Marrone Bio Innovations, Inc. (MBII) 2017 Q3 法說會逐字稿

Good day, and welcome to the Marrone Bio Innovations Third Quarter 2017 Earnings Conference Call. Today's conference is being recorded.

At this time, I would like to turn the conference over to Linda Moore, General Counsel. Please go ahead.

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 annual report on Form 10-K for the 2016 fiscal year and the company's Form 10-Q to be filed for the third quarter of 2017 and in our earnings release posted on the company's website. Should one or more of these risks or uncertainties materialize or should any of management's assumptions prove incorrect, actual results may vary in materials 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 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 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.

We experienced several noteworthy catalysts in the third quarter of 2017 such as distribution agreements for Africa; exceptional field data in the largest global pesticide market, Brazil, as well as several other countries and the U.S.; the completion of our Grandevo WDG granulation line receiving EPA registration for MBI-110 product, Stargus, which is the seventh product we have commercialized in 11 years, an unprecedented accomplishment in the ag industry. One of our products was launched successfully via our strategic partner, Albaugh, into the row crop seed treatment market. Albaugh has announced that their BioST treatment outperformed the commercial standards and increased yields on corn and soybeans. In addition, our own bio-stacked seed treatment showed increased yields in the second year of field trials in soybeans and corn. We view all of these as major accomplishments.

Despite these major events, unfavorable weather conditions reduced the number of expected sprays in several of our key markets. Historically, the third quarter is the lowest quarter of the year in terms of sales and is the most unpredictable. This year, it was no different as Hurricanes Irma and Maria significantly impacted our sales in both Florida and Puerto Rico. Fortunately, our portfolio approach to product development and marketing is designed to diversify our revenue base and reduce the impact of any one variable on the success of the company as a whole. This product portfolio approach allowed us to achieve year-to-date growth well above the industry average. We believe we are well positioned in the market and have made significant progress in penetrating the U.S. and abroad.

As I noted briefly, we have expanded our reach to Africa through select partnerships with ÉLÉPHANT VERT in North Africa and Kenya Biologics in Kenya and Tanzania. Additionally, we have taken several steps to increase product awareness in the substantial Central and South American market, such as sponsoring grower education events in Honduras and Chile. We also successfully advanced field trials in Brazil, which have shown tremendous progress to date. Our continued advancements on the R&D front, paired with the progress we have made in advancing distribution and product awareness, are translating into greater market opportunities.

But before going further, I would like to take a moment to discuss who we are, what we do, why are we the innovation leaders and why it's so very important for those of you who may be new to Marrone Bio Innovations. Put simply, we develop natural products commonly called biologicals for controlling pests and increasing crop yields and quality. Our products are all biologically based and fall into 2 categories under the umbrella of biologicals: biopesticide for crop protection and biostimulants for crop enhancement. There are many benefits to growers who implement biologicals as part of their Integrated Pest Management programs, or IPM, whether they are organic, transitioning to organic or conventional and spray our products in a tank mixed with chemicals. Although our products are often used by organic farmers, conventional farmers who use synthetic chemicals actually account for around 70% of our sales today. So why is that? Well, the benefits are significant. First, our products can make pest management more effective than programs that only use synthetic chemical pesticides. Implementing biologicals as part of IPM and crop production programs, growers can improve yields and quality of their crops, creating a higher return on investment. Pest resistance, a common problem with synthetic chemicals, is reduced or eliminated, again increasing return on investment. Our products also do not harm the beneficials such as bees. Second, our products are biodegradable, offering environmentally friendly protection. Biologicals are generally safe for field workers to handle, so farmers can manage their labor more efficiently as work crews can enter the field more quickly after spraying. Biologicals don't leave residues as synthetic chemicals do, which is particularly important for branded food, retail and export markets with very strict MRL or maximum residue level standards.

Aside from the significant benefits to our growers, there are also major benefits to us as a company in producing these biological products. Our technology and science-based approach has led the way to mainstreaming biologicals. Biologicals have a much lower development cost and time to market than a synthetic chemical. As a comparison, synthetic chemicals cost, on average, close to $300 million to develop and also take about 12 years to enter the market. Our strategy is to uniquely take advantage of a capital-lite model. Given our experience, it takes us less than 5 years and less than $10 million to get a new product to the U.S. market. We get into the market quickly with early adopter growers. The growers give us feedback that, in turn, helps us develop consecutive versions, associated new uses of the product and crop and label expansion. This, in turn, expands our market opportunity. The global pesticide market is massive, totaling over $50 billion today and is growing at a compound annual growth rate of about 2%. While the newly emerging biological market is much smaller, around $4 billion, it is growing at a compound annual growth rate between 10% and 20%. The biostimulant market, which MBI entered this year with Haven, is growing about 10% to 15% annually. MBI's growth is significantly outpacing both of these markets.

Currently, we are focusing our marketing dollars on the biggest opportunities in specialty crops: berries, leafy greens, potatoes, palm fruit, fruiting vegetables, grapes and nuts. But a large opportunity exists in row crops such as corn and soybeans, which we will penetrate through partnerships with larger players. In addition, organic is the highest growth segment in food, and there simply are not enough acres to meet the demand. So this continues to be a growth driver for us.

We continue to prove in field trials, on farm demos and customer adoption that we have great products that can perform as well as, or in some cases, better than chemicals alone and can also improve control, yields and quality when incorporated into integrated programs with chemicals, resulting in an increased return on investment. That said, to reach our full potential, we need to continue to drive grower demand through demos, educational programs and increased awareness.

With that, I'll turn the presentation back to the quarter and discuss some of the highlights within each product category. As I noted in my opening remarks, we continued to make considerable progress in the quarter despite a challenging agricultural environment. We now have 6 EPA-approved biopesticide products and 1 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.

I'd now like to touch on each product specifically. Note that our international strategy is to, first, focus on countries with intense pesticide sprays and export markets where we can get registrations quickly while we wait for registrations in larger regions such as Europe and Brazil.

Regalia, the first MBI product to enter the market, is the industry's first effective plant-extracted fungicide, and it is now becoming the recognized standard for biological control of powdery mildew, a major crop disease. We continued to gain a better understanding of the plant health benefits of using Regalia to improve crop yields and quality. In the third quarter, EPA approved new -- a new Regalia 5% master label, which captures new uses for row crops for Regalia Rx, such as cotton, forage grasses, peanuts, as well as cereal grains and sugar beets. The new label also had smaller-container sizes and easier-use instructions for crops related to home and garden uses as well as cannabis and hemp production where authorized by state governments. MBI's first field trials for Regalia on cannabis were completed in Canada to support label expansion. Results are eminent, and the verbal report is positive.

With regard to Regalia in the U.S., we received positive results in Oregon, California and New York across a variety of crops such as berries, nuts, grapes, tomatoes and fruits. Against mummy berry disease on blueberries in Oregon, Regalia have the highest percent control in terms of primary infection of flowers and shoots, outperforming 2 leading biological competitors. In California, in a trial with one of our retailers, Regalia bested the commercial standard, Manzate ProStik plus copper, against Walnut Blight in both blight rating and number of blighted nuts. With the same retailer, when Regalia was applied on the foliage, in addition to the chemical standards applied through drip irrigation, Regalia provided a higher return in marketable tons per acre of tomatoes, an increase of 5.3 to 6.5 tons per acre more or 12% to 17% better than the chemicals applied by drip alone. This is the second year to achieve these excellent results.

On California citrus, in a demo with one of our largest growers, Regalia increased the number of bins per acre by 2 to 3x in 2016 and 2017 when 1 quart was applied just after petal fall.

Grape powdery mildew, the most severe grapes disease in California, is developing resistance to the leading chemicals. For the third year in a row, the leading California grape researcher conducted trials of Regalia in rotation with the big-gun chemical. With Regalia in the rotation with these chemicals, mildew severity was reduced, the same as the chemical-only programs. So growers should rotate Regalia into the programs to stop or delay resistance. In other trials, that same researcher found out in rotation with the leading biopesticide, Regalia reduced the severity of powdery mildew better than all other treatments.

Against fire blight in New York, the Regalia program outperformed all programs for shoot and trauma blight on apples. Regalia used an organic fungicide program outperformed the previous organic standard program, making organic apples much more feasible in the Northeast, which has a heavy disease pressure, limiting the ability to grow organically.

Looking at overseas growth and milestones, key highlights are as follows: in field trials in Brazil, when applied twice to cotton crops, Regalia increased yields in average of 6.7%. For all rate and timing, in combination, Regalia showed an impressive 71% win rate over the untreated cotton. Our Central America distributor reports higher yields and quality with Regalia on onions, melons, potatoes, sugar cane and tobacco. For example, Regalia increased onion yields by 33% in Honduras.

Now turning to Grandevo and Venerate, our bioinsecticides. Grandevo continues to expand its uses in IPM programs across many fruits and vegetables. This product experienced volume growth year-over-year, but its growth was affected by lack of supply of Grandevo WDG. Grandevo is gaining momentum against the dreaded Spotted Wing Drosophila. This year, Grandevo programs were as good as the chemical programs and better than the organic standard programs in Michigan State blueberry trials. Grandevo is not just for organic fruits but can be used with chemicals for resistance management and less residue.

Venerate, our second insecticide, which controls a wide spectrum of pests, insects and mites with a novel but different mode of action than Grandevo, is rapidly gaining uptake as growers experienced the improved control in their IPM programs with the added flexibility of labor and residue management. Our overall year-over-year growth was led by growth of Venerate.

In insecticide trials in Brazil for the control of cotton bollworms, Grandevo performed equally well with both the biological and chemical standard in 2 or 3 locations on cotton crops and equally well in all 3 locations on soybeans. Grandevo was voted the Imidacloprid chemical standard to reduce Asian citrus psyllid, or ACP. Venerate yields were as good as the chemical as well. We now have data against the ACP in Mexico, U.S. and Brazil, all showing their efficacy. ACP has devastated Florida growth and has been recently found in California.

In Central American trials, Venerate bioinsecticide used in IPM programs for managing the dreaded coffee berry borer or broca successfully reduced the number of organophosphate insecticide applications by 50%, including that of the controversial and increasingly restricted chlorpyrifos. The program with Venerate reduced boring damage by almost 70% and was 40% more effective than the chemical-only program. Broca can cause coffee farmers to lose up to 20% of a crop and reduce the crop's marketable price by 30% to 40%.

From University of Arizona trials on lettuce, the Venerate rotation for worm control was superior to the majority of treatments and similar to the chemicals known to be the very best of all insecticides. In UC Riverside data of tomatoes showed that the Venerate rotation have the overall lowest percent damage from all pasts, worms and sucking insects and was superior to competitor chemicals in the study. Control of San Jose scale on apples in New York with Grandevo and Venerate was equal to 2 chemical standard programs and better than 1 of the chemicals considered to be the best in the industry. In order to expand Grandevo into various markets, our R&D and manufacturing teams have been preparing technology packages for improved fermentation processes and in-house production of the WDG. We are fast tracking the first of the manufacturing improvement, which have the potential to reduce Grandevo cost of goods by more than 50%.

Now turning to Majestene bionematicide. Majestene controls roundworms or nematodes that feed on the roots of plants and destroy crop yields. Majestene sales volumes grew significantly year-over-year. Our Venerate-Majestene microbe had good success in the market by our partner Albaugh this year after having conducted hundreds of trials in 2016 confirming the yield increases when our microbe was incorporated into their BioST seed treatment.

For soybean data, thus far, 70% is captured. The yield of BioST was 3.5 bushels per acre over the fungicide insecticide standard and approximately a bushel above the nearest competitor on corn with 10% of the data capture, BioST yielded 10 to 20 bushels higher than the standard.

In addition, initial reports from the 5 of the 15 of our biological-stacked seed treatment studies on soybeans and corn indicate performance equal to the chemical standard for control of corn root worm, soybean cyst nematode, corn lesion nematode and soil-borne diseases in soybeans. Treatments contained various combinations of the microbe in Stargus, or MBI-110, but not within Regalia, which was tested for the first time, the microbe in Grandevo and Groundwork BioAg's biostimulant might arise up.

In trials in Brazil, Majestene reduced burrowing nematodes, the most significant pest of bananas, as well as or better than the chemical standard the organophosphate, chlorpyrifos. The burrowing nematode destroys the roots of bananas and plantains so that the plants are starved of water, nutrients and lack support, causing 30% to 60% yield loss. The use of Majestene to control nematodes would be a major step forward in reducing exposure risks to pesticide applicators as well. On soybean trials in Brazil, Majestene yield was as good or better than the commercial chemical standard. In the U.S. grower usage this year, Majestene is showing good performance on potatoes, carrots, turf and other crops.

R&D continues to advance the next-generation Majestene product that substantially amps up the nematocidal activity and reduces the field application rate while increasing gross margin for MBI. They are working to rapidly scale this exciting new process.

Haven is our first non-pesticidal product and is an extract of coconut oil. This product is a sunscreen for crops, reducing sun stress and water loss. We successfully scaled up, manufactured and shipped product in the 3 quarters, targeting crops such as apples, onions, berries and grapes. In demos and trials in blackberries and grapes, the product did a great job reducing sun damage. We will give an update as we get additional yield and quality data, especially for nut crops in California. Due to the lower regulatory variance by stimulants, we are shipping product to international locations to get efficacy data needed to support sales as quickly as we can.

Now let's talk about our new biofungicide, MBI-110, which we call Stargus for specialty crops and Amplitude for row crops and which was recently approved by the EPA. We also submitted the registration to Mexico and Canada. This is the seventh EPA-registered product we have commercialized from 6 new active ingredients, which we believe is an unmatched productivity. Against lettuce downy mildew, Stargus rotated with the chemical standards, REVUS and Reason, provided better reduction of disease incidence compared to all other treatments, including REVUS and Reason program without Stargus. Our rotation program with Stargus would be good for resistance management, a serious problem with downy mildews on leafy greens in California and Arizona.

In the first comprehensive California trials against Botrytis bunch rot conducted by the leading grape disease researcher, Stargus showed exceptional control of Botrytis bunch rot. Stargus alone reduced percent severity similar to the elevate standard and the other highest-performing materials. Stargus rotations were among the best treatments, performing similarly to industry standard and outperforming some treatments. We think we have a real winner here. Stargus reduced white mold on snap bean plants in New York similarly to the chemical standards, but Stargus' marketable yield was 40% better than the chemical standards.

MBI-601, a biofumigant, is our newest product, which we have named Ennoble. Ennoble showed excellent results in field trials against lettuce white mold Sclerotinia Sclerotium. Ennoble had numerically the highest yield. Against the white mold Sclerotinia minor, yields were the best when Ennoble was rotated with our own Stargus. The next best yields were recorded for plots treated with Ennoble and Bio-tam 2.0, which we distribute for Isagro. Ennoble also had the best activity of all treatments against another serious disease, Fusarium wilt on celery. Ennoble manufacturing is being scaled, and we are in the process of arranging full demos with customers.

Our R&D group is generally finished with their work for the EPA submission of MBI-014 bioherbicide. Toxicology studies are in progress. And once those are finished, we will submit the package. MBI-014 has always showed good activity against the pigweed 's family. A new spectrum study show more-than-expected activity against some grasses, along with some control of the Malva and Aster families. The USDA doing work on the mode of action saw a complete and total repression of key genes in 5 minutes, leading to plant stunting. The key herbicide compound at MBI-014 is active at 0.3 grams per acre, which is remarkably active compared to the leading herbicide, glyphosate, which is active at 109 grams per acre; and gluphosphonate, which is active at 348 grams per acre.

And finally, an update on Zequanox, the industry's only biological solution for invasive mussels and the only low-risk product registered by the EPA for open water use. We've continued working with large companies and government agencies for both open water and pipe treatments. For in-pipe treatments, we have finalized a distribution agreement with a large water treatment company, who assisted with commercial application to a power plant this year. Due to the confidential nature of the business, we cannot disclose the name of our partner right now.

I'd also like to highlight our success in the rapidly growing cannabis industry. MBI's products are impacting cannabis production through the reduction of toxic chemicals and pesticide residues that are harmful to both the environment and to consumers. Additionally, the intensity of cannabis production requires heavier use of input relative to traditional agriculture, increasing the urgency for growers to switch from toxic chemicals to biologicals. Recently, MBI's products have been added to cannabis-approved listings by several states that have permitted the sale of cannabis and hemp for either medicinal, food, fiber or adult uses. We continue to work directly with states to ensure universal approvals where cannabis and hemp production are legal.

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. We also have Regalia, Grandevo and Venerate on Amazon. We have completed the required efficacy studies for Regalia in Canada where cannabis may soon be legal, and we will submit the label as soon as the data are summarized.

Worth noting, we have sales through a distributor who targeted the cannabis market, and that distributor is now one of our top customers. We have just signed and received an order with an even larger distributor to the hydroponic industry. Cannabis growers continue to ask for our products and technical support for our products for diseases and pests such as powdery mildew and mites. To field all the calls and better support our customers, we will be hiring a sales specialist for the cannabis market.

To provide some scale of the market opportunity, a study from UC Davis Graduate School of Management estimated the cannabis inputs market in just Colorado, Oregon and Washington to be currently $91 million. The study estimates this pesticide and fertilizer inputs market, including California, due to recent changes in California legislation will grow to $1.4 billion within the next 5 years.

I'd now like to speak briefly about some of the partnerships and collaborations. First, our Evogene collaboration. Transgenic plants containing MBI's insecticidal genes were developed, and one candidate showed promising results with 100% kill against cabbage looper. Additional tests are in progress. In September, we announced a partnership with ÉLÉPHANT VERT, a Swiss firm that strives for healthy and sustainable agriculture in Africa. ÉLÉPHANT VERT is marketing 2 of MBI's products in Morocco, Tunisia and Algeria, Reysana, which is the local marketing name for Regalia and Majestene. We also recently signed an exclusive distribution agreement with Kenya Biologics to bring MBI's biopesticide to Kenya and Tanzania. Kenya is the second-largest exporter of French beans and peas to the EU as well as a key supplier of roses globally. In addition, we are currently in discussions with several food companies about how to best transition growers to organic and help their grower suppliers with specific best in disease problems. We are also in discussions with both organic and nonorganic consumer food products companies who want to increase their sustainability. We look forward to updating you more on this in future calls.

But before going further, I would now like to turn the call over to Jim to go through the numbers and provide additional detail on our financial performance. Afterwards, I'll walk you through some of our other strategic initiatives for the remainder of the year before wrapping up the call with Q&A. Jim?

Thank you, Pam. Good afternoon, everyone. I would like to walk you through our third quarter results. Our year-to-date GAAP revenues totaled $14.8 million, up 31% compared to the same 9-month period in 2016. We reported product shipments year-to-date of $15.2 million, up 36% compared to $11.2 million for the same 9-month period in the prior year.

GAAP revenues for the third quarter of 2017 increased 16% to $4.2 million compared to $3.6 million in the third quarter of 2016. Product shipments for the third quarter were $3.1 million, which were flat with the third quarter of last year.

Our revenues and product shipments in the third quarter were negatively impacted by hurricane weather conditions in key growing regions, which significantly delayed planting or destroyed targeted crops. Revenue growth in the third quarter was led by Venerate. Although revenues and product shipments were affected by the weather this quarter, we believe that company-wide execution in our third quarter was strong, and we believe we are well positioned for ongoing growth opportunities.

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 it's not affected by this revenue recognition methodology.

As a result of this, we believe that product shipments are a helpful measure for investors to understand operating results and track product adoption. The company is in the process of assessing the impact on both revenues and deferred revenues related to the implementation of the new revenue accounting standards, commonly referred to as ASC 606, which take effect January 1, 2018.

Now returning to GAAP reporting. Our gross margin in the quarter was 40.9%, a significant increase compared to the 31.4% gross margin for the third quarter of last year. Gross margins increased sequentially from Q2 to Q3, primarily due to product sales mix and manufacturing process of [fluids] that we made both at our own facility in Michigan and at our third-party manufacturers. We expect both margins to continue to improve over time.

Operating expenses increased year-over-year from $6.4 million in the third quarter of 2016 to $8.3 million for the current quarter. Included in our $8.3 million of operating expenses are approximately $1.2 million of noncash expenses, including $369,000 of a noncash loss related to an asset sale of some biodiesel tanks at our Michigan facility that were on site when we purchased the facility.

SG&A in the third quarter increased to $5.2 million compared to the $3.8 million in the same period last year. The increase from last year was largely due to the $369,000 noncash write-off on the sale of equipment mentioned earlier, Oracle Cloud ERP implementation cost, financing-related cost and a $1 million net difference in legal expenses. This change in legal expenses primarily related to a $700,000 credit related to D&O coverage recognized in 2016. R&D costs, which include manufacturing support and process improvements, patents, regulatory, field trials and new product development in the third quarter were $3.2 million, up relative to $2.7 million in the same quarter of last year. The increase was mainly due to an increase in field trial expenses.

We remain intensely focused on managing operating expenses. We expect our operating expenses to remain flat, which we consider sufficient to support our growth.

Now turning to the balance sheet. Inventory at the end of the third quarter was $9.3 million as compared to $8.4 million last year, which is adequate to address near-term demand. Our year-to-date cash usage from operations was $14.4 million or an average of $4.8 million per quarter. The $14.4 million represents a 21% decrease when compared to the $18.4 million of cash used from operations in the same period of 2016.

Third quarter 2017 cash usage from operation was [$4.6 million versus $4.8 million] for the third quarter of 2016, a 4% decrease. At the end of the third quarter, we reported total cash and cash equivalents, including restricted cash, of [$6.2 million, of which $2.5 million is restricted]. In October 2017, we entered into an unsecured promissory note with an investor, which enabled them to fund certain tranches at their sole discretion. To date, we have received $2 million in funding under the note.

I'd now like to turn the call back to Pam for a discussion on some of our initiatives for the remainder of the year. Pam?

Thanks, Jim. We've made great progress in key strategic goals and operations. We have a proven history of strong product shipment growth through 8 quarters. Our products have demonstrated exceptional results in both our U.S. and international field trials against key pests and diseases, as I described previously.

We continue to focus on those products in our pipeline with the best near-term commercial opportunities, and our R&D expenses continue to reflect a lean but capable organizational structure and a highly targeted R&D approach that is focused on supporting sales and manufacturing and increasing gross margins through process improvements and also a small percentage on new product development.

Since the fourth quarter of 2015, we had a goal to introduce 4 new products to the market in the next 3 years, and we remain on track to do so. We introduced one in 2016 and 2 in 2017 and also registered and demoed with customers a fourth product, MBI-601 or Ennoble. We've done this all while keeping R&D flat. For our little company, it is truly impressive to have a portfolio of 7 highly effective products in 11 years.

Vertical integration continues to be a key focus of ours as our volumes increase. In 2012, we purchased our own manufacturing facility and have since brought several products in-house, such as Regalia, Grandevo and Zequanox. We expect to bring Venerate and Majestene production in-house in the future. Key benefits include controlled intellectual property and flexible and faster scaleup times as well as better margins, cost controls and return on investment.

Our Michigan facility has rapidly scaled with demand and has ample acreage for drying and warehousing. The Grandevo granulation line is finished, and the packaging line has been ordered.

In summary, we are achieving short-term goals while building an organization that is positioned for continued success and growth. I'm extremely proud of our entire team for their hard work and dedication. We remain keenly focused on execution to build shareholder value.

With that, I'd now like to open the call for questions. Operator?

(Operator Instructions) And we'll take our first question from Sameer Joshi with H.C. Wainwright.

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

We are assessing that right now. They had to replant some tomatoes and peppers and actually pick up the plants that were already there and try to re-stake them and see if they could save them. And then, of course, the citrus crop was really messed up; and then all of the ag in Puerto Rico. So we're assessing that now. Sprays are starting again, so we'll see. Sometimes when there are fewer crops out there, they spray more because the value of the crop is higher. So that's often -- that may be the case.

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

I don't think you'll see pushouts.

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

Okay. Just a clarification on the biofumigant, MBI-601. Has it been approved and launched? Or is it -- that you're under trials at various sites?

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

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

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

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

The -- it is the same formulation, but the label and the rates per use are different. So there's a -- you use a different number of [courts]in -- for things like white molds versus specialty crops. Just like with Regalia and Regalia RX, Regalia RX is the different rate. Yes, yes.

Got it. So this next question is sort of a longish question, but it goes for the next 12 to 15 months in terms of product launches. I know you mentioned 4 new product launches over the next 3 years. But over the next 12 to 15 months, how does that look? And then part B of that question is, how do -- how does your utilization of current capacity and future capacity expansion relate to new product launches and expansion of market?

Okay. So we're -- so we said -- after the end of 2015, we said we were going to launch 4 new products in the next 3 years. So we're done with 3 of the 4. So that's Haven -- Majestene, Haven and Stargus, I mean, in terms of -- and shortly launching Stargus. So the next one up would be Ennoble. That would make #4, and then after that would be our herbicide, MBI-014, but that depends on when we launch -- on when we get EPA. We have to submit it, and that's near-term -- we're just finishing the tox studies -- already done with their stuff. And then that will be the next one up. We have other things in development that are, I said, grand refresh and value creators to existing products. For example, Regalia premixes with the strobilurin chemistry. And Regalia and Stargus premixes to create an even better product and brand segmentation in the market, and those are already completed by R&D. We haven't set a target launch for that. We also have some seed treatment versions that would be near-term launch as well. We're looking at the go-to-market strategy for the -- our bio -- BioST, bio-stacked seed treatment because the second year in a row, and we did semi-commercial trials this year, which are looking very good, so we're figuring out how to go to market and launch that in 2018. Maybe the first growers will be the organic ones, who have the biggest need, while we're looking for partners for the larger markets anyway. Now the second part of your question was how much of the new product is contributing to the growth?

Yes, contributing to the growth and also your manufacturing capacity with this utilization, yes.

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

And we're going to be increasing Regalia production.

Oh, yes. We're definitely -- we're buying a bigger tank because Regalia, we need it, yes.

I know I said my previous question was to be the last, but just a curious question. Are you seeing sequential growth from the cannabis/hydroponic market? Or is it lumpy right now?

We are seeing sequential growth, especially since the largest hydroponic distributor took in product this -- actually, it was the fourth quarter, right? Yes. We are seeing sequential growth. There was a little -- fires burning in some of the crop in California, for the medical crop. And they -- our estimate, some 20%, 25% burn, but we don't know if that's going to affect anything right now. Certainly, California is gearing up for January 1 recreational. And the California Department of Food and Agriculture has hired 100 people to put in place "Cadillac regulations that will regulate recreational use." So that's why we're doing the small pack sizes because that's going to hit -- we think that's going to have an effect and hit pretty quickly.

But we continue to seek it.

Yes, yes, yes.

(Operator Instructions) We'll take our next question from Laurence Alexander with Jefferies.

This is Nick Cecero on for Laurence. So I guess, taking a look at over the next 3 to 5 years, what areas do you see having the most opportunity for growth?

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

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

Thank you. In closing, I want to thank each of you for joining us today. We will be conducting several roadshows and attending conferences on both coasts. So if you're interested in the meeting, please contact management or our IR forum, MZ Group, to arrange. We look forward to updating on our progress as we move forward with a number of key initiatives to build shareholder value over the long term. Thank you.

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