Marrone Bio Innovations' (MBII) CEO Pamela Marrone on Q2 2014 Results - Earnings Call Transcript

Aug. 8.14 | About: Marrone Bio (MBII)

Marrone Bio Innovations Inc (NASDAQ:MBII)

Q2 2014 Earnings Conference Call

August 7, 2014 4:30 PM ET

Executives

James R. Palczynski – Investor Relations

Pamela Marrone – Chief Executive Officer and Founder

James Boyd – Chief Financial Officer

Analysts

George D'Angelo – Jefferies & Company

Michael Cox – Piper Jaffray

Tony Shin – Stifel Nicolaus & Company

Ben Kallo – Robert W. Baird

Matt Koranda – ROTH Capital

Operator

Good day, ladies and gentlemen. And welcome to the Marrone Bio Innovations Second Quarter 2014 Financial Results Call. (Operator Instructions) As a reminder, today's call is being recorded. I would now like to turn the conference over to James Palczynski from ICR. Sir, you may begin.

James R. Palczynski

Thank you. Good afternoon and thanking everyone for joining us on today’s conference call to discuss Marrone Bio Innovations' second quarter 2014 results. I would just like to note this call is also being broadcast live over the web and can be accessed in the Investor Relations section of the Marrone Bio Innovations website at investors.marronebioinnovations.com. With us on call today are Pam Marrone, Chief Executive Officer; and Jim Boyd, our Chief Financial Officer.

After the market closed today, Marrone issued a press release announcing the results for second quarter ended June 30, 2014. Additionally, there’s a slide deck that accompanies the call that can be downloaded from the Investor Relations portion of the website. Before beginning, I would just like to also remind you that today’s conference call may contain statements regarding management's expectations, believes, hopes, 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 expectation and belief concerning future developments and a potential effect 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'’ 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 the Form 10-Q that the company filed on March 25, 2014 and our earnings release posted on the company’s website. Should one or more of these risks or uncertainties materialize or any of the management’s assumptions prove incorrect, actual results may vary in material respects from those discussed today. Any guidance that management may offer in this conference call represents a point in time estimate. The company expressly disclaims any obligation to revise or update any guidance or other forward-looking statement to reflect events or circumstances that may arise after the date of this call.

Now with that out of the way, I would like to introduce Pam Marrone, Chief Executive Officer of Marrone Bio Innovations.

Pamela Marrone

Thank you, James. And also thank you to everyone for joining us on the call today. Our second quarter was notable, not for our financial results, which reflect the challenging agricultural market, but for the strategic and operational progress we made. Our strategy remains to diversify and grow the business through new products, new customers, international expansion, and new crops segment. We are making good progress on all fronts. We had a very successful launch of a new insecticide, Venerate, this quarter and sold out all initial inventory. In terms of new customers, in California we saw significant increases in adoption for both Regalia and Grandevo.

Internationally, key regulatory milestones have been achieved in both Brazil and Europe for Regalia. Regarding new crops, we made progress for Regalia for wheat and cotton, obviously very large opportunities.

Additionally, we were very pleased to have had our official ribbon-cutting of our new Bangor, Michigan manufacturing plant this past quarter. We continued to develop a great network of suppliers and partners with whom we will grow, develop new products, and create tremendous value for our communities and our shareholders. Perhaps most importantly, we have continued our efforts to build and motivate highly capable dedicated teams in every department of the company to ensure we achieve our potential. That having been said, as you should have seen this afternoon, we issued a separate press release announcing the resignation of our COO, Hector Absi. This leaves us with a gap in our team-building plan. We understand his decision, which was personal and family-related. While this gap in our team is temporary, it does reduce our short-term visibility at a point in time where we are contending with some adverse market conditions.

As you know, we've communicated that our goal was to double our revenues this year. Given the ongoing challenges of the agricultural market, it’s becoming increasingly evident that our revenues have been impacted, and we will not be able to make up that volume. At this point, it is clear that the prudent thing to do is to back off of that goal, particularly given the timing of Hector's resignation. Therefore, we’ve made the decision to suspend guidance for the time being. At the same time, I would stress that the challenges we faced in the first half of the year, which were principally weather-related, do not alter our fundamental view of the company's prospects in the long term. Our company is on the right path.

While we have every confidence in our long-term plan, and that is where our focus remains, obviously the short-term picture was of a difficult second quarter. As you know, the agricultural products market remains soft because of severe weather earlier this year, and product supplies were generally flat to down in the period, especially in the United States. For us, because we remain highly concentrated in the U.S., where weather has been most problematic, the negative impact was pronounced.

We also are reassured that despite the pressure on shipments, adoption rates for our products continue to increase meaningfully in the quarter and first half of the year. In California, a very important market, both Regalia and Grandevo performed well, despite the drought, with significant adoption rate increases. Along a different line, our international growth effort has progressed. We expect to receive the registration of Regalia in Brazil in 2014, although meaningful revenues are anticipated to happen in the following year, 2015. We also received registration for Regalia in Colombia on July 1, triggering a milestone payment from FMC under our agreement.

Regulators in the UK completed their data assessment report with recommendation to register Regalia, which is called Fatalia in Europe. This triggered a milestone payment from Syngenta under our agreement. We now expect European registration of the technical grade active ingredient in the later half of 2015, and the formulated product in 2016.

In Canada, we submitted Regalia labels for several new crops, including canola, a major crop, and such that we plan on segmenting row crops and specialty crops like we do in the U.S. Scott also submitted the label for home and garden products based on Regalia. Note that many provinces and cities in Canada have banned chemicals for cosmetic uses hence biologicals have a good opportunity there. We’ve also now begun to move Grandevo into international markets. After successful field trials, we have scheduled our pre-submission meeting with the appropriate regulatory authorities in Europe to start the process there. We also have begun trials in Brazil and Europe with our partner copper.

The demand for an awareness of biopesticides and biostimulants continues to build, both in general and for our products specifically. An important driver of this trend is the increasing attention on the environmental and human health effects of certain chemicals. Our products are both effective and economic alternatives that meet society’s increasing requirement for human safety and environmental sustainability. It is very exciting to be at the forefront of this movement, and the only pure-play public company in this fast-growing global and disruptive category.

I would like to provide you with a quick update about each of the commercialized products, Grandevo, Venerate, Regalia and Zequanox. Each of these products incorporates a large addressable market, and demonstrates strong performance characteristics. First Regalia; Regalia is both a biofungicide and crop enhancer. We are pleased to receive a key U.S. patent for Regalia’s synergistic effect when combined in concert with a wide range of synthetic fungicides. Trials demonstrate that when combined with the best chemical fungicide in Europe on wheat. Regalia improved the performance of the standard chemical against all major wheat diseases.

Additionally on cotton, after a robust set of trials, we have some encouraging results from a plant health and yield perspective. Given the scale of this opportunity, we are pushing hard to institute additional trials for the growing season in Latin America. Second is Grandevo; Grandevo is a broad-spectrum feeding-based insecticide. It is effective against a wide range of insects and mites, utilizing multiple modes of action.

We received two patents on the technology behind Grandevo; one for a bacterially-produced insecticidal compound, and the other for the treatment for corn rootworm control, one of the world's most devastating corn pests. Grandevo also has a large addressable market, and like Regalia, it is non-toxic. We saw a good increase in the adoption of Grandevo in the Western fruit, not in vegetable markets year-over-year.

Third is Venerate; Venerate is a broad-spectrum exposure-based insecticide. We successfully launched Venerate and sold out all available inventory to customers. We anticipate that demand will continue to grow, and effective in mid-August, Venerate is approved for use in California. This significantly and immediately increases our opportunity. It is of note that Venerate is an outstanding complement to Grandevo.

Together they form a powerful solution for hard-to-control and invasive insect populations for a wide range of crops. As an illustration of this, you’ll see in the slide deck that they proved effective in protecting potatoes against zebra chip disease, a ruinous disease that tops the list of increasing problems for growers.

Finally, Venerate is also non-toxic, an attribute that we seek to design into all of our pipeline products. Data is showing that Venerate had no negative effect on apple blossom pollination and fruit set are shown in the slide deck as well.

Finally, Zequanox; Zequanox is a non-toxic molluscicide used to control invasive zebra and quagga mussels. We received EPA approval for open water environments this past quarter. This validates the safety of this important and very effective product, and opens the door to a very large market. Data from our open water demos are in the slide deck as well. We’re excited for our first open-water projects in Michigan and Minnesota, and we’ll be looking to build on them across many regions. As far as in-pipe treatment, the invasive mussels have spread into Mexico via the Colorado River, where we have achieved a successful treatment to demonstrate Zequanox’s effectiveness.

Continuing to innovate products like these is important to our growth strategy. Like most good science, breakthroughs are very often collaborative, and we have been pleased with our R&D partnership developments this past quarter. We are very excited to announce a multiyear collaboration with Evogene, a plant biotech company in Israel, to target the joint discovery of novel modes of biological action for insect control, followed by the development and commercialization of new insect control products.

We also reached an agreement with DSM Food Specialties to exchange microorganisms from our respective libraries. In order to facilitate, and advancement of research in our clearly differentiated areas of interest. For DSM applications for food ingredients, and for Marrone Bio, crop protection and plant health.

Lastly, we entered into a collaboration agreement with Valagro to further the work in biostimulant. We will examine if combining our respective proprietary technologies can reveal new paths to the market. And particularly, we think that Valagro's experience in global markets and can help us access countries with our biostimulant. At the same time as we are exploring new scientific avenues for product development over the past quarter, our executive team has been through a thoughtful thorough examination of our entire pipeline.

We have prioritized a group of opportunities that we believe offer the greatest revenue potential as flagship products, are launchable within a two-year time, and where our investment has the best risk return profile. I’d like to quickly describe the pipeline opportunities we have chosen to prioritize which collectively address the $40 billion market opportunity. In the slide deck, you can see prioritized pipeline and international expansion effort.

First is Haven, which we plan to launch late this year. It’s an anti-transpirant, or sun-stressed protector. This plant-derived compound, already widely used in cosmetics, is safe, effective and inexpensive. We have additional field trial data that supports a strong product launch. This product does not require EPA approval, just state approvals, so it’s on a faster track. Second is our nematicide effort. We have prioritized MBI-304 and MBI-305 from our larger group. We have registered these with the EPA, and expect to launch with some specialty crop applications in 2015, and to follow with a launch for seed treatment in 2016.

We believe that the addressable market for nematicides in these applications exceeds $2 billion annually. Third, our two biostimulants, MBI-507 and MBI-508 that promote healthy crop development. We’ve tested these products on a wide variety of crops and have seen some exciting increases in yield and plant growth, as shown on wheat on slide 15 in the slide deck, and on bell peppers, also in the slide deck. We expect to launch a new biostimulant in 2015. I remind you that because they do not control pests, biostimulants typically require only state registrations, and do not need EPA registration, and are generally faster to market than biopesticide. Biostimulant market is approximately $1 billion, and is growing at 20% compounded annual growth rate.

Fourth is our bioherbicide MBI-010 that we expect to submit to the EPA for approval this year, and could launch as early as 2016. MBI-010 is an innovative product that addresses the $20 billion herbicide market where weed resistance has become a very serious issue, one that opens the door for alternative solution. We have confirmed MBI-010’s efficacy on a number of key weeds such as Glyphosate-resistant Palmer amaranth, and waterhemp. We believe that this category represents an excellent opportunity for us both with organic production, and in mixture with chemical herbicide.

Fifth, is a new biofungicide, MBI-110 for which we have confirmed effectiveness against grape downy mildew in Europe, in which we believe will also address Botrytis bunch rot, gray mold, and other diseases. The total fungicide market is about $16 billion annually.

Downy mildews alone are $2 billion, where there are few effective chemical, let alone biological solutions, and where resistance to traditional chemicals has become a significant problem. We are on track to submit MBI-110 to the EPS this year, and could be ready for launch in 2016. This could be a very significant product for us, and I’d note that MBI-110 as also shown excellent efficacy against a serious soil disease for potatoes, pink rot, and outperformed two competitive products, as shown in the slide deck. And early formulation of MBI-110 also had good efficacy against the major disease of turf, dollar spot, as shown in slide 21.

Finally, as our bio-fumigant MBI-601. This product is based on a fungus strain that produces a suite of gaseous compounds that control plant diseases, insects and nematode. They’ve already submitted it the EPA, and expect to launch in 2016 in high-value fruit and vegetable crops. Chemical fumigants, a more than $1 billion market, are generally toxic, heavily restricted, and require large buffer zones from populated areas when applied. We believe MBI-601 could be a much-needed tool in this category. I would also like to mention that we are working to develop applications based on our already launched and in-development products for the soil and seed-treatment markets.

Seed-treatment is $2.4 billion market that is growing fast, and is expected to be $4.5 billion by 2018. We are using some of the proceeds from the follow-on offering for hiring a small team to work on formulations, and to conduct additional field trials. We believe that nearly all of our products have potential as seed treatments and soil applications, as seen from the 2013 and 2014 field trials. I hope that my comments today have given you a sense of the increasingly clear direction and opportunity that we are working toward, and the progress we're making.

I’d now like to turn the call over to Jim for some additional color on the current operating environment, and more detailed look at our results. Jim?

James Boyd

Thanks, Pam and good afternoon, everyone. Total revenues for the quarter were $3.6 million, compared to $4.5 million last year. The tough environment in the first half of the year has caused us to come off our original revenue target of doubling. To clarify the environment, weather conditions adversely affected a number of sprays and the acreage planted in the first half of 2014, which thus reduced demand for our products.

Revenues were most impacted in the Southeast with our Grandevo sprays. This represents our largest gap. Due to a very compressed blooming period, aggressive spray practices became necessary to control the pests.

Grandevo did not disperse ultimately under the required aggressive spraying conditions. We have since developed a more versatile formulation which improves dispersion during mixing for all applications and crops, and registration is now pending at the EPA. In addition, we have recently developed and implemented procedures that can be used to improve applications of the existing formulation. We believe we will see significant improvements in the second half of the year from the continued penetration of Regalia Rx in the row crops, continued growth for Grandevo and Venerate, some additional international sales, and the launch of Haven.

These are anticipated to create a seasonally strong fourth quarter and momentum for 2015. Gross margins for the second quarter of 2014 was 21.5%. This compares to 24.5% for the second quarter of 2013. Approximately 6.5 percentage points of the lower second quarter margin was from a write-down of inventory we determined to be substandard. Absent that gross margins and margins improved over the prior year's quarter.

As capacity utilization ramps up, we expect to benefit from volume increases. Manufacturing efficiencies, improved formulations, and other productivity enhancing technologies. M3 holds the promise of improved margins, quality, consistency and turnaround time. This will drive financial performance and working capital efficiency.

However, as we discussed previously, as we switch over to in-house manufacturing, plant utilization rates and unabsorbed manufacturing variances will be a significant and fluctuating factor in the margin rate in any given period.

Total operating expenses for the quarter were $10.3 million, compared to $10.6 million for the last quarter and $7 million in the second quarter of 2013.

R&D expenses were $4.3 million, flat to last quarter, and up slightly versus the prior year’s level of $3.9 million. Shifts in regulatory efforts, field trials and other drug materially expenses will cause some variability in our R&D spend quarter-by-quarter.

SG&A expenses for the quarter were $6 million, down about $300,000 from the first quarter level of $6.3 million, the difference being the absence of management transition expenses. We had $1.8 million of non-cash expenses in the quarter. This consists of $1.2 million of stock-based compensation, and $600,000 in depreciation and amortization. In addition, below the line, we also had $250,000 of non-cash interest expense.

Net loss for the second quarter was $10.4 million, compared to $10.2 million last quarter. Our weighted average shares outstanding were 20.8 million shares for both the basic and diluted calculations.

This reflects the timing of the secondary offering, and I’d like to note that at the end of the quarter there were 24.4 million shares outstanding in total. This is the right number to use in your models for the third and fourth quarter. But for the full year per-share calculations, you should be using a weighted average of 22.3 million shares.

Now turning to the balance sheet. Cash, cash equivalents, restricted cash and short-term investments as of June 30, 2014 totaled $62.8 million compared to $38.1 million at the end of 2013. The increase reflects the proceeds to the company from our secondary offering, offset by a reduction in cash from loss from operations and the build-out of our Michigan plant. On June 17, we received a net $9.6 million loan from Five Star Bank backed by a guaranty issued by the USDA.

$4.7 million went directly to pay capital costs associated with M3. The remaining $4.9 million will be used solely for future capital costs associated with M3. This loan will be amortized over 22 years, and has an interest rate of prime plus 2%. As a result of this loan facility, long-term debt increased to $22.1 million during the quarter, with an average interest rate of 9%.

Inventory decreased to $12.5 million, stable with last quarter’s level. This reflects both the transition to in-house manufacturing, and inventory necessary to support our planned sales growth, particularly in the fourth quarter.

Now, we’d be happy to answer any of your questions. Operator?

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question comes from Laurence Alexander of Jefferies. You may begin.

George D'Angelo – Jefferies & Company

Good afternoon. This is George D’Angelo sitting in for Laurence. The new partnership with Evogene, what sort of ramifications might there be there, more products in the pipeline or better quality products with a higher hurdle rate?

Pamela Marrone

Actually, we think it will lead to royalty revenues from traits that are engineered at the plant. So the idea is that they’ll mine our collection of certain specific strains we give them and they’ll look for insect control genes which can then put into plants. If they could be cloned into a microbe and then used as a sprayable, that's certainly possible for us. They could go both ways.

George D'Angelo – Jefferies & Company

Okay, thanks. And one more, I know you suspended your guidance, but can you provide any color on a run rate for sales for the next few quarters?

Pamela Marrone

Well, we’ve always said that we were going to be heavily weighted to Q4, and we’re still working on that plan, the same plan, which was getting an increase in Regalia Rx on row crops, and then specialty crops for Regalia, Grandevo and Venerate in the Southeast and also in the West, and then some international and new products for that fourth quarter. And that fourth quarter was going to be a big one. But no, we’re not providing any guidance. And our decision to suspend was driven by a combination of the tough environment and the timing of Hector’s resignation which was Tuesday night. So we wanted to double check our assumptions and provide guidance with more confidence.

George D'Angelo – Jefferies & Company

Okay, thanks.

Operator

Thank you. Our next question is from Michael Cox of Piper. You may begin.

Michael Cox – Piper Jaffray

Thanks a lot. I guess it sounds like as the news from Hector is pretty recent here. But it was – I was hoping you could talk about the process you plan to go through to replace him, and any early thoughts on what the timeline might look like for that.

Pamela Marrone

So we’ve already launched the search. I move fast. And even have some of the first resumes, and so in the meantime we’re splitting the operational responsibilities between Jim and Scott Peeples, our VP of Marketing. So the commercial side to Scott and the operation side to Jim. And I don’t know of an exact timeframe, but we’ll do it as quickly as we can, as possible, and look for someone to replace.

Michael Cox – Piper Jaffray

It sounds good. And as you look ahead to the fourth quarter, given some of the challenges, the weather related that we’ve seen and obviously in the row crop side you have much lower grain prices. Can you speak to where? I guess where the confidence resides or where the visibility resides in seeing such a big ramp up in the fourth quarter, given the backdrop that we’re in right now, either anecdotes from your distribution partners or something of that sort?

Pamela Marrone

Based on the really good results we had last year, and the fact that a lot, most of the inventory is already moved out on the ground from the fourth quarter of last year load, has moved out on the ground and was sprayed out. There is reports from the field everything is okay. But we won’t really know until they harvest in the fall the exact yield results.

But I mean there’s nothing to say right now that would have us come off a strong fourth quarter in Rx. And even with the lower prices, I think as you saw at the conference, technologies that increase yields to the level that something like Regalia does, would still be attractive, economically attractive, even under low grain prices.

Michael Cox – Piper Jaffray

Okay. That sounds good. And my last question is on the facility. Can you provide of the trajectory of how that facility will ramp up, just so we have some sense as to that margin variability and startup cost that you reference in the prepared remarks?

James Boyd

Yes, it’s really difficult to predict. We’re starting production. We are producing Regalia, Grandevo and Zequanox in the plant. We’re doing a lot of training and startup type of exercises, and it will take some time for us to get into steady production to be able to switch between the various products smoothly and efficiently. I’m thinking it’s going to take quite to get to the maximum. But I think you should see steady improvement in cost out of that Michigan facility over, say, the next six to 12 months.

Michael Cox – Piper Jaffray

Okay. Thanks a lot.

Operator

Thank you. Our next question is from Paul Baltimore of Stifel. You may begin.

Tony Shin – Stifel Nicolaus & Company

Hi guys. This is Tony Shin sitting in for Paul. Thank you for taking my question. I was wondering if you guys made any pricing concessions during the quarter. I’m just trying to reconcile the lower year-over-year revenue with the higher adoption across all products.

Pamela Marrone

So, the higher adoption was in the West and the miss in the second quarter was in the Southeast. And so it wasn’t due to any pricing considerations. It was Grandevo in the bloom sprays were so compressed that they went through the field everything is okay. But we won't through the field very aggressively, and we they used a lot what product was in the channel, but didn’t restock. There was no need to restock Grandevo at that point.

Tony Shin – Stifel Nicolaus & Company

Okay, okay. Thank you. And is it possible for you to quantify the negative impact or of weather during the quarter?

Pamela Marrone

No. But I would say the significant impact was the Southeast compressed bloom. That was the bulk of the difference.

Tony Shin – Stifel Nicolaus & Company

Okay, great. Thank you, guys.

Operator

Thank you. Our next question comes from Ben Kallo of Baird. You may begin.

Ben Kallo – Robert W. Baird

Hi. Thanks for taking my question. As we look through this year with the lower revenue, how should we think about margin going forward and then kind of position that with the ramp up of the new facility as well?

James Boyd

Yes, so we do have inventory on hand, which is built mainly from the third-party manufacturers. So I don’t think that you’ll? I think margins will probably be at sort of existing levels, slightly higher that we’ve experienced in the last few quarters. But we?

Pamela Marrone

You know, to top end here we expect to see continue in 2015. I think speaking to your question it’s continue growth of Regalia, the Regalia family, Grandevo and Venerate in the U.S.

Ben Kallo – Robert W. Baird

No, I'm thinking more of 2014, with the lower volumes.

James Boyd

I think at lower volumes we’re going to burning some of that inventory. We’re going to have Michigan coming online. But again, the Michigan plant, they’re going to be learning. They’re going to be transitioning. I don’t think you’re going to see that significant of improvements coming out of Michigan throughout the end of this year.

Ben Kallo – Robert W. Baird

And then in the past, you guys have talked about profitability next year. What do we think about that at this point now?

James Boyd

Well, I think we’re still focused on? We said in the follow-on offering that we felt that we’d get to breakeven in the latter half of 2016. And I think that remains true.

Ben Kallo – Robert W. Baird

The latter half of 2016. And then is there a chance that as you go and try to find someone to replace Hector, that you miss this season as far as sales go in some kind of way and you basically push out? Especially in the row crops? And then my last question tied into that is how do crop yields this year impact the adoption of Regalia Rx?

Pamela Marrone

Okay, so it’s clearly very unlikely that will double this year. But we still expect growth. The conditions in the Ag market are not good for anyone. You combine that with Hector’s resignation and we just have to double check our assumptions before giving any specific guidance. As far as grain prices, I was just at another Ag conference, investment conference, and they had a panel from farmers there and all of the farmers on the panel, they were corn and soybean farmers, said that they’re still using technologies that increase yields that give an economic opportunity. And we’re going to need to see this year’s yield data. But there’s no reason to believe otherwise.

James Boyd

But it is a competitive environment with lower corn prices, and a lot of the competition is discounting, while we’re not.

Pamela Marrone

Yes, that’s true.

Ben Kallo – Robert W. Baird

All right. Thank you.

Operator

Thank you. Our next question comes from Philip Shen of ROTH Capital. You may begin.

Matt Koranda – ROTH Capital

Hey guys, it’s Matt on for Phil. Thanks for taking our questions. Just wanted to start out. A lot of them have been answered already, but wanted to start out with Zequanox. Congratulations on receiving the open water certification from the EPA. Could you talk about the opportunity there over the next couple of years and perhaps quantify the impact and sort of how you see revenues trending from that opportunity?

Pamela Marrone

That’s a really interesting one. The open water, I actually think could be bigger than the pipe treatment, but it’s hard to quantify because there’s no chemical allowed for open water treatment currently. And they just let the mussels take over and destroy the lake.

So, you can like roll up all the lakes in the U.S. and the private lakes and the Gulf Coast and everything and come up with a number. But we don’t really know exactly what it is for the lake treatment. But we’ve said that the combined in-pipe and open water treatment market is approximately a $1 billion TAM. So that’s kind of where we’re at with that.

Matt Koranda – ROTH Capital

Okay, great. That’s helpful. And then you guys held down OpEx quarter-over-quarter here. Can you just talk about where you are with headcount and are you at a comfortable level at this point in time, or do you anticipate adding in the back half of 2014? And then just as a quick aside to that? Do you anticipate any one-time charges associated with Hector’s departure?

James Boyd

Well, let me start at the back end of that question. No, we don’t anticipate any charges with Hector’s departure. And right now our headcount is about 162, and we might have slight headcount adds in the second half, but it will be minimal.

Pamela Marrone

Most of the headcount openings right now are in the commercial side. We have some sales and product manager open slots and where we focusing on openings that drive revenue, and really flat and basically flat in R&D.

Matt Koranda – ROTH Capital

Okay, great. That’s helpful, guys. I’ll jump back in queue. Thank you.

Operator

Thank you. I’m showing no further questions at this time. I would like to turn the conference back over to Pam Marrone for closing remarks.

Pamela Marrone

Thank you, everyone, for listening to our call. We’re very excited by the progress we’ve made this quarter in the fundamentals of the business for the long-term prospects. Despite the challenging Ag market and the recent news of Hector, we remain very optimistic and confident in the fundamentals of the business. Thank you.

Operator

Ladies and gentlemen, this concludes today’s conference. Thank you for your participation, and have a wonderful day.

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