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Edited Transcript of PURE earnings conference call or presentation 14-Dec-17 9:30pm GMT

Q1 2018 PURE Biosciences Inc Earnings Call

EL CAJON Dec 15, 2017 (Thomson StreetEvents) -- Edited Transcript of PURE Biosciences Inc earnings conference call or presentation Thursday, December 14, 2017 at 9:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Henry R. Lambert

PURE Bioscience, Inc. - CEO & Director

* Julie Lesser

* Mark Stuart Elliott

PURE Bioscience, Inc. - Principal Financial & Accounting Officer and VP of Finance

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Conference Call Participants

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* Stan Caplan

* Timothy O'Brien

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Presentation

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Operator [1]

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Welcome to the PURE Bioscience Fiscal 2018 Q1 Results Conference Call. (Operator Instructions) The conference is being recorded. (Operator Instructions)

I would now like to turn the conference over to Julie Lesser, Investor Relations. Please go ahead.

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Julie Lesser, [2]

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Thank you, operator, and good afternoon, everyone. As Investor Relations representing PURE Bioscience, it's my pleasure to welcome you to the company's conference call to discuss fiscal Q1 financial and operating results and provide an update on PURE's food safety business strategy.

On our call today is Hank Lambert, Chief Executive Officer; and Mark Elliott, Vice President of Finance.

Earlier this afternoon, PURE issued a financial results press release and filed its quarterly report on Form 10-Q, copies of which are available on the SEC's website and the Investor Relations page of PURE's website, www.purebio.com. This call is being webcast live and recorded. A replay of the event will be posted later today on the company's website and will remain available for at least 60 days following this call.

Our discussions today include forward-looking statements. These statements include certain assumptions made by PURE based on historical trends, current conditions, expected future developments, including business prospects, customer adoption, regulatory approvals, product and market development objectives, future financial performance and market share and other factors PURE believes to be appropriate in the circumstances.

Risks and uncertainties may cause the company's actual results to differ materially from those projected in these forward-looking statements. You can find a discussion of these risks and uncertainties and more information about PURE in its filings with the SEC, including the Risk Factors section in the company's 2017 Annual Report on Form 10-K, in 10-Qs and in periodic filings on Form 8-K. As a result, you are cautioned not to place undue reliance on forward-looking statements. These forward-looking statements are made as of the date of this call, and PURE assumes no obligation to update these statements publicly even if new information becomes available in the future.

This broadcast is covered by U.S. copyright laws, and any use or rebroadcast of all or any portion of this conference call may only be done with the company's express written permission.

On this call, we will refer to non-GAAP measures, such as adjusted net loss, that, when used in combination with GAAP results, provide us with additional analytic tools to understand our operations. We have provided reconciliations to the most directly comparable GAAP financial measures in the press release.

I will now turn the call over to Mark Elliott, Vice President of Finance. Mark?

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Mark Stuart Elliott, PURE Bioscience, Inc. - Principal Financial & Accounting Officer and VP of Finance [3]

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Thank you, Julie. As we reported earlier today in our Q1 fiscal '18 operating results and as previously discussed on prior conference calls, we continue to focus on building our commercialization efforts for our patented SDC technology as a food safety solution while simultaneously managing our resources as effectively as possible.

Upon conclusion of our successful $2.8 million warrant tender offer financing, we now have funding in place to support our operations through fiscal year 2018, accelerate the commercialization of SDC-based PURE Control as an FDA-approved direct food contact processing aid for fresh produce and an FDA- and USDA-approved processing aid for raw poultry, accelerate the commercialization of PURE Hard Surface for the sanitization of food transport trucks and pallets and further accelerate the development of PURE Hard Surface as a food contact surface disinfectant for both the food processor and the restaurant chain markets.

I will now discuss Q1 fiscal '18 operating results. Net product sales for the first fiscal quarter ended October 31, 2017, were $464,000, a decrease of 13% compared to net product sales of $531,000 for the fiscal quarter ended October 31, 2016. Revenues from our core business, food safety, decreased 60% Q-over-Q. The decline in both total and food safety revenues was due to the timing of product orders as the initial systemwide stocking order from Chipotle occurred in Q1 of the prior year.

Total operating costs and expenses, excluding cost of goods sold and share-based compensation, for the fiscal quarter ended October 31, 2017 and 2016 were $1.6 million and $1.6 million, respectively. The first quarter net loss, excluding noncash inducement expense and derivative income and expense, was $1.9 million compared with $1.6 million from the prior year. We ended the first quarter with a cash position of $3.2 million. Cash received from financing activities during Q1 was $2.6 million, offset by cash used in operating and investing activities of $1 million.

This concludes my financial review. I'll now turn the call over to Hank for a progress update of our business strategy. Hank?

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Henry R. Lambert, PURE Bioscience, Inc. - CEO & Director [4]

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Thanks, Mark, and good afternoon, everyone. We certainly appreciate your joining us for today's discussion.

As I said in our last call discussing the close of fiscal 2017, fiscal 2018 is the year in which I expect PURE to truly accelerate delivering against our business plan and goals with material results, by which I mean growing customers, orders and meaningful revenues.

While the first quarter numbers do not appear to reflect it, as Mark reported, the decline in both total and food safety revenues was entirely due to timing and the initial systemwide stocking order from Chipotle. If we back that order out of fiscal year 2017 Q1 results, food safety sales were up in double digits in our most recent quarter. I'm also pleased to report that Chipotle reorders continue to build in fiscal 2018 to date.

So we actually begin fiscal 2018 with growing adoption, momentum and opportunity for both PURE Hard Surface and PURE Control, validating our food safety solution strategy to commercialize products, which reduce the risks of food contamination and foodborne illness outbreaks. As a result, we continue to believe that we are on the path to achieving a cash flow break-even revenue run rate by year-end calendar 2018.

We'll accomplish our goals with increasing sales and food safety market penetration of our powerful patented nontoxic SDC-based antimicrobial technology. SDC is being sold in EPA-approved PURE Hard Surface disinfectant and in FDA- and USDA-approved PURE Control, which is applied directly onto food during processing. As part of our ongoing industry marketing and awareness-building programs, 2 weeks ago, we showcased PURE's 2 product lines at our exhibit at the 2017 Food Safety Consortium in Chicago, which is attended by food safety and quality assurance industry experts and government officials.

Along with the Director of Microbiology from Chipotle, Dr. [Jagdeep Saini] , we made a presentation on the key food safety challenges facing the industry for 2018 and how PURE Bioscience is integrating food safety throughout the supply chain with our suite of products and solutions. Ours was one of the better-attended sessions of the conference, and we came away with significant interest and potential customer contacts.

Let's look now at our progress with PURE Hard Surface. The growing market for PURE Hard Surface disinfectant now includes use by national casual-dining and quick-service restaurant chains, including Chipotle and SUBWAY. I'm pleased to report that after the successful completion of extensive testing and evaluation, we believe we are well positioned with 2 new large footprint national casual-dining chains for their systemwide adoption in the first calendar quarter of 2018.

Our goal for calendar 2018 is to add at least 3 additional restaurant chains. Restaurant chains in particular are especially interested in the superior ability of SDC to eliminate one of the leading causes of foodborne illness outbreaks, Norovirus.

PURE Hard Surface is also being used for plant and -- for plant equipment and environmental disinfection by more than 70 national food manufacturers and processors in a wide range of industry segments, including produce, bakeries, pet food, cheese, dairy and meats. Our calendar 2018 goal is to increase our customer base to at least 100 in this category, and we're currently on track adding new customers and plants at a steady rate of 3 to 4 per month.

PURE Hard Surface continues to deliver the superior ability to eliminate another leading cause of foodborne illness outbreaks, Listeria, in a processing environment. Our added competitive advantages include being lowest in toxicity and user and environment friendly while providing a residual pathogen kill, which is not provided by other products.

In our last call, we talked about our introduction of a new food transport sanitizing solution using PURE Hard Surface and a patent-pending application process to meet an industry need resulting from new rules handed down by the FDA under the Food Safety Modernization Act or FSMA. Since its introduction, we have seen rapid acceptance of our new transportation solution. Our initial targets are both refrigerated and non-refrigerated food transport trucks and equipment, of which there are more than 200,000 in the U.S.

An initial order in October from iGPS Logistics, the leading supplier of plastic pallets to the food industry, marks PURE's entry into this $50 million-plus U.S. food transportation sanitization market. This initial sale supports start-up operations in 5 of 15 iGPS pallet pooling centers. We expect follow-on orders for the initial 5 centers as well as rollout into the balance of the iGPS system, which will result in an annuity-like revenue stream in the coming months.

In our proprietary solution, PURE Hard Surface is being mist-spray applied to the surfaces of plastic pallets to quickly eliminate microorganisms, preventing cross-contamination. This process complies with the new FSMA requirement that transport equipment be sanitized for food contamination.

After over 6 months of successful testing and evaluation by one of the nation's largest foodservice distributors, we believe we are positioned to be approved for use as a required SOP for truck cleaning and sanitizing systemwide. We anticipate the rollout to begin with initial orders in January.

In our testing, we achieved several compelling competitive advantages for disinfecting refrigerated and non-refrigerated trucks. PURE Hard Surface can provide a mist-spray, nontoxic, noncorrosive disinfection treatment to a trailer and its refrigeration unit and generate a dramatic 5-log reduction in pathogens.

For those nonscientists like me, a log reduction is a mathematical term used to show the relative number of live microbes eliminated from a surface by disinfecting or cleaning. For example, a 5-log reduction can be best illustrated as having 5 zeros, meaning the number of germs is 100,000x smaller or a 2-log reduction means the number of germs is 100x smaller and so on. PURE Hard Surface achieved that impressive 5-log reduction in just 15 minutes versus the current 2 hours it now takes carriers and distributors to clean and sanitize a truck. Of course, this results in significant labor savings, minimizes water usage and minimizes trailer downtime.

We're also in discussions and testing with 5 additional major food carriers, and interest from others is rapidly building. Among processors, Taylor Farms is already using our truck solution, and we are in tests with a number of others. To say that we are enthusiastic about the prospects for this new solution would be a huge understatement.

Turning now to our second food safety solution, PURE Control. It is applied directly onto food during processing to eliminate pathogens causing foodborne illness, including the leading causes of Salmonella, E. coli, Listeria and Campylobacter.

For produce, earlier in 2017, you may recall that after extensive testing, we made our first PURE Control sale to Taylor Farms, the largest U.S. produce processor and an industry thought leader. This marked a critically validating sale into the new $300 million-plus U.S. produce processing aids market. The initial order was for pilot testing on one line in one processing plant. In a rollout planning meeting last week, Taylor Farms is currently scaling up the application of PURE Control on 4 lines in its largest plant in Salinas, California. Their plan is to be in full production on those lines in January and then move on to multiple lines in a second plant in Salinas by the end of the first calendar quarter.

Ultimately, Taylor plans to move PURE Control application into all 12 of their plants over the next 12 to 18 months. We estimate that when fully deployed, each plant has the potential to generate approximately $1 million in annual revenue to PURE or $12 million when fully rolled out.

Today, we have 5 additional produce processors conducting or evaluating their own in-house validation and optimization testing, which is industry SOP before placing a first order. Our calendar 2018 goal is to attain at least 5 new produce processor customers for PURE Control.

Turning to poultry. Early in fiscal Q1, we gained important USDA approval for use of SDC up to 160 parts per million as PURE Control in pre-online reprocessing and post-chill raw poultry processing and immediately began commercialization efforts into the poultry parts market. Poultry parts represent approximately 75% of all poultry sold to consumers. It's a very large and important market for us. We know of no other equally effective nontoxic solution and believe PURE Control is the breakthrough solution the poultry industry needs.

We previously reported that a processor is achieving outstanding pathogen reduction results on poultry parts from its own in-house validation and optimization testing. In initial testing, PURE Control successfully eliminated Salmonella and generated up to a 2.7-log or more than 200x reduction in bacteria when applied in a dip tank on poultry parts in a real-world production environment. These are results that interventions currently being used are not consistently achieving. The processor is in the later stages of its own validation testing, and we are in the final stages of optimizing usage and pricing models. While ounce for ounce, PURE Control will be somewhat more expensive than existing chemistries, we believe our total value proposition is compelling.

In addition to seeking a superior answer to reducing Salmonella, the poultry processors that we have talked to and the ones we're working with are seeking ways to get rid of PAA, which is peracetic acid, because of its toxicity and the fact that it's an irritant to employees. PAA, which is currently in broad use, has a negative impact on the environment and equipment and has a negative impact on yield. We have a compelling alternative solution.

We've recently agreed to and scheduled testing with a number of additional leading poultry processors. Our sales and marketing plan for poultry is poised to begin in earnest once processors complete successful in-plant testing and optimization work. We have direct sales and technical service teams in place, which are augmented by existing strategic distributor and marketing partnerships.

In addition, we have relationships with poultry industry-experienced business development agents as well as technical service and equipment groups who can assist with implementation. Over time, as revenues build and can support it, we would certainly expand our direct sales and technical service teams here internally.

Our ultimate goal is to capture a 10%-plus market share. We estimate that the total produce and poultry processing aid markets that we're targeting is approximately $650 million in the U.S. per year, comprised of $300 million for produce and $350 million for poultry.

I'd now like to turn our call over to our operator to begin the question-and-answer session. Steve?

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from [Thomas Cape], private investor.

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Unidentified Participant, [2]

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Really, really exciting. It's been a long, long wait. I have a couple of questions. You said that by fourth quarter, you should be cash flow breakeven. I'm wondering what kind of revenues are you going to need for that to happen, maybe $3 million for that quarter? And -- go ahead.

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Henry R. Lambert, PURE Bioscience, Inc. - CEO & Director [3]

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Yes. This is -- yes, the answer to that, [Thomas], is, on an annualized basis, we need between $12 million and $15 million in revenues to reach cash flow breakeven based on our current cash position as well as our projected revenues. So that would be roughly $3 million to $3.5 million in the quarter, yes.

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Unidentified Participant, [4]

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Okay, okay. And it almost sounds like -- I know you guys probably don't want to make that kind of commitment yet, but it sounds like PURE could almost maybe be profitable by maybe the fourth quarter of 2018 if everything goes as planned.

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Mark Stuart Elliott, PURE Bioscience, Inc. - Principal Financial & Accounting Officer and VP of Finance [5]

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Yes, as long as we could hit that $3.5 million target per quarter.

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Operator [6]

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The next question is from Stan Caplan, private investor.

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Stan Caplan, [7]

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Adoption has been quite a bit slower than we would have expected several quarters ago. This new opportunity in the food transport industry, do you have good reason to believe that that's going to be adopted a lot quicker than these other markets? And if so, tell us why.

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Henry R. Lambert, PURE Bioscience, Inc. - CEO & Director [8]

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Yes. Thanks, Stan. Great question. We do expect it to be faster, and there are a couple of reasons for that. First of all, this new regulation that was handed down by the FDA went into effect in April, which essentially requires food transport companies to sanitize their trucks on a regular basis. And also, the indications from the FDA that they will be increasing their audits and inspections of food transport companies has really generated significant interest in our solution because of the significant productivity gains that they can realize in terms of labor savings and being able to turn around trucks more quickly than what is currently being done today. So I think in response to that regulation, these companies are looking for a solution to get them a sanitization solution that works for them and keeps them in compliance with the new rules but also that saves them money and time and labor savings. So as an example, the large foodservice distributor that we're working with, we began testing and evaluation with them roughly 6 months ago. And we just had a very key meeting with them yesterday where they have essentially committed to rolling out systemwide. So that process took about 6 months. And you compare that with how long it took us to get a commitment from SUBWAY for restaurants, for example, which was almost 2 years, Taylor Farms for PURE Control was close to 2 years. So I think we have good reason to believe that food transport companies are going to be much quicker to adopt this solution. Because of the compelling competitive advantages that we have of labor savings being noncorrosive, generating a disinfectant level kill, minimizing water usage, et cetera, we've got a very strong, compelling case.

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Stan Caplan, [9]

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I mean, are they just more nimble, they react quicker, they -- I mean, what's making the difference in years between the 2 industries?

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Henry R. Lambert, PURE Bioscience, Inc. - CEO & Director [10]

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Well, I think a couple of things. One, PURE Hard Surface is already known to a number of these companies that are using it for environment and equipment disinfection. So they know it works. So they don't have to test efficacy. The food transport companies are really under the gun. They don't have -- there isn't a solution out there. What they're currently using typically is quaternary ammonia, which is being flood applied. It's highly corrosive to their aluminum siding on the trailers. It's putting highly toxic effluent into their wastewater systems, and they're under scrutiny from the EPA for that. So we're able to offer them a nontoxic solution that saves labor, saves water, is user and environment friendly. So it's just somewhat of an easier sell. There are fewer barriers to get over.

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Stan Caplan, [11]

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Okay. Well, good answer, and that makes sense. And lastly, we haven't lost any of our poultry or produce customers that are in testing, have we?

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Henry R. Lambert, PURE Bioscience, Inc. - CEO & Director [12]

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No, no, we haven't lost any. We have a number that continue to test and haven't made the decision to pull the trigger yet. But we haven't had any customers that have walked away or stopped buying.

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Operator [13]

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The next question is from [Cal Caplan], private investor.

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Unidentified Participant, [14]

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My question is kind of a follow-up to the previous questions. It took Taylor Farms, I think, you said almost 2 years to -- of testing before they decided to move. Do you think it will find the same kind of constraints with poultry? Or will they be able to move faster than the 2 years that it took Taylor Farms?

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Henry R. Lambert, PURE Bioscience, Inc. - CEO & Director [15]

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Thanks, [Cal]. Great question. We believe the sales cycle for poultry should be shorter, and it's for a couple of reasons. With produce and Taylor Farms in particular, we are being brought in as an incremental step in their processing of produce. So we are being added, sprayed onto produce during processing as a pretreatment prior to the produce entering into a chlorinated flume, which was pretty much the only intervention that produce processors had previously. So we're an incremental step, an incremental cost. And that's why it took Taylor Farms so long to test it and validate it because they wanted to be sure that if they were bringing in a new chemistry as an incremental step at an incremental cost, that not only were we achieving superior efficacy to what they were already achieving with their chlorinated flume, but they also wanted to make sure that we had no organoleptic impact on the product, no off-odors, no discoloration, no impact on nutritional values, and they also wanted to do extensive shelf-life testing. They did 3 or 4 rounds of organoleptic and shelf-life testing. And those are very lengthy tests, and you have to put the product in storage for weeks after production to ensure that there aren't any negative impacts. So it was a very extensive process before they got comfortable to bring us in. With poultry, we are going to be replacing, as I indicated in my remarks, peracetic acid or PAA, which is highly toxic, highly corrosive, an irritant to users and the environment and has a negative impact on yield. And we feel we have a compelling value proposition in being nontoxic, noncorrosive, having a neutral or positive impact on yield. And therefore, they will be switching out of peracetic acid and using PURE Control in its place. So that should be a quicker decision to reach by the poultry processors than it was for produce. I would also add that with the adoption by Taylor Farms for produce and Taylor Farms being clearly viewed as an industry leader and thought leader, that will -- we believe and are seeing that, that will incentivize other produce processors to bring us in and test us and do a much quicker validation now that Taylor has done all the heavy lifting upfront and provided their validation. So long way of answering your question, but we think poultry will be shorter, and we think going forward, subsequent produce processors will come on onstream faster than Taylor did.

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Unidentified Participant, [16]

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I had just one more question. I think current balance sheet shows about 68 million shares issued and outstanding. You recently had a warrant offering. I'm not sure exactly how many shares would be outstanding at those warrants and any other options. In other words, what would be the fully diluted number of shares outstanding? And what are your thoughts about how many more might have to be issued before you reach that point where you don't need any more offerings? In other words, I'm trying to get to the point where I understand how many shares are going to be outstanding when you become profitable.

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Mark Stuart Elliott, PURE Bioscience, Inc. - Principal Financial & Accounting Officer and VP of Finance [17]

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Right. So right now, we have -- as we reported on the balance sheet, we have about 68 million primary shares outstanding. There's the potential right now for the total overhang of another 11 million. Right now, we have -- and those are comprised of RSUs, warrants and options. So right now, we're at -- we have 100,000 -- excuse me, 100 million authorized. Right now, on a fully diluted basis, we're at approximately 80 million.

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Operator [18]

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The next question is from Timothy O'Brien of OB Communications, LLC.

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Timothy O'Brien, [19]

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A comment and then a question. I'm impressed with the management team, and I'm also very impressed with the Board of Directors, top-notch, and I thank you for that. I'm enthused about the future of PURE. The questions I have seem to center around that PURE has a competitive advantage with its patents, reduction of pathogens, and such a great advantage in the patent end that is unmatchable today. Thinking about the $67 million of stock outstanding now and up to 80 million is fine and the current price of the stock, could you perhaps give a little color on the possibility that one of the gorillas in the industry would see you and PURE as a wonderful takeover candidate at some x times the stock price today in today's world? I mean, even if today at the $67 million, you're talking a relatively wonderful price for something they cannot compete with. So with that, if that's a fair question, could I gain your thoughts?

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Henry R. Lambert, PURE Bioscience, Inc. - CEO & Director [20]

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Sure, thank you. It certainly is a fair question. We have said all along that our goal since coming into PURE 4.5 years ago has been to really turn the company around, leverage the unique patented technologies you indicated as a food safety solution, build revenues, market awareness, validation in the marketplace and with the expectation that we would attract interest from other major strategic players in this space. And I can't predict what they would do, but I can tell you that we know we have their attention. We have taken business from a number of them. We have gotten the endorsement, as you've indicated, by our board members and with -- Dr. James Marsden is heading up our scientific advisory group, and Dr. Elisabeth Hagen, our newest board member, who's former USDA Undersecretary for Food Safety. We have a great deal of validation and visibility in the market now. And we would certainly hope, as you do, that this could be a good strategic fit for some major players in the market.

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Operator [21]

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The next question is from [Thomas Cape], private investor.

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Unidentified Participant, [22]

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One other question, gentlemen. Have you been in any talks with any analyst to get some kind of coverage out there, which give -- would give PURE some more exposures as far as to the investment world?

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Henry R. Lambert, PURE Bioscience, Inc. - CEO & Director [23]

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Yes, [Thomas]. Thank you. We have. We meet with analysts every opportunity we get at investor conferences, like LD Micro or ROTH or Marcum. We do have some paid analyst coverage with Zacks and SeeThru Equity. We do not have any institutional analyst coverage at this point. The challenge we run into, and I'm sure you can relate to this, that as an over-the-counter bulletin board stock, while we have very good discussions with analysts and they indicate they're very interested in picking us up and providing regular coverage, once we get uplisted, there are a lot of institutions that have restrictions on what kinds of stocks they can do research on and invest in. And unfortunately, we're in that category where there are some restrictions on what they can do with PURE. We do anticipate -- and part of the reason why we've been having these discussions with analysts every chance we get is to kind of lay the groundwork and so that we can hit the ground running once we do get uplisted. That is one of our goals. We believe that we're in a position for uplisting on most criteria. We're looking at both NYSE market and NASDAQ. We know that for NYSE market, we need to get to a $2 share price in order to qualify for uplisting. And we believe we'll get there with our revenue projections and all of the very strong initiatives that we have going into 2018. We're very, very hopeful that 2018 will be the year where we can do that. And once we do that, we would then expect to have some pretty good analyst coverage.

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Operator [24]

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This concludes the question-and-answer session. I would like to turn the conference back over to Hank Lambert for any closing remarks.

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Henry R. Lambert, PURE Bioscience, Inc. - CEO & Director [25]

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Thanks, Steve. It bears repeating, both our near-term and long-term opportunities lead me to be very optimistic about the success of our company. We continue to deliver on our unique ability to help customers supply safer food to their consumers while protecting their company's brand. And we look forward to building on that foundation in calendar 2018 and reporting our progress to you. I wish you all a happy and food-safe holiday and a Happy New Year. Thank you again for joining us today.

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Operator [26]

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This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.