Executives
Michael Krall - Chairman & Chief Executive Officer
Andrew Buckland - Chief Financial Officer
Terri MacInnis - Director of Investor Relations
Analysts
Robert LeBoyer - Aurora capital
Mark Stafford - Stafford Capital
Jason Dipaola - Axiom Capital Management
Chuck Lipson - CSL Associates
Keith Markey - Griffin Securities
Erwin Maizer - Oppenheimer & Co
[Tom Kay] - Private Investor
[Glory Acadie] - Private Investor
Gene Inger - The Inger Letter
Mark Stafford - Stafford Capital
PURE Bioscience Inc. (PURE) Q4 2009 Earnings Call October 14, 2009 4:30 AM ET
Operator
Greetings and welcome to the PURE Bioscience year end results conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions)
It is now my pleasure to introduce your host Terri MacInnis, Director of IR for PURE Bioscience. Thank you, you may begin.
Terri MacInnis
Good afternoon everyone. Our apologies for the slightly delayed start of our call we had some echo on the line and we wanted to be able to get rid of that. As the Director of IR at Bibicoff & MacInnis, I am pleased to welcome you to our discussion of PURE Bioscience’s financial results for the fiscal year ended July 31, ‘09.
Joining me this afternoon from the company is Michael Krall, Chairman and CEO, and Andrew Buckland, Chief Financial Officer. Before we begin, I remind you that the information presented and discussed today, includes forward-looking statements, which may cause PURE Bioscience’s actual results in future periods to be materially different from any future performance that maybe suggested in this financial results release and are made under the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.
The risks and uncertainties related to such statements are detailed in the company’s SEC filings. Today’s call is being recorded and archived. A replay of the call will be available on the Investor Relations section of the PURE Bioscience website, www.purebio.com. After Mike and Andrew conclude their remarks, Mike will open up the call for your questions.
Now it’s my pleasure to turn the call over Michael Krall, Chief Executive Officer.
Michael Krall
Thank you, Terri and good afternoon. Thank you taking the time to join our call. After Andrew completes his review of the financial results, I’ll provide an overview of the progress we’ve made with our partners to commercialize SDC, our patented silver antimicrobial technology. I will also discuss in greater detail the announcement made this morning about the expansion of our business plan and our affiliation with Richmont Sciences to enhance our sales and marketing efforts.
At this time I’d like to introduce Andrew Buckland. Andrew?
Andrew Buckland
Thank you, Mike and thank you to everyone who dialed into our conference call today. Today, I intend to be fairly brief in my comments regarding our fiscal year just ended. So it’s to knock down silver patented based upon the information Mike provided in our quarterly conference call. You can find much more detailed information in our 10-K that’s filed with SEC yesterday and available at sec.gov.
Total revenue for fiscal 2009 was $728,000 including licensing fee revenue of $250,000. Revenue for the prior fiscal year was just under $1.5 million, which included almost $1 million of sales to South American distributors who did not subsequently purchased any product from us in fiscal 2009.
Our revenue for the fourth quarter of fiscal 2009 was $203,000 and a net loss for the quarter was $1.7 million, or $0.06 per share. At this time, we won’t be providing specific revenue or earnings guidance, however during next calendar year we expect to see the first fruits of our relationship with Richmont Sciences, as we announced this morning and which Mike will discuss in more detail later.
Our gross margin for fiscal 2009 were 50% of product revenue, a significant proportion of sales for 2009 or a finished package product hard surface disinfectant which we generally sell at lower margins than our concentrated products. Additionally, with relatively low throughput in the last year, our manufacturing overheads are the proportionate of net sales were greater in 2009 than we expect them to be with higher volumes going forward.
Our total operating expenses declined in fiscal 2009 by $80,000, compared with the prior year to $7.6 million. In 2009 we wrote up $780,000 of bad debt, which is in general and administrative expense related to amounts billed during the prior fiscal year to international distributors with rights to Argentina, Colombia and other South American countries.
That expenses more than offset by a reduction of $1.2 million in stock option expense in 2009 versus 2008, which is partly due to longer vesting periods being applied to stock option grants made in 2009 compared with grants made in prior years. Our general and administrative accounting and legal fees increased by approximately $200,000 year-over-year.
During fiscal 2009, we completed our first full year as a NASDAQ-listed accelerated filer. We incurred costs throughout first year of Sarbanes-Oxley 404 anticipation and we filed the next three registration statement, which was subsequently declared effective.
Our net after-tax loss for fiscal 2009 was $7.1 million or $0.23 per share, compared with $6.5 million or $0.24 per share in 2008. We have no material tax expense due to our current losses and at July 31, our federal tax net operating loss carry forwards was $50 million and our California tax loss carry forwards was $40 million. We obviously intend to take advantage of these valuable assets in future periods.
$47 million of that federal carry forwards will expire after 2017 and our California carry forwards will not begin to expire until 2014.
Our cash balance for July 31, 2009 was $4.2 million. In September after the end of the fiscal year, we raised an additional net amount of approximately $2.8 million, in a registered direct offering of common stock. The common stock resulted a price of $1.65 per share, and investors received warrants to purchase 0.4 shares of common stock at an exercise price of $2.10 per share to each share they purchased in the offering.
During the fiscal year, in May of 2009, we’ve completed a separate registered direct offering of common stock that also provided net proceeds to the company of approximately $2.8 million. In that offering, the common stock was sold at a price of approximately $2.11 per share and the investors received warrants to purchase 0.35 shares of common stock at an exercise price of $2.37 per share to each share they purchased in the offering.
The net proceeds from each offering will be used to fund our working capital and we continued to have no long-term debt. In addition to the proceeds of the offerings, cash proceeds from the exercise of stock options and warrants in fiscal 2009, were $940,000 compared with $2.2 million in fiscal 2008. Net cash used in operations in fiscal 2009, was $5.9 million, compared with $4.4 million in the prior year.
On a final note, I’m pleased to be able to tell our shareholders, that our financial statement and control audits went very smoothly this year. As an accelerated filer 2009 was our second year complying with Section 404 of the Sarbanes-Oxley Act. As a part of that plan to lay our foundation for future growth, our company has built a strong control environment and as last year, we reported no material weakness or even significant deficiency within our controls.
At this point, I’m going to hand the call back to Mike.
Michael Krall
Thank you, Andrew. I’d like to begin by providing a brief overview of our technology in our business. I won’t spend much time characterizing our patented SDC antimicrobial molecule, because if you’re listening to this call, you’re either already aware of SDC and its powerful efficacy, or you’ve read today’s news release, which discusses the quick kill time and its unique 24-hour bacterial protection, that SDC is being developed for using a variety of applications in healthcare, personal care, industrial applications, food processing, and agriculture.
While our business plan it still includes three tracks being pursued simultaneously, our Hard Surface Disinfectant Program, our specialty chemical reseller program and the FDA regulated product development program. As announced earlier today, we have now taken an important step to expand our business model and strengthen our first and second tracks by engaging a world-class sales and marketing association, and I’ll talk more about that in just a minute.
In each of the three tracks, our patented new molecule, the non-toxic Silver Dihyrdogen Citrate or SDC offers revolutionary efficacy as an effective ingredient or preservative in a wide variety of products in several multi-billion dollar markets, including household, personal care, preservatives, food processing, water treatment, industrial applications, textiles, and agriculture, as well as pharmaceutical new drug products and devices, as a platform technology SDC addresses the current market’s demands for green alternatives to traditional toxic substances.
PURE is too small to independently commercialize our antimicrobial technology into all of those markets. So our business strategy includes forming agreements for the product development, distribution, and sales and marketing with companies in various markets. These agreements position PURE as the sole source manufacturer of SDC and our partner companies shoulder the majority of the sales and marketing burden to bring products containing SDC to market.
The maximum potential market penetration of SDC is amazing and we believe that the global shift towards implementing green technologies helps to set our stage for success. There is no doubt that the revenues for the last fiscal year did not meet our expectations. It was a tough year and although we still are not able to point to the generating steady meaningful revenues, we made measurable progress and got a lot of projects off the ground.
During the year, we recorded $250,000 in licensing from a Fortune-100 company, often referred to as the mystery shopper by shareholders. Within we have a confidentiality agreement that prohibits us from disclosing its name. We’re actively working on multiple projects that are in various stages of formulations by PURE working in conjunction with that leader company.
Once again the process is lengthy, but more than worthwhile. We expect that once we have successfully completed product development work, we can expect to announce a contract to new products with this entity. We work diligently this year to expand our R&D programs to create additional new product formulations like sporicidal and high-level disinfectant products and to test SDC’s effectiveness against other additional organisms and emerging pathogens.
We made and continue to make real progress with new formulations including those that target TB and hepatitis and find that our internal formulation and research collaborations are helpful to our distributors and potential partners. I look forward to providing you with the progress report next quarter on this.
In July, the Cleveland Clinic became an equity partner in FTA Therapeutics. A licensed pharmaceutical development partner for SDC and the Cleveland Clinic began collaboration with FTA on SDC product development.
Several projects are underway, including refining the alcohol-free hand sanitizer product, final formulation and toxicity analysis for a topical acne product, development of a patented wound care device that disseminates SDC in exploration, formulation, and microbiological testing on a series of specific additional applications for SDC, including antimicrobial coatings to prevent biofilm on implants and medical devices.
In the current fiscal year, we expect to look forward to providing milestone updates regarding preclinical testing and clinical trials by FTA. Distribution by Ciba, now BASF, continues to expand under the new contract that was signed during this fiscal year.
I’m speaking to you today from Switzerland having spent yesterday in meeting with BASF representatives and was told that BASF currently expects to receive regulatory approval in the next several months for SDC as a preservative in cosmetic and personal care applications in the European Union.
As you know, Beiersdorf, a BASF customer has launched Nivea silver protect deodorant in most of Europe and parts of Asia now. It continues to grow and we expect and we hope to announce new products introduced by BASF customers as they register and come to market.
The launch of our new SDC-based food contact surface sanitizer, anticipated for the current fiscal year, will significantly expand the product offering and market reach into restaurants, hotels, and food processing storage facilities.
One of the cornerstones for this new market was laid last October, when we expanded our intellectual property portfolio with the issuance of the food treatment patent for SDC by the US Patent and Trademark Office.
This is particularly significant because this summer we also successfully concluded a six-year process with the EPA, which first included petitioning the EPA to amend the Federal Register to establish SDC as the only silver product acceptable as a food contact surface sanitizer and next obtaining EPA registration of our Axen50 product. The registration also accelerates our ongoing pursuit, through USDA and FDA of direct food contact applications of SDC-based formulations as an antimicrobial processing aid.
To that end, we’re collaborating with several universities and industry groups here in the U.S. regarding specific SDC-based formulations and use protocols for many applications throughout the food growing, processing, distribution chain, including meats, poultry, fruits, and vegetables.
Testing protocols have been developed and others are under development, while we work to establish start dates for various trials. The projects are ongoing and will take time, but we believe they are successful and hands our entry into very large markets for SDC -based products.
We expect to provide updates as progresses is realized. As we continue to validate additional applications for SDC in many diverse industries, and work to develop strategies for each industry, we believe it will be invaluable to receive guidance from key leaders in various market segments. Subsequent to year end, we formed our Advisory Panel and welcomed its first new members.
Our business is significantly strengthened by access to the experience, vision, and contacts of leaders like Tom Ridge, first Secretary of the U.S. Department of Homeland Security and Former Governor of Pennsylvania. Scott Russell, Ph.D., Professor of poultry processing and products microbiology, Poultry Science Department of the University of Georgia; and Tommy G. Thompson, former U.S. Secretary of Health and Human Services and former four-term Governor of Wisconsin.
In fact, the fact of the matter is that we have been fighting in that field battle. The tremendous challenges of introducing a disruptive technology and obtaining regulatory approvals are taking longer than expected for our distributors to overcome. We discovered that ultimately, there’s often motivation by the potential big business customer to stall or even block commercialization of the technology, even after making significant investments of time, money, and resources to formulate products and develop brands.
In addition, we’ve observed a natural emersion and desire to maintain the status quo with market dominance of traditional chemical sold under strong national brands. We now recognize that the timelines of the big players do not match ours and that although it’s counterintuitive, we’ve learnt that current customer or consumer and industrial disinfectant business is not always about bringing the best product to market nor to protect consumers. It’s often simply to sell as much product at the greatest margin possible with the least amount of effort.
We’re not sitting on our hands waiting for big business to site, if and when SDC enters the marketplace, and so we’ve enhanced our business model to include a direct and aggressive route to market with not only our disinfectant, but also our SDC as an active ingredient and preservative.
We’re very excited today to have announced our alliance with Richmont Sciences, LLC, a wholly-owned subsidiary of Richmont Holdings. Richmont is a seasoned team of sales and marketing experts headed by John Rochon, less than 35 years successfully building and promoting a host of well-known consumer and business to market brands. Members of Richmont team have built many brands, including Mary Kay, Avon, Dirt Devil, American and United Airlines, and other household names.
As you remember, until now our sales strategy has been to license multiple distributors, the right to sell SDC-based disinfectant under various private-label brands. Those licensed distributors, in term sold to customers; our existing sub-registrant distributors will continue to sell products. However, going forward, Richmont will service our exclusive direct sales and marketing arm for both ready-to-use disinfectant products, as well SDC concentrate used to manufacture those products.
Richmont will initially focus on marketing our current hard surface disinfectant under the brand name ‘IV-7, Ultimate Germ Defense. After we finish the remaining federal and state regulatory work, Richmont will also market PURE’s food contact surface sanitizers to hotels, restaurants, and food processing facilities.
In addition, Richmont will sell SDC concentrate as a disinfectant or sanitizing active ingredient, and as a preservative for a variety of products. Richmont functions as a sales agent on behalf of PURE. So customers or PURE’s customers and PURE expects to recognize the revenues for products sold under the arrangement. PURE will pay marketing fees to Richmont based upon those revenues.
Adding a successful and sophisticated sales and marketing arm to our business strategy, represents a totally new more aggressive approach for us. We too are frustrated by the fact that we have extraordinary technology that can help save lives, but we are hindered by the inertia of larger, consumer, and institutional product companies that may have motives that conflict with ours.
Richmont has no alternative agenda, its agenda and objectives are aligned perfectly with ours, and we’re eager to take a more direct role in getting our products into the business, homes, schools, hospitals and anywhere that can help fight illnesses like H1N1 and MRSA. The expertise of the sales and marketing professionals of Richmont strengthens our business model at a time when the marketplace is demanding the kind of antimicrobial solutions we offer.
Richmont’s investment of time and resources has thus far been quite impressive, and we believe that has hit the ground running with enough momentum to generate significant revenues for PURE in the near term.
At this time, I’d like to ask the operator to open the call up to questions. Feel free to address your question to either myself or Andrew. Operator.
Question-and-Answer Session
(Operator Instructions) Your first question comes from Robert LeBoyer - Aurora capital.
Robert LeBoyer - Aurora capital
I actually have two questions for you. The first one was on the bad debt write-off related to the South American territories that you mentioned. I was wondering if that affects the licensing or anything going forward other than the accounting for the fiscal year, and second I would like to elaborate on what you mean by the incentive to disrupt after they’ve made investment.
It sounds as if they are almost getting right to the product to keep it off of the market and basically do some anti-competitive would be the right term, but things to prevent this technology from reaching the market when it back I thought this was something that would make each product competitive and they could maintain their position that way?
Michael Krall
Well, I mean, there are several parts there, speaking to the large brands. I can only say that we have personal knowledge that several of the large brands have developed platforms of products, as far as we know they are ready to go through regulatory. We’ve actually seen the first ones pass through regulatory and that get to launch. Their launch plans are basically they’re kept to themselves.
We don’t interface with marketing in these companies. So as far as launch dates, we just have no idea. I think it’s safe to say though with if we’re talking about the large brand companies that sell chlorine-based products for example, they would actually prefer that PURE go away and they be allowed to continue to sell those products the same chlorine-based products forever.
I think, bringing the Richmont group in, I think with this disrupted technology, I think we actually have a chance to push them into releasing these brands or bringing them to market quicker. That’s our strategy and that’s what we intend to employ.
With regard to your question, South America, there are actually several parts and make sure I understood it completely, if it was the bad debt with the Columbian partners, their contract is null and void. There is no extended licensing to that group. There is a new group that is negotiating in Columbia right now for rights and we’ll entertain those as it develops.
With regard to the group in Brazil, Brazil was an interesting example. They have spent significant money, constructed facilities, have equipment in place, we have been to Brazilian to train their people. A fine group of employees working in this facility. They’ve received the two regulatory approvals that they needed to move forward.
They’re telling us, that the economy is just not in shape to bring out a premium product. It’s hinging conceivable to us that they would spend literally millions of dollars to develop platform to distribute products and then simply abandon that. We believe that they’re waiting for the right time. We believe that that is in the near future and that the launch of the products accordingly.
Robert LeBoyer - Aurora capital
Can you give us any guidance as to what you’re expecting next year in terms of revenues or loss per share or loss total for the year?
Michael Krall
Andrew?
Andrew Buckland
We can’t provide any specific guidance at this time. Obviously, the sensitivities are extensive. We are currently receiving significant feedback from Richmont Sciences on what the market potential maybe. However, and I think on IV system, before if we were provide guidance now, the only thing I can guarantee is that we would miss it.
So I think it’s appropriate until we actually start to see the fruits of our Richmont agreement, which we have only just entered into. It was that obviously announced this morning and we’ve only just entered into that arrangement with Richmont Sciences. Until we get greater visibility to what that relationship it can be achieved for us.
Richmond actually gets that into the marketplace and we actually see the fruits of their activities. I think it’s appropriate that we don’t provide any specific guidance, but obviously as I actually said in my comments, we expect to start seeing revenues under that relationship with Richmont in this current calendar year.
Operator
Your next question comes from Mark Stafford - Stafford Capital.
Mark Stafford - Stafford Capital
My question is, we’ve had during this past year India has the potential however in the cruise lines and TB and cooling towers. Do you have any comments or updates on what’s going on in those areas?
Michael Krall
India has, as you know we announced they received their registration not too long ago. We shipped product to India. They’re testing their packaging. They’re sending samples back to us to make sure that they’ve done everything correctly. We’re waiting for a launch date. I’m not sure exactly, when that date is to tell you the truth, but I don’t believe that’s too far off. We’ve also had meetings with several other companies regarding distribution in India and we expect to sign up one or more of those in the near future.
Mark, what was the rest of your question?
Mark Stafford - Stafford Capital
Cruise line?
Michael Krall
Cruise line, we’ve completed our first test with the cruise lines on a ship that actually had a Norovirus outbreak. The tests were extremely positive for us. The numbers absolutely don’t lie. The cruise ships, as you know run from Sunday-to-Sunday generally. Our representatives boarded the ship on Sunday, trained the crew on Monday, Tuesday and Wednesday.
On Monday, they discovered a Norovirus outbreak for people who went to five additional people the next day. I believe that was ten in the following day. On Thursday, it was, I believe 19, they elected to go ahead and use our product now. The outbreak was substantial. By Thursday afternoon, we were in most of the ship. Friday, it went to, I believe an additional 25 people and then Saturday, it dropped to eight and Sunday to one. The 24 hours incubation period in between Thursday and Friday is normal.
It takes those people are typically infected or would have been infected before our product was at use. So it was a very successful program. We are in negotiation with the company, and we’re expected to test several more times. We’re not putting all of our eggs in one basket. We’ve got several distributors working on this with several different cruise lines.
Mark Stafford - Stafford Capital
Can you offer comment on, that earlier we are looking at results on the TB testing and the cooling towers?
Andrew Buckland
Yes, we’ll be making some announcements on the various formulations in near future. I will tell you we have several formulations that have been effective against the TB. They require just a little more taking for statics, but it was good and I’m sorry your last question?
Mark Stafford - Stafford Capital
Cooling towers.
Andrew Buckland
Cooling towers, we’re working with a nationally recognized firm out of the south, protocols are in place and they expect to begin testing in the near future and we’ll provide more information on that as it goes forward.
Operator
Your next question comes from Jason Dipaola - Axiom Capital Management.
Jason Dipaola - Axiom Capital Management
I know you are not going give specific guidance on revenue numbers, but can you talk about the economics as far as what you’ll recognize in revenue versus, what you recognize now when you sell through a distributor?
Michael Krall
I’ll take a stab at that Andrew. I’m sorry there is delay in the phone line. I apologize. I’m in Switzerland right now. So there is a delay between the question-and-answer and it’s confusing some of that. So I apologize for that. With the new arrangement, the customers that are developed become our customers and the revenues flow to PURE. So we will ship the product. We will bill for the product. We will collect for it and we will pay Richmont accordingly.
So we would expect we’ll be getting all of the revenues that there will be more expenses of course out of those, but it’s a portion of the revenues we never realized before. Typically we would just sell the package product to a distributor he in turn would sell it to a customer. So, the revenues on that portion are expected to be higher as a replace to the individual sale.
Andrew Buckland
Just for an example, I believe that’s an inaccurate number, say for $13 a bottle and I know Richmont not could be out there selling individuals for each bottles to distributors for example, but if you are selling it through a distributor for $4 and then reselling that for $13 is that mean you will be selling the products for closer to a $13 number.
Michael Krall
I think you answered your own question.
Jason Dipaola - Axiom Capital Management
Is there any update with the BASF buying Ciba, and not but that relationship is up in the air, but have they given any indication on going forward, how they are going to proceed with the relationship?
Michael Krall
As I believe we mentioned before, we have a pre-existing relationship with BASF in the agricultural area. We’re working with their R&D site currently. We expect that and actually we’re told in the meetings that they expect the relationship to expand with our relationship now with them taking over the entire Ciba side of the business that we’re involved with and that would both of those departments that two additional facilities and their positions are safe and secure and they’re working hard.
Jason Dipaola - Axiom Capital Management
One last question and I’ll get back in line. It’s kind of going back to the guidance issue. I know that you are not going to give guidance. I’m assuming, given the reputation of your marketing partner that they have some kind of number in their mind would that be an accurate statement of what they’ve been think they can sell?
Michael Krall
They have an entire team of analysts and they have thoroughly analyzed the market and it’s safe to say that they’re operating under the plan can I do if all those numbers form, I wouldn’t do that.
Jason Dipaola - Axiom Capital Management
Based on what you know with your conversations with them, you think that they possibly can get you to a breakeven on profitability in the next 12 to 18 months?
Operator
Your next question comes from Chuck Lipson - CSL Associates.
Chuck Lipson - CSL Associates
During the year, when we had a severe cash conscious necessitated by the two equity raisers, why weren’t salaries cut and employees let go and then two, after five years of EPA approval and municipal revenues, why should we have confidence that your plan is going to work? I’ve been with this stock long time as you know and we’re still doing coffee cards type revenues. So when do we start seeing something that you have confidence?
Andrew Buckland
I just have to say right off the bat, when the stock jumped up, I didn’t give one phone call suggesting this instance to everybody. Mike.
Chuck Lipson - CSL Associates
Has nothing to do with this stock, it has to do with revenues with predictions and promises made of cash flow positive and what have you, I would like to know, when we’re going to start seeing the fruits of this labor and not raise salaries and not hire employees and keep expenses under control?
Michael Krall
We’ve had many conversations you and I on this subject and it’s almost impossible to have you understand that in a regulatory environment, we’re not making floor wax. We’re not just making a formulation for a new shinier floor wax and bringing it to market the next day. The registrations involve for these products, the preparation and testing and development that goes into it is not measured in weeks or months, it’s measured in years.
I felt one thing it’s unfair to characterize five years of most of the time development and in the expectations of revenues, the very next year. Five years for the first disinfectant product and we have added to the pathogens that are addressed by that product continuously every year to make it the robust product that it is today. I don’t know how to answer you any better than that, because you dissatisfied with every answer that you’ve been given and than ours in this side.
Chuck Lipson - CSL Associates
No, I get judged by the stock price. I’m an investor. I have worked in the great bull market, last year you said, sales were weak because of the world’ economy, last quarter. We are in a bull market now. Brazil is a strongest country in the world practically and yet we’re not seeing sales. I think just contracted with Richmont. What is their obligation? Do you they have minimums, and what does this contract means?
Michael Krall
I think the reputation of the parties involved speak for themselves Chuck. They have increased the sales. They have built multibillion-dollar enterprises and they’ve done it with a sales and marketing genius like John Rochon. John Rochon has personally involved with this project. I can tell you, how involved he is with this. He believes in it passionately and they are hitting the ground running and I think we should give them some time to perform on this.
Aside from the hard surface disinfectant, that one little sliver of the technology, I really think you’re overshadowing the entire registration and development effort that is going on in all of these other sectors. We’re not just focused on one product, success or failure, that this will be a success, we all knew a this is a disruptive technology, we expected. Let me say it this way, we didn’t expect the companies just to rollover on this.
The better mousetrap, it just proved once again that it takes more than a better mousetrap. And we are working on it Chuck.
Andrew Buckland
Mike can I just add one thing, Chuck, in order for our company to be able to move forward really take advantage of this technology, we have to invest in developing the technology. We have to invest in regulatory approval. We have invest in putting in place a global world-class IT portfolio, developing new formulations protecting our trade secret. If we would have cut our 22 employees, we just wouldn’t be able to do it; we are working on a same crew 22 employees to build what is a world-class platform.
Those 22 employees has managed to get us to a place where we just obtained regulatory approval the lack of which no corporation with 3000 employees has been able to achieve in third year. So it’s almost impossible to develop this technology and get it to the place where it can be commercial on it with 10 people with cutting a significant proposition of that 22 members or so.
Chuck Lipson - CSL Associates
Well I bring another that was approval be when the revenues come, but the last thing and I’ll ask and get it somebody else. You said that during this calendar year 2009 we’d see revenues out of Richmont, now it was just stated on the call; you want to reaffirm that?
Michael Krall
Yes, obviously you won’t be able to see that specifically for the calendar year, because we like to report at quarterly earnings until January, but our expectation today is that we will achieve revenue out of our relationship with Richmont during this current calendar year, obviously they extend from the settlement process and you can’t get any specific guidance on it at this time.
Chuck Lipson - CSL Associates
So they will have products that they are marketing that’s on the shelves or as an ingredient to somebody else there will be revenues coming out of this agreement.
Michael Krall
They have products that they are selling in this calendar year.
Operator
Your next question comes from Keith Markey - Griffin Securities
Keith Markey - Griffin Securities
I had a couple of questions all pertaining to the marketing plan and I was wondering if you might provide a little bit of detail about the Richmont marketing strategy whether it’s going to be for instance what kind of media they might be using and if you could add give us a sense as to what the marketing budget is planned for this fiscal year?
Michael Krall
No.
Keith Markey - Griffin Securities
How about the strategy, I mean media is not just the comp
Michael Krall
Can I help you with something else?
Keith Markey - Griffin Securities
I think Mike, you can talk generally about the strategy and the investment in sales and marketing get in too specific? Unless you don’t want to.
Michael Krall
Well, I prefer not to disclose any other strategies at this time. They’ve worked long and hard on this and I think it would be improper for me to preamp their efforts and be the specific thereafter.
Keith Markey - Griffin Securities
This one pertains a little to what they are doing and a little bit to how you’re going to recognize it. You talked about recognition of revenues, which is to be straightforward, but what about the selling expenses? In the past, you’ve been reducing your selling expenses as your distributors were taking over that role and will we see the Richmont related expenses in that same line item on your income statement?
Andrew Buckland
Obviously, we haven’t yet had a financial period in which we’ve recognized revenue under this relationship. My expectation and we haven’t researched what the appropriate accounting yet and certainly haven’t discussed any of this with our independent auditors. My expectation would be that we would recognize a 100% of the revenue and we would have an expense based upon a proportion of those revenues that we would recognize as an operating cost.
Potentially it could be recognized as cost of goods sold. The accounting regulations are both complicated and ever moving. The impact on our bottom-line obviously is entirely determined where the piece is set on the different line items in the financial statements. We can have a little better visibility too when we’re really that kind of go and look in mandates the rooms. Even this week, there were new pronouncements we have to take into consideration regarding revenue recognition. But my current expectation is that well in record the 100% of the revenue they are our customers.
It’s our responsibility to fulfill those customers. They will be billing us. We will be collecting directly from those customers and that’s what we’re recognized by revenue and then record an expense, which will be the expense of having our marketing partner, Richmont provide that services. Even though mathematically, their remuneration is based upon a proportion of revenue that they achieve on our behalf.
Keith Markey - Griffin Securities
Is their budget tied into and of course let’s say, do have any direct control over how much they spend on marketing in anyway?
Michael Krall
Rickmont has 100% control of their sales and marketing efforts. Basically, if I could characterize our agreement with Richmont they eat what they kill. If they don’t sell any product, they don’t make any money and it’s as simple as that, and they’re betting on themselves and we’re betting on them as well. But this is a very good agreement for PURE with a world-class firm. I don’t know how we could get a better firm and I don’t know we could get a better deal for PURE.
Andrew Buckland
Just to go back just briefly about a question that was asked earlier. In terms of the structure of this deal, it certainly allows us to take a part of the distribution chain in which we would not have done before i.e., when we sell product to this thing distributors, they take a 100% of the margin over our selling price, obviously compared for the price that they sell to the end user in the marketplace. This does allow us to sharing those rewards with our marketing partner.
Operator
Your next question comes from Erwin Maizer - Oppenheimer & Co.
Erwin Maizer - Oppenheimer & Co
It was about two years ago, that we were disappointed in the cruise ship to pose a testing that never really took place, because somebody was running interference to prevent the PURE product from being tested. Then we found that about a year ago finally, it was being tested. Now you mentioned that, it sounded like this last week that it was tried on a ship. What’s the difference between those three testing periods?
Michael Krall
Well the first testing periods were static testing. That was basically determining if we feel the pain off the side of the ship with our disinfectant, it was tested on all the ships materials and fabrics, so woods and bright work, and painted coatings, and plastics, and laminates and various fabrics, carpets, and we passed all of that. This has been the first on-ship test and it didn’t happened last week. It happened sometime ago and now we’re waiting for the second test.
This has been the first onboard test, where we have actually been able to position our product against a Norovirus outbreak. It’s difficult to prove a product, aside from in vitro studies, in a real world application, if there’s no outbreak. It does test for us, as if they have a problem.
Erwin Maizer - Oppenheimer & Co
You said this is et cetera and et cetera and nobody cares about that. The success of the product has had in Kentucky Prison and a number of other facilities that has no bearing on the cruise ships?
Michael Krall
It’s a different product entirely. This was developed specifically, but I don’t have a clear answer as to why the industry is not embracing the product. I mean the numbers speak for themselves. It appears to be a very political environment, we’ve known that for quite sometime, but I can assure you that the project is ongoing with multiple channels and that any progress will be reported in future conference calls. We’re very eager to burst into this market and Richmont is also going to be moving forward with that product too.
Erwin Maizer - Oppenheimer & Co
Follow-up question, the cash position of the company is that we say meager to some extent and it seems to me you’re entering into an aggressive product placement situation that’s going to require substantial amount of money and we’re not in a very attractive credit market and outside of diluting the company’s stock, how we are going to be able to afford all this?
Michael Krall
That’s the beautiful part of the agreement with Richmont. They’re actually, that’s a cost that they incur. They are being paid a percentage of sales and a percentage of profits.
Erwin Maizer - Oppenheimer & Co
So, their out of pocket for leverage?
Michael Krall
Out of pockets of theirs.
Andrew Buckland
We made no upfront investments under that relationship, rather than potentially just a very small sum for regulatory works, but its income sequential in that brand statement things.
Operator
Your next question comes from [Tom Kay] - Private Investor.
Tom Kay - Private Investor
Mike, I’m just wondering, my understanding there’s some kind of a minimum that Ciba has to buy with this SDC product each year and is it coming up this next quarter where they have to do this now on purchase?
Michael Krall
We’ve never announced any of that information. I will tell you there are minimums and I just won’t comment beyond that. I believe Ciba is an honorable partner and I believe that they’ll honor their agreements.
Operator
Your next question comes from [Glory Acadie] - Private Investor.
Glory Acadie - Private Investor
A couple of people have already asked questions I had, because at the last conference call you had mentioned that Ciba would have to make a minimum purchase by the end of the calendar year, but you’ve covered that and the cruise lines someone asked, how long do you think it actually takes for a testing?
Michael Krall
Its one test at a time and a test is a week. It’s catching a cruise ship with a problem and is deploying our product to offset that problem to solve it.
Glory Acadie - Private Investor
And that’s cruise line be in the move to test to begin with, so?
Michael Krall
They’re very inclined to test the products, because they say that this is a huge problem in the industry, we believe that is. I mean, since conceivable that these cruise lines spend a fortune to get you to take a cruise. This is bad publicity for them, but like I say, we’re moving forward on multiple channels with a multiple cruise lines. We do have contacts now at the higher levels with the cruise lines and we expect they’re going to bear fruit. It’s simply taking longer than we expected.
Glory Acadie - Private Investor
Now for two more questions. Do we know what’s going on with the wet wipes and did they get there correct formulations for the wet wipe yet?
Michael Krall
Our scientists have recently taken a direct collaboration role with Rockline to jump start this start program. I’m optimistic that’s the solutions we found to the previous formulation, challenges will lead to regulatory submittal sometime during this fiscal year for and these are for the disinfecting wipes contained in the SDC as an active. We believe that the non-woven wipes market remains very large and ultimately lucrative opportunity for us.
We’re eager to move to this forward. We actually wish they would have opened the doors sooner, so that we could have help them, because the guidance that we provided them in the formulation work was provided almost immediately and it appears to be bearing fruit. I know they’re very excited about it. They’ve been out to our facilities recently and these are their key R&D people and they’re reinvigorated and they are back on the charge.
There were some other issues at Rockline that were Rockline issues that were affecting it. They’ve assured us that those have been removed now and that they’re moving forward on the project. I think the Rockline will be a good partner. There are several other companies that are pursuing us to be partners in this area. We’re keeping all possibilities open.
Glory Acadie - Private Investor
One more, as far as we were discussing on the message board earlier today about that herewith Richmont and whether or not Ciba has the only exclusive for personal care products, when I tell about the anhydrous and preservatives being something that Richmont would deal with?
Michael Krall
Ciba has an exclusive for personnel care and non-exclusive for a non-food non-water preservatives and household products. So initially, Richmont is going to operate in the non-food non-water preservative space and the household including institutional or industrial applications for disinfectants.
Glory Acadie - Private Investor
Where do the cosmetic stand is that something that Richmont can do or no?
Michael Krall
Our product is first being used as a preservative in cosmetics, that’s one of the highest and best use as cosmetics are not considered personal care products, as the preservative would apply.
Operator
Your next question comes from Gene Inger – The Inger Letter
Gene Inger – The Inger Letter
First of all gentlemen, in a strange way I feel relieved that you have, I think done the inverse of a lot of what I was not to please about when we met back in most recently in August and that is your Richmont deal, I think is potentially terrific and I wonder whether it is an outgrowth, a lot of my specific question is that we have been addressed did not necessarily answered, but with regard to this, is this and it sounds a result of having the stronger by the Colombian situation where now you want to be in control of seeking in the money and then paying out the percentages as opposed to the inverse?
Michael Krall
No, absolutely not. This is a matter of just taking our hands on approach, but more importantly finding the right partner that’s willing.
Gene Inger – The Inger Letter
It sounds, one of my primary concern was that, I thought as some of your smaller distributors have shown how you and even I agreed on that how positive to market a disruptive product against the name brands. There’s OxiClean or a couple of others their about the only one that have been successful.
I think you’d agree in that regard over the recent year and so what you basically done is that in a sense acquire a potentially enormous marketing organization to circumvent the business value you’re previously using or am I missing something their?
Michael Krall
No, I think you’re more right and wrong there. I don’t want to really understate what the small distributors were able to accomplish over the last couple of years. What they were really able to accomplish sort of revenues was to make this technology known throughout at disinfectant community.
Last weak, I was in Chicago as was our business development unit assisting some of the distributors there and their negotiations, but one of the important things that we did is, is really can was that entire presentation and this is the largest janitorial and sanitation chemical show in the United States, its an annual event.
There’s nobody, it does not know about our technology now. I mean it was truly amazing at a widespread it was. The other thing that smacked us in the face, there was not another new technology out there. There’s nothing new. We still remain the only new technology antimicrobial sense out on the floor and I attribute a lot of this to the small distributors throughout accounting the placement and putting their products in front of retailers and hospitals and schools and janitorial and sanitation companies.
Gene Inger – The Inger Letter
I understand that, but this the way of amplifying that in a magnetite that you could not do with in-house small staff?
Andrew Buckland
Absolutely, there’s no question.
Michael Krall
I think rather than circumventing issue here is that, this is incremental to anything we’ve done before and creates obviously even greater awareness of our technologies and we’re achieving just with our direct distributors. This is all incremental to what we’ve done before, but it’s very significantly incremental, because we have a partner who have the resources to really go out and market and sell this where some of our existing distributors may not have quite the same resources, but I think everybody benefits from this, because as a far grade of marketing spend and a creation of awareness for everybody of our technology. So I think it’s a big win for everybody.
Andrew Buckland
I think it’s a positive approach, I’m very pleased personally to hear of that, which brings up another question, as long as we’re talking about Richmont. First of all, they’re not making products, they’re distributing your product, obviously does is there any intention or obligation of John, how do you pronounce his name? Rochon?
Michael Krall
Rochon
Gene Inger – The Inger Letter
Rochon to have an equity position or the right to an equity position in PURE and do you believe that by taking this business model, you’ll be able to hopefully migrate through without further dilution as we move forward over the next year?
Michael Krall
Well time will tell on that, there’s been no arrangement with Rochon or Richmont for any special deals regarding equity. So his equity position would be his business at this point.
Gene Inger – The Inger Letter
Now, I think Andrew you may want to address this. You’ve cited not discussed, but you’ve mentioned in the past, if there were benchmarks or points for payments that Ciba have to make as time goes on. First of all, do you expect Ciba without disclosing I don’t expect you to do that what they are to meet their contractual commitments and would you differentiate those clearly all that this is supposed to by based on a calendar year not a fiscal year basis?
Andrew Buckland
I’m actually going to leave that question to Mike, mainly because Mike actually met with BASF yesterday, unfortunately, when you are about to file the 10-K, that’s little difficult to be in Switzerland, so Mike is alone.
Michael Krall
Let me answer it first by saying, what’s it risk for BASF? What they risk is, losing exclusivity in the personal care products. So they don’t lose the entire agreement. Now, as a company, I am conflicted on that is the amount they owe in minimums, worse them having exclusivity in these areas. Since they’ve come aboard, other companies have approached us requesting rights to sell in these areas. So, I’m answering you honestly, I’m conflicted with it.
I believe they’re an honorable company. Everything that I heard led me to believe that the minimums would be taken care of that that wouldn’t be an issue, but the honest answer is I’m not sure I’d be unhappy if they weren’t.
Gene Inger – The Inger Letter
Do you want to expand upon your sense of their enthusiasm or lack of same in moving forward with SDC overall?
Michael Krall
Well, I think without a doubt they were extremely enthusiastic. I met with the most senior executive in the transition. I spent several hours with him in his office. I went to Germany and met with the next group. There are three groups involved, I’ve spent three and a half hours with them, went to the next section, spent two and half hours with them and every place I went, the employees involved with this project could not be more motivated and more optimistic. They’re still is excited about this as the first few weeks that we got involved with them.
Gene Inger – The Inger Letter
Mike, it could be, I hope so. I get the feeling that after all over this time the 11 years to you, five years for some, I think three years for yours truly and our leadership to the onboard somewhat. I think the main concern has been timeframe, timeframe, timeframe. Whether if timeframe for hard surface, timeframe for institutional, timeframe for personal care, now timeframe for agricultural and food handling and so on.
So, just I would ask you, since that seems to be more organized and structured and I don’t want to, because I may have been, maybe it’s my fault that you would pushed and talking about positive cash flow a couple of years back, I certainly hope not, but I know you’ve been disappointed in that regard. So, can you give us a measure as to where we stand relative to your overall vision for this company?
Some people believe that it’s the lack of vision especially what the pandemic and everything that approaching, I personally don’t, because I don’t think there is anyway other than if you could get the major brand firms to come online quickly, that you are going to seize those markets, but could you just summarize where we are timeframe wise with these segments?
Michael Krall
I think a lot of it is too soon to tell, but I think it’s safe to say that we’re further forward now than we were last year. There is no doubt about it. In new projects, take the agriculture just for an example. Every one of these sectors we’re competing with these large companies resources for R&D time and their organizations. Budgets involved and resources like employees involved and we’re competing for these times are at this time.
Company like BASF has new companies everyday, so listening for R&D time. So what we’ve done is taken a more hands on approach in this and we learned this by simply waiting the weeks and months going back and forth are we up the yet? Are we in the queue yet that type of a response.
So we’ve taken a more hands on approach. We’ve gone out to the universities. We’re performing industry accepted protocols for these products. They’re certainly from an expense side there within our grasp, so that we’re going to these companies with data in hand. Now, it’s certainly not going to be the exact data that they would have after putting our product or products through their R&D process, but at least, I think it gives us more than the other competitors for their time and that really is, we’re just taken a more hands on approach to this.
Gene Inger – The Inger Letter
Could you touch on the science for a second? Your relationship with Cleveland Clinic and so on with one or two of your formally key people having departed and some other key people coming onboard, do you believe that thus further evaluation and development of product is essentially outsourced to Cleveland Clinic and so on and what have you?
Michael Krall
Well, the Cleveland Clinic is an equity partner in FTA Therapeutics. FTA Therapeutics is our partner now FTA is bring in really some top notch people I mean world renowned type people to their organization. As a matter of fact, I believe they’ll begin to disclose some of the names of these people here in the near future. We had a conversation with them as recently as today.
They just ask me not to put the information of the yet for a suppose negotiating or strategic reasons, but I was very impressed with the quality of the people that are coming aboard with FTA and these are in specific areas of the development bioflim experts, silver experts, wound care experts, experts in women health. They appear to be really getting their act together and moving toward quickly now they’re gaining momentum and momentum seems to be the name of the game now.
Andrew Buckland
I sounds and that’s I am not sure that many of your shareholders totally understand that because it seems to me based on your own hands about the number of products you made that previously as well that are in various stages of regulatory approval and my own belief that the hand sanitizer and so on was down the road like about now originally I thought and that the hard surface cleaning.
I know moments you probably wished you never heard originally, but that’s what I liked about the company, because I thought that was the long hanging fruit as a big market itself that would create a bills till these other things came along. If I wonder if you could comment about from whether those delays are the primary frustration and the ultimate product whether it’s mouth wash, whether it’s antifungal, whether it’s hand sanitizer are really not disappointing and may actually blossom and very much as you originally expected.
Michael Krall
Well, I think it’s safe to say everything is taken longer than we expected, there is no doubt that extended litigation we were involved through 2003, 2006 although it’s Asian history it still was an absolute disruption for three years.
Gene Inger - The Inger Letter
I know, but with their new shareholders coming in now new participants, new needs.
Andrew Buckland
So, going forward again I think we’re putting the technology in hands for these specific product applications with licensing agreements in place and good IP to support and unfortunately this doesn’t happen in weeks. [Multiple Speakers]
Gene Inger - The Inger Letter
That’s what we said in August and at the last quarterly you enumerated I believe the dozens of regulatory stages that were out there. So my question is, are we close to being on a cost of something were in calendar 2010, a whole bunch of products utilizations that may hit strike in different segments almost simultaneously.
Andrew Buckland
This is where I got into trouble before by trying to docks myself.
Gene Inger - The Inger Letter
You were tacking the docks before a lot of this went into regulatory, but now a lot of it’s in regulatory?
Michael Krall
When the products go into regulatory and these are products that other companies are developing, we have absolutely no visibility beyond that point. We can work with them aggressively on the product development, answer their questions, provide formulation guidance and so, we believe that they believe they have a suitable formulation in our product that put into regulatory. Once they go into regulatory and we’re talking primarily, I believe about the Ciba type products that are going through personal care and that application.
We have worked with dozens and dozens of Ciba companies within through Ciba and we believe to a fruitful conclusion on product development toward these products have moved into regulatory. Now, once they come out of regulatory, it’s still up to that company to determine a proper launch date. We know one large brand company here in the U.S. that has the first product already come out of regulatory and we still don’t have their launch date in mind.
Gene Inger - The Inger Letter
Are these products that would use this as a preservative, which is a maybe not lower margin profit that lower quantity of ingredient that goes into the product or they using active ingredient SDC or they using both?
Michael Krall
The once I’m speaking to right now are all active ingredients.
Gene Inger - The Inger Letter
So, you’re feeling is, if these companies want to make the move, they are sufficiently close to being out of, if not already out of regulatory that they could have a meaningful impact on the corporate revenues over the course of the next year?
Michael Krall
Again you’re connecting dots that get me into trouble. I can only answer to what I can answer. Final launch dates are up to the marketing and up to those companies and I just don’t have access for that information. I can take it up to regulatory and beyond regulatory, I see the products when you do.
Now, one thing that hopefully will give us a tip off on those is now we’re into the forecasting modules in many of the contracts. So, we’re beginning to get the early forecasting results that was one of the conversations we had with Ciba. We granted them a little leeway because of the transition. We’ve been assured now by the BASF executives that they will be prompt and we’ll receive our quarterly report.
So hopefully, we’ll be able to provide more guidance. Hopefully, their customers are providing them, the forecasting requirements. So it’s a trickle down for us and we act on the best information we have on a daily basis. I hope that answered your question.
Operator
Your final question comes from Mark Stafford - Stafford Capital.
Mark Stafford - Stafford Capital
I just want to make a comment that, I thought in today’s conference is very, very positive and it’s something that a lot of people I’m sure has like myself are very happy about. The other question is, in the 10-K there was something about taking back inventory from a customer about $12,000. It wasn’t a big amount was that related to the Columbians or was that related to a domestic distributor?
Andrew Buckland
Yes, that product we purchased was actually based in the United States, obviously I can’t be entirely specific, but it’s the length of product that we had sold, which was unutilized held in a warehouse and logistics facility whereby the customer did not pay the logistics company for both the shipping and the warehousing over a period of time.
This particular warehousing company obviously didn’t want to maintain that product in those facilities. So, we entered into an interesting situation, where normally what happens with these logistics companies, is that they could have lien on the assets and in a public lien sale they make these assets available and essentially market them to the highest bidder to sell them and recoup some of the cost that they’ve been unable to collect from their customer.
Obviously, this is an interesting situation. They contacted us. The problem once that the logistics company themselves under EPA regulations, when allowed to settle that product obviously it needs to be controlled. So we essentially even though they did conduct a public lien sale, we had entered into an agreement with them whereby, for the cost of what they were owed by the end customer, that we would acquire that product and take it back.
It’s kind of interesting in a sense for us from a purely accounting perspective we use the weighted average cost method for valuing our inventory and because we didn’t pay an extensive to get that product for a period of time, when we ship concentrate, we’re going to be shipping it at fairly low cost of good sold and therefore margins on the concentrate at least on the income statement, are going to look better than they otherwise at least for a period of time until that product has worked its way through our inventory.
Operator
I’ll now like to turn the call back over to management for closing remarks.
Michael Krall
I’d like to thank everyone for attending this call. Tonight I hope we provided some information to you that you’ll find useful and I’d like to sign off. It’s close to midnight here.
Operator
Thank you. It concludes the teleconference. You may disconnect your lines. Thank you for your participation.
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