PURE Bioscience (NASDAQ:PURE) Q2 2017 Earnings Conference Call March 2, 2017 4:30 PM ET
Terri MacInnis - Investor Relations, Bibicoff & MacInnis
Hank Lambert - Chief Executive Officer
Mark Elliott - Vice President of Finance, Chief Financial Officer and Chief Accounting Officer
Thank you for standing by. This is the conference operator. And welcome to the PURE Bioscience Second Quarter 2017 Results Conference Call. As a reminder, all participants are in 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 Terri MacInnis, Vice President Investor Relations at Bibicoff & MacInnis. Please go ahead.
Thank you, operator and good afternoon everyone. As VP of Investor Relations representing PURE Bioscience, it’s my pleasure to welcome you to the Company’s conference call to discuss fiscal Q2 and financial and operating results and the progress report on PURE’s food safety business strategy. On our call today is Hank Lambert, Chief Executive Officer and Mark Elliott, VP Finance.
A copy of today’s press release announcing the results is available on PURE’s Web site at www.purebio.com in the Investor Relations section. This call is being webcast live and recorded. A replay of the event will be posted later today on the Company’s Web site and will remain available for at least 60 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 shares 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 and its filings with the SEC, including the Risk Factors section in the Company’s 2016 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.
I will now turn the call over to Mark Elliott, VP Finance. Mark?
Thank you, Terri. As we reported earlier today in our second fiscal quarter 2017 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.
We currently have the funding in place to support our operations for calendar Q3 2017, accelerate advancement of the commercialization of SDC based peer control as an FDA approved direct food contact processing aid for fresh produce and an FDA and USDA approved -- direct food contact processing aid for raw poultry and pre-online reprocessing, online reprocessing and post chill processing. Pursue regulatory approval for a use of SDC as a direct food contact processing aid for raw meat and further accelerate the development of PURE Hard Surface as a food contact surface disinfectant for both the food processors and restaurant chain markets.
I will now discuss our fiscal Q2 operating results. Net product sales for the second fiscal quarter ended January 31, 2017 were $447,000 an increase of 154% compared with net product sales of $176,000 for the second quarter ended January 31, 2016. Food safety revenues of $157,000 increased 149% as compared with food safety revenues during the second quarter ended 2016. Total operating cost and expense, excluding cost of goods sold and share based compensation for the second quarter ending 2017 and 2016, were $1.5 million and $1.6 million respectively. The second quarter net loss, excluding share based compensation and non-cash derivative income and expense, was $1.2 million compared with $1.5 million for the fiscal second quarter in 2016.
Net product sales for the six months ended January 31, 2017 were $978,000, an increase of 170% compared with net product sales of $362,000 for the six months ended January 31, 2016. Core food safety revenues of $655,000 increased 463% as compared with food safety revenues during the six months ended 2016. Total operating costs and expense, excluding cost of goods and share based comp for the six months ended January 31, 2017 and 2016, were $3.1 million and $2.9 million respectively.
The six months net loss, excluding share based comp and non cash derivative income and expense, was $2.5 million compared with $2.7 million for the six months ended January 31, 2016. We ended the second quarter with a cash position of $3.9 million. Cash used in operating and investing activities was $2.4 million, offset by cash received from financing activities of $1.1 million.
This concludes my financial review. Now, I'll turn the call over to Hank for a progress update for our business strategy. Hank?
Thanks, Mark, and good afternoon everyone. We really appreciate you joining us. Our recently reported improving financials are a result of the growing momentum and market adoption of our power patented non-toxic SDC antimicrobial technology as a food safety solution. Sales of PURE Hard Surface disinfectant, our first food safety solution to be commercialized, are currently at $2 million plus annualized revenue run rate. We’re building meaningful traction behind sales of our disinfectant and its superior ability to eliminate Norovirus and Listeria, in particular, the two leading causes of Foodborne Illness outbreaks.
We expect to do the same with our second product, PURE Control, and I am very pleased to inform you that today we received our first purchase order for PURE Control from a leading produce processor. FDA approved PURE Control is applied directly on to produce and on to poultry to eliminate pathogens causing foodborne illness, including Salmonella, E. coli, Listeria, and Campylobacter.
Together, we anticipate that these two SDC based product sales streams will enable us to achieve our revenue goal of $12 million to $15 million annualized revenue run rate to reach cash flow breakeven within 12 to 18 months. We’re now commercializing FDA approved pure control to fresh produce processors as FDA approval was the only regulatory hurdle needed for that use.
After successfully completing extensive efficacy organoleptic and shelf life testing over the past 18 months, a leading produce processor has recently installed a PURE Control application on its first line in one of its many operating plans, as an added interventions step. And we received our first purchase order today. Going forward, the plan is for a phased rollout of PURE Control to the processors network of 12 plants nationally over the next 12 to 18 months.
Their order marks our first modest sale into a new $300 million plus U.S. processing aids market for produce. Our goal is to capture 10% plus share of that market. When this produce processor began testing and optimizing the use of PURE Control in its pilot plan, it starts to achieve a one log reduction in pathogens. It's testing consistently exceeded expectations, indicating pathogen reductions in excess of three logs or a 99.99% pathogen elimination. We are currently in various stages of testing with three additional produce processors and are seeing similar positive results.
For raw poultry, use of PURE Control also requires USDA approval, in addition to our already received FDA approval. We have already been granted USDA approval for two of the three uses that we seek during poultry processing, three online reprocessing and post immersion chiller, either as a spray or in a dip tank. We are continuing our in-plant trial work to obtain regulatory approval for use of PURE Control in poultry online reprocessing or OLR. And we are on track to achieve those approvals by the end of calendar Q2.
In February, we received FDA authorization to conduct these in plant trials at higher concentrations of SDC based PURE Control. Pending receipt of USDA authorization we expect to initiate those trials later this month and complete them in the second calendar quarter. Upon receiving the final USDA approval for OLR use, we are then poised to immediately initiate sales into the fresh poultry processing market. Our reasonable sales goal is to capture a 10% plus share of the $350 million U.S. poultry processing aids market.
Poultry processors are indicating a high level of interest for our non-toxic intervention to dramatically reduce Salmonella. Those processors know they have a Salmonella problem, and they are under increasing regulatory pressure and scrutiny. Just this week, the USDA’s food safety and inspection service, known as FSIS, reported on the rate of poultry processors’ effectiveness in controlling Salmonella and Campylobacter. A very disturbing 40% of processors exceeded the USDA’s maximum allowable percent positive of those pathogens during the past three months.
We know of no other equally effective non-toxic solution and believe PURE Control is the breakthrough solutions that poultry industry needs. With positive test results and final regulatory approvals in hand, we expect the sales cycle for poultry processors to be faster than what we have experienced in produce for several reasons. First, PURE Control will be replacing currently used interventions. It will not be an incremental step and costs as it is for produce processors. Second, PURE Control has proven superior in eliminating Salmonella and Campylobacter to currently used chemistries.
As evidenced by the FSIS data just sighted, interventions in use today are not getting the job done, and enabling processors to meet the new government standards. And they are under growing scrutiny and pressure to meet them. Third, SDC is distinguished by the fact that it is non-toxic. Currently used chemistries, most notably peracetic acid or PAA or highly toxic irritants to users, negatively impact the environment and are corrosive to equipment. Additionally, where current toxic interventions can have a negative impact on yields, PURE Control has shown a neutral to positive processing yield impact.
Finally, with PURE Control, we can offer economic benefits and potentially significant savings; less chemistry can be used while delivering superior efficacy; minimizing or eliminating yield loss drive significant savings; and doing non-corrosive and user and environment friendly drives productivity and equipment replacement savings. Bottom line, we have a very compelling sales advantage.
In addition, many of the produce and poultry processors who are using PURE Control are existing customers using PURE Hard Surface disinfectant. And therefore, are already aware and receiving the superior benefits of SDC. They are currently applying PURE Hard Surface for environment and equipment surface disinfection as a replacement for less effective and toxic legacy products.
Our optimism and confidence is fueled by the fact that PURE Hard Surface disinfectant is gaining traction with sales 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.
Of important value to both processors and restaurants is the fact that PURE Hard Surface is highly effective against both Norovirus and Listeria contamination, the leading causes of food borne illness outbreaks. Another benefit is that it does not require rinsing after application, and can be left on surfaces to provide residual pathogen kill. This feature eliminates the rinse process and represents productivity savings, uniquely effective SDC also mitigates bacterial resistance, which is a problematic issue with other commonly used chemistries. Increasing adoption of PURE Hard Surface continues to be a result of expanding existing customer applications, expanding use to additional plants in customers’ networks, and on-boarding new customers.
Our sales and marketing focus continues to be on SDCs ability to help our customers supply safer food to their consumers, while protecting their Company's brand. New business opportunities continue to materialize since we announced last September that we are now supplying PURE Hard Surface as a food safety solution to the entire Chipotle Mexican Grill’s chain of more than 2,200 stores nationwide. PURE Hard Surface disinfectant is now being used by five casual dining and quick service restaurant chains, including Chipotle and Subway, our first QSR customer. And we are actively pursuing interest from new restaurant chains.
A large national casual dining chain is set to begin testing next week. Three other casual dining or QSR chains are in various stages of ongoing evaluation. And also, a number of our restaurant chain customers have begun directing their own product suppliers to begin testing SDC and bring us in to ensure the safety of their respective supply chains.
In addition, we currently supply PURE Hard Surface to more than 50 national food manufacturers and processors in a wide variety of industries for environmental disinfection and protection. Our goal is to double that number in calendar 2017, and we are adding one to two new customers to this list every week. Recent additions include leading cheese and dairy processors, tortilla manufacturers and bakeries. And, this list also includes poultry and produce processors, which become extremely relevant as we are launching PURE Control.
In the last quarter, we developed a new solution using PURE Hard Surface for the sanitization of food transport trucks, and this will enable compliance with new Food Safety Modernization Act rules that have been recently handed down. Part of the solution is a unique spray mist unit that when placed in the trailer can completely-mist all surfaces and refrigeration units with a disinfection level kill in less than a quarter of the time that it currently takes to sanitize the trailer.
We’re currently in testing with one of the largest food transportation companies. This is a potential new PURE Hard Surface revenue stream that we are very excited about, and we look forward to bringing new progress updates in more details moving forward.
As part of our ongoing efforts to increase industry awareness about our highly effective non-toxic food safety solution, PURE attend select industry conferences. Last month, PURE exhibited at IPPE, the International Production and Processing Expo which is the world's largest annual poultry and meat production and processing expo. A wide range of international decision makers attend this event to network and become informed on the latest technological development and issues facing the industry. We saw very good traffic at our booth and a very high level of interest in our pure control solution, especially due to its low taxes and e-profile relative to current widely used innervations like peracetic acid.
With that overview of the quarter, I would now like to turn our call over to our operator to begin the question-and-answer session. Joe?
Thank you [Operator Instructions]. Your first question today is from [indiscernible] [18.47] [Matthew Crash] with ING. Please go ahead.
It sounds like good news for the quarter, congratulations. I had a question regarding the FDA, the new approval for interim safety for termination authorization to test the higher concentrations of PURE Control for poultry. If the current concentration reduces Salmonella to non- detection levels, why test the higher concentration?
Actually, what we found while we do laboratory environments and in simulated operating conditions, we do eliminate Salmonella to below detection levels at 30 parts per million. We determined when we initiated our planned trials that in various plant processing conditions and environments and water sources, we needed a higher concentration of that PC in order to achieve the same results that we were seeing in a lab. It’s very rare when results that you see in a lab translate directly to results that you get in an operating environment, because of the variation in everything from temperature to water source to length of dwell time of the chemistry on the poultry parts and carcuses.
So we determined that we needed a higher concentration of SDC in order to achieve the results that we know we can achieve. We did some offline testing at higher concentrations and we were able to achieve those same non-detectable Salmonella results. So, we went back to the FDA for an exemption to go up to a higher concentration of SDC for future plan trials and that was the approval that was granted last month by the FDA.
There are no more other questions. I'll now turn the conference back over to Hank Lambert for any closing remarks.
Thanks, Joe. Well, I am greatly encouraged by the fact that for the first time in three years that I’ve been with PURE, new customers are now approaching us and contacting us to learn more about our solution and the impact that SDC can have on their food safety programs. Awareness and validation of our powerful SDC technology as a food safety solution is gaining momentum, as evidenced by today's first order for PURE Control. Certainly look forward to speaking with you again when we report our fiscal third quarter results. With two product revenues streams fueling our momentum, we look forward to not too distant day when we deliver the success that we’ve all been anticipating. Thanks again for joining us on today’s call. And have a great rest of your day.
This concludes today’s conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.
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