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Edited Transcript of MBII earnings conference call or presentation 10-May-18 8:30pm GMT

Q1 2018 Marrone Bio Innovations Inc Earnings Call

Davis May 17, 2018 (Thomson StreetEvents) -- Edited Transcript of Marrone Bio Innovations Inc earnings conference call or presentation Thursday, May 10, 2018 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* James B. Boyd

Marrone Bio Innovations, Inc. - President & CFO

* Linda V. Moore

Marrone Bio Innovations, Inc. - Chief Compliance Officer, General Counsel, Executive VP & Secretary

* Pamela G. Marrone

Marrone Bio Innovations, Inc. - Founder, CEO & Director

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Conference Call Participants

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* Nicholas Cecero

Jefferies LLC, Research Division - Equity Associate

* Sameer S. Joshi

H.C. Wainwright & Co, LLC, Research Division - Associate

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Presentation

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Operator [1]

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Good day, and welcome to the Marrone Bio Innovations First Quarter 2018 Earnings Conference Call. Today's conference is being recorded.

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

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Linda V. Moore, Marrone Bio Innovations, Inc. - Chief Compliance Officer, General Counsel, Executive VP & Secretary [2]

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

After our remarks, we will hold a question-and-answer session.

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

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Pamela G. Marrone, Marrone Bio Innovations, Inc. - Founder, CEO & Director [3]

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Thank you, Linda. Good afternoon, and thank you to everyone for joining us. With me today is Jim Boyd, our President and Chief Financial Officer; and as you just heard, Linda Moore, our General Counsel.

The first quarter of 2018 was highlighted by our comprehensive capital raise and debt refinancing initiatives, which dramatically improved our balance sheet and allow us to aggressively execute upon our business plan. As the CEO and Founder of Marrone Bio Innovations, I can confidently say that I've never been more optimistic than I am today about the growth opportunities of the company.

The health of our business is seen in several ways. First, in connection with these financings, we have raised $40 million in net proceeds to the company from the sale of our common stock and converted $45 million in principle of our long-term debt, which provides us with sufficient resources to fund operations as currently planned for the foreseeable future. With our stronger balance sheet, customers, distributors and growers can purchase our products with confidence.

Second, we launched 2 new products in 2017: Haven sun protectant in March and Stargus biofungicide in December. And we've already launched Zelto bioinsecticide/nematicide, our first turf brand in January of 2018.

Third, global field trials have come back very promising in key areas, including U.S., Europe, Brazil, Vietnam, the Philippines and other large pesticide markets worldwide.

Fourth, we really -- we recently announced the hire of Kevin Hammill as Chief Commercial Officer to develop MBI's commercial team and presence into a leadership position within the industry. Kevin has 25 years of commercial and managerial, agrichemical and biologicals experience. As you can see, we are clearly a much stronger company today than we were even a year ago.

In the first quarter of 2018, we continued our momentum and execution, which included several positive and noteworthy operational events as follows. We expanded MBI's international distribution network through new deals in Israel, the Philippines and Central America. MBI received a U.S. patent for the use of one of our bioherbicides for control of key weeds in rice and turf, strengthening MBI's total intellectual property portfolio to more than 400 issued and pending patents. One of our microbes was successfully launched via our strategic partner, Albaugh, into row crop seed treatment market in 2017. We expect this partnership to drive significant growth for MBI. We estimate that this partnership could translate into $8 million to $10 million of revenue for MBI on an estimated 8 million to 9 million acres in the next 3 years. Use of Regalia, Grandevo and Venerate has been cleared by several key states for use on cannabis, a rapidly growing market that we believe will represent an area of high and consistent growth for MBI on a go-forward basis.

Data coming in already this year show outstanding results. In Vietnam, which is the world's third-largest exporter of rice with several million acres, Regalia applied as a seed treatment increased rice yields 14% to 35% more than the commercial standard. Also in Vietnam, Grandevo and Venerate showed exceptional control against mealybugs on custard apples. In Europe, Grandevo showed positive trial results on grape berry moth and Stargus on grape downy mildew, while Stargus and Regalia enhanced disease management programs on apples in the Pacific Northwest. We launched Zelto, a biological insecticide and nematicide in turf protection markets in the quarter, and there are trials on 15 golf courses.

We announced an exclusive Zequanox distribution agreement with Solenis, targeting a strong pipeline of potential industrial and power plant customers. We anticipate significant growth in Zequanox sales as its efficacy is recognized in the marketplace.

From a manufacturing and R&D standpoint in the first quarter of 2018, research and development, a favorable product mix and manufacturing efficiency efforts have continued to increase gross margins, increasing the consolidated gross margin of the company. We successfully scaled and improved production process for Grandevo in our Michigan plant. An automatic filling and packaging line has been installed in our Michigan plant, improving efficiency and gross margins.

We made another significant improvement in the nematicidal properties of Majestene. We are in the homestretch of preparing MBI-014 bioherbicide for EPA submission.

In a collaboration with Evogene, we have announced candidates that have been moved into the next phase of development with activity against beetles, caterpillars and sucking bugs. The results achieved in plants are progressing to the next steps with validation from field and greenhouse trials in soybeans followed by cotton.

We view all of these as major accomplishments in the first quarter.

Weather, yet again, presented many challenges in the first quarter of 2018 to the entire ag industry. The unfavorable weather conditions reduced the number of expected sprays in several of our key markets, especially in California and the Pacific Northwest, where rains came too late for the typical spraying season. 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. We believe this product portfolio approach has allowed us to historically achieve growth above the industry average. In addition, we will continue to work diligently to grow sales geographically, which should help to smooth out seasonal fluctuations in the longer term.

As noted previously, we have now 6 EPA-approved biopesticide products and 1 biostimulant product on the market. 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, national product chemistry, mixtures, formulations and new uses and new pests. A significant patent in 2018 was received on our second pipeline herbicide, MBI-005. The fact that our products are based on natural product chemistry and not live microbes like other companies provides us a stronger proprietary position and more robust products in terms of ease of use, shelf life and spectrum.

But before going further, I would like now 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 balance of 2018 before wrapping the call up with Q&A. Jim?

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James B. Boyd, Marrone Bio Innovations, Inc. - President & CFO [4]

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Thank you, Pam. As noted, I would like to walk you through our first quarter 2018 results. GAAP revenues for the first quarter of 2018 increased to $4.3 million compared to $4.2 million in the first quarter of 2017. Revenues in the first quarter were affected by a lack of rain during the Pacific Northwest and California's typical spray season as well as turnover in our sales force. Our revenues and sales force were impacted by perceived uncertainties regarding our business, which we believe we have addressed by strengthening our balance sheet in the first quarter and during April 2018.

Starting January 1, 2018, we adopted the new revenue accounting standard commonly referred to as ASC 606. GAAP revenues on a go-forward basis will be similar to the old sell-in method, generally allowing us to recognize revenues upon product shipment to our distributors. As a result, we will no longer be reporting our non-GAAP product shipments number starting this quarter. Please note that an estimated $5.9 million of our 2017 deferred revenues will not be recognized as GAAP revenue in 2018 under ASC 606. Instead, the $5.9 million in 2017 deferred revenues will be booked to the balance sheet as retained earnings and not run through our income statement in accordance with ACS (sic) [ASC] 606.

Gross margins in the first quarter were 48.1% compared to 45.1% in the first quarter of 2018 -- '17, I mean. First quarter gross margins benefited from a favorable product mix and improvements in our production efficiencies. We expect to see gross margins increases over the life of each of our products as production processes improve and as we continue to increase yields and potencies and implement efficiencies in manufacturing.

SG&A in the first quarter decreased to $5 million compared to $5.3 million in the same period last year.

R&D expenses in the first quarter of 2018 were $2.5 million compared to $2.4 million in the first quarter of 2017. We remain focused on managing our operating expenses. We expect our operating expenses to be approximately flat in all departments with the exception of sales and marketing, which will be up slightly in 2018. We are investing in sales and marketing by putting more boots on the ground, which should increase grower demand, develop new customers as well as expand business with existing customers.

Interest expense in the first quarter of 2018 was $1.6 million compared to $1.7 million in the fourth quarter of -- first quarter of 2017. We expect our interest expense to be significantly less in the future quarters, due to the conversion of $45 million of our long-term debt and the capitalization of all future interest expense on the remaining $7.5 million in principal balance under the Waddell & Reed and Snyder promissory notes. Please note that we have 2 other outstanding loans, including $9 million under a USDA guaranteed loan on our Michigan plant and $1.6 million under our working capital line of credit as of March 31, 2018, for which we will continue to recognize and pay out interest expense on a go-forward basis.

During the quarter, we recognized a net gain of $9.3 million on the conversion of our debt to equity. What this essentially means is that, in connection with the equity transaction I will discuss in a moment, some of our debt holders agreed to receive stock with a fair market value below our book value. This gain, as well as a significant increase in the number of common shares outstanding, reduced our loss per share from $0.31 per share to $0.04 per share for the 3 months ended March 31, 2017 and 2018, respectively.

Now turning to the balance sheet. Both cash and cash equivalents included restricted cash was $16.8 million at the end of this quarter. Noted -- note, we raised an additional $12.7 million in net proceeds in April. Inventory at the end of the first quarter was $10 million as compared to $9.8 million at the end of December '17.

During the quarter, $45 million in long-term debt was converted into common stock by 2 of our debt holders as part of our comprehensive financing transaction that closed in February 2018. The debt was converted at $1.75 per share, a price more than 70% above the market price on the date of conversion. We also were able to defer all interest and principal payments due after the transaction on the remaining portion of the notes until maturity at December 31, 2022. After conversion, the 2 debt holders continue to have debt outstanding with a combined remaining principal balance of $7.5 million. Because of the accounting rules associated with debt extinguishment, we were required to increase the debt outstanding by the amount of interest expected to be paid over the remaining life of those reduced notes. As a result, our GAAP debt principal balance is approximately $3.2 million higher than the contractual principal amount outstanding under those notes. However, because of this accounting treatment, we will not recognize any period interest expense on these 2 notes on a go-forward basis.

From October 2017 through January 2018, we borrowed $6 million under a bridge loan facility. $4 million was outstanding under the bridge loan as of December 31, 2017, and 0 was outstanding as of March 31, 2018, as the bridge loan was totally converted to common stock in connection with the comprehensive financing transaction that closed in February 2018.

Significantly, also in connection with the comprehensive financing transaction in February 2018, we closed private placement equity transactions with certain institutional investors in which we sold $30 million in gross proceeds of our common stock with warrants attached inclusive of the bridge loan, which was converted. Net proceeds of the sales were approximately $27.3 million.

In April of 2018, the company completed a public offering of our common stock at which we sold $13.8 million in gross proceeds and generated approximately $12.7 million in additional net proceeds. These transactions, which raised $40 million in net proceeds and converted $45 million in principal of our long-term debt to equity, were truly transformative to a point where we believe we have sufficient resources to fund operations as currently planned for the foreseeable 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?

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Pamela G. Marrone, Marrone Bio Innovations, Inc. - Founder, CEO & Director [5]

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Thank you, Jim. We have made great progress on key strategic goals and operations. I want to now highlight where our focus will remain for the balance of 2018.

On the product front, we expect the targeted placement of MBI-601 biofumigant, Ennoble, with early adopter growers; significant growth in our seed treatment business with our partner, Albaugh; targeted placement with leading organic seed companies of our bio-stacked seed treatment with Groundwork BioAg; the launch of Amplitude biofungicide into large acre crops, including dry beans, a new market segment for MBI; the launch of the CG brand of Regalia, Venerate, Grandevo into the cannabis and home garden market, which we expect to represent a significant growth driver for us on a go-forward basis; growth in Zequanox sales as we continue to build our sales pipeline of potential industrial and power plant customers with our partner, Solenis.

And in international, we expect approval for the use of Regalia on cannabis in Canada to sign at least 3 more international distribution agreements in key global markets; several international regulatory submissions, such as South Africa, Kenya, Europe, Brazil, Ecuador, Canada, Australia and New Zealand; several international regulatory approvals, including Morocco, Philippines and Canada. Operationally, we anticipate adding Venerate and Majestene production to our Michigan facility; and continued gross margin improvement as R&D and manufacturing initiatives continue to increase efficiencies.

In 2018 with our company stronger than ever, we remain laser-focused on commercial execution and building a high-performance sales and marketing team around the hire of our new Chief Commercial Officer, Kevin Hammill. We also are focused on increasing our presence with key large growers and strengthening our channel partnerships, all the while building our longer-term vision of being the market-leading biologicals company through our own products, combined with other synergistic products and technologies. I'm extremely proud of our employees for their hard work and dedication.

We recognize the tremendous responsibility we have to realize MBI's significant potential as a leading force in ag biologicals and global crop production. We thank our debt holders and our new and existing investors for the confidence they have placed in us.

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

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Questions and Answers

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Operator [1]

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

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Sameer S. Joshi, H.C. Wainwright & Co, LLC, Research Division - Associate [2]

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

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Pamela G. Marrone, Marrone Bio Innovations, Inc. - Founder, CEO & Director [3]

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

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Sameer S. Joshi, H.C. Wainwright & Co, LLC, Research Division - Associate [4]

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

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Pamela G. Marrone, Marrone Bio Innovations, Inc. - Founder, CEO & Director [5]

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

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Sameer S. Joshi, H.C. Wainwright & Co, LLC, Research Division - Associate [6]

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

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Pamela G. Marrone, Marrone Bio Innovations, Inc. - Founder, CEO & Director [7]

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

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Sameer S. Joshi, H.C. Wainwright & Co, LLC, Research Division - Associate [8]

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

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Pamela G. Marrone, Marrone Bio Innovations, Inc. - Founder, CEO & Director [9]

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

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Sameer S. Joshi, H.C. Wainwright & Co, LLC, Research Division - Associate [10]

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

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Pamela G. Marrone, Marrone Bio Innovations, Inc. - Founder, CEO & Director [11]

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

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James B. Boyd, Marrone Bio Innovations, Inc. - President & CFO [12]

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

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Pamela G. Marrone, Marrone Bio Innovations, Inc. - Founder, CEO & Director [13]

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

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Sameer S. Joshi, H.C. Wainwright & Co, LLC, Research Division - Associate [14]

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

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Pamela G. Marrone, Marrone Bio Innovations, Inc. - Founder, CEO & Director [15]

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Yes. They are one of our significant -- I don't know if they're #5, but they are significant. We have -- we are setting up additional distributors and making our way around how we're going to do Canada as well. But we did add -- late last year, we did add another large hydroponic distributor who did place a significant order already.

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James B. Boyd, Marrone Bio Innovations, Inc. - President & CFO [16]

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

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Operator [17]

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(Operator Instructions) We'll go next to Laurence Alexander of Jefferies.

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Nicholas Cecero, Jefferies LLC, Research Division - Equity Associate [18]

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

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Pamela G. Marrone, Marrone Bio Innovations, Inc. - Founder, CEO & Director [19]

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

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Nicholas Cecero, Jefferies LLC, Research Division - Equity Associate [20]

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

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Pamela G. Marrone, Marrone Bio Innovations, Inc. - Founder, CEO & Director [21]

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

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Operator [22]

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At this time, I show no additional questions. So I would like to turn it back to Pamela Marrone.

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Pamela G. Marrone, Marrone Bio Innovations, Inc. - Founder, CEO & Director [23]

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

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Operator [24]

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