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Executives

Peter C. Wulff - Chief Operating Officer and Chief Financial Officer

Henry R. Lambert - Chief Executive Officer and Director

Analysts

Aaron Vaughn

PURE Bioscience (OTCQB:PURE) Q1 2014 Earnings Call December 12, 2013 5:00 PM ET

Operator

Hello, and thank you for standing by. Welcome to the PURE Bioscience Q1 Conference Call. [Operator Instructions] And the conference is being recorded [Operator Instructions] At this time, I would like to turn the conference over to Peter Wulff, Chief Financial Officer and Chief Operating Officer. Please go ahead.

Peter C. Wulff

Thank you, operator, and good afternoon, everyone. Welcome to PURE Bioscience's conference call to discuss our fiscal first quarter 2014 financial and operating results and the progress report on our refocused business strategy. With me today on our conference call is Hank Lambert, our Chief Executive Officer.

By now, you should have seen a copy of today's press release announcing PURE Bioscience's fiscal first quarter 2014 financial and operating results. If you do not have a copy of today’s press release, you can find it in the Investor Relations section on our website at www.purebio.com.

Before we start, there are a couple of items we would like to cover. I'd like to remind you that this call is being webcast live and recorded. A replay of the event will be available later today on our website and will remain available for at least 30 days following this call.

We would also like to remind you that our discussion’s today include forward-looking statements. These statements are based on certain assumptions made by us based on historical trends, current conditions, expected future developments, including business prospects, product development objectives, future financial performance and other factors we believe to be appropriate in the circumstances.

Risks and uncertainties may cause our actual results to differ materially from those projected in these forward-looking statements. You can find a discussion of these factors and more information about us in our filings with the SEC, including the risk factor sections on our Annual Report on Form 10-K and our subsequent quarterly reports on Form 10-Q and periodic filings on Form 8-K.

These forward-looking statements are made as of the date of this call and we assume no obligation to update these statements publically even if new information becomes available in the future. This broadcast is covered by U.S. copyright laws and any use or rebroadcast of all or any portion of this conference call may only be done with our express written permission.

On today's call, I will provide an overview of our fiscal first quarter 2014 operating results and then hand the call over to Hank Lambert, PURE Bioscience's Chief Executive Officer, who will update you on the progress of our business strategy in providing food safety solutions in the food industry and then we will open up the call for questions.

To start off our call today, I'm pleased to share with you how we are strengthening our financial condition and generating the resources necessary to execute our refocused strategy and business plan. As we reported earlier today, we have made significant strides to stand up the business and strengthen our balance sheet. With respect to our balance sheet and financial position, the company reported that it has raised a total of $4.7 million through private equity placements from August 13, 2013, through December 12, 2013. As of October 31, 2013, the company reported a cash position of $1.1 million and on a pro forma basis, an adjusted cash position of $2.5 million, which is based on additional private equity placement proceeds of $1.4 million raised from October 31, 2013, through today.

The use of these private equity placements have been to fund the focused business plan as a food safety solutions provider less onetime payments related to the separation paid to the former management team, other reorganization expenses related to the corporate governance changes and reduction of liabilities. As reported, the net cash used in operating activities for the fiscal first quarter 2014 was $2.3 million, which included the use of these of approximately $1.2 million for these extraordinary payments related to the restructuring and reorganization changes mentioned above.

The balance of cash used of $1.1 million was used to fund our ongoing operations. Total adjusted liabilities reported as of October 31, 2013, was $2.3 million, a decrease of approximately $800,000 or 25% compared with the year end fiscal 2013 reported liabilities of $3.1 million. The adjusted liabilities excludes the accrued severance liability recorded due to the management leadership and corporate governance changes.

In terms of our results from operations, the company reported fiscal first quarter 2014 revenues of $115,000 comparable to revenues of $110,000 for the fiscal first quarter of 2013. The results of the revenues reported is based on our legacy business and does not reflect revenues from our new business strategy initiated over 100 days ago on August 13, 2013.

The fiscal first quarter 2014 net loss was $3.8 million compared with $2.2 million for fiscal first quarter 2013, an increase of $1.6 million. The company reported for fiscal first quarter 2014, a restructuring expense of $2.7 million related to the management leadership and corporate governance changes in August 2013.

On a pro forma basis, excluding these restructuring expense, the adjusted fiscal first quarter 2014 net loss was $1.1 million, a reduction of $1.1 million, or 50%, compared with the fiscal first quarter 2013 net loss of $2.2 million.

As previously discussed on our last conference call, a key element of our refocused business strategy is our intent to outsource manufacturing and supply-chain operations. This will enable us to focus all of our resources on customer market development, as well as the development of new products and applications, leveraging our unique SDC technology. And so doing, we will avoid the capital expense of building and maintaining production facilities for expanded capacity and we'll also access a more efficient supply chain for distribution of our products.

As announced earlier today, the company entered into a strategic collaboration agreement with Intercon Chemical Company and PURE, which allows us to implement this key element of our strategy.

Lastly, as mentioned on our last call, the process of restoring our financial condition will take several steps, and as reported today, we have made significant strides to stand the business up, as we implement our business plan and drive toward financial and operating stability.

Going forward, we will continue to strengthen our financial position by sustainable, profitable revenue generation through leveraging our focus go to market strategy, outsourcing, licensing or shedding non-core assets and operating activities, further reductions in liabilities and potential public and/or private securities offerings.

I will now turn it over to Hank for the progress update of the business strategy and Q&A. Thank you.

Henry R. Lambert

Thanks, Peter, and good afternoon. In our last call on October 24, we introduced you to the new PURE Bioscience with a new management team and Board of Directors and a new laser-focused food industry strategy. We are positioning our unique patented and proven silver dihydrogen citrate or SDC-based technology as a food safety solution to today's increasing food safety problems and regulations.

We are just over 100 days into executing our new strategy. So how are we doing? As context, in our last call, we told you that we are relentlessly focused on 3 core priorities: Number one, commercialization of our SDC-based products as a food safety solution with an initial focus on quick service restaurant chains and food processors; number two, optimization of our operations and supply chain and termination of non-core activities; and third, restoring a strong financial position and providing the resources to fund execution of our strategy.

Progress on all 3 fronts has been significant. In the area of strengthening our financial position and raising capital, Peter has just provided you with a progress report. Bottom line, we are in an increasingly solid position to fund execution of our strategy.

We have significant traction already toward commercializing and gaining adoption for PURE as a food safety solution. We have a pipeline of over 25 national food companies that are in various stages of evaluating and testing PURE in their operations. Roughly 1/3 are QSR chains and 2/3 are food processors. In each case, results of testing completed to date, have been extremely compelling, with PURE surpassing incumbent sanitizers by anywhere from 90% to 200% in terms of level and speed of pathogen kill. In addition, we are uniquely positioned with 24-hour residual kill.

And after testing, we've gained initial orders from our first food processor and are developing initial orders and rollout plans with 3 additional major processors and our first quick service restaurant chain.

Although these initial orders from the food processors are not significant for their revenue, they are extremely significant as validation that our new business model is working. Remember that we have only been at this for approximately 100 days. To give you some context for the selling cycle, the first order was for the first processing line of a 10-line-plant. The order was placed after testing PURE on that line. A second line in that plant has been successfully tested, and we expect to receive an order for that line shortly.

We also expect that during the first quarter of calendar 2014, we will receive orders for the rest of the lines in that processing facility, and would expect to roll out to other plants operated by that processor in due course. We expect the same process to take place with the 3 other processors mentioned above.

As for the status of our first QSR chain, after initial successful testing, we were asked to expand our testing on several additional specific pieces of equipment. These tests have also been successful. We expect to be getting opening orders from this chain in the first calendar quarter of 2014. Importantly, we are pursuing new applications for SDC technology in food. During the quarter, we retained a leading food safety scientist to guide the formulation, testing and regulatory submissions for SDC and direct food contact applications for use as a processing aid or intervention step. We expect to be in a position to commercialize this new application for SDC within the next 12 months in this $1 billion plus industry segment.

Lastly, we have retained a leading marketing and PR agency to assist in building awareness and visibility in our target markets and to related media outlets, positioning SDC as a food safety solution.

Important progress has also been made in optimizing our operations and supply chain. As Peter said and we announced earlier today, we have entered into a strategic collaboration agreement with Intercon Chemical Company. Intercom will license our patents and technology and be the exclusive manufacturer of all SDC-based products.

Intercon will also have distribution rights for SDC-based products into its core channels, which include hospitals and healthcare facilities and janitorial and sanitation distributors. This agreement allows PURE to focus on our core food business while outsourcing manufacturing and supply-chain management to an established business with a 30-year operating history, while at the same time, extending PURE's reach into non-core channels. We believe this will also result in lower product costs, increased capacity to support growth and preservation of capital.

As you can see, we've been extremely busy over the past 100 days, executing the new PURE plan that we have told you about. I look forward to reporting on continuing progress on our next quarterly call.

Thanks for your support of the new PURE, and I'd now like to open it up for your questions. And to do that, I'll turn it back to our operator, Sachi.

Question-and-Answer Session

Operator

[Operator Instructions] The first question is from Gene Singer [ph] of Blue Capital Securities.

Unknown Analyst

Great job on the progress of the turnaround so far. Can you, on a pro forma basis, talk about what margins will be going forward and what effect the expensive outsourcing will have?

Peter C. Wulff

Hi gene [ph], this is Peter. Good question. Our target margins for this business under this new arrangement is to be in the mid-40s to low 50s range, depending on our product mix. And was there a second half to your question, Gene [ph]?

Unknown Analyst

No, no, I think that answers it and good luck. I wish you guys all the best.

Operator

The next question is from Ken Nick [ph], a private investor.

Unknown Attendee

Gentleman, congratulations on more progress than the last 7 years combined. I hope it continues this fast, or even faster. My question, principally, is can you put any color of the potential value of -- any of the business that you have in the pipeline?

Henry R. Lambert

Ken, this is Hank. Great question. What we can do is -- basically what we have presented in previous investor presentations, we believe the value of the pipeline that we have right now could be anywhere from $20 million to $40 million. I know that's a broad range. It also assumes that we sign-up all of the accounts that are in the pipeline, which in reality and practice is not likely to happen, but we do think we have a good probability of getting a significant number of those prospects to convert to being customers. But the market that we are going after is roughly $1.5 billion to $2 billion, that would be the market for disinfectants, sanitizers and cleaners used in food service operations, as well as in food processors. And we believe we've got a very good opportunity to get some -- make good progress in gaining share in that market, given the competitive advantages of our product.

Operator

[Operator Instructions] The next question is from Aaron Vaughn of Mid-Continent Capital.

Aaron Vaughn

Two questions please. Any color on the size of additional capital and the timing related to that? And then also in terms of the FDA approval. Is that a 510(k) approval process or could you explain a little bit of background on that, too?

Peter C. Wulff

All right, those are good questions. Hank can handle the regulatory approval. This is Peter. We're not really providing guidance on capital as you can tell from the 10-Q. We do not have adequate capital today to fund the operations through the next 12 months. At this point, I won't be able to comment, though, as to what form or size of a capital raise will be necessary in order to have more than 12 months of capital available. On the other side of it, though, we do hope and plan for continued reduction in our operating burn as we increase the level of revenue to this company.

Aaron Vaughn

Any idea on the timing?

Peter C. Wulff

Timing of the revenue?

Aaron Vaughn

Of additional capital, when this may happen, is it 1Q next year event?

Peter C. Wulff

Yes, I can't comment on that. Thank you.

Henry R. Lambert

And Aaron, thank you for the question on the FDA approval process. As I mentioned, we think we have significant opportunity to develop a formulation of our SDC-based technology into a direct food application as a processing aid for produce, meats and poultry. We are currently working with a leading food safety scientist, who is helping us do the requisite testing that's required for a submission to the FDA and the USDA for approval for use as a direct food contact. The testing will probably take anywhere from 2 to 3 months to complete, and then we will prepare the submissions. And once we submit to the FDA and the USDA, which we are targeting to be in the February, March timeframe, then the ball is in their court and our experience has been that it can take anywhere from 4 to 6 months to get approval. So we're probably looking at 8 to 12 months kind of timeframe before we get approval from the FDA and the USDA for use as a processing aid or an intervention step direct food contact.

Peter C. Wulff

I would add to this, this is not a medical product and therefore, it's not under the CDRH where it will be under either a 510(k) type device or a PMA or something of that ilk, this falls under the food regulations under the FDA.

Aaron Vaughn

Okay. So the investments related to this approval process is not nearly as significant as a 510(k) would be for instance?

Peter C. Wulff

It's not as significant as a -- yes, depending on what kind of 510(k) you're talking about, but not as a 510(k) or as a Class III medical device, correct.

Operator

There are no more questions at this time. I'll hand the call back over to Hank Lambert for closing comments.

Henry R. Lambert

Again, thanks, Sachi, and thanks to all of you for attending this call and for your continuing support. As you can see by our progress, we are executing a focused strategy and it is working, and we firmly believe we have momentum and it will continue to build. So we look forward to continuing this open and transparent dialogue with you, our most critical constituency. Thanks very much and have a great afternoon.

Operator

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

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