Marrone Bio Innovations, Inc. (MBII) 2017 Q4 法說會逐字稿

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

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

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 development 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 2017 fiscal year, and in our earnings release posted on the company's website. Should one or more of these risks or uncertainties materialize or should any of management's assumptions prove incorrect, actual results may vary in material respects from those discussed today. Additionally, the company will be making reference to certain non-GAAP financial measures on this call. The reconciliation of these non-GAAP measures to their 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 or to reflect events or circumstances that may arise after the date of this call. After our remarks, we will hold a question-and-answer session.

I will now turn the call over to our Founder and Chief Executive Officer, Pam Marrone. Pam?

Thank you, Linda. Good afternoon, and thank you, to everyone for joining us. With me today is Jim Boyd, our President and Chief Financial Officer; and as you just heard, Linda Moore, our General Counsel. 2017 was a transformative year, and one of continued execution.

Today, I'm pleased to announced that the company is in a healthier position than ever before. First, from a capital standpoint. We raised new equity and have eliminated the vast majority of our debt and deferred much of the remaining interest until maturity, which provides us with the resources to execute on our business plan. Second, from a longevity standpoint, with a stronger balance sheet customers, distributors and growers now have the confidence that we will be around tomorrow, the next day and years to come. As a result, our customers know that MBI's products will always be available for use in their crop production program, which we expect to translate into more meaningful sales.

Third, our customer base is growing and our relationships with distributors are stronger. We believe, we are well positioned in the marketplace, and have made steady progress in penetrating target markets in both the U.S. and abroad through our partnerships. Some that we signed in 2017 were with Agri-Star in Mexico, DISAGRO in Central America, ÉLÉPHANT VERT in North Africa and Kenya Biologics in Kenya and Tanzania. Fourth, from a product standpoint, we launched 2 new products in 2017, Haven in March and Stargus in December. We now have 6 EPA approved biopesticide products and 1 biostimulant product on the market.

MBI has commercialized 7 products in only 11 years, an unprecedented accomplishment in the AG industry. We expect more to follow. And finally from a data standpoint, global field trials, which are required for registration have come back very promising as always. Key areas that are returning good data include the U.S., Canada, Central America, Europe, East and Southeast Asia and notably, Brazil, which is a key target market and the largest pesticide market in the world.

Now before going any further, I would like to take a moment to discuss who we are, what we do, why we are 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: biopesticides for crop protection; and biostimulants for crop enhancement. There are many benefits to growers who implement biologicals as part of their Integrated Pest Management program or IPM, whether they are organic, transitioning to organic or conventional, and spray our products in a tank mix in -- or in rotation 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 this the case? 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 crop production programs, growers can improve yields and quality of their crops, creating a higher return on investment. Pest resistance, a common problem with many synthetic chemicals, is reduced or eliminated, again, increasing return on investment. Biologicals generally 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 as -- more quickly after spraying.

Biologicals don't leave synthetic chemical residue, which is particularly important for branded food, retail and export markets with very strict MRLs, or Maximum Residue Level standards. Aside from the significant benefits to the growers, there are also major benefits to us as a company in producing these biological products. Our technology and science-based approach has helped lead the way to mainstreaming biologicals. Biologicals have a much lower development cost and time-to-market than synthetic chemicals.

As a comparison, synthetic chemicals cost on average close to $300 million and take 11 years to develop and bring to market. Our strategy is to uniquely take advantage of a capital-like model. Given our experience, it takes us less than 5 years and around $5 million to get a product to the U.S. market. We get into the market quickly with early adopter growers. The growers give us feedback that in turn helps us develop consecutive versions, associated new uses of the products and cross and label expansion. This in turn expands our market opportunity.

The global pesticide market is massive, totaling approximately $50 billion today. But recently, growth has stagnated and projections for the synthetic pesticide market are less than 6% compounded annual growth rate. While the newly emerging biological market is much smaller, around $3 billion, it is growing at a compound annual growth rate of around 15%. The biostimulant market, which MBI entered in 2007 (sic) [2017] with Haven is growing about 10% to 15% annually. MBI's growth is significantly outpacing all of these markets.

Currently, we are focusing our marketing dollars on the biggest opportunities in specialty crops, such as berries, leafy greens, potatoes, palm and stone fruits, pruning vegetables, grapes and nuts. But a large new opportunity exists with the registration of Stargus and Amplitude in late 2017, which provides powerful products to combat downy mildews in grapes, leafy greens and vegetables and white mold in leafy greens, succulent and dry beans and peas and lentils. These complement Regalia, which is strongest on powdery mildew. Also a significant opportunity exists in row crops, such as corn, cotton, wheat and soybeans, especially for seed treatments, which we started to penetrate through a strategic partnership with a large agrochemical company, Albaugh, LLC.

Finally, another growth driver for us is organic. The fastest growing segment is food. There are simply not enough acres to meet the demand. To help transitioning in current organic growers, we have a product portfolio across the full range of pest and plant disease needs, with the exception of a herbicide, which we plan to launch in the future.

We continue to prove in field trials, on-farm demos and customer adoptions that we have great products that on their own can perform as well as or in some cases better than chemical standards and also improve control, yields and quality when incorporated into integrated programs with chemicals, resulting in an increase return on investment for the grower. That said, to reach our full potential, we need to continue to drive grower demand through increased awareness, demos and educational programs. With that, I'll turn the presentation back to the quarter and full year 2017 to discuss some of the highlights within each product category.

As I noted in my opening remarks, we continue to make considerable progress despite a challenging agriculture environment and weather conditions. 2017 was a year of continued momentum and execution, which included several noteworthy events. I'd like to briefly highlight a few of these at a high level before jumping into the details. We signed international distribution agreements for Central America, Morocco, North Africa, Kenya and Mexico. We signed a distribution agreement with a large water treatment company Solenis, who assisted with a commercial application to a power plant in 2017. We're excited by the potential of Zequanox with an experienced large water treatment partner like Solenis.

Two new commercial products were launched in 2017, Haven sun protectant in March and Stargus, our downy mildew and white mold biopesticide in December. More recently in January 2018, we launched our Majestene counterpart brand, Zelto, our first segmented product into turf. One of our microbes was launched successfully via our strategic partner Albaugh into the row cross seed treatment market. Albaugh has announced that their BioST seed treatment outperformed the commercial standards, leading to increased yields on cotton, corn and soy beans.

In the next 3 years, we estimate that our partnership with Albaugh as part of their BioST seed treatment could translate to $8 million to $10 million of revenue for MBI on an estimated 8 million to 9 million acres. Our field trial results around the globe were very positive. We completed the second year of successful field trials with MBI and Groundwork BioAg's bio-stacked microbial seed treatments on corn and soy beans, with yields as good or better than the commercial standard. Our biofumigant Ennoble, our MBI-601, gained higher marketable yields as good or better than the chemical standard on strawberry, lettuce and celery. We saw exceptional results from field trials in Brazil for Regalia, Grandevo, Majestene and Venerate. With these results, we anticipate a clearer path to registering our products in Brazil, providing access to one of the largest commercial crop protection markets in the world.

Other key areas with very good data for Regalia, Grandevo and/or Venerate are Europe, South Korea, Philippines and Vietnam. For example, in the Philippines, Regalia delayed the onset of the worst banana disease, Black Sigatoka and was as good as the chemical standard. Haven increased yields of almonds and walnuts for the second season in a row, providing nut growers an ROI of 5x to 9x on almonds, and 3x to 5x on walnuts, depending on the number of applications and amount of water used. From a manufacturing and R&D standpoint in 2017, we've completed installation of our Grandevo WDG granulation line, which is now up and running at our Michigan manufacturing facility, which will improve margins and ensure consistent supply.

We shortened the production cycle times of Venerate and Majestene, which improved our margins. We have developed a new process for Majestene that substantially increases the (inaudible) compound, which should improve margin. We made a substantial potency improvement in Grandevo, which should improve margins in our future product version. We successfully scaled up in manufactured Haven and Stargus.

Together with our partner, Evogene, we discovered an insecticidal protein from MBI's bacteria, which was successfully expressed in plants, resulting in 100% kill of pest caterpillars. We jointly filed a patent on this discovery. We completed development of MBI-014 bioherbicide and finished toxicology studies and we are now preparing the EPA submission package. We view all of these as major accomplishments.

Weather presented many challenges in 2017 to the entire AG industry. The unfavorable weather conditions reduced the number of expected sprays in several of our key markets, especially in the fourth quarter in the Southeast due to hurricanes and in parts of the West, where the droughts are still in effect.

Fortunately, our portfolio approach to product development and marketing is designed to diversify our revenue base and reduce the impact of any one approach -- of any -- of any one variable on the success of the company as a whole. This product portfolio approach allowed us to achieve 2017 growth above the industry average, with all of our product lines showing growth. In addition to this portfolio approach, we also have worked diligently to grow our sales geographically, which should help to smooth out a seasonal fluctuation in the longer term.

As noted previously, 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 microorganism, natural product chemistry, mixtures, formulation and new uses and new [pests] .

A significant patent in 2017 was from the U.S. Patent and Trademark's Office on broad composition claims for the microbes in Majestene and Venerate, and another from the European patent office on broad plant health claims for the technology behind Regalia.

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

Regalia, our first product and the industry's first effective plant extracted fungicide is now becoming the recognized standard for biological control of powdery mildew, a major crop disease. We continue to gain a better understanding of the plant health benefits of using Regalia to improve crop yields and quality.

For example, Regalia increased marketable yields in strawberries, with more than a 9x return on investment. In alfalfa, Regalia increased nutrient content and increased yield by nearly 1 ton more per acre, which results in an estimated tenfold ROI.

On potatoes in Guatemala, REGALIA MAXX provided early preventative control of [leaf life] under high disease-pressure conditions. These preventative sprays of REGALIA MAXX allowed adoption of an IPM program to reduce the high number of chemical sprays.

In young rubber plantations, REGALIA MAXX can delay the onset of diseases like black stripe and moldy rot. On older diseased plantations, REGALIA MAXX performed as well as the standard, which was comprised of 4 different modes of action chemicals.

Organic Grandevo continued 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, for which we recently expanded our production capacity at MMM. We are fast tracking another new process improvement from R&D, which we estimate has the potential to significantly reduce Grandevo's costs of goods.

Grandevo is increasingly being recognized for its benefit in an IPM program for controlling the dreaded Spotted Wing Drosophila on stock fruit. USDA trials continue to show outstanding control of pecan weevil. In Brazil, Grandevo was as good as the neonic standard for Asian citrus psyllid, and in the Philippines was the best at reducing scale on mealy bugs on bananas. Grandevo and Venerate outperformed the chemical standard on strawberry syrup in Europe.

Venerate, which controls a wide spectrum of pest insects and mites, with a novel but different mode of action than Grandevo, is rapidly gaining uptick as growers experienced the improved control on their IPM programs with the added flexibility of labor, residue and resistance management.

Our overall year-over-year product growth was led by the growth of Venerate with an 80% increase. Of note, Venerate showed effective control as a dormant spray for control of scale on apples, which has historically been sprayed with controversial chemicals, such as chlorpyrifos.

Venerate also controlled 2 bad fly pests, walnut husk flies and olive flies, typically treated with toxic chemicals. Both Grandevo and Venerate gave approximately a 20x return on investment by stopping damage from naval orange worm on almonds, which is becoming increasingly problematic due to resistance to conventional chemicals.

As mating disruption becomes the standard program for naval orange worm, Grandevo and Venerate are wonderful complements to the pheromone program for extra assurance and lower risk of damage. In the Philippines, Venerate controlled banana thrips as well as the chemical standard.

Majestene controls roundworms or nematodes that feed on the roots of plants and destroy crop yields. In 2017, U.S. grower usage, Majestene showed good performance on potatoes, carrots, turf and several other berry and vegetable crops.

Trials in Brazil showed control of nematodes and yield increases as well as the chemical standard on soybeans and bananas. We saw control of nematodes on black pepper trees in Vietnam and bananas in Central America and the Philippines. In South Korea, Majestene had good efficacy against root knot nematodes on tomatoes.

R&D continues to advance the next-generation Majestene product that substantially amps up nematicidal activity by more than a hundredfold and will likely reduce the field application rate while increasing gross margin for MBI. We are working to rapidly scale this exciting new process.

Haven is our first non-pesticidal product and is an extract of coconut oil. This product is a sunscreen for crops, reducing sun stress that affects yields and quality. We successfully scaled up, manufactured and shipped products targeting crops such as nuts, apples, onions, berries and grapes.

Yield increases in nut trials have been positive for the second year in a row, showing an ROI of 5x to 9x on almonds and 3x to 5x on walnuts, depending on the number of applications and the amounts of water used. Due to the lower regulatory barriers for biostimulants, we're shipping product to international locations to get the efficacy data needed to support sales as quickly as we can.

The active ingredient MBI-110, which we call Stargus for specialty crops and Amplitude for row crops, and which was approved by the EPA in late October has showed outstanding efficacy on white mold, downy mildews and Botrytis bunch rot. This is the seventh EPA registered product we have commercialized from 6 new active ingredients, which we believe is unmatched productivity.

We also submitted the registration to Mexico and Canada. Stargus gained its access to the eastern grape mildew and bunch rot markets. Amplitude gains us access to an intensive fungicide segment on dry beans, peas and lentils, where better solutions are needed. We are really excited about the future potential of these products.

MBI-601, a biofumigant is our newest product, which we have named Ennoble. Ennoble showed excellent results in field trials. On strawberries, Ennoble plots had 1,000 to 1,500 more pounds of marketable berries than the chemical fumigant standard. Ennoble yielded 13% and 20% more than the best chemical standard against 2 types of lettuce white mold. And against the dreaded (inaudible) on lettuce, achieved closed to $8,000 greater return per acre. Against one of the very worst vegetable diseases, Fusarium Race 4, Ennoble outperformed the grower standard under severe disease conditions on celery. Ennoble manufacturing is being scaled and we have arranged demos with customers.

Our R&D group has finished the development of MBI-014 bioherbicide for submission. Toxicology studies are completed and the package is in preparation for submission. MBI-014 has always showed good activity against the scourge pig weeds such as glyphosate-resistant Palmer amaranth. New spectrum studies showed more than expected activity against some grasses along with some control in the Malva and Aster families. The USDA team doing work for us on the mode of action saw complete and total repression of Key weed gene -- key weed genes in 5 minutes, leading to plants dunking.

In laboratory tests, the key herbicide compound in MBI-014 by itself is more than 300x more active in glyphosate and more than 1000x more active in gluphosphonate on a per-acre base. Our 2018 goal for MBI-014 is to further define the art of use in combination with [adjuvant] and conventional chemical herbicides in a substantial field testing program.

And finally, an update on Zequanox, the industry's only biological solution for invasive mussels and the only low-risk product registered by the EPA for open water use. For in-pipe treatments, they announced a distribution agreement with a large water treatment company Solenis, who assisted with the commercial application in the power plant in 2017. We are very excited by the potential of Zequanox, with this experienced, large water treatment partner.

I'd also like to highlight our success in the rapidly growing cannabis industry. MBI's products are impacting cannabis production through the reduction of toxic chemicals and pesticide residues that are harmful to both the environment and to consumers.

Additionally, the intensity of cannabis production requires heavier use of inputs relative to traditional agriculture, increasing the urgency for growers to switch from toxic chemicals to biologicals. MBI's products have been added to cannabis-approved listings by several states. That has permitted the sale of cannabis and hemp for either medicinal, food, fiber or adult recreational uses.

We have developed labels for all of our products in smaller packet sizes with the suffix CG, which stands for cannabis in garden, such as Regalia CG, Grandevo CG and Venerate CG. Colorado, Oregon, Washington and Nevada have approved the CG label and package for Regalia with other states pending. We are also selling Regalia, Grandevo and Venerate on Amazon. We have completed the required efficacy studies for Regalia in Canada, where recreational cannabis may soon be legal throughout.

Worth noting, we have sales through a distributor who targets the cannabis market, and that distributor is now one of our top customers. In late 2017, we signed and received an order with an even larger distributor to the hydroponic industry. Cannabis growers continue to act for our products and technical support for our products for diseases in pests such as powdery mildew and mites. To field all the calls and better support our customers, we have hired a sales specialist for the cannabis market. 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 2018 before wrapping up the call with Q&A. Jim?

Thank you, Pam. As noted, I would like to walk you through our fourth quarter and full year 2017 results. Our GAAP revenues for 2017 totaled $18.2 million, up 29.4% compared to $14 million in 2016. We reported product shipments in 2017 of $19 million, up 16.2% compared to 16.4%, up [$1 million] in the prior year. GAAP revenues for the fourth quarter of 2017 increased 23.3% to $3.3 million compared to $2.7 million in the fourth quarter of 2016.

Product shipments for the fourth quarter were $3.8 million compared to $5.2 million in the fourth quarter of last year. The fourth quarter shipment decline was due to several factors including hurricanes in the Southeast in Puerto Rico, continued drought in parts of the Southwest as well as hesitations in buying decisions from our customers prior to our comprehensive financing and debt restructuring. We believe we are now on firm financial footing, which we expect will help sales moving forward.

As a reminder, our GAAP revenue recognition policy requires us to defer some revenue to certain customers on a sell-through revenue recognition method. We do not grant any return rights to these customers, and deferred revenues are recognized over time. Cash is collected on normal terms, exactly the same as with our sell-in customers, and is not affected by this revenue recognition methodology.

As a result of this, we believe that our product shipments are a helpful measure for investors to understand operating results and track product adoption. However, starting January 1, 2018, we will be subject to the implementation of a new revenue accounting standard, commonly referred to as ASC 606. That's our GAAP revenues on -- on a go-forward basis will essentially be the same as the old sell-in method, allowing us to recognize revenue upon product shipment to our distributors. We welcome this change as we feel revenue recognition upon product shipment more accurately reflects the performance of the company in a given quarter. Please note that an estimated $5.7 million of our 2017 deferred revenue will not be recognized as revenue in 2018 as it would have been in the past. Instead, the $5.7 million will be booked to the balance sheet as returning earnings and not run through our income statement, in accordance with the guidance in ASC 606.

Gross margins increased significantly year-over-year to 42% in 2017 from 32.2% in 2016. Gross margins in the fourth quarter were 46% compared to 39% in the fourth quarter of 2016. Gross margins benefited from favorable product mix, the true up of annual rebates as well as some small capitalization of manufacturing variances. We expect to see gross margins increases over the life cycle of each of our products as production processes improve and as we gain efficiencies in increased yields.

Operating expenses in 2017 were $31.1 million compared to $28.2 million in 2016. SG&A expenses in 2017 were $20.1 million compared to $18.5 million in 2016. This increase was largely due to higher consulting expenses associated with our Oracle Cloud ERP implementation, general financing and marketing efforts, higher legal expenses associated with corporate financing activities and a noncash write-off on the sale of equipment. SG&A in the fourth quarter decreased to 5 point -- $4.5 million compared to $4.7 million in the same period last year.

R&D expenses, which include manufacturing support and process improvement, patents, regulatory, field trials and new product development were $11 million for the full year 2017 compared to $9.7 million for 2016. R&D expenses in the fourth quarter of 2017 were $2.6 million compared to $2.4 million in the fourth quarter of 2016. The increases were mainly due to an increase in field trial expenses.

We remain focused on managing operating expenses. We expect operating expenses to remain approximately flat in all departments with the exception of our sales and marketing departments. In 2018, we are planning for growth by investing in sales and marketing resources. We are putting more boots on the ground, which should increase grower demand or pull-through, develop new customers as well as expand business with existing grower customers.

Investments in sales and marketing also strengthens our infrastructure and derisks our business by allowing us to intensify our efforts in certain territories, cover for employee turnover, better educate our customer-facing personnel and increase marketing and communications campaign.

Interest expense grew $360,000 year-over-year to $7.7 million, or an average of $1.9 million per quarter. However, with our recent debt restructure, our interest expense on long-term debt will decrease to less than $2 million in 2018 or $500,000 per quarter.

Now turning to the balance sheet. Inventory at the end of the fourth quarter was $9.8 million as compared to $8.5 million last year, which is adequate to address near-term demand. Our 2017 cash usage from operations was $21.1 million or an average of $5.3 million per quarter. The $21.1 million represents a 13.4% decrease when compared to the $24.3 million of cash used from operations in 2016. Fourth quarter 2017 cash usage from operations was $6.6 million versus $6 million for the fourth quarter of 2016. This increase was primarily due to increased working capital.

At the end of the fourth quarter, we reported total cash and cash equivalents, included -- including restricted cash of $2.8 million. Of note, in February 2018, we closed private placement equity transactions with certain institutional investors in tandem with a debt restructuring -- with debt restructuring transactions, in which we sold $30 million of common stock with net proceeds of approximately $27.3 million. In addition, we converted $45 million in principle of our long-term debt at year-end or 73% of our year-end debt to common stock at an average price of $1.75 per share, together with 20% warrant coverage.

The restructuring included the extension of all maturities on the Waddell & Reed and Snyder notes until December 31, 2022, and the deferral of all remaining interest payments on those notes until maturity. The above numbers exclude the $4 million in bridge loans that were part of the new financing and also converted to common stock in the transaction. This reduction and debt -- this reduction in debt and the deferral of interest will reduce total cash burn for the company by approximately $1.3 million per quarter. This transaction was truly transformative, and we are confident that it provides a solid foundation for our future.

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

Thank you, Jim. We thank our debt holders and our new and existing investors for their confidence they have placed in us. We recognize the tremendous responsibility we have to realize MBI's potential as a significant force in AG biologicals and global crop production. We have made great progress in key strategic goals in operation.

I want to now highlight where our focus will remain in 2018 and beyond. We continue to focus on those products in our pipeline with the best near-term commercial opportunities. And our R&D expenses continue to reflect a lean 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.

Our R&D, supply chain and manufacturing margin enhancement efforts have been achieved through: potency improvement, achieving the same protection with less product; yield increases, which reduces our cost of goods sold; greater scale, which reduces overhead and improved operating efficiencies; and finally, continued focus on strain improvement technologies, such as the next generation processes of Venerate, Grandevo and Majestene. We will continue to also move forward with our selected pipeline product MBI-601 Ennoble biofumigant as well as MBI-014 bioherbicide.

Since late 2015, we had a goal to introduce 4 new products to the market in the next 3 years and have substantially accomplished this goal. We introduced Majestene in early 2016, Haven and Stargus in 2017, and our Majestene counterpart brand, Zelto in 2018. We have done this all while keeping R&D flat. For our little company, it is truly impressive to have a portfolio of 7 highly effective products in 11 years.

We now focus on continued market penetration of our existing products. These include additional specialty crops, such as: carrots, cannabis, mangoes, coffee and bananas, turfs and ornamentals; use in large row crops, like corn, cotton and soybeans; seed treatments; and home and garden. There are 2 key areas we think we can improve and are actively working to do so. First, to continue our push-pull strategy, working closely with distributors to identify their grower customer needs. And second, a renewed focus to create grower demand by increasing awareness, education and demos with top growers on our key target crops.

We can significantly improve our execution in this area, especially with our stronger balance sheet. We have already seen positive reaction and increased interest by distributors and growers in existing and possible new strategic partners. We believe that hiring the right people is also a key component to our success moving forward. We are seeking entrepreneurs who are passionate believers in sustainable ag and biologicals and who want to help growers increase their ROI.

We are recruiting top 2 industry talents to lead this charge by focusing our entire commercial team to add new customers, expand revenues of existing customers, enhance the grower demo program and launch new products in our target crops where our portfolio has the best fit in integrated programs. We believe our product portfolio presents an excellent opportunity into row crops, led by seed treatment where we are experiencing significant growth.

As noted, we believe our recently closed private placement and debt restructuring transactions represents a significant milestone in our corporate history, putting us in a strong position to execute and focus on our core business. In summary, we remain focused on short-term goals, such as revenue and margin growth, working capital management and building a high-performance sales and marketing team. All the while, building for our longer-term vision of being the market-leading biologicals company through our own products, combined with synergistic products and technology. I'm extremely proud of our employees for their hard work and dedication. We remain keenly focused on execution to build shareholder value.

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

(Operator Instructions) And we'll go first to Amit Dayal with H.C. Wainwright.

This is my first question, Pam, if you will, on the gross margin side. We saw substantially higher gross margins on slightly weaker revenues. What is the driver behind this? Was that certain products or certain customers that were not part of the sales this time that drove margin higher? Any color to clarify what this data was.

Well, it really was what I mentioned in my script. It was mainly product mix. [I'd follow] to a lesser extent with some capitalization of variances. And -- oh, yes, we had some true up of our rebates that we took earlier in the year.

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

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

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

Yes. We did launch Stargus in the fourth quarter, but it was -- we just had gotten registration. So it was really where we had gotten state registration in a couple of states. So really, Stargus is new across the country in 2018 as well as we haven't launched Amplitude yet. That will be launched soon as we get the product finished, the labels on the jug. And into the bean segment, which I mentioned on the call. And so those will be the focus. Yes, you're right. We don't have new active ingredient other than those for 2018, which -- because we had targeted 4 new and then launched 2 of those. We still have Ennoble and 014 to go. We'd like to have a targeted placement of Ennoble in 2018 but we haven't forecasted a lot of that because we're still scaling up the manufacturing on that. Now on the sales and marketing, they really -- we really are focusing on executing on increasing grower demand through a very tightly controlled demo program as well as a focus on creating a crop focus, so a key -- a set of key target crops, as I mentioned, and then, really getting the top growers to become aware of us and educate them and have them try the product. Number one is product and company awareness. We're still -- we're a small company and still have a lot of work to do on increasing the awareness of just who we are, and this category, biologicals, and then educating on how you use these products. And that's really where we are focusing. Jim, do you have anything to add?

Yes, and we're going to really focus on all the efforts of the company on ramping our current commercialized products.

Right.

Including those 4 new that we've had in the last couple of years. We really need to ramp those up in volume.

Now the 014 product, which we still have very -- got a lot of potential, the herbicide, because we'll have a minimum of an 18 months, once we submit, approval timeline unless we can get some emergency uses for that. But we don't know about that. There will be work to do on really defining, as I mentioned, the art of use of this first-generation product and top -- really there's a lot to do on that art of use and there's a lot of chemical combinations with the product because it synergizes glyphosate for resistant weeds, getting adjuvants that are best uses and all the things that they do to really turn it into a powerful commercial product when we launch version 1.

And we are really, as I said earlier, focusing on ramping the commercial -- our current commercial products. We've added one sales person this year already, in 2018. One sale position in the Southeast, one in the Pacific Northwest and 1 in California.

Right. Additionally.

To really concentrate on ramping those products.

And then, as you ramp the sales efforts, how does that equate to the existing capacity levels that we're running at? Was it always available? Do you need to add more capacity? Do you need to do work on that front there?

Yes. We actually added a fair amount (inaudible).

Manufacturing.

In manufacturing this year. And we did spend about $1 million in capital expenditures over the last 12 months, adding WDG and just improving the production and...

Packaging line.

Yes, we're adding that now...

Adding that.

But that plant MMM can probably take us through the next year. We're also right now starting an expansion of the plant. And I think we could possibly get through 2018 and '19 with the existing capacity. But we'll start building for 2020 soon.

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

Yes, we keep backup vendors to be able to produce in case there's any downtime at MMM. But also to handle any peak demands.

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

So as you know, the international business is gated by field trials for efficacy trials first, official trails, and then registration in each country. And we're -- as I mentioned as a number -- ticking those down, using exclusive, just regional or national distributors to do those for us. And as those come in, that drives growth. So we do see the growth outside the U.S. to be higher, actually -- the highest, because it starts from a small base. So also as you tick down those countries it drives growth. And so we do, in 5 years, expect international to be a significant part of the business. And that's by design, because our products fit in these markets where all the drivers are there, residue resistant, higher yields and quality and so forth. And also, the U.S. is a much more mature biological pesticide market, whereas the markets outside the U.S. are not -- they're not -- the adoption of biologicals is early. So the growth is higher.

We'll go next to Laurence Alexander with Jefferies.

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

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

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

We have not planned on substantial R&D increases, because we as a management team, want to get to breakeven in a reasonable period of time. I should mention that, previous question is -- previous question or a needs to ask about we don't have any new product launches this year. That doesn't mean that R&D isn't doing anything on new products. So we've actually got some interesting combo products that they're working on with the amounts -- the small amount that we've allocated for new product development. And we're looking -- we are looking at the pipeline of the next generation of products now that we've pretty much developed, or close to developing that, ones we said 3 years ago. It's now time to refresh that R&D pipeline. And we're in a strategic planning process to do just that. And we have a lot of assets, we have screened 18,000 microbes, we've got a lot of new microbes, we've got a lot of other companies, entrepreneurs and other small companies that have come to us with their products for development. So we're going to sort through those and pick the next 4 to 5 products in the -- for the pipeline for the future growth.

But in addition, I'd add that, our current R&D team keeps impressing us with how much they can put out. And every time we challenge them, they rise to the occasion. And we think they'll continue that going forward.

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

Pam, can you discuss the potential market for the development of a chlorine substitute? And what are the steps to that end?

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

Is there anything within the product or ancillary products that might find a use in general water treatment? On the consumption?

Of other products? Or Zequanox? Or other products we have?

Well, I'm just looking as far as down the road as I might want to or you might want to. I don't know, is there the possibility for developing a chlorine substitute to general public in the water supply?

Oh, okay. So we haven't actually looked at that. But I would mention that we have screened about 5,000 microbes, as I recall correctly, maybe it's smaller, against algae. And the Great Lakes and Lake Erie, they're in a crisis right now in algae blooms (inaudible) and mussel. And we do have 2 companies testing some of those candidates for algae. We haven't -- we don't know if those would be disinfectants or replace chlorine. It's certainly possible. We haven't tested -- the other thing is, we have tested the whole -- almost the whole collection against bacteria for plant diseases -- for plant disease-causing bacteria. So it makes sense that we could then try them against other types of bacteria outside of the agriculture arena. So certainly possible. And we would -- if that was an interest, we would certainly, for somebody, try and find a partner for that. Solenis could be, if they wanted to expand their partnership in the future. Yes.

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

Thank you, operator. In closing, I want to thank each of you for joining us today. We continue to conduct roadshows and attend conferences on both coasts. So if you're interested in a meeting, please contact management or our IR firm, MZ Group, to arrange. We look forward to updating you on our progress as we move forward with a number of key initiatives to build shareholder value over the longer term. Thank you very much.

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