Good day, and welcome to today’s Marrone Bio Innovations’ Second Quarter 2019 Earnings Conference Call. Just as a reminder, today’s call is being recorded. At this time, I would like to turn the conference over to your host for today, Linda Moore, General Counsel. Please go ahead.

Good afternoon, everyone, and thank you for joining our call. Welcome to the 2019 second 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 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 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. Today is a landmark day for Marrone Bio. First, we are executing on our long-term strategy of providing growers with sustainable and high-value alternatives that support and enhance their current production practices. This focus differentiates us from others who have been affected more than us by this year’s challenging agricultural environment. We realized record revenues in both the second quarter and the first half at growth rates well above others in the industry. Second, we announced that we have entered into a definitive agreement to acquire the Pro Farm company, which makes a proprietary nutrient technology that expands our reach into the biostimulant market. We are aggressively expanding our platform with new options for crop protection and plant health and expanding our global reach. This acquisition is expected to be accretive to net income and cash flow from operations in 2020 and contributes to the acceleration of our path to breakeven. Finally, we have secured access to a unique financing facility that can cost-effectively fund strategic opportunities and our operational needs. Under our current strategic plan, we expect this funding will take us to positive cash flow operations. There is a lot of information to digest today, and I’d like to start by highlighting the positive commercial and financial performance of the second quarter and the first half. I’ll briefly touch on the new financing facility, and then Pam will discuss the newest addition to Marrone. If you would turn to Slide 3, let’s discuss the second quarter. Revenues for the second quarter of 2019 increased 21.6% to a record $7 million. As we’ve discussed previously, our revenues in the second quarter shift away from raw crops and into specialty crops. We saw significant use of…

Thank you, Jim. Suffice to say, as we show on Slide 6, the last six months have been a period of extraordinary activity and results on every front at Marrone Bio. With today’s announcements of the definitive purchase agreement for Pro Farm plus the financing facility, we are creating a significantly larger commercial presence. We believe this broader platform will lead to enhanced long-term strategic options as a partner of choice with growers and distributors as well as with other emerging and established ag companies. We consider 2019 to be a critical turning point in the adoption of bio-based crop protection products. Marrone Bio is strategically in sync with growers’ needs in today’s ag environment. Our goal is to help them achieve a higher return on investment while addressing regulatory pressures and preserving the longevity and usefulness of their production practices, all with the end consumer in mind. To that point, we believe we are aligned with consumers’ demands for more sustainability and greater transparency around food production. With today’s announcements, we are signaling our intention and capability to be a leading biologicals company in the agricultural inputs industry. We believe we have the technology, the talent and the financial support to achieve our goal of creating a biological ag inputs company of major scope and scale. The financial results for the first half of the year represent a step change in our revenue potential, reflecting the revamp of the sales organization and revitalized customer relations. We continue to deliver solid gross margins and are effectively managing our ongoing expenses and conserving cash. We have maintained our strategic focus on select R&D, commercial and manufacturing opportunities. These include striking collaborations with other ag leaders that allow us to leverage our R&D investment and access complementary technologies. Specifically, in just the…

Thank you. [Operator Instructions] Up first from Zacks Investment Research, we’ll go to Ian Gilson.

Hi, good afternoon to you all. Looking at the second quarter data, the G&A line showed a significant increase, part of which you had mentioned but is also an impediment to return to cash flow positive and to profit. Could you go through a little more about what constitutes that and how you can hold the number or the growth in that number to lower than what it has been?

Yes. Ian, thanks for the question. This is Jim speaking. If you look at our operating expenses historically, I think that you’ll see they’re quite flat, and we have been very conscious about maintaining them at a flat level. However, in the last few calls, we’ve indicated that we’ve increased our investment in our commercial team and also in accelerating our innovation, mainly 014 and our Super Majestene [ph] product. If you take the first half sales and you take out that approximately $2 million from increased legal and acquisition-related expenses, we’ve only really increased the operating expenses by a couple million dollars. And we did mention that $1.1 million of that was specifically for toxicology and field trials, which are supporting that 014 herbicide and the Super Majestene. So that leaves a very modest growth in operating expenses. Where I think you’ll get the cash flow breakeven and what you should focus on is that in the recent 4 – few quarters, you’ve seen that we are substantially growing our top line, our revenue line and, at the same time, substantially improving our margin enhancement. And the two of them are converging to accelerate the amount of revenue that is necessary to get us to breakeven.

Okay. So can I assume that $2 million will come out of that number as you look into the second half of the year?

I would expect that – Ian, this is Jim again.

Yes.

I would expect that a similar amount of that sort of legal and acquisition-related expenses will occur in the third quarter. But after that, you can expect that, that amount would come out and view those as sort of onetime expenses.

Thank you very much.

[Operator Instructions] We’ll go next to Nathan Weinstein of Aegis. Please go ahead.

Good afternoon, Pam and Jim, and thanks for taking my question.

Hi, Nathan.,

Hi, guys. So quite an interesting announcement, a couple of big announcements, any details, firstly, on what you may have paid as a multiple perhaps to EBITDA or sales? And then if you can’t get too specific, kind of did you pay what was generally in line for acquisitions at this end of the market? And then secondly, can you give us any more insight into what the combined organization will look like, how you plan to manage them…

Yes, I’ll take that first.

Some of the synergies might be.

Then I’ll turn it over to Jim. Yes. So we’re excited that we found a unique investment at a fair price that we think will accelerate our growth, achieve positive cash flow earlier and improve shareholder value. Also, it gets us into the big biostimulant space and improves our – increases our international footprint. So we’re – it’s at – the company is at the cusp of growth, so we got it right before where we think there’s transformative growth possibilities. Jim, did you want anything to add?

Yes. I’m sorry, you were breaking out a little bit on the question, but I’ll answer what I think the question is. And that is I think that you should think about the acquisition that in 2019, because we’re acquiring it so late in the year, that the addition to our results is going to be minor. 2020, we expect good growth out of Pro Farm, and we would expect that it would, as we say, be earnings accretive. And therefore, we think it will be additive to our already significant growth in revenue and additive to our margin enhancement. So it will be a plus for cash flow.

Now as far as how it’s going to be managed going forward, what was attractive about this acquisition and Pro Farm is what the team – [indiscernible] and the team have been able to do, entrepreneurial – very good entrepreneurs, being able to move quickly into the market with an exciting technology. We like that, and therefore, it’s going to be a separate subsidiary, right, Linda? Set up as a separate subsidiary. And because majority of the activity is commercial, the head of the subsidiary, CEO of Pro Farm, will be reporting to Kevin, our Chief Commercial Officer, going forward.

Okay. Thanks. So is it fair to say that you’ve known the team there for a while and have had a dialogue with them for quite some time?

We’ve done exhaustive due diligence on these guys and have done extensive modeling on them. We feel very confident that they have a great product and very cost-effective in the marketplace, and we should see very good growth coming from them starting in 2020.

Okay. Thanks. And then just one more for me. It’s intended as a top-down question. But when you guys and your field team are out there talking to growers, that marginal grower that may have been reticent to incorporate biopesticides in the past, are they showing greater willingness now to adopt the biopesticides in their program?

We do think we’re at a tipping point with bioprotection products. And there’s a lot of pressure on growers regulatory-wise, products being – chemicals being removed from market and pests developing resistance. But more importantly, the BioUnite strategy – and Kevin can go more into – to give us color on it, is really showing the growers a higher ROI with the combinations of our products and their traditional solutions. So even if the growers have some challenges these days, they can get a better ROI with our products, and that really is driving adoption. Kevin, did you want to add any more to that?

Yes. And I’ll just build on Pam’s comment about BioUnite. And I was just looking over some market research today and also looking at some grower adoptions from California. And we’ve talked about this in the previous call where we – the part of the BioUnite strategy – and again, for people not familiar with that, is how we harness the power of biology with the performance of chemistry. And we gave various examples from our fungicides in the Midwest to our seed treatments. And then most prevalently, we talked last week – last earnings call about our product Venerate and how we’re combining it with the growers’ traditional crop protection products and where they see less damage because of the higher performance of our combination of the two products together. This less damage leads to higher revenue and overall a high return on investment, up to six or seven. So back to where I started from in terms of the market research, the market research showed great adoption of this concept in almonds this year. Then we look at the grower uptake. That increased significantly. And then from anecdotal discussions with our sales reps over the last few weeks, they’ve seen great perceptions in this whole BioUnite strategy and, in particular, this one concept in almonds.

Okay. Thanks a lot guys.

We’ll go next to Robert Smith of Center for Performance Investing. Please go ahead.

Hi, good afternoon. Thanks for my questions. I’ve read that Austria is trying to ban glyphosate within the EU, and I’m wondering whether the acquisition will provide an entrée into that market.

Pro Farm has biostimulant, bionutrient products, and they’re not in the herbicide market. So I don’t think so. But Kevin, do you want to?

Yes, just build on that. And I think, Pam, this is one of the products that we’re developing that could fit in that market, is our 014 new herbicide that we have. And Pam has been a great partner, cheerleader for our product over the years.

Yes.

So we’re extremely excited that if a grower needs a solution, a new solution going forward, 014 is one of those options. We look forward to bringing them to the grower. How Pro Farm would help us is that they have the footprint, maybe not specifically in Austria but in Europe, and we could use that footprint to bring our 014 herbicide into the European market.

Yes. Actually, that’s what I was sort of getting at. I didn’t mention 014. So Pam, could you take us through the product portfolio and give us some updates as to the three months that – as you spoke of them last time? Just give us a current view.

Well, as we’ve mentioned in the various press releases and such, we’ve seen strong growth of – and usage of Regalia and Venerate – well, all three leading products, Regalia, Venerate and Grandevo, in the first half of the year and as we’ve moved from seed treatment in the first quarter to specialty crops in the second quarter. And the third quarter will continue to the specialty crop market, and then we move back to the seed treatment in the fourth quarter. So we – what’s exciting to me is we just did a Stargus webinar for growers and customers. Stargus is our – one of our most recent products. And it’s still awaiting approval of California, but we hope it’s imminent. And hence, the webinar. And we have started getting some traction with that product in the marketplace. So we’re – I’m excited to see that our next product is moving along there as well, especially for white molds and downy mildews. And it’ll be a strong – hoping for a strong fall season controlling downy mildews in the leafy greens. Now our Super Majestene project which we’re investing in is very exciting. And we have various versions in field trials right now which we believe will increase the potency, hence, driving down the cost to growers and making this a really potentially high-growth and transformative product, which is why we’re investing in it. 015 – 014, sorry, and we have a formulation called 015, which is multiple formulations that we’re developing. And I just saw some data out in the field, very exciting, looking at it compared to one of the new formulations, looking at it compared to one of the main herbicides, glufosinate, and looking very nice in the field. So I think we’ve got – and I’m sorry, the pipeline as well. You might have remembered Ennoble or our biofumigant, and did a second demo with a leading – one of the leading strawberry growers and, the second time in a row, got a significant improved yield with Ennoble, and we’re also waiting for California approval there.

And any update on Zequanox?

Oh, yes, of course. I knew you were going to ask that. Yes, a very exciting update actually. So yesterday, our team, along with a whole group of partners, trying to reduce the mussel impact in Lake Michigan that causes toxic algae because the mussel presence increases the toxic algae, the Leland/Good Harbor area of the lake, we did a treatment to control the mussels there. So we’re very excited by this prospect. And in addition, we’re going into our – we do a preventative or maintenance treatment in some large power plants, and we’re going to another one, another treatment this week as well as with future treatments into some Canadian power plants. So the – with the objective to really – to see in the industrial and power plant facilities how we can provide value to the customer and drive revenue in the future for that product.

So how many more demo projects would you need to begin to get some commercial orders for the product?

So the industrial and pipe are all – are purchased. They’re all paid for. In the treatment – Kevin, correct me if I’m wrong. They do pay for the product.

Yes.

Yes. So in the treatment of the Great Lakes, they do pay for the product. And so you might – yes, so we’re excited about – so we’re trying – while we’re doing a demo in – another demo in Lake Michigan is they’re trying ways to keep the product in the site where the mussels feed. And so they’re trying some different application methodologies this year. So as I said, we’re excited by the potential of that, yes.

And as far as 014 goes, I mean where are we now in the process of getting that registered?

Well, always not – taking the position not to predict when that’s going to happen, but it’s winding its way along the agency, and we’re doing all the things we can to get it through. And meanwhile, as I mentioned, we’ve got multiple formulations that are exciting. And the team is doing – and R&D is doing – and product development doing everything to invest to really focus on killing those palmer amaranths, herbicide-resistant weeds and water hemp in the key markets and the large – real proud when we launch, yes.

Yes. And I’m wondering, how is it going, reducing the cost profile of your products? You’ve made some substantial progress in the past, and I’m wondering how this is being reflected in the recent past.

Yes. So if you look at our gross margins, that’s the evidence. But it’s a continued – although there’s been some lumpiness of the quarters that we – it’s the beautiful evidence showing how we’ve gone from – early last year from the 30-something up to 50s now. And that is due to both product mix, manufacturing efficiencies but a lot due to the past efforts of R&D. And I would say that the prototypes for the Super Majestene products look really good. We just had a big team meeting last week to touch-base on the progress, and we’re all excited that we’re going to get there with a dramatic improvement in the compounds that caused the pest-killing – nematode-killing activity. Kevin, did you want to say anything about that Super Majestene project?

Yes. Well, I’m really positive on this one. It’ll transform the company. That has become a bit of a running joke here, but yes.

I have 014. You have Super Majestene.

Exactly. So just building on the review meeting that Pam mentioned from last Friday, we came away with some insight that we have made great progress from both the formulation advancement and the global registration. The lab bioassays are coming back positive for pest management, and we’re looking forward to positive field trials from our multiple formulations this year. And the Super Majestene product will be part of our whole BioUnite strategy where we’ll integrate this aggressively into chemistry programs out there. So we’re really excited to how this low-usage, high-performing product can fit into the marketplace.

So it would be fair to say that this cost profile will be a continuing work in process, I mean, to reduce those costs?

Yes, we will continue. So knowing microbes as I do, you can continue to tweak or change processes continuously. Now you start topping out to where you’ve got an initial bump-up. And – but with the modern tools of molecular biology and genomics these days, there’s more power in the technology to be able to amp up these microbes and reduce costs. And we’re seeing that now in our Super Majestene project.

Yes. And this is Kevin again. And one of the parts I’m really – for me, the excitement is actually getting this down – the usage rate for our grower, for in-furrow down to a lower level, so that we think it’s going to become integrated into more programs as they go forward and that it’ll fit their cultural practices even further. We got a great product now. I think as we go forward and improve the formulation, decreasing the rates, we’ll get a phenomenal product going forward.

And as far as the R&D effort itself goes, I mean in the last few quarters, you just put the focus aside to really promote the products that are being marketed. But with the acquisition, is this going to essentially revitalize the R&D effort itself?

Well, we will – we have – I’ll mention that we have two collaborations that I mentioned today, Compass Minerals and Valagro. So that mines our early-stage pipeline of other microbes outside of our current commercial products to enter into the plant nutrition and further into the biostimulant market. So that is – and if you call revitalization, that’s an additional leveraging or helping to monetize some of the R&D assets we already have. And then, Kevin, I’ll turn it over to you to what you see as far as the Pro Farm products and the pipeline there.

Yes. Just building on, first off, the research and development standpoint, MBI has world-class facilities and the team in Davis. And we still believe that we can help accelerate the next generation of Pro Farm technology. Not only that, we see there’s a synergy with our – Pro Farm technology and our products such as Majestene or Venerate or even our foliar products, whereby we can see increased quality yield by putting the two products together. And so we see both from a commercial market access, market penetration standpoint, this will be synergies between the two companies. But also, from a research and development, we see the ability to further enhance their portfolio with our world-class facilities here and also to grow – increase BioUnite strategies with their products and our products with the traditional chemistry market.

I just – this is Jim. I’d just like to add, while a majority of R&D time and dollars are probably spent on existing commercial products, there is still a very substantial investment in our pipeline, namely 014 and Super Majestene, and all these collaborative efforts that you’re seeing us announce.

Yes.

That sounds encouraging. Thank you so much for the color. Good luck.

Thank you.

And with no further questions at this time, I would like to turn the call back over to management.

Thank you again for joining us today and for your interest in Marrone Bio. This has been a landmark day for our company, and we’re excited by the possibility to further pursue our strategic objective to create a large, global biologicals platform company and to accelerate our growth potential. We have a lot of work ahead of us as we close the Pro Farm transaction and integrate them into our operation. We are confident we can do so in a way that captures the potential of a new future for agriculture and create significant shareholder value in the process. Again, our thanks. And we look forward to speaking with you further about the future of Marrone Bio Innovations. Thank you.