PURE Bioscience (OTC:PURE) Q2 2019 Earnings Conference Call March 6, 2019 4:30 PM ET
Terri MacInnis - Vice President, Investor Relations
Henry Lambert - CEO
Mark Elliott - VP of Finance
Conference Call Participants
Gloria Gaddy - Private Investor
Welcome to the PURE Bioscience Fiscal Q2 2019 Results Conference Call. [Operator Instructions]
I would now like to turn the conference over to Terri MacInnis, Vice President of Investor Relations at Bibicoff and MacInnis, Inc. Please go ahead.
Thank you, Shanay, and good afternoon, everyone. It's my pleasure to welcome you to the company's conference call to discuss fiscal 2019 Q2 and six month financial and operating results and an update on PURE's food safety business strategy. On our call today is Hank Lambert, Chief Executive Officer; and Mark Elliott, VP, Finance.
This afternoon, PURE issued a financial results news release and filed its fiscal Q2 report on Form 10-Q, copies of which are available on the SEC's website and the Investor Relations page of PURE's website, purebio.com. This call is being webcast live and recorded. A replay of the event will be posted later today in the company's website and will remain available for at least 60 days following the call.
Our discussions today include forward-looking statements. These statements include 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 Factor section in the company's 2018 annual report on Form 10-K, in 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 be done with the company's expressed written permission.
On this call, we will refer to non-GAAP measures such as adjusted net loss that when used in combination with GAAP results, provides us with additional analytical tools to understand our operations. We have provided reconciliations to the most directly comparable GAAP financial measures in the press release.
I'll now turn the call over to Mark Elliott, Vice President of Finance. Mark?
Thank you, Terri. As we reported earlier today in our Q2 fiscal 2019 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.
Along with our current revenue projections and upon the conclusion of our February 2019, $840,000 financing, we now have estimated funding in place to support our operations into our fourth fiscal quarter 2019 accelerate the commercialization of SDC-based pure control as an FDA-approved direct food contact processing aid for fresh produce, accelerate the commercialization of pure hard surface for the sanitization of food transport trucks and pallets and further accelerate the development of pure hard surface as a food contact surface disinfectant for both the food processor and restaurant chain markets.
I'll now discuss our Q2 and year-to-date fiscal 2019 operating results. Net product sales for the second fiscal quarter ended January 31, 2019 were $394,000, a decrease of 4% compared with net product sales of $411,000 for the second fiscal quarter ended January 31, 2018. The decrease was entirely due to fluctuations within our existing legacy customer base.
Revenues from our core business; food safety continued to gain traction increasing 52% quarter-over-quarter. Total operating costs and expenses excluding cost of goods sold and share-based compensation for the second fiscal quarter ended January 31, 2019 and 2018 were $1.1 million and $1.5 million respectively. Net loss excluding share-based compensation for the second fiscal quarter in 2019 was $839,000 as compared with net loss of $1.3 million for the second quarter in 2018.
Net product sales for the six months ended January 31, 2019 were $984,000 an increase of 12% compared with net product sales of $875,000 for the six months ended January 31, 2018. Core food safety revenues increased 68% as compared to food safety revenues during the six months ended 2018. Total operating costs and expenses excluding cost of goods sold and share-based compensation for the six months ended January 31, 2019 and 2018 were $2.3 million and $3.1 million respectively.
Net loss excluding derivative income, inducement expense and share-based compensation for the six months ended January 31, 2019 was $1.7 million as compared $2.6 million for the six-month period in 2018. We ended the quarter with a cash and restricted cash position of $410,000. Cash received from financing activities during the six months ended January 31, 2019 was $993,000 offset by cash used in operating and investing activities of $1.5 million.
Our Board of Directors continues to actively evaluate our future financing needs and assesses the various types and opportunities available to us to meet those needs and to allow us to achieve our cash flow revenue breakeven target around mid calendar Q2 2019. No future financing determinations have been made at this time regarding size, type or timing.
This concludes my financial review, I will now turn the call over to Hank for a progress update of our business strategy. Hank?
Thanks Mark and good afternoon, everyone. We certainly appreciate you joining us for today's discussion. As Mark mentioned for the third consecutive quarter, our core food safety revenues showed strong growth, 52% for the quarter and 68% for the six-month period. We anticipate the next quarter fiscal Q3 comparable results will also show strong growth continuing the validation of the game-changing nature of our non-toxic SDC-based antimicrobial food safety solutions.
Important to note is that our Q2 revenues did not yet include anticipated revenues from Taylor Farms expanded use of PURE Control. You may recall that Taylor Farms' initial forecast anticipated four additional processing plants online by the end of March. While the unfortunate November, December romaine lettuce contamination and recall served to enhance the visibility of and interest in our food safety solution in the produce industry, it caused a significant delay in Taylor's plant expansion plans as that segment of Taylor's business ground to a virtual halt. The processing lines were shut down and romaine fields were plowed under and replanted.
For this reason our fiscal Q2 results did not include the plant expansion revenues as expected. Based upon overall revenue and the anticipated rollout plans of our lead produce processor customer, we remain optimistic that we will achieve our goal of cash flow breakeven revenue run rate around mid calendar 2019. Today $6 million in annual revenue run rate is our breakeven target.
As long as our customer's adoption plans materialize as they project will reach our target. Our cash flow breakeven timing forecast continues to be based on our present expectations of customer adoption and rollout of our two product lines; FDA approved PURE Control applied directly on to produce during processing and EPA approved PURE Hard Surface disinfectant applied by food processors and manufacturers in food transportation and by restaurant chains to surfaces and equipment that come into contact with food.
Looking first at produce processing, our key revenue driver, as we discussed Taylor Farms, the largest U.S. produce processor and our first customer for PURE Control is continuing its rollout and use of PURE Control into its 14 plant network. As announced this morning, Taylor has combining PURE Control with it's own SmartWash processing aid and now the newly named SmartWash Boost is being actively marketed to their food service and retail customers and is in use at three Taylor plants today.
As Jim Brennan, President of SmartWash said the introduction SmartWash Boost is quote, "the most advanced risk management approach for prepared salads" end quote. Boost is truly a game changing food safety innovation. Boost enhances food safety by eliminating pathogens causing foodborne illness, including leading causes salmonella, E. coli and Listeria. Once fully deployed we estimate that each of Taylor's plants represents up to a $1 million per year in revenue or up to a $14 million annual revenue opportunity for PURE.
Taylor's goal continues to be to have the SmartWash boost application operational in all 14 of its plants within 12 to 18 months. Our latest update from Taylor is that they are continuing work to bring four new plants online. They’ve ordered equipment needed to begin their installation process and work has been initiated at the first of the four plants. As Taylor's customer adoption grows, it will bring additional plants online in 2019. They are in the midst of testing treated lettuce for household named Fast Casual Restaurant chain and the anticipated chain-wide adoption once the work is completed.
Currently Taylor treats shredded romaine and iceberg lettuce with Boost for the customers who request this added processing step. Subway has recently agreed to become a Boost customer for its shredded lettuce and implementation plans are in process. Taylor tells us that several other leading restaurant chains and retailers are close to approval.
Beyond use on leafy greens, Taylor continues to test SmartWash Boost on additional produce items such as cabbage, onions, broccoli and strawberries, with positive results and this success is expected to drive incremental usage in 2019 and beyond. Looking toward expansion of PURE Control with other produce processors, today we have 10 additional processors conducting or evaluating their own in-house validation and optimization testing, which is industry SOP before placing a first order as compared with eight processes last quarter.
We expect that as Taylor being to publicize SmartWash Boost, the rest of the industry will move more quickly and that has already begun with this morning's press release announcing the partnership between PURE and Taylor's SmartWash. We've made important progress with several of these larger new processors. Del Monte has completed testing PURE Control on strawberries and we've been approved for that use. We anticipate their first order in calendar Q2 for application in the first of its 20 strawberry processing plants.
Del Monte has also successfully completed testing on tomatoes and is completing plans for a late calendar Q2 installation for that use. For both strawberries and tomatoes, PURE Control will replace currently used chemistries. It will not be an added intervention step as is in the case for lettuce and leafy greens treated by Taylor. Del Monte represents a 20 plant opportunity for both strawberries and tomatoes.
Beyond its use of PURE Control, Del Monte is also a customer for PURE Hard Surface for environmental disinfection. It has recently begun expanded use of PURE Hard Surface disinfectant in its 33 banana ripening rooms. This represents a sizeable new opportunity for PURE as all processors have ripening rooms. Taylor Farms is clearly committed to the expanding use of SDC also. You may recall that they have also been using PURE Hard Surface extensively for successful environmental disinfection inside their processing plants and they are aggressively moving forward.
Taylor last week completed installation of permanently installed pushbutton application equipment into its entire New Jersey facility. It will be used for a daily four-minute missed application of PURE Hard Surface in all 10 production rooms. Taylor has already committed to starting installation in their Marilyn plant and we have a meeting tomorrow with their QA and engineers that plan the rollout for that application to the rest of their plant network.
Last quarter we told you about Taylor testing a new application for PURE Hard Surface disinfectant used to disinfect the collection bins, which transport vegetables from the field into their processing plants. I am pleased to report that Taylor has recently completed the test we talked about last quarter and is installing the application in its first plant in Yuma, Arizona.
Turning now to another use for PURE Hard Surface, food transportation sanitization. Our faith, cost-effective and superior pure hard surface disinfectant solution addresses an estimated $50 million total market opportunity. Our first transportation customers, which include the largest North American food distributor, represent a $2 million to $3 million annual revenue opportunity for us when fully deployed, which we estimate to be completed within 12 months.
Our targeted prospect list consists of 200,000 plus refrigerated and non-refrigerated food transport trucks in the U.S. Our sales and business development teams successfully highlight our reference account as a door opener for those efforts. We sell directly into each operating company at our reference account customer and we perform the training and installation at each company individually.
We've shipped product and equipment to 23 of those operating companies and we continue making inroads into three super distribution centers, which deploy three times the number of trucks as the average center and we continue to expect that we'll reach our 2019 calendar yearend goal of being in a large majority of their 90 operating company systems.
Last quarter we told you, we were in advanced discussions with another one of the five largest food service distributors in the country with 1600 trucks, 27 distribution centers and seven processing plants, which serve restaurant, school, venues and institutions. I can report that following a meeting with Corbett last week, we've been given the go-ahead for a systemwide rollout and it is the top priority of their food safety and QA teams this year.
At this company, corporate control all distribution centers and we look forward to their calendar Q2 orders for disinfection on trucks, environmental and surface disinfection inside distribution centers and meet processing plants. Word of mouth drives interests and we're actively presenting our solution to more than a half-dozen other food transport companies.
I'll spend just a minute to remind you about the truly compelling time and money saving advantages of using pure hard surface to disinfect refrigerated and nonrefrigerated trucks. Our solution is mist spray applied as a non-toxic disinfection treatment to a trailer and its refrigeration unit, generating a dramatic five log pathogen reduction in just 15 minutes versus the two hours it now takes carriers or distributors to less effectively clean and sanitize a truck. This result in significant labor savings and minimizes trailer downtime to get them back on the road with the important added benefit of being noncorrosive to refrigeration units.
In addition we've demonstrated extended residual kill benefits. As an example, I'd like to share with you the truly great test results we achieved, which were key to our winning our first piece of business for refrigerated trucks. The potential customer presented us with a pre-clean truck in order to see if we can improve on what was currently being used for cleaning and sanitization.
Before our treatment we tested and found an 840,000 pathogen count on that quote "clean" unquote truck. Every four minutes missed treatment with PURE Hard Surface we've reduced the 840,000 count down to a 700 pathogen count. A week later after continuous use of the truck, we retested and found only 8600 pathogen count we found continued dramatic residual kill results for up to two weeks, when counts were only 42,000 again after continuous use. Remember we started at 840,000 two weeks earlier.
PURE Hard Surface continues to be a superior solution for transportation companies to meet the requirements of the food safety modernization act, particularly as the FDA steps up audits of food transport companies to ensure compliance. Continuing our discussion of PURE Hard Surface, equipment and environmental use in the most recent quarter, we added national branded customers, including Church Brothers Truly Farms, Saputo Dairy and Garden Fresh. We're continuing to add customers, plants and expanded applications with existing customers at the average rate of at least one per week.
PURE Hard Surface usage for plant and equipment and environmental disinfection is now up to over 100 national food manufacturers and processors in a wide range of industry segments, including produce, bakeries, pet food, cheese and dairy and meats. We closed calendar 2018 with over 90 users in this category.
Restaurant chains continue to have particular interest in the superior ability of our patented SDC technology to eliminate Norovirus, the leading cause of foodborne illness outbreaks in restaurants. The cheesecake factory is using PURE Hard Surface in the front of the house in their entire 210 stores system in the US and it continues testing for expanded use in the back of the house. We look forward to rolling out to another casual dining chain in calendar Q2 and are in the later stages of evaluation by two other restaurant chains.
In our Newmarket initiative for PURE Hard Surface for disinfection, egg hatcheries we're continuing testing at hatcheries of two of the top five poultry producers. We still anticipate that testing will be completed sometime in mid-calendar 2019. At that time we'll have enough information to be able to comment on market metrics. We expect numerous application points for PURE Hard Surface disinfectant in this segment, including breeder farms, hatcheries and chicken egg transport vehicles.
The parameters of our testing program are built to not only quantify pathogen reduction, but also determine how much product to use and how often a quote "typical" product application will be required. Our objective is to optimize the pathogen-free environment, reducing cross-contamination risk for egg laying, hatching and growing birds, lowering the very high chick mortality rates and ensuring cleaner birds, entering processing.
To sum up, based on the growing momentum that we have in produce processing, food transport sanitization and PURE Hard Surface use in processing plants and restaurant chains, we are increasingly confident that the revenues needed to drive us to a cash flow breakeven and beyond are not only achievable but are eminent.
Now I'd like to turn our call back over to our operator Shanay to begin the question-and-answer session.
[Operator Instructions] Our first question comes from Christian [ph]. Please go ahead.
Unidentified Conference Call Participants
Hi Mr. Lambert, regarding the trucking industry, I was wondering how many trucking companies you have on board so far?
So far we have four companies that are using our truck sanitizing solution and we are in discussions with up to 10 additional potential customers.
Unidentified Conference Call Participants
Okay. Calendar '14, four plus was 10 or any of them but say the top 10 largest truck companies in our state?
Yes, we're working with two of the top five food service distributors, including the largest.
Our next question comes from Gloria Gaddy a private investor. Please go ahead.
Yes thanks. Can you be more and specific on when you expect the cash flow positive since we've already retained it from the first quarter to last time I think by the end of the second quarter. Now it looks like we don't know maybe because of the Taylor farms mishap.
Right and again Gloria that's a great question. We ask all the time here. We are dependent upon the speed with which our customers who have committed to adoption actually execute and install our applications and begin buying chemistry Taylor farms delay in rolling out SmartWash Boost including PURE Control to additional plants as a result of Romain operate that did set us back a couple of months. So I can't give, I would hesitate to give a specific date or month. We do expect it sometime around the middle of the calendar year.
There are no more questions at this time. I would like to turn the conference back over to Hank Lambert for any closing remarks.
Thanks Shanay, and thanks to each of you for your time and patience and continued support as we move closer to that inflection point we've all been waiting for with our full pipeline and customer adoption accelerating, I look forward to reporting back to you with our continuing progress on our next call. Have a great afternoon.
This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.