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Edited Transcript of SNES.OQ earnings conference call or presentation 13-Aug-19 9:00pm GMT

Q2 2019 Senestech Inc Earnings Call

FLAGSTAFF Aug 20, 2019 (Thomson StreetEvents) -- Edited Transcript of SenesTech Inc earnings conference call or presentation Tuesday, August 13, 2019 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Kenneth S. Siegel

SenesTech, Inc. - CEO & Director

* Thomas C. Chesterman

SenesTech, Inc. - Executive VP, CFO, Treasurer & Assistant Secretary

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Conference Call Participants

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* Kevin Kim Ellich

Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst

* Robert A. Blum

Lytham Partners, LLC - Managing Partner

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Presentation

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Operator [1]

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Good afternoon, and welcome to the SenesTech Second Quarter Fiscal 2019 Financial Results Conference Call. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Mr. Robert Blum of Lytham Partners. Please go ahead, sir.

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Robert A. Blum, Lytham Partners, LLC - Managing Partner [2]

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Thank you very much, Cole and thank all of you for joining us today. On today's call, we will discuss SenesTech’s second quarter 2019 financial results for the period ended June 30, 2019. With us on the call today are Ken Siegel, the company's Chief Executive Officer; and Tom Chesterman, the company’s Chief Financial Officer. At the conclusion of today’s prepared remarks, we will open the call for a question-and-answer session. (Operator Instructions)

Before we begin with prepared remarks, we submit for the record the following statement. Statements made by the management team of SenesTech during the course of this conference call may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 as amended and Section 21E of the Securities Exchange Act of 1934 as amended, and such forward-looking statements are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements describe future expectations, plans, results or strategies and are generally preceded by words such as may, future, plan or planned, will or should, expected, anticipates, draft, eventually or projected.

Listeners are cautioned that such statements are subject to a multitude of risks and uncertainties that could cause future circumstances, events or results to differ materially from those projected in the forward-looking statements, including the risk that actual results may differ materially from those projected in the forward-looking statements as a result of various factors and other risks identified in our filings with the Securities and Exchange Commission. All forward-looking statements contained during this conference call speak only as of the date on which they're made and are based on management’s assumptions and estimates as of such date. The company does not undertake any obligation to publicly update any forward-looking statements, whether as a result of the receipt of new information, the occurrence of future events or otherwise.

With that said, let me turn the call over to Ken Siegel, Chief Executive Officer. Ken, please proceed.

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Kenneth S. Siegel, SenesTech, Inc. - CEO & Director [3]

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Great. Thanks, Robert. Good afternoon, everybody. So today marks the end of my third full month at SenesTech. During that period of time, we've made a number of significant changes in our strategy that are intended to drive our near-term and long-term success. Most notably, we are becoming more defined in our focus with an idea that we need to do one thing and to do it well.

As a company rich in scientific progress and success, the transition to commercialization is never easy. For scientific and early commercialization reasons, the company has historically tried to pursue every potential opportunity across multiple end markets and geographies. It has created multiple potential pipelines, but unfortunately, we haven't had the resources or the focus to close deals. The exciting part is that there are so many opportunities for ContraPest out there. However, in order to become more successful, we need to first prove ourselves with commercial success in a more narrowly defined market or geography. That will then allow us to more readily expand into many additional markets around the country and the world.

That brings us to California. As many of you are aware, the potential adoption of AB1788, which bans second-generation anticoagulant rodenticides in California, represents a potential accelerant for the company as ContraPest moves from a disruptive innovation to a potential necessity in the world's fifth largest economy.

Over the past few months, the team of SenesTech has been preparing for the potential passage of 1788. We have significantly expanded our outreach into this market as we build awareness and customer contacts ahead of 1788's implementation. We've also seen an increase in inbound activity as well as responsiveness to our direct selling efforts. We are still in the process of determining the overall value of the California market alone. Our best estimate at this point is that it currently represents more than $100 million in overall sales of rodenticides as an addressable market. How much and how fast we can generate the sales is yet to be seen, though.

We're also testing and augmenting our systems to make sure they are robust enough to handle the anticipated demand. Although we are confident in our ability to manufacture sufficient product to handle demand for this foreseeable future, we are launching incentive programs to attempt to drive some sales into the next quarters as an effort to be better able to forecast future requirements.

All of our back-end systems are being reviewed to make sure that we have no footfalls in managing our customers' demand and expectations. Many potential customers in California, such as municipalities, counties, state agencies and facilities on public lands, will shortly be faced with the need to find viable alternatives to SGARs and first-generation rodenticides. ContraPest offers that solution.

In keeping with the theme of focus, we've identified 3 areas of attack intended to create near-term opportunities and build a solid platform for the future. These are zoos and sanctuaries, municipalities and government agencies and food and agriculture.

Our food and agriculture focus is initially in the feather industry, that's poultry and eggs, for reasons I'll explain in a moment. We believe that zoos and sanctuaries, although a relatively small market, offer us the best chance at near-term revenue. These locations are highly sensitive to the use of poisons given their inherent mission and are in areas in which we already have robust proofs of concept. Given their size and geographic dispersion, we are testing the use of a contract sales organization to help us. Assuming this is successful, we plan to quickly expand its use into our other target markets. Using a CSO will help us get feet on the street more quickly and will allow us to flex our workforce as needs change.

Municipalities and government agencies are another obvious target. We already have demonstrated success in a program we ran in St. Louis and are seeing promising results in our recently discussed program in Washington, D.C. With AB1788, we're aggressively focusing on the California market and have projects in test phases in the Bay Area and expect to launch an additional test in Los Angeles shortly. We are looking to expand across the state as cities and government agencies look for effective alternatives once anticoagulants are essentially banned.

Currently, we have a comprehensive awareness campaign in process to make sure that both end-user customers and pest management professionals know that ContraPest is a more effective alternative to banned rodenticides. We are also working on significantly expanding our training programs to make sure that PMPs are up to speed with how best to employ ContraPest to assure both results and cost effectiveness. We're working with municipalities to make sure that ContraPest is included in their 2020 and 2021 budget cycles. We are also doing sampling to drive adoption ahead of next year's budgets.

Our third target, the feather industry, is potentially the most exciting and the most lucrative. We have 2 major proofs of concept in process and are working on different baiting techniques to maximize effectiveness. We're also working with the EPA so that the new techniques will be available to consumers once validated. Again, California has a significant role to play, given the strong agricultural base of its economy. The poultry and egg business has one additional advantage in that they're made up of a small group of very large players. We believe that once field use has been validated, we will be able to scale across the industry and across the country.

We've also recently learned that chicken manure is a significant contributor to the overall economics of the poultry industry. Rodenticides can contaminate this product through rat droppings. ContraPest doesn't bio-accumulate in the animal nor is it present in the droppings. Therefore, it doesn't have the significant negative effect that rodenticides have. Longer term, we believe that this will help drive further adoption within the industry as sensitivity to poisons in fertilizers for organic farming gains even greater traction.

The feather industry programs also share a common element with many of our future target markets: grain. Grain is the key component of chicken feed and is enormously attractive to rats. As we demonstrate effectiveness here, we are establishing a launching pad for other grain-based industries, including food storage, pet foods, cereals and packaged foods. Since ContraPest will not contaminate grain through rat droppings and simultaneously reduces grain shrinkage, we believe we have a winning combination across many applications.

Again, though, I want to make clear that we're highly focused on staying within certain key verticals and geographies. We understand that there are lots of shiny objects out there. However, as an organization, we will stay focused and disciplined on opportunities where we believe that we have the best opportunity for quick and efficient results.

As discussed in the press release, the results of the second quarter revenues reflect the focus we are placing into California and the continued adjustment we are making to our sales model. We're cautiously optimistic about the balance of the third quarter and the fourth quarter, particularly as PMPs and distributors begin to build inventory for the anticipated demand spike after AB1788 goes into effect. However, we don't anticipate meaningful revenue from 1788 until next year.

To make sure that we have sufficient resources to bridge us well into next year, we took steps to reduce our monthly burn rate. We are also continuing our generational shift from science to commerce, an ongoing process. Part of these savings will be reinvested in the company as we build muscle to drive sales and prepare for the anticipated demand from 1788. Right now, we've largely shifted from our historic focus on R&D to an all-out effort to commercialize ContraPest. Future R&D will focus on product improvement and addressing customer requirements until we achieve sustainable revenues.

Also related to resources, we completed a $4.1 million financing last month. As we announced at that time, I personally invested heavily in that offering. As you might expect, I believe strongly in this company, and I wanted you all to know that I have real skin in the game along with you. Between our cost controls in this financing, I believe we have sufficient resources to pursue our strategy.

So I know there are 2 questions you have that I won't be able to definitively answer today: First, will you have to finance again? And second, when will we see meaningful revenue? The 2 questions, of course, are related. The truth is that with only a few months on the job, I can't say for sure. We have learned that breaking into the pest management industry has been extremely difficult given practices that have been ingrained over decades, if not centuries. We continue to refine our sales and pricing strategies and have narrowed our focus to key markets that we believe are the most likely to generate near-term results with a significant amount of focus into California, which we believe has the ability to be a significant multimillion-dollar opportunity for the company in the relatively near term. I'd certainly make this as an exciting time. So thank you, shareholders and friends, for your continued support of our mission and your confidence in our ability to bring this incredible disruptive technology to commercial success.

And now let me turn it over to Tom to further review the financial results.

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Thomas C. Chesterman, SenesTech, Inc. - Executive VP, CFO, Treasurer & Assistant Secretary [4]

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Thank you, Ken. As we have just released our financials, I will only summarize and comment. We will be filing the 10-Q tomorrow, which should provide additional information of interest to our investors.

Revenues, as noted by Ken, came in at $24,000, a slight increase over the prior quarter. Revenues were depressed by both our reallocation of resources to California, revising our sales model to better address our focused markets as well as an impact of changing our tank format from fitting in a JT Eaton bait station to EVO bait stations. It is quite clear now that we were right in moving to the EVO-compatible design as that is the market preference. But as part of that, we had to replace some JT Eaton inventory in the field with EVO inventory. This is a timing issue as the returns were sent in last quarter, and the replacement sales will show up in this coming quarter.

Gross margin was lower than expected due to the lower production during the quarter and due to sales incentives. We still believe that a going-forward margin assumption of better than 50% is reasonable.

Operating expenses came in at $2.3 million, significantly lower than the second quarter of last year and slightly lower than the first quarter of this year. Our guiding spending philosophy has been, as Ken noted, focus, focus, focus. If it doesn't lead to sales or lower cost, it's likely not to be approved.

Overall, our net loss for the quarter was $2.3 million or $0.09 per share, a significant improvement over the last quarter and the second quarter of last year.

Adjusted EBITDA, a non-GAAP measure that we use to assess operating performance, was $2.0 million loss, roughly equal to the first quarter. We ended the quarter with $2.6 million in cash or $6.2 million on a pro forma basis when we include the net impact of our recent financing. With our current cost structure, this provides us with the necessary resources well into 2020.

A word about our recent financing. As we've previously announced, we priced on July 11 and closed on July 17 an offering of common stock at $1.35 per share for gross proceeds of $4.1 million. The pricing represented a discount to today's close of 11% or 12% discount to the trailing 30 days. While no one likes to issue stock at a discount, we chose this route rather than to continue to issue stock with warrants. The terms were reasonable based on recent market comparables and the lack of warrants helped avoid additional overhang.

We're also quite pleased with the quality of the investors that our bank, H.C. Wainwright, introduced to us. As mentioned above, this provides us the resources to fully pursue our opportunities, most especially to step up the pace in California.

Part of stepping up the pace includes expanding our sales presence. To this end, learning a bit from the biotech and pharmaceutical space, we have engaged a contract sales organization, a CSO, to expand our outbound sales. Guided by our marketing and commercialization experts in-house, we expect and hope that they can be productive in a matter of weeks and to move the needle for the fourth quarter and the first quarter of next year.

One last point on stepping up the pace. We have a rich history of scientific progress and success. The technology works, and it works better than the status quo. But as we dive deeper into each of the target verticals, we realize we do not have sufficiently compelling commercial validation in each of those verticals. The value statement, as our marketing friends call it, is different for each vertical, each market and each decision maker. The value of fewer reps is very different for a chicken farm than for a city manager. So as we work on market awareness, we are also working on building these compelling value statements in a very multidisciplinary way. Some of this will come from our past experience, some of it will come from validation exercises in the field with customer implementations, such as that's going on in the poultry project, and some of it will come from partnering with enlightened pest management professionals or PMPs. Look to hear more about this in future calls.

One last point. As we step up the pace in these ways and as we pursue this promising strategy, we also wanted to provide some metrics, some ways of monitoring our progress to our investors. As we are in the awareness phase, the first 2 metrics we would like to introduce are total inquiries and unique contacts. Total inquiries are a total pipeline of individuals who have shown interest in a solution that SenesTech offers. This is the starting point of a potential customer relationship. As of the end of the second quarter, this figure was 193. In July, as the awareness campaign in California hit its initial stride, the number jumped another 417.

Unique contacts are what we call qualified leads, those with whom the conversation has ramped up and who are now ready for a full sales effort. At the end of the quarter, this number was 107. By the end of the July, this number had doubled to 218. It's too early to take the next step to conversion rates, but we will keep tracking and reporting this progress for you. At this point, we'd like to open up the lines for questions.

Operator, please do so.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question today comes from Kevin Ellich with Craig-Hallum.

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Kevin Kim Ellich, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [2]

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I guess let's just start off with the metrics that you just provided, Tom. Really appreciate that, it's good to get any information out there. Just wanted to make sure I heard you right. Did you say in July, the total inquiries jumped up to 417, or it increased by 417?

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Thomas C. Chesterman, SenesTech, Inc. - Executive VP, CFO, Treasurer & Assistant Secretary [3]

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It increased by 417.

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Kevin Kim Ellich, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [4]

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Okay. That's fantastic. And then I don't know if you have this, but how long does it take to convert either a qualified lead or one of these initial inquiries into a sale?

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Thomas C. Chesterman, SenesTech, Inc. - Executive VP, CFO, Treasurer & Assistant Secretary [5]

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Well, that's part of the metrics tracking that we are focused on. At this point, I don't think we have enough data to give you a sense of that. I would say that we know it is dramatically different, depending on the vertical you're talking about. Municipals can take months, quarters even years. On the other hand, a food producer has a different set of incentives. They may make decisions much more quickly. So I think that when we get into the more data, we will need to be very cognizant of exactly which kinds of customers we're talking about.

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Kevin Kim Ellich, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [6]

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Okay. That makes sense. And I guess since you talked about food, Ken, let's just go back to the feather industry as you call it, poultry (inaudible). Can you give us a little bit of information in terms of the field studies that you talked about [or] proof of concept test that you're running, how long those take? And you also mentioned, I think, the EPA, are they involved in the approval to use ContraPest in this setting or not?

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Kenneth S. Siegel, SenesTech, Inc. - CEO & Director [7]

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So Kevin, I'll work backwards. Just -- the EPA is involved because some of the testing protocols require a waiver for -- from our existing protocols. So that is -- they are already supportive of what it is we're doing, and we're just waiting for final clearance to deploy. What we're doing is we are working on different baiting techniques for ContraPest in the big hen houses. The key thing here is what we're attempting to do is bait in a way that the rats are already accustomed to consuming the grain and the liquids that are in the barns, so there won't be any need for them to become familiar with the baiting stations.

We'll be using [pumps] and the like to -- so that there's no initial period of reluctance, no initial period of experimentation. And we're experimenting with deploying it in different locations. So the plan is that we'll take between 90 and 180 days to complete the testing, and then we go back to EPA with the results to make it permanent change in the labeling. So the places in which we're testing, we'll be able to continue to use that for the foreseeable future, but we'll need the EPA clearance for potentially some of these applications, which will take into early next year.

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Kevin Kim Ellich, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [8]

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Got it. And then while you're doing these proof-of-concept tests that you talked about, are you getting paid for whenever ContraPest is deployed at those, I guess, hen houses and poultry and egg facilities?

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Kenneth S. Siegel, SenesTech, Inc. - CEO & Director [9]

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We are. It's -- actually, we're working with a PMP, so that PMP will be buying product from distributors. So it will be a period of time, probably, before we see it in direct bookings as they -- as some of the distributors are still depleting inventory that they bought earlier this year or last year.

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Kevin Kim Ellich, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [10]

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Got you. And then one thing that jumped out to me too, Ken, you talked about chicken manure, which just -- can you help educate us, what is chicken manure used for, and why is that kind of important here?

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Kenneth S. Siegel, SenesTech, Inc. - CEO & Director [11]

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Yes. I mean it's absolutely fascinating. And sometimes every time I say chicken manure, I start to smile, so you have to forgive me if we all start cracking up. One of the things that we learned is particularly when the price of eggs drops, a lot of these poultry farms make more money selling the manure than they actually do selling the eggs. And the reason is, is that chicken manure is high in nitrogen, so it is a very powerful natural fertilizer, and it is in high demand for organic farming.

The sort of the dirty little secret that we have happened on is if rat droppings get in there, this organic fertilizer actually is contaminated with rodenticides. So what we believe is by taking -- by going with ContraPest, which doesn't end up in the droppings, we have the ability for these farms now to have a better pitch for organic. The other piece is, again, as organic becomes more and more mainstream, we think we're going to start seeing the manures making their way into conventional farming as well.

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Kevin Kim Ellich, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [12]

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Got it. Okay. And then California legislation, AB1788, just -- can you give us an update on the timing, when you expect we should hear things more out of California and also, what pushback you guys have been hearing in the market? It sounds like -- I've seen some stories where some of the Pestmasters don't want second-generation anticoagulants taken away because of how bad the problem is in California.

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Kenneth S. Siegel, SenesTech, Inc. - CEO & Director [13]

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Yes. So a couple of pieces to that. The best intelligence we have right now is AB1788 is in front of the Senate Finance Committee a week from yesterday. It always has to go to the Committee in case there is any issue of funding that needs to be required by the state. Since there are no funding requirements, we think this is essentially just a pro forma item. And then we'll go to the Senate floor later this month. We expect it to pass. We actually have pretty high confidence in it passing because even if it went down on party lines, the Democrats have such a significant majority that it's very likely to pass.

It then needs to go to the Governor by the 24th of September. And the Governor's already indicated that he will sign it. What's going on right now is the pest control industry is going down 2 different [tacks], one of which you've seen, which is the -- for lack of a better term, the scare tactics about the rodent problem in major cities, particularly L.A. and San Francisco and then conversations about bubonic plague, typhus, et cetera. And one of the interesting things that we've learned is the issue of typhus actually is being spread by cats and not by rats. But they're trying, I don't think that they're getting a lot of traction with the scare tactics.

The other tactic that they're trying now is to see whether they can put riders on at the bill, which might either delay its effectiveness or give the pest control companies the ability to essentially pay a fee or a fine if they wanted to continue to use anticoagulants. Current intelligence indicates neither of those paths is likely to be successful, but obviously, we're looking at it closely.

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Operator [14]

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And I'd like to turn the conference over to Robert Blum to read questions offline.

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Robert A. Blum, Lytham Partners, LLC - Managing Partner [15]

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All right. Thanks so much, Cole. (Operator Instructions)

The first question here is -- and then you've touched about this a little bit on the prepared remarks, Ken. Has the company developed a specific plan to target specific areas to generate revenue, for instance, animal sanctuaries and poultry farms, which you talked on? Specifically also, how did the recently announced hospital deployments come about? Was that the result of a pest control company, or was it internally generated?

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Kenneth S. Siegel, SenesTech, Inc. - CEO & Director [16]

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So let me expand a little bit on the verticals. As I mentioned in the prepared remarks, for the zoos and sanctuaries, we are bringing on board a contract sales organization. They're scheduled to go completely live Labor Day. We are in the process now of sharing with them all of the leads we have in that area. We're training their sales personnel with an idea that they'll be able to ramp very quickly.

We're in the middle of a comprehensive awareness campaign with the municipalities and state agencies. One of the things that's interesting, I might even mention the conversation that you and I -- that I was having with [Keith], is that in terms of the municipalities in California, they've recognized that even whether or not 1788 comes into effect, they have a significant amount of pressure from within their communities to move forward with -- moving away from rodenticides. So one of the things that started to happen in that area is we're now getting inbound calls. So we've been invited now to present and make proposals in a number of the major cities, and we've already begun to get some small orders early -- in the past week or so for the deployments that we're looking at, particularly in Los Angeles.

So that one, a combination of the awareness, a combination of the fact that they know that 1788 is coming and the fact that they have an enormous pressure coming from their own internal constituencies, that's beginning to drive itself to a degree.

The poultry and eggs, that's being driven by our own efforts in these tests that we're doing. And other pieces, we are looking at, again, trying to stay from bright and shiny objects. But when somebody comes in with something interesting that may potentially generate short-term revenue, for example, big-box retail, we're looking at that as well.

So everything has a specific team deployed against a specific strategy. As Tom mentioned in his remarks, we're also working very much on assessing what success looks like in each of those verticals. So back to poultry, back to grain, et cetera, it's a reduction in grain loss, it's a reduction in the loss of their chickens, their protein and a reduction in contamination to the by-products. And they can actually do some pretty specific math as to how much ContraPest will actually drive to their bottom line by effectively eliminating rodents.

The cities and municipalities, it's very much complaint-driven, it's sighting-driven, so we're working with them on demonstrating how it is they will reduce complaints coming in from their constituents. And zoos and sanctuaries, similar piece there. It's reduction on sightings. It's reduction on damage to the wildlife that they are protecting. But again, there, it's a little bit more intangible than not looking at a specific economic value, so we have to come up with different alternatives. And Tom, you want to talk a little bit about...

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Thomas C. Chesterman, SenesTech, Inc. - Executive VP, CFO, Treasurer & Assistant Secretary [17]

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Yes. The hospital was actually a case study that was -- actually was from last year. It was a PMP that deployed at a hospital successfully. He was found that he was able to drastically reduce his time on-prem servicing the traps that he had. And so from a PMP's business standpoint, that contract moved from being a difficult contract to a relatively profitable contract as a result of the ContraPest deployment. So it's one of the reasons why we wanted to make sure that they got out as a testimonial as opposed to being -- it's not a new deployment.

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Robert A. Blum, Lytham Partners, LLC - Managing Partner [18]

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All right. Our next question here, and this came in a couple of different times, can you share any updates on success of the program in Washington, D.C.?

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Kenneth S. Siegel, SenesTech, Inc. - CEO & Director [19]

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I can. So Washington, D.C., the original program was set out essentially to measure consumption, which is what the city believed would be the best indicator of success of the product. We have gotten our initial studies back, consumption at all of the stations, with the exception of 2 or 3, has been at the 75% to 100% level in relatively short periods of time, so they're seeing good consumption. What we have asked them to do and what we're doing now is we want to count juveniles, which will be the most clear indication that we're actually knocking the populations down.

So over the past week, we've been installing cameras in a number of the alleys in the wards that we're servicing. That data will take another few weeks before we have it back but at least the preliminary indications is that consumption's been very good and very high. And now we want to see whether we can monitor whether we're actually seeing reduction in rat activity through reduction in juveniles.

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Robert A. Blum, Lytham Partners, LLC - Managing Partner [20]

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Our next question here is -- probably, Tom, why was the cost of goods so high during the quarter?

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Thomas C. Chesterman, SenesTech, Inc. - Executive VP, CFO, Treasurer & Assistant Secretary [21]

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Yes, I touched on this a bit in my remarks. And a lot more detail will, of course, be in the 10-Q that we'll file tomorrow. But just to reiterate, we had some sales discounts. We had some incentives out there. We also had some scrap, which although low on an absolute basis, had a measurable impact on gross profit, given the level of sales. So all of those combined to produce a lower-than-expected margin. But we still continue to be confident that we can move towards an expected margin in the 50% range.

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Robert A. Blum, Lytham Partners, LLC - Managing Partner [22]

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All right. Our next question here, is there any update on seeking approval for mice?

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Kenneth S. Siegel, SenesTech, Inc. - CEO & Director [23]

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Mice is still in the queue. What we are really focusing on right now is twofold. One of which is making sure that we have general use designation in all 50 states or as close as we can get to that, and the various usage that we're looking at for the poultry industry. So mice has taken a little bit of a back burner as we're focusing on the core markets, but it's something that we've identified to continue to pursue in 2020.

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Robert A. Blum, Lytham Partners, LLC - Managing Partner [24]

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Is there a update on your internal breakeven revenue level?

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Thomas C. Chesterman, SenesTech, Inc. - Executive VP, CFO, Treasurer & Assistant Secretary [25]

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Well, it's -- the breakeven is, again, as I mentioned, we expect gross margins to be able to move to about 50%. Our operating expenses are -- just to give very round numbers, $8 million a year. That implies the breakeven ought to be somewhere in the $16 million range per annum on a run-rate basis. That's just a very simple way of not -- any kind of a forecast, but as of right now, that's what it would look like.

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Robert A. Blum, Lytham Partners, LLC - Managing Partner [26]

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All right. The next question here is can you discuss what is happening with previous contracts that were negotiated in Hawaii, St. Louis? We already touched on Washington, D.C. As well as New York, do you have any updates that you can provide?

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Kenneth S. Siegel, SenesTech, Inc. - CEO & Director [27]

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You want to take that one?

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Thomas C. Chesterman, SenesTech, Inc. - Executive VP, CFO, Treasurer & Assistant Secretary [28]

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Sure. Going in kind of top of mind order. St. Louis, the initial deployment was successful, and there was a lot of press about that success. We do note that the PMP is now deploying ContraPest on additional sites. So we consider that to be a successful and growing relationship there. With respect to Hawaii, there is a distributor that is distributing product there. We do not have direct contact any of the PMPs there, so we do not know exactly how or where it's being deployed there.

Washington D.C. we just mentioned. New York, again, that's something that is being done by the PMPs, and we are selling through distributors there. We do get anecdotal evidence from our visits there that it is being deployed, and it is -- particularly in the private sector, is expanding in its deployment. But we don't have any hard numbers on the government's contracts there. Most of our attention, as Ken mentioned, as we mentioned elsewhere, has been moving towards California where there is a different set of politics at play.

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Robert A. Blum, Lytham Partners, LLC - Managing Partner [29]

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All right. Looks like our next question here is now that you have almost 50 states accepting the less restrictive use label, what are your plans to capitalize upon this situation in terms of sales development?

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Kenneth S. Siegel, SenesTech, Inc. - CEO & Director [30]

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Interesting question. So one of the going-in assumptions in how we market this has been that the vast bulk of sales are going to be to PMPs and through PMPs. So we've been working with the PMPs on their value models, how it is they can deploy ContraPest in a way that assures a long-term revenue stream for them. So one of the key pieces we're working on the model is that since ContraPest can so dramatically reduce rodent populations, that they switch from the historic "Let's bomb with rodenticides every 3 months and wait for rebound and come back," to a model in which essentially they knock the population down and then they switch more to a maintenance model.

And so the idea is to get the PMPs focused on multiyear contracts, which essentially, if you think about it, as -- some of us who have termite control, et cetera, it's more a guarantee that the rodents aren't going to come back, so the revenue stream in the back end really becomes more an annuity because their service levels drop.

As the PMPs are trying to internalize this, I mean, they continue to fall back on their normal practice, which is let me charge as much as I can because if this product works as well as I think it does, I may not have a future revenue stream. So one of the concerns that come up initially is getting them out of the mindset that they shouldn't be overcharging for ContraPest as well as for the service. So what we're doing at the outset is in the now 43 states that are non-RUP is we are -- we've identified how it is we can go directly to end users, sell them the product at our current margin without the markup by the PMPs and the distributors with instructions on how to deploy. And we're currently working that model with a couple of corporates.

The key piece here is not necessarily to move fully into a non-PMP deployment, it's really to indicate to customers that they have alternatives. And we think that will also start introducing some discipline on the pricing side of the PMPs. So we are looking at how it is we deploy directly. We've got a couple of projects now in process with direct deployment to end users in non-RUP markets. We're also using it as a way to impose pricing discipline in the core markets, whether it's RUP or non-RUP.

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Robert A. Blum, Lytham Partners, LLC - Managing Partner [31]

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All right. Cole, I'm going to turn the call back over to you for additional questions that might be on the live portion of the call here.

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Operator [32]

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Next question will come from Kevin Ellich from Craig-Hallum.

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Kevin Kim Ellich, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [33]

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Ken, just wanted to follow up quickly. You said, I think, there's 43 states now that have removed the restricted use label. When do you expect to get the rest, the other 7 states?

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Kenneth S. Siegel, SenesTech, Inc. - CEO & Director [34]

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Two of them -- it's interesting. Two of them are not going to remove the designation but are going to essentially allow us to sell it as though it's non-RUP, so we're really up to 45. The other 5 -- and I don't know them off the top of my head, other than one of them is California. So California is clearly the one, Kevin, that we're most acutely focused on. And we're looking at that as first quarter next year. But in the meantime, at least the good news in California is because of AB1788, there's enormous pressure on end-user customers to shift regardless of whether we go non-RUP.

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Kevin Kim Ellich, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [35]

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Got you. Okay. Do you think you'll get the other 4 states by year-end then?

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Kenneth S. Siegel, SenesTech, Inc. - CEO & Director [36]

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I'm not sure. I'll go back to our regulatory people and see what the sense is. They're kind of dribbling in at this particular point in time, but none of them are of the magnitude of a California.

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Kevin Kim Ellich, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [37]

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Got you. Okay. And then with the CSO, the contract sales force for zoos and sanctuaries, just wondering if you could give any information in terms of what the arrangement is with them. Do they get a percentage of the sales? And I guess, are they exclusive to ContraPest? Or are they able to sell other things as well?

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Kenneth S. Siegel, SenesTech, Inc. - CEO & Director [38]

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So the company that we've engaged is not exclusive to ContraPest, but we will have dedicated sales people who'll only be selling our product. So the arrangement, essentially, is we pay the salaries of these sales people. They will be commissioned so their salaries are relatively low. A significant portion of the balance is commission. There is a modest -- call it, the supervisory fee to the company itself and then a small commission on actual sales, so we stayed away from a lot of the models which are to pay based on leads. They will be commissioned only if they sell the product.

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Kevin Kim Ellich, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [39]

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Got you. Okay. That makes a lot of sense. And then, Tom, cash burn, I think, this quarter around $2 million. Are we still looking at about $8 million for the year?

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Thomas C. Chesterman, SenesTech, Inc. - Executive VP, CFO, Treasurer & Assistant Secretary [40]

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Yes. We -- As we said, we've taken steps to reduce the burn rate where we can, but some of that is being redeployed to sales activities and marketing activities. So I think probably a steady state is probably conservative assumption.

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Kevin Kim Ellich, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [41]

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Okay. That's what we'll use. And then lastly, Ken, with the Washington, D.C. update, and forgive me if I'm misunderstanding what you meant, but it's great that the consumption rate was high for all the bait stations out there. And I think you said you're installing cameras or have installed cameras to see the activity of juveniles. I guess, why do you need to do that when that's exactly what ContraPest does, is it stops rats from reproducing?

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Kenneth S. Siegel, SenesTech, Inc. - CEO & Director [42]

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It's really, in some respects, right, it's belt and suspenders. But as I'm thinking about this in terms of creating the proofs of concept and the future testimonials, it's one thing to say that the product's being consumed. It's another thing to be able to say definitively that we've seen a reduction. And so this is sort of in the -- if I can come up with something that hits somebody squarely between the eyes and says it works and here is documented proof, it just feels like a better way to sell on a go-forward basis. But consumption, clearly, is the indicator that it's working. This is something that I think no matter what vertical we take it to, we're going to go, "Okay. It's actually reducing the rat population."

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Kevin Kim Ellich, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [43]

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Okay. That makes sense. And then lastly, Ken, you've been with the company 3 months now, and we saw the big investments you've made with the equity offering. How would you say the first 3 months have gone relative to what you expected when you started? What are the pros and cons, both positive and negative, that you've learned since joining the company?

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Kenneth S. Siegel, SenesTech, Inc. - CEO & Director [44]

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That's a great question. So obviously, there've been more pros than cons, or I wouldn't have put $1 million of my own money in, so it's a good way to start. The -- all the pros are -- I'm enormously impressed with the talent of the team, the strength of the science. And I came in, as I even said on day one, it's better to have a challenge of selling a product than have a challenge of creating it and then figuring out how to sell it. So that's all very positive.

The thing that is a little concerning with some of the stuff that we've identified and we talked about on the call today, I need more proofs of concept, which is what we're working on in these various verticals. And we needed focus. One of the things is there were so many attractive alternatives that the company was pursuing, that putting a discipline in and saying, "We're going to go with these 3 key verticals. We're going to focus our energy in California" was a major shift. But given the revenue profile, given the fact that we're public, I felt I owed it to the investors to buckle down and hit those areas where we were most likely to generate revenue in the nearest term.

So that was the challenge that I think we all saw, and what we're laying out for you now is how it is we're going to address it. And hopefully, when we get together next quarter, be able to tell you that we hit on the right formula. I'm very optimistic, again, or I wouldn't have put that amount of money in.

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Operator [45]

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And our next question comes from [Greg Sullivan], private investor.

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Unidentified Participant, [46]

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Actually, Ken, you've done a really good job of answering my question before I even get a chance to ask. So I'm good.

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Operator [47]

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And our next question comes from [Mike Lee], private investor.

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Unidentified Participant, [48]

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It's been very nice to listen to you folks speak, and you've given a lot of information. Of all of my questions, I only have one left, and it's in regard to a comment that Mr. Chesterman said that -- Mr. Siegel said that in California, there was an option for the end users to possibly buy directly from SenesTech than the distributors. My question is will the pricing for the end-user be exactly the same if they buy directly from SenesTech versus an upcharge from the distributors? Or -- that's my question.

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Kenneth S. Siegel, SenesTech, Inc. - CEO & Director [49]

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So essentially, our plan right now is we will sell at what we believe is our suggested retail price to an end user. What's been happening is the distributors and the pest management companies have been marking up from the suggested retail price. Sometimes 1 or 2 times what it is we would otherwise sell. We will allow for volume discounting for large purchases, but the key here is really to main the integrity of our pricing and put some discipline in the pricing that third parties have been using to mark up the product.

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Thomas C. Chesterman, SenesTech, Inc. - Executive VP, CFO, Treasurer & Assistant Secretary [50]

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I would just add one thing to that and that is that you have to also remember that the PMPs are incorporating our product into a service offering. And so there's a lot of different pieces that go into that. If a customer was considering buying direct, they're still going to have to figure out the cost and feasibility of servicing that. And so it's all going to be brought together in one way or another. So it's really not as clear, an apples-to-apples comparison because of that service component.

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Unidentified Participant, [51]

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Sure. And if I may add one more question. On the website, in July, last month, which is the first month of the next quarter, it was a -- looks as if there was an effort to try to move a lot more product, and it was some sort of discount, which was probably there in June or earlier. Can you give us, the listeners, an indication of how that promotion went in the month of July?

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Thomas C. Chesterman, SenesTech, Inc. - Executive VP, CFO, Treasurer & Assistant Secretary [52]

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I think it will be premature for us to comment on the next quarter. We're going to try and remain disciplined to remain in the quarter we're reporting on.

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Operator [53]

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And I'd like to turn the conference back over to Mr. Bloom to read additional questions.

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Robert A. Blum, Lytham Partners, LLC - Managing Partner [54]

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All right. Just looks like maybe 1 or 2 more questions here. Question is how far along is SenesTech or ContraPest in developing birth control for plants, wild hogs and all other animal and nonanimal species?

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Thomas C. Chesterman, SenesTech, Inc. - Executive VP, CFO, Treasurer & Assistant Secretary [55]

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Well, I'm going to take that because I want to make sure that our new CEO knows that we got the message. We are all about focus, focus, focus. So just, Ken, just so you know, we actually heard what you're saying. We are not working on those other programs at present. We are working on making ContraPest work for the products we have and can sell right now.

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Robert A. Blum, Lytham Partners, LLC - Managing Partner [56]

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All right. With that, I will turn it back over to Ken for any closing remarks.

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Kenneth S. Siegel, SenesTech, Inc. - CEO & Director [57]

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Well, everybody, thanks for spending the time. I will tell you, it's been an exciting 3 months. And hopefully, I've given you a sense of what the strengths are that I inherited as the CEO, which are really quite incredible and how it is that we're working together as a team to drive focus and make sure that we're doing the one thing that all of you will most value, which is put some revenue on the board.

And hopefully, either in the next quarter call or certainly in the next few, we'll be talking about the uptick in revenue and how we're driving the success. So again, thank all of you for the support. I hope you realize just how passionate we all are about this company. And I look forward to talking to you next quarter. So thanks again.

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Operator [58]

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The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time, and have a wonderful day.