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Edited Transcript of PURE earnings conference call or presentation 13-Jun-19 8:30pm GMT

Q3 2019 PURE Biosciences Inc Earnings Call

EL CAJON Jun 20, 2019 (Thomson StreetEvents) -- Edited Transcript of PURE Biosciences Inc earnings conference call or presentation Thursday, June 13, 2019 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Henry R. Lambert

PURE Bioscience, Inc. - CEO, Secretary & Director

* Mark Stuart Elliott

PURE Bioscience, Inc. - VP of Finance

* Thomas Richard Myers

PURE Bioscience, Inc. - COO

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Conference Call Participants

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* Christian Bozorth - The Kanawha-Gauley Coal & Coke Company; President & CEO

* Terri MacInnis

Bibicoff & Macinnis, Inc. - VP of IR

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Presentation

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Operator [1]

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Thank you for standing by. This is the conference operator. Welcome to the PURE Bioscience Q3 2019 Results Conference Call. (Operator Instructions) And the conference is being recorded. (Operator Instructions)

I would now like to turn the conference over to Terri MacInnis, Vice President of Investor Relations at Bibicoff + MacInnis, Inc. Go ahead, ma'am.

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Terri MacInnis, Bibicoff & Macinnis, Inc. - VP of IR [2]

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Thank you, Karl, and good afternoon, everyone. I'm pleased to welcome you to the company's conference call to discuss fiscal 2019 Q3 and 9 months financial and operating results and an update on PURE's food safety business strategy.

On our call is Hank Lambert, Chief Executive Officer; and Mark Elliott, VP, Finance. They are joined today by Tom Myers, Chief Operating Officer.

This afternoon, PURE issued a financial results news release and filed its fiscal Q3 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 on 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 Factors 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, provide us with additional analytical tools to understand operations. We have provided reconciliations to the most directly comparable GAAP financial measures in the press release.

I will now turn the call over to Mark Elliott, Vice President of Finance. Mark?

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Mark Stuart Elliott, PURE Bioscience, Inc. - VP of Finance [3]

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Thank you, Terri. As we reported earlier today in our Q3 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 and our subsequent $285,000 financing, we now have the 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 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 Q3 fiscal 2019 operating results. Net product sales for the third fiscal quarter ended April 30, 2019, were $312,000, a decrease of 20% compared with net product sales of $390,000 for the third fiscal quarter ended April 30, 2018. The decrease was due to a decline in food safety sales due to delays in customer implementation and fluctuations within our existing legacy customer base.

Total operating costs and expenses, excluding cost of goods sold and share-based compensation, for the third fiscal quarter ended April 30, 2019, and 2018 were $1.2 million and $1.4 million, respectively. Net loss, excluding share-based compensation and inducement expense, for the third fiscal quarter in 2019 was $913,000 as compared with a loss of $947,000 for the third quarter in 2018.

Net product sales for the 9 months ended April 30, 2019, were $1,296,000, an increase of 2% compared with net product sales of $1,265,000 for the 9 months ended April 30, 2018. Core food safety revenues increased by 31% as compared with food safety revenues during the 9 months ended 2018.

Total operating costs and expenses, excluding cost of goods sold and share-based compensation, for the 9 months ended April 30, 2019, and 2018 were $3.2 million and $4.5 million, respectively. Net loss, excluding derivative income, inducement expense and share-based compensation, for the 9 months ended April 30, 2019, was $2 million as compared with $3.2 million for the 9 months period in 2018.

We ended the quarter with a cash and restricted cash position of $415,000. Cash received from financing activities during the 9 months ended April 30, 2019, was $1.8 million, offset by cash used in operating and investing activities of $2.3 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. We recently disclosed that we raised $285,000 of net proceeds under a private placement and intend to raise additional working capital to fund the company.

This concludes my financial review. I will now turn the call over to Hank Lambert, CEO, for a business strategy update. Hank?

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Henry R. Lambert, PURE Bioscience, Inc. - CEO, Secretary & Director [4]

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Thanks, Mark. Good afternoon, everyone. We certainly appreciate you joining us for today's discussion. As Mark mentioned, our core food safety revenues were somewhat lower for the third quarter, however, for the 9-month period showed strong growth at plus 31%. Quarterly food safety revenues were impacted by the timing of orders and unanticipated delays in key customer adoption and rollout of our SDC solutions. The good news is that since the end of the quarter, a number of these customers have accelerated adoption and installation of solutions. As a result, we anticipate that our current quarter, fiscal Q4 ending in July, will show stronger food safety revenues, continuing to validate our nontoxic SDC-based antimicrobial food safety solutions.

Highlighting first our produce processing initiatives, PURE Bioscience is finalizing a PURE Control supply agreement with SmartWash Solutions. We continue to work closely with SmartWash Solutions and the largest fresh produce processor in the world on both application of and marketing the treated final products to end users as well as other produce processors.

SmartWash Solutions is working closely with the USDA to obtain third-party verification of the PURE application and efficacy for use to ensure produce safety in the U.S. There are currently 3 facilities equipped to apply the application at adoption by customers and 4 additional facilities planned for future rollout with USDA verification.

It has been conclusively determined that PURE Control used in the produce industry enhances food safety by eliminating pathogens causing foodborne illness, including the leading causes: salmonella, E. coli and Listeria. Currently, shredded romaine and iceberg lettuce are treated with PURE Control for the customers who adopt this added processing step. In addition to this direct work with our lead processor, other major processors are accelerating adoption of PURE Control for treating produce. Tom will give you a current update on this shortly.

In Q1, we had 8 produce processors conducting or evaluating their own in-house validation and optimization testing. In Q2, that number was 10, and in Q3, that number grew to 12 processors. Awareness of the incremental efficacy our solution provides to produce processors is growing, and we will build on that when SmartWash executives, along with Tom Myers, discuss the results of their extensive testing of SDC at the International Association of Food Protection in mid-July.

The produce industry is clearly committed to the expanding use of our SDC solutions. They also use PURE Hard Surface extensively for successful environmental disinfection within their processing plants. Tom will elaborate on this as well as new applications that are in development.

Continuing our discussion of PURE Hard Surface equipment and environmental use, in the most recent quarter, we added national branded customers and continue to add plants and expanded applications with existing customers, averaging more than 1 per week.

PURE Hard Surface used environmentally and on equipment is now in over 110 national food manufacturers and processors in a wide range of industry segments, including produce, bakeries, pet food, cheese and dairy, and meats.

Our food transportation solution is continuing to gain momentum and with -- with acceleration in the last month, and Tom will also give you the latest on that.

In our egg hatcheries initiative for PURE Hard Surface for disinfection, we continue our testing with 2 of the top 5 poultry producers. 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. We anticipate the testing will be completed some time before the end of this calendar year. At that time, we'll have enough information to be able to comment on potential and market metrics.

To sum up then, 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 cash flow breakeven and beyond are achievable and imminent.

I'd like to turn our call over now to Tom Myers, Chief Operating Officer, for his up-to-the-minute remarks from the frontlines. Tom?

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Thomas Richard Myers, PURE Bioscience, Inc. - COO [5]

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Thank you, Hank. Good afternoon, everyone. I'm pleased to have this opportunity to join today's call and share with you my-boots-on-the-ground perspective and the status of our sales, marketing and execution progress for both PURE Control and PURE Hard Surface disinfectant.

We continue to work closely with produce industry leaders in both application of and marketing the treated final products to end users and to other fresh produce suppliers. In fact, PURE Bioscience was sponsored to attend and present at the recent PMA, Produce Marketing Association, in May, where one-on-one meetings took place and numerous leads were generated.

Also, as mentioned, SmartWash Solutions have been working with the USDA to obtain verification of the PURE application and efficacy for its use to ensure a safer U.S. processed produce supply. This will provide powerful third-party verification of the lethality claims being achieved and will be used as a powerful tool to differentiate our process.

We are working constantly with produce processors to expand the application of PURE Control beyond the shredded and chopped products. We are in contact with QA executives, engineering, marketing and sales multiple times a week moving toward adoptions.

At another global produce supplier U.S. facilities, PURE Control is now being used in the first 2 of their 20 U.S. processing plants on strawberries. PURE Control is completely replacing the current PAA treatment, a result of our efficacy and enhanced product quality that is proven directly with the customer. Their rollout plan anticipates expansion into remaining 18 facilities by the end of the calendar year. This same processor is also completing its validation of PURE Control use on tomatoes. In July, it plans to begin installing into the first of its 10 U.S. tomato processing facilities, and we are told that, that process will be completed over the next 12 months. When fully deployed, this means that 30 of their U.S. plants will be running PURE Control on 2 separate products. We expect their ongoing validation work will yield additional produce commodities for future treatment.

We look forward to providing future updates on the progress of ongoing validation efforts on multiple products over a dozen other processing facilities across the fresh produce industry.

I'd like to turn to the information on the transport. Our food transport solution has been well received and continues to grow. Sales and installations are progressing with our first customer, one of the largest U.S. food distribution companies, and our distribution center penetration is at a rate approaching 40%.

Last quarter, we talked about the PURE system being adopted and mandated by another top 5 national food service distributor. This has been progressing rapidly. In May, we received initial orders for chemistry and equipment from half of these distribution centers, and they tell us they expect that all 22 facilities will be installed and treating the entire fleet of 1,500 vehicles by the end of June. This top 5 distributor will also mandate the use in their 7 meat plants as well as environmentally inside their 27 distribution centers.

Today, we have 4 transportation customers, and word-of-mouth drives interest that we are in discussions with the 10 additional food transportation companies. We continue validation work with multiple distribution carriers and food specialty distribution companies representing a potential to treat up to 3,500 trailers with the PURE system.

Further, on new initiatives, utilizing PURE Hard Surface for produce processors, field bin sanitization systems have been designed and employed that allow a whole new level of protection during transport from field to the processing lines, along with the ongoing application of PURE Hard Surface in plants' automated one-button systems for entire processing facilities have been designed and installed. This is repeatable and has been marketed by PURE to multiple processors.

Now I'd like to mention a new direction that we have been working on in the last quarter. We've actually developed an application methodology for the dairy processing sector. This provides sanitization procedures that have not been possible before now. Our misting application technology allows treatment in dryers and other processing areas of cheese and dry powder facilities to provide enhanced product safety. Today, we are working with national dairy co-ops and processors, and we'll report on that progress over the next few quarters.

Hank, this concludes my comments, and I'll turn it back to you.

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Henry R. Lambert, PURE Bioscience, Inc. - CEO, Secretary & Director [6]

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Thanks, Tom. Based on Tom's remarks and the anticipated rollout plans of our leading produce processor customers, we remain optimistic that we will achieve our goal of a cash flow breakeven revenue run rate this calendar year. As long as our customers' adoption plans materialize as they project, we'll reach our target. A $6 million annual revenue run rate is our breakeven target.

Our cash flow breakeven forecast continues to be based on our customers' present expectations of adoption and rollout of our 2 product lines: FDA-approved PURE Control, which is applied directly onto produce during processing; and EPA-approved PURE Hard Surface disinfectant, which is applied by food processors and manufacturers in food transportation and by restaurant chains to surfaces and equipment that come into contact with food.

Due to customer timing and delays referenced earlier, we are resetting our projection to achieve a cash flow breakeven run rate by the end of fiscal Q1 2020, which is October.

I'm pleased to say that we are well on our way and that the current quarter is off to a strong start.

Now I'd like to turn our call over to our operator to begin the Q&A session. Karl?

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from Christian Bozorth of Kanawha-Gauley Coal.

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Christian Bozorth - The Kanawha-Gauley Coal & Coke Company; President & CEO, [2]

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Glad to hear about all the great things going on in the sales pipeline. My question is, do you think you have enough cash to get to breakeven in October?

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Henry R. Lambert, PURE Bioscience, Inc. - CEO, Secretary & Director [3]

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Yes, thank you, Christian. Great question. And as Mark indicated in his remarks, we are in the process of raising the working capital necessary to run operations to get to cash flow breakeven. Our Board has -- is pursuing that, and we've raised $285,000 in recent weeks and are continuing to pursue that. We are confident we will have the cash to fund our way to cash flow breakeven.

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Operator [4]

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The next question comes from [Gloria Gatti], a private investor.

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Unidentified Participant, [5]

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Hank, I have a question. This goes clear back to May of 2017 with the online reprocessing trial for chicken. Are we waiting until we have funds for that? I mean back then, it said they assumed you would have a successful trial, and no additional trials would be required by the USDA, and that they would issue a letter of no obligation in approximately 4 to 6 weeks after completion of the trial. So did we have a successful trial or more results -- or more testing asked for by the USDA?

And then for Tom, and I can't remember exactly what it was and he may have referred to it, but they were showing with all of the online sales of food, et cetera, how these companies needed to have refrigerated sites and such, and their units were way high in the building. And it occurred to me that, that would be a great place for PURE to be used, and I didn't know how you would get it misted up that high in these big buildings and if that's something you just looked at it. It seems like it was cold America or something like that. So those are my 2 questions.

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Henry R. Lambert, PURE Bioscience, Inc. - CEO, Secretary & Director [6]

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Okay. Thanks, [Gloria]. I'll take the first one. As we've indicated in previous calls, with regard to online reprocessing, we had some stops and starts with trials on that. We did not get to the point where we were as successful as we expected to be, and there were some cost issues involved with that as well. What we shifted our focus to was testing on parts, pre-online reprocessing and then post-emergent chiller, and we have done a lot of testing on parts. We continue to look at testing on parts, but to be honest, over the past several months, we've had our limited sales and technical services resources really focused on our closest in opportunities, especially our produce processors and food transportation solution.

On poultry, as we mentioned in our prepared remarks, we are focused on the front end of the supply chain in hatcheries, and we are also working with 2 strategic distributors who have specific expertise in poultry processing and distributing processing aids to poultry processors. We're working with them on a strategic arrangement where we could -- they would augment our efforts because our resources are stretched very thin right now with produce and food transportation. So we know there's an opportunity with parts, and we're bringing more resources to bear against that as we work with these strategic distributors.

I'll now turn it over to Tom to answer the question about misting in high freezer areas.

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Thomas Richard Myers, PURE Bioscience, Inc. - COO [7]

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[Gloria], that's a very good question and very intuitive. We have been testing recently, actually in the last quarter, the air in different food transport areas and in processing facilities to determine the level of contamination that's in those units. And our, say, misting technology that we're employing in the trailers has been designed to be applied to that, and Gloria , they are a pie and it is a push button-type arrangement where on a regular basis, that all the units would be treated at once with our fine mist application. So it is something that we are working with actually several companies on right now.

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Operator [8]

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The next question comes from [Matthew Crest], a private investor.

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Unidentified Participant, [9]

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I was wondering what methods or what ways you might think to raise capital in the interim before reaching breakeven and more equity issuance or debt.

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Henry R. Lambert, PURE Bioscience, Inc. - CEO, Secretary & Director [10]

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Yes. We would pursue the typical structures that we have used in the past. PIPEs, private placements with primarily current shareholders, and it would be all equity. We're not pursuing any debt issuance at this point.

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Operator [11]

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There are no more questions at this time. This concludes the question-and-answer session. I would now like to turn the conference back over to Hank Lambert for any closing remarks.

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Henry R. Lambert, PURE Bioscience, Inc. - CEO, Secretary & Director [12]

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Thanks, Karl, and thanks to each of you for your time and continued support as we move closer to more meaningful commercialization of our powerful SDC antimicrobial. I look forward to reporting back to you with our continuing progress on our next call. Thanks, and have a great rest of your day.

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Operator [13]

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