing over time? And if they're changing, do you have any sense why?

What's really interesting, another good question. What we're seeing over time is globally our products working better compared to commercial standards. And why I believe that is the case, I believe that it's resistance that's coming into that. So we'll see that some of the chemical classes have been around. They've gone generic. They're low priced. They're heavily used and used back-to-back. And so in some of these intense markets, they're not working as well, and our products are often working better. And certainly, when they're incorporated into programs, we make the chemicals better probably because it's an alternative mode of action and we're breaking that resistance.

At this time, I show no additional questions. So I would like to turn it back to 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 over the longer term. Thank you.

This concludes today's call. Thank you for your participation. You may now disconnect.