PURE Bioscience Is Now National Thanks To Subway

| About: PURE Bioscience (PURE)

Summary

PURE Bioscience is now in 7100 Subway stores and growing.

The company has received FDA approvals that complete its product offerings.

Additional national accounts are aggressively being pursued.

I recently wrote an article about the challenges and missteps that Chipotle (NYSE:CMG) has experienced with the E. Coli problems. One of the positives resulting from the article was my discovery of PURE Biosciences (NASDAQ:PURE) via a comment on the article. Having spent some some time looking at the company, I find it too compelling to ignore. Interestingly, there has not been a single SA write-up about PURE or its prospects since 2014. That is about to change with this article.

So what does PURE do? In simple layman's terms, it makes products for Hard Surface disinfectant and Direct Food contact. These products are based on its silver dihydrogen citrate, or SDC, products technology.

Lets dive into the company's current and future prospects, including recent Food & Drug Administration (FDA) approvals that open huge new markets to the company.

Recent Company Updates

Key to its growth prospects are two FDA approvals that the company has received since the Q1 2016 earnings were released.

The first is the FDA approval for use of the company's SDC antimicrobal product as a poultry processing aid to reduce pathogens, including salmonella.

Second is the approval for use of its SDC antimicrobal product as a fresh produce processing aid to combat food-borne illnesses to reduce pathogens, including salmonella, E. Coli and Listeria.

Approval of these two products means the company has a complete line of seven products related to: 1) Hard Surface Disinfectant; and 2) Direct Food Contact.

In a Q1 2016 results earnings transcript, Hank Lambert, PURE's CEO, discussed the Q1 2016 results. It is evident from these transcripts that the company is aggressively targeting 100% penetration into Subway and also has an interest in enticing Chipotle as a customer:

"Moving on to the restaurant chain business segment, with SUBWAY, our first quick-service restaurant customer, we continued to expand our controlled national sales rollout program, where we are engaged with a market-by-market sales effort into the 100% franchisee-owned chain. We are currently selling to 17 regions representing reach into 7,100 stores, or a 25% SUBWAY penetration rate. We are expanding the potential applications of PURE Hard Surface in the SUBWAY chain as well. PURE Hard Surface was initially approved for use on five food contact surfaces. We recently gained approval for use of the product on SUBWAY's ice machines and SUBWAY is in the process of evaluating additional areas for use. Expanded use is expected to increase our revenues per store. With the validation by SUBWAY Restaurants as our marquee restaurant chain reference account, we continue to build business with other restaurant operations."

The real meat of the transcript, however, was Hank's emphasis on how PURE can help Chipotle with the current E. Coli outbreaks. Clearly, Hank is pursuing the company:

"Chipotle is just one of the most recent examples of how a food safety issue can rapidly escalate and damage a company and its brand. Indications are that the initial E. coli contamination at Chipotle can be traced to fresh produce supplied to their stores by local growers and processors. And then earlier this week, a new outbreak linked to a Chipotle store in Boston was traced to Norovirus, which sickened over 120 customers. In this case, the pathogen was likely transmitted from food contact surfaces inside the store, as well as potentially from sick employees transmitting the virus to the food itself. In response to both these outbreaks, Chipotle has undertaken a significant tightening of the food safety standards required of its suppliers. And at the store level, they have also greatly enhanced their food safety, cleaning and sanitizing practices as well as employee training. These issues are exactly where PURE and SDC can provide solutions superior to any on the market today."

The efforts position PURE well for future revenue growth that should accelerate the company's already fast-track revenue growth.

Current Results

Speaking of the company's growth, let's look at PURE's recent performance.

Per the company's SEC Q1 2016 report, Q1 2016 sales increase 59% to $186,000 from Q1 2015's $117,000. Thanks in large part to the Subway account, 67% of PURE's product sales were from its three largest accounts. While this may be disconcerting to some, given the relatively young age of the company and the limited sales force, it was expected. Signing up Subway has given the company credibility, and its ability to gain additional national accounts should not be overlooked. Net income was ($1.32 million) in Q1 2016 compared to ($1.37 million) in Q1 2015. The net loss excludes a non-cash charge of $1 million relating to fair valuation of warrants issued in October 2015. Given the rapid expansion the company is experiencing, it is a positive sign that the net loss is not growing at a parabolic rate. If costs can be controlled through this rapid expansion, it bodes well for future results.

PURE's balance sheet has also been shored up, thanks to financing activities in 2015.

Both accounts receivable and accounts payable balances are rock-solid, and despite the company's growth, both are decreasing. PURE is managing its balance sheet well. This is crucial for when the company's expected ramp-up of national chain accounts demands attention to both. Management has also acknowledged having enough cash to fund operations through early 2017.

Those of you who have followed me know that I always examine executive compensation to see if management's interests are aligned with those of shareholders. In the case of PURE, I am happy to share the following: Base compensation of the top three executives was $825,000. Given the rapid growth of the company, I view this compensation as very reasonable

Prospects

Given management's efforts to aggressively seek national accounts and their recent successes, future revenue growth of over 100% annually cannot be ruled out, and should likely be expected. As revenues grow, so too should the SG&A expense of hiring new sales and support staff. This should be offset by the increased efficiencies of scale that will be derived from increased product production and deployment. Considering PURE's strong balance sheet, it would not be unexpected to see reduced losses in 2016 giving way to breakeven results in the coming quarters, with small profits of 5-10 cents a share by the end of 2017.

Competition

A discussion of PURE needs to also address the competitive environment in which it operates. The competition is enormous in both the number of companies and their size. Just two companies that are also in the market for PURE's clients are Ecolab (NYSE:ECL) and Clorox (NYSE:CLX). Perhaps due to their extraordinary size, I think PURE has an distinct advantage. The ability of a company to deal directly with management and not just "another salesman" should allow PURE to quickly address any issues potential customers may have, especially in the face of a crisis that demands immediate attention.

Conclusion

So what should investors expect from PURE? It is evident that it has products that are needed by companies in the food service and preparation industries. Management's aggressive courting of Subway, Chipotle and other chains (as mentioned in the earnings call transcripts) exhibits a high confidence level in the future prospects of the company. Given the high revenue growth potential and strong balance sheet, once profitability is achieved, PURE should be rewarded with a high P/E ratio. For those willing to accept the risks associated with small and yet unproven companies, the stock is a compelling story for a 2-3 year investment that can outperform the major market indices.

Disclaimer: Small capitalization stocks such as PURE Bioscience are risky. There is not guarantee that your investment will be safe. There is also a great likelihood that you may lose some or all of your investment. Please do your own due diligence before investing in PURE Bioscience or any other investment. Information provided in this article is informational and should not be the sole guide to determine if investing in the company is appropriate for you. Also remember to only initiate trades that are within your pre-defined risk parameters.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.

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