PURE Bioscience's (PURE) CEO Hank Lambert on Q3 2016 Results - Earnings Call Transcript

| About: PURE Bioscience (PURE)

PURE Bioscience (NASDAQ:PURE)

Q3 2016 Earnings Conference Call

June 09, 2016, 04:30 PM ET

Executives

Terri MacInnis - Investor Relations, Bibicoff & MacInnis

Hank Lambert - Chief Executive Officer

Mark Elliott - Vice President of Finance, Chief Financial Officer and Chief Accounting Officer

Analysts

Stephanie Grant - Noble Financial Capital Markets

Eddie Grossman - Maxim Group LLC

Operator

Thank you for standing by. This is the conference operator. Welcome to the PURE Bioscience Q3 2016 Results Conference Call. As a reminder, all participants are in a listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. [Operator Instructions]

I would now like to turn the conference over to Ms. Terri MacInnis, VP of Investor Relations at Bibicoff & MacInnis. Please go ahead.

Terri MacInnis

Thank you, operator, and good afternoon, everyone. As VP of Investor Relations representing PURE, it’s my pleasure to welcome you to PURE Bioscience’s conference call to discuss 2016 fiscal Q3 and nine months financial and operating results and the progress report on the Company’s food safety business strategy. With me today on our call is Hank Lambert, Chief Executive Officer and Mark Elliott, VP Finance.

By now, you should have seen a copy of today’s press release announcing PURE’s 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 PURE’s website at www.purebio.com. I remind you that this call is being webcast live and recorded. A replay of the event will be available later today on PURE’s website and will remain available for at least 30 days following the call.

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

Risks and uncertainties may cause the Company’s actual results to differ materially from those projected in these forward-looking statements. You can find a discussion of these risks and uncertainties and more information about PURE in its filings with the SEC, including the Risk Factors section in the Company’s 2015 Annual Report on Form 10-K and 10-Qs and in periodic filings on Form 8-K.

As a result you are cautioned not to place undue reliance on forward-looking statements. These forward-looking statements are made as of the date of this call and PURE assumes no obligation to update these statements publicly even if new information becomes available in the future. This broadcast is covered by U.S. copyright laws and any use or rebroadcast of all or any portion of this conference call may only being done with the Company’s expressed written permission.

During our call, we will discuss some non-GAAP measures including adjusted net loss and adjusted total operating costs and expenses. We use these non-GAAP measures for internal evaluations and to report the results of the business. We believe that these measures provide useful information to management, our board of directors and investors about our operating activities and business trends related to our financial condition and results of operations.

These non-GAAP measures are intended to supplement GAAP financial information and should not be considered in isolation as a substitute for or superior to financial measures calculated in accordance with GAAP. The Company’s financial results calculated in accordance with GAAP and the reconciliation to those financial statements should be carefully evaluated.

For reconciliation of these non-GAAP measures to the most directly comparable GAAP measures please see today’s earnings release a copy of which is posted on PURE’s website.

On today’s call, Mark Elliott, VP, Finance will provide an overview of PURE’s fiscal Q3 and nine months 2016 operating results and then he will turn the call over to Hank Lambert, CEO who will update you on the progress of PURE’s business strategy to provide food safety solutions in the food industry. The operator will then open the call for your questions. Mark?

Mark Elliott

Thank you, Terri. As we reported earlier today in our fiscal third quarter 2016 operating results and as previously discussed on prior conference calls, we continue to focus on building our commercialization efforts for our patented SDC technology as a food safety solution while simultaneously managing our resources as effectively as possible.

Upon conclusion of our combined $8 million financing and the $1.27 million received from the exercise of warrants, we now have the funding in place to support our operations through calendar Q1 2017, accelerate advancement of the commercialization of SDC-based PURE Control as an FDA-approved direct food contact processing aid for fresh produce and an FDA and USDA approved processing aid for raw poultry, pursue regulatory approval for use of SDC as a direct food contact processing aid for raw meats and further accelerate the development of PURE Hard Surface as a food contact surface disinfectant for both the food processor and the restaurant chain markets.

I will now discuss our results from operations. Revenues from our core business, food safety, continued to gain traction increasing 372% in the third fiscal quarter of 2016 as compared with the third quarter in the prior year. Consolidated revenues for the third fiscal quarter of 2016 were $403,000, an increase from the third fiscal quarter of 2015 of $109,000.

Total operating costs and expenses, excluding cost of goods and share-based compensation, for the third fiscal quarter 2016 and 2015 were $1.6 million and $1.4 million respectively. The third fiscal quarter 2016 net income was $30,000 compared with a net loss of $2.1 million for our third fiscal quarter 2015. The adjusted net loss, excluding the $1.5 million of derivative income recognized due to the expiration of warrants and share-based comp was $1.7 million and $1.3 million respectively.

Food safety revenues for the nine months ended April 30, 2016 increased 223% as compared with food safety revenues in the same period in 2015. Consolidated revenues for the six-month period were $765,000, compared with revenues of $499,000 for the nine months ended April 30, 2015.

Total operating costs and expenses, excluding cost of goods sold and share-based compensation, were $4.5 million and $4.3 million respectively. The net loss for the nine months ended April 30, 2016, was $13.7 million or $0.25 per share compared with a net loss of $5.8 million or $0.15 per share for the nine months ended April 30, 2015.

The adjusted net loss, excluding derivative expense and share-based compensation, for the nine months ended April 30, 2016 was $4 million compared with prior year adjusted net loss of $4 million. We ended the third quarter with the cash position of $5.4 million, cash received from financing activities is $8.2 million offset by cash used in operating and investing activities of $4.1 million.

As of April 30, 2016, we had a net equity deficit of $2.9 million, the deficit is due to the non-cash derivative liability associated with the warrants issued in connection with the $8 million financing. During the April 2016 fiscal quarter, $6.3 million of derivative liability was returned to additional paid in capital due to the expiration in exercise of derivative warrants.

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

Hank Lambert

Thank you, Mark, and good afternoon, everyone. Really appreciate you joining us. Mark has just highlighted the revenue and margin improvements we achieved in our fiscal third quarter, and the fact that a growing percentage of our sales are food safety related. I am confident we are moving in the right direction and can achieve our goal of a $12 million to $15 million revenue run rate to reach cash flow breakeven within 18 to 24 months.

A key driver in our ability to reach that goal is PURE Control. In our fiscal second quarter, we received FDA approval for our two food contact notifications or submissions - or FCNs allowing use of our patented non-toxic SDC antimicrobial as a direct food contact processing aid on fresh produce and raw poultry.

In fiscal Q3, we made important progress in our initiatives to commercialize PURE Control, the brand name for our unique leading-edge SDC antimicrobial technology to be used as a direct food contact processing aid for those two new markets. The media coverage seems to be endless about the financial losses and loss to brand reputation as well as brand value impairment, which are being caused by Salmonella, E. coli, Listeria, and Norovirus in our food supply and in our restaurants. These pathogens have caused sickness, deaths, plant closings, and restaurant closings.

We believe that PURE’s total food safety solution with PURE Hard Surface for food contact surface and environmental disinfection and now PURE Control as a processing aid for fresh produce and raw poultry will have a major positive impact on these issues. Before I talk specifically about the status of PURE Control for both raw produce and fresh poultry processing, I will speak briefly to the use, benefits, and market opportunity for PURE Control.

PURE Control is applied directly on to the fresh produce or raw poultry during online processing, either as a spray or in a dip tank to eliminate pathogens. PURE Control is being positioned as a leading-edge food safety solution that in testing has demonstrated the potential to eliminate Salmonella to below detection levels during the processing of fresh poultry and to generate meaningful reductions in E. coli, Listeria, and Salmonella during the processing of raw produce thus addressing the leading causes of foodborne illness outbreaks.

With PURE Control, we are now actively pursuing a combined $650 million U.S. produce and poultry processing aids market, and we expect to capture a significant share and by significant I mean in excess of 10% within the next 3 to 5 years.

For produce and poultry, the key competitive advantages of SDC in the form of PURE Control as a processing aid include superior broad range efficacy and faster kill times, it’s non-toxic, odorless, colorless, tasteless, and non-corrosive to processing equipment making it both user and environment friendly. It mitigates bacterial resistance.

There are no organoleptic issues, no off-colors, off-odors, or impact on nutritional values, and on poultry there is no negative yield impact. Meaning that it does not reduce the weight of the bird during processing, which is highly significant versus many chemistries in use today.

Let’s look at fresh produce processing, our first market for PURE Control. PURE Control continues to be validated by leading produce processor during optimization testing in its pilot plant and thus far has performed well and in some tests even exceeding expectations. It is being used on a broad range of processed fresh vegetables and fruits that are most frequently associated with pathogen contamination.

PURE Control is being used as an added intervention step applied prior to a flu rinse containing commonly-used chlorine to significantly enhance existing pathogen kill rates. This customer is also conducting organoleptic and shelf-life testing and early results confirm that the application of PURE Control during the shredding of lettuce is not resulting in any deterioration, discoloration or off-odors after packaging an extended shelf-life.

We expect the expanded optimization testing in the operating facility to conclude in the present fiscal quarter Q4 ending in July. After which we can look forward to initial product orders with subsequent follow-on orders as the use of PURE Control is introduced system-wide.

This processor is an existing customer using PURE Hard Surface disinfectant and therefore already aware of and receiving the superior benefits of SDC applying it to disinfect plants and equipment surfaces as a replacement for less effective toxic legacy products. Different types of produce and different produce processors will each have their own proprietary processing systems and process flows.

Our ongoing work with individual produce processors will determine optimal application methodologies and amounts. Each processor is unique and we anticipate upfront validation and optimization testing will be required as we bring on each new customer.

According to the CDC produce is the leading source of foodborne illness in the U.S., with the dual benefits of proven superior efficacy and lower toxicity of PURE Control as compared with existing processing chemicals, we believe we can achieve relatively quick and meaningful market penetration among some of the largest fruit and vegetable processors.

Turning now to raw poultry processing. With FDA approval for our food contact notification in hand. We are now pursuing USDA approval as the final step in the regulatory approval process for poultry. To gain USDA approval we are required to conduct in-plant process validation and optimization trials with the authorization of the USDA.

During fiscal Q2 ended last January we developed protocols for the USDA trials and designed, built and installed application equipment. And in fiscal Q3 ended in April we received the USDA Permission Letter to begin the in-plant trials at a poultry processing plant. If it is determined that we will need to only complete one in-plant trial before being granted USDA approval, we project beginning sales and marketing of PURE Control to poultry processors as early as calendar Q3 this year.

Now like the produce processors, poultry processors each will have their own proprietary processing systems and process flows. We expect PURE Control will replace the current processing aid is being sprayed on to poultry carcasses and parts during online reprocessing and/or being applied in dip tanks in multiple potential points in the process. And each new poultry customer will want to conduct validation and optimization studies in their own environment before converting technologies.

In poultry processing we expect to replace currently used chemistry including highly toxic peracetic acid and Sonova. A compelling feature of PURE Control is that while these chemistries are being flooded on to the poultry, PURE Control only requires misting, resulting in potential productivity savings for the plant.

In addition testing is demonstrated that application of PURE Control has a neutral to positive impact on poultry yield during processing, which could result in a significant economic benefit for plant operations. As chemistries like peracetic acid have a negative impact on yield by cauterizing the fat and reducing the weight of the bird. There is a high level of interest and anticipation from poultry processors for our non-toxic intervention to dramatically reduce Salmonella.

The top priority for the USDA is their Salmonella action plan, which calls for a 50% reduction in the presence of Salmonella in raw chicken sold to consumers. The poultry processors know they have a Salmonella problem and now they are under increasing regulatory pressure and scrutiny. We believe PURE Control is the breakthrough solution the poultry industry needs.

In our PURE Control sales and marketing, we are actively targeting processors already using PURE Hard Surface for environmental plant and equipment sanitation and we have several of the largest produce and poultry processors using PURE Hard Surface plant wide today. We are also targeting industry thought leaders and those with known pathogen issues and many of those are coming to us now in addition to our – seeking them out.

For both produce and poultry until we begin to generate PURE Control revenues in calendar Q3 2016, it is premature for us to more specifically address the usage, pricing and/or sales estimates. We look forward to providing a more in-depth discussion on our next call.

Turning now to our initial antimicrobial food safety product, PURE Hard Surface disinfectant which is being sold to food processors and manufacturers and restaurant chains for food contact surface and environmental disinfection. PURE Hard Surface is applied on surfaces that come into contact with food, but not directly on the food itself.

It is also increasingly applied environmentally through misting to disinfect all plant surfaces and pathogen harborage points. A great value to both processors and restaurants is the fact that PURE Hard Surface does not require rinsing after application and can be left on surfaces to provide residual pathogen kill. These are significant competitive advantages for PURE Hard Surface.

Now as we heard from Mark, sales of PURE Hard Surface are gaining traction, validating our strategic food safety focus. We are expanding applications in existing customer operations, expanding use to additional plants and customer networks and bringing on new customers. Our sales and marketing focus continues to be centered on helping our customers supply safer food to their consumers while protecting their Company’s brand.

In our Food Manufacturers and Processors business segment for PURE Hard Surface, we employ both direct sales and technical support and continue to broaden our reach by partnering with the growing number of distributor partners.

During the quarter, we signed an agreement with a leading distributor and technical service provider on the West Coast and are in discussions with three additional distributor partners. We continue to generate adoption and reorders for PURE Hard Surface from a growing number of national food manufacturers and processors for pathogen and hygiene control points in their plants.

This list now includes more than 30 manufacturers or processors in segments ranging from bakery to pet food, to dairy and ready-to-eat foods as well as poultry and produce processors which become extremely relevant as we launch PURE Control.

Much of the growing demand for PURE Hard Surface for use in plant environments is due to our superior efficacy in eliminating Listeria. A recent example is the widespread Listeria outbreaks and product recalls traced back to IQF or Individually Quick Frozen fruits and vegetables used as ingredients in prepared salads and entrees by a number of leading retail brands. PURE is currently providing solutions to several of the leading IQF processors.

Moving on to the Restaurant Chain business segment, we are seeing success in leveraging the fact that SDC and PURE Hard Surface are uniquely effective in eliminating Norovirus from restaurant surfaces and with its residual effect acting as an ongoing preventive control for Norovirus contamination.

Norovirus is the largest pathogen risk that restaurants face and it is an increasingly highly visible issue for restaurant chains negatively impacting the health of their customers as well as their brand value. PURE Hard Surface is the only disinfectant proven effective against Norovirus.

We are beginning to be contacted by restaurant customers seeking a solution to Norovirus contamination. We’ve been adopted by two Casual Dining chains and two Quick Service Restaurant chains as a preventive control for addressing the risk of Norovirus as well as overall food contact surface disinfection.

With SUBWAY, our first Quick Service Restaurant customer, we continued to work to expand our national sales rollout program, where we are engaged in a market-by-market sales effort into the 100% franchisee-owned chain. Importantly, the validation of having SUBWAY Restaurants as our marquee restaurant chain reference account continues to be a key influence as we build business with other restaurant operations. We are in various stages of ongoing evaluation with four additional Casual Dining and QSR chains.

I am pleased to note that in fiscal Q3, we established a Scientific Advisory Board to deepen our resources, advance our corporate initiatives and leverage our SDC technologies to prevent foodborne illness. Dr. James Marsden, Emeritus Distinguished Professor of food safety and security at Kansas State University was named Chairman of our Advisory Board. Dr. Marsden has since been appointed Executive Director of Food Safety at Chipotle Mexican Grill. Given Dr. Marsden familiarity with the power of SDC, I am confident that PURE will play a role in providing leading-edge food safety solutions to Chipotle.

In summary of our fiscal third quarter, 48% of our revenues are now being generated from food safety. With PURE Control and FDA approvals for direct food contact, we are entering a large important higher margin market where we expect to comparatively quicker sales ramp. We believe that calendar 2016 is the year we build meaningful food safety-related revenue momentum with an unassailably superior and effective pathogen controlled technology.

At this time, I would like to turn our call over to [Anastasia], to begin the question-and-answer session.

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Thank you. Our first question is from Stephanie Grant of Noble Financial. Please go ahead.

Stephanie Grant

Hi, congratulations on the great quarter again. I have a question on the gross margin. Do you expect -- especially with amount of revenues coming from food safety, do you expect those margins to continue increasing?

Mark Elliott

Well, what we stated on prior calls is we’re aiming for a 40% margin on PURE Control product. With our EPA product, we maintained about a 70% margin over the last couple of years that had to do with product mix as it relates to configuration and size, the size of the container and the labor component involved.

Hank Lambert

Just to build on that, the 70% plus margins that we sold this past quarter, as Mark said had a lot to do with product mix. We sell our concentrate to Brenntag which is a chemical distribution company, which sells it in turn for use in personal care products in Europe. Our margins on that concentrate are significantly higher than they are on PURE Hard Surface or PURE Control, so that was the reason that the percentage of sales to Brenntag in our mix this quarter really drove that margin increase.

Stephanie Grant

Okay. Very helpful. With the poultry products, do you think what – how would you go about increasing [ph] margins on that?

Hank Lambert

For PURE Control?

Stephanie Grant

Yes.

Hank Lambert

PURE Control for both produce and poultry, we’re looking at margins in excess of 40%, certainly closer to 50% for PURE Control. We’re still in the process of optimizing our pricing model. We’re going through extensive testing as I indicated both with produce processors and poultry processors to determine the appropriate dilution, the percent of citric acid, and also the flow rates. So those will all go into determination of our pricing, but we’re targeting margins in the 50% range for PURE Control.

Stephanie Grant

Okay, great. And I also had a question on the pilot plant testing and optimization and where -- you kind of hit on that during the call you’re expecting hopefully in the third quarter, would that be finished?

Hank Lambert

Correct, third calendar quarter.

Mark Elliott

Calendar, yes.

Stephanie Grant

All right. Thank you so much guys.

Hank Lambert

Thank you.

Operator

The next question is from Eddie Grossman of the Maxim Group. Please go ahead.

Eddie Grossman

She actually asked my question, so [I am over]. Thank you.

Operator

The next question is from Gloria Gatti an Individual Investor. Please go ahead.

Unidentified Analyst

Hello, I have a couple questions Hank.

Hank Lambert

Sure.

Unidentified Analyst

On the chicken processing, what I thought this - it’s been over six weeks. So I guess I’m wondering why the delay in the trial and then how long after the trial is completed do we expect the USDA approval to be announced, I don’t know how long they look at that? And also how long does the optimization processing period take, because I was expecting I’ve already had PURE Control sales for produce. And also have another question, how many food processors whether it would be produce for chicken are actually paying for any PURE Control?

Hank Lambert

Okay. Thanks Gloria. To answer the second question first, we do not have any PURE Control revenues. At this point, there are none reflected in our third quarter results. The first PURE Control sales will go to produce processors and our expectation is that the testing that’s being done by the leading produce processor that we’re working with, we expect that to be done in the next month or so certainly before the end of our fiscal year at which time they would begin rolling use of PURE Control and installation of the application equipment into their plants. We would expect revenues therefore from PURE Control being sold to this leading produce processor to begin before the end of our fiscal year July 31.

On the poultry testing, we are – there is no specific regulatory timeframe or framework for USDA testing. We are in the process, as I mentioned of optimizing dilution in flow rates and application points and that has taken a little bit longer than we had anticipated, when we said four to six weeks for the trial that was probably an optimistic or aggressive target. We do expect to have the trials completed and USDA approval we are projecting in the third calendar quarter, so sometime this summer.

Operator

The next question is from [indiscernible], a Private Investor. Please go ahead.

Unidentified Analyst

Good afternoon Mr. Lambert. On your last conference call that you mentioned that PURE had a marketing effort targeting the big box retailers like Costco and Walmart and seeing whether that they could require their suppliers to use SDC if they wanted to remain on the approved supplier list. Can you update us on that please?

Hank Lambert

Yes. Great question. We continue to have those discussions. We have – in fact, we just made a presentation last week to the entire supply chain, a supplier conference for a major retail in this case restaurant chain, we made a presentation on PURE Hard Surface and PURE Control to their entire supply chain and that was with the backing and the sponsorship of the restaurant chain. So we continue to have those discussions. We don’t have a retailer yet who has specified to their suppliers that they have to use PURE or PURE Control, but those conversations are progressing.

End of Q&A

Operator

This concludes the time allocated for questions on today’s call. I would now like to turn the conference back over to Mr. Hank Lambert for closing remarks.

Hank Lambert

Thank you, Anastasia and thanks again to all of you for spending some time with us today. The foodborne illness problem is clear. As we say in our marketing materials, our nontoxic SDC solution is PURE genius delivering green antimicrobial technology to protect people and protect customers brands.

We are on the verge of two catalytic events. First with the commercialization of PURE Control into the fresh produce processing market, and second, in calendar Q3, we expect to have achieved all the regulatory approvals and introduce PURE Control into the raw poultry processing market.

All of this provides strong validation that our focus food safety strategy is working and gaining momentum. Together these two new large growing and higher margin business segments are expected to usher in a new era for PURE. We look forward to sharing our progress and important milestones with you in the coming quarters. Thank you and have a great rest of your day.

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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