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Edited Transcript of PURE earnings conference call or presentation 13-Dec-18 9:30pm GMT

Q1 2019 PURE Biosciences Inc Earnings Call

EL CAJON Jan 4, 2019 (Thomson StreetEvents) -- Edited Transcript of PURE Biosciences Inc earnings conference call or presentation Thursday, December 13, 2018 at 9:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Henry R. Lambert

PURE Bioscience, Inc. - CEO & Director

* Mark Stuart Elliott

PURE Bioscience, Inc. - VP of Finance

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Conference Call Participants

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* 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 Fiscal 2019 First Quarter 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. Please go ahead.

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

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Thank you, Shanay, and good afternoon. It's my pleasure to welcome you to the company's

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to discuss fiscal 2019 Q1 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 press release and filed its fiscal Q1 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 provide 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?

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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 Q1 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 conclusion of our August 2018 $1.5 million financing, we now have estimated funding in place to support our operations through our third fiscal quarter 2019: accelerate 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; 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 Q1 fiscal '19 operating results. Net product sales for the first fiscal quarter ended October 31, 2018 were $590,000, an increase of 27% compared with net product sales of $464,000 for the first fiscal quarter ended October 31, 2017. Revenues from our core business, food safety, continue to gain traction, increasing 124% quarter-over-quarter. Total operating costs and expenses, excluding cost of goods sold and share-based compensation, for the fiscal quarter ended October 31, 2018 and 2017 was $1.2 million and $1.6 million, respectively. Net loss excluding inducement expense, derivative expense and share-based comp for Q1 '18 was $822,000 as compared with $1.3 million for Q1 in 2017.

We ended the quarter with a cash and restricted cash position of $851,000. Cash received from financing activities during Q1 '18 was $993,000, offset by cash used in operating and investing activities of $1.1 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 in 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?

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

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Thanks, Mark. Good afternoon, everyone. We certainly appreciate you joining us for today's discussion.

As Mark mentioned, for the second consecutive quarter, our core food safety revenues showed strong triple-digit growth, and momentum is building. I'm pleased to tell you that fiscal Q2 is also off to a very strong start.

Fiscal Q1 core revenues increased 124%, and we anticipate that fiscal Q2 2019 comparable revenues will again show very strong growth. While this has taken longer than any of us expected, this continues to validate the game-changing nature of our nontoxic SDC-based antimicrobial food-safety solutions.

Based upon the revenue momentum and the anticipated rollout plans of our lead produce processor customer, we remain optimistic that we will achieve our goal of a cash flow breakeven revenue run rate early in calendar Q2 2019. As long as our customers' adoption plans materialize as they project, we'll reach our breakeven run rate target.

Our cash flow breakeven timing forecast continues to be based on our present expectations of customer 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 to surfaces and equipment by food processors and manufacturers, in food transportation and by restaurant chains.

Looking first at produce processing, our key revenue driver. Taylor Farms, the largest U.S. produce processor, is our first customer for PURE Control and is continuing its rollout and use of PURE Control into its 14-plant network. Last quarter, we told you that PURE Control had been combined with Taylor's SmartWash processing aid and is being used as the newly branded SmartWash Boost. We also reported that Taylor was set up to use Boost on all lines in 2 plants. Today, Boost is in use in 3 of Taylor's plants. As Taylor's customer adoption grows, additional plants will be brought online in 2019. Taylor plans to bring 4 additional plants online using Boost by the end of calendar Q1. Currently, it treats shredded romaine, iceberg and cabbage with Boost for the customers who specify this added processing step. Taylor is signing new customers, including Subway, and will treat shredded lettuce with Boost for those chains.

I'd like to point out that our board member, Jan Risi, has been instrumental in getting Subway to approve use of Boost on produce sourced from Taylor, making Subway Taylor's flagship customer for the Boost treatment. Taylor reports that they are in discussions with several other household-name restaurant chains and retailers.

Boost enhances food safety by eliminating pathogens causing foodborne illness, including the leading causes: Salmonella, E. coli and Listeria. Once fully deployed, we estimate each of Taylor's plants represent approximately $1 million per year in revenue to PURE, a $14 million annual revenue opportunity.

Taylor began sales and marketing of the Boost solution in earnest to its key food service and retail customers in late September. At that time, Taylor produced a video supporting the launch, in which a Taylor spokesperson states that SmartWash Boost provides "a virtual kill step" that would have prevented the then recent romaine E. coli outbreak and is "the next generation of prevention of outbreaks." This is quite an endorsement as we believe this is the first time anyone has claimed they have a kill step for produce processing.

As an aside, as you might imagine, the most recent romaine lettuce E. coli outbreak, which occurred just before Thanksgiving, served to enhance the visibility of and interest in our solution in the produce industry.

Beyond leafy greens, Taylor has begun testing SmartWash Boost on additional produce items, such as 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 8 additional processors conducting or evaluating their own in-house validation and optimization testing, which is industry SOP before placing a first order. We've made important progress with several of those larger new processors. Del Monte has completed testing PURE Control on strawberries, and we have been approved for that use. Next week, Del Monte will begin the process of rolling out PURE Control to treat strawberries in an initial plant. Already a customer of PURE Hard Surface for environmental disinfection, Del Monte also plans to use PURE Hard Surface disinfectant in calendar Q1 in its 33 banana-ripening rooms. This represents a sizable new application opportunity for PURE as all produce processors have ripening rooms.

Taylor Farms has also been using PURE Hard Surface extensively for successful environmental disinfection inside its processing plants. Our product's superior performance led Taylor to seek to expand the use of our uniquely safe and effective SDC antimicrobial. Taylor Farms is completing the protocols and testing we talked about last quarter for a new application for PURE Hard Surface on the collection bins which transport vegetables from the field into their processing plants. That work is progressing, and we anticipate calendar 2019 sales for this new application, at which point we'll have more information to share with you. Being the largest produce processor in the country, Taylor obviously has the capability to examine every possible alternative to address the risk of foodborne contamination. We are proud of the fact that they have chosen PURE Control and PURE Hard Surface disinfectant to address the threat on the production line and as the products are being transported.

Turning now to food transport sanitization. Our safe, 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 by the end of calendar 2019.

We have a targeted prospect list from the 200,000-plus refrigerated and nonrefrigerated food transport trucks in the U.S. Our sales and business development teams routinely highlight our reference account as a part of 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 have shipped product and equipment to 21 of those operating companies and have 10 additional approvals. We have also made inroads into 3 of their super distribution centers, which deploy 3 times the number of trucks as the average center, and continue to get to expect that we'll reach our December 2018 year-end goal of being in about half of their 90 operating company systems.

We're in advanced discussions with another one of the 5 largest food service distributors in the country, which has 16,000 trucks serving restaurants, schools, venues and institutions. We look forward to updating you about that customer on our next call.

Taylor Farms is also a customer for our truck sanitization solution. Word of mouth drives interests, and we're actively presenting our solution to more than a half dozen other food transport companies.

PURE Hard Surface saves time and money, providing several compelling, competitive advantages for disinfecting refrigerated and nonrefrigerated trucks. It is mist-spray applied as a nontoxic disinfection treatment to a trailer and its refrigeration unit, generating a dramatic 5-log pathogen reduction in just 15 minutes versus the 2 hours that now takes carriers or distributors to clean and sanitize a truck. This results 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 have demonstrated extended residual kill in food transport trucks.

It is a perfect 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, previously we told you about adoption by national brands, including Butterball, Ben & Jerry's and Chicken of the Sea and the addition of plants in the Del Monte network. In the most recent quarter, we added national branded customers, including Rich Products, Papa John's and Lamb Weston. We're continuing to add customers and plants and to add expanded applications within those existing customers at an average rate of more than one per week.

PURE Hard Surface usage for plant equipment and environmental disinfection is now up to over 90 national food manufacturers and processors in a wide range of industry segments, including produce, bakeries, pet food, cheese and dairy and meats. We'll close calendar 2018 with nearly 100 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.

In our last call, we told you that The Cheesecake Factory rolled out usage to their entire 210-store system in the U.S. It is completing testing for back-of-house usage, and we anticipate that expanded use in calendar Q1.

We will be rolling out to another casual dining chain over the next 2 quarters and are in the latter stages of evaluation by 2 other restaurant chains.

Last quarter, we talked about our initiative into a new market for PURE Hard Surface for disinfection in egg hatcheries. We have since finalized protocols and have begun testing at hatcheries of 2 of the top 5 poultry producers. Once we complete testing sometime in mid-calendar 2019, we'll be able to comment on market metrics and expected penetration. We do anticipate numerous application points for PURE Hard Surface disinfectant, 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 how much product to use and how often a "typical" product application will be required. Our objective is to optimize a 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.

On the subject of poultry, we have FDA and USDA approval for use of 160 parts per million of PURE Control in pre-online reprocessing and post-chill raw poultry processing. Our work to commercialize continues with in-plant testing and validation efforts with a poultry processor for poultry parts. We continue to expect that optimization work will continue into the first half of calendar 2019.

At 160 parts per million, PURE Control disinfects as advertised, but ounce per ounce, it is at a significantly higher price point in chemistries currently in use. We continue to work to optimize various parameters such as parts per million, flow rates and dwell time to achieve the needed efficacy at a price acceptable to customers. We know our total value proposition is compelling, and our work continues.

Poultry parts represents 75% of all poultry sold to consumers. It's a large and very important potential market for us. We know of no other equally effective nontoxic solution, and we continue to believe PURE Control is the breakthrough solution the poultry industry needs. Until such time when we have successfully commercialized PURE Control for poultry parts, we have suspended our testing to gain USDA approval for a second poultry processing use in online reprocessing of whole birds.

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 cash flow breakeven and beyond are achievable. And we note that our calendar 2019 estimates do not include any PURE Control revenues from poultry processing.

Now I'd like to turn our call over to our operator to begin the question-and-answer session. Shanay?

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from [Tom Cape], a private investor.

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Unidentified Participant, [2]

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I've just got a -- one question. Do you think there's a chance that you can get to a cash flow breakeven in 2019?

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

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Thanks, [Tom]. Yes. We project right now based on our revenue projections and our cash on hand that we will get to cash flow breakeven sometime around the end of calendar Q1, the beginning of calendar Q2 of 2019.

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Operator [4]

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The next question comes from [Bill Chapman], a private investor.

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Unidentified Participant, [5]

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I was curious. In your Q, you mentioned about your intent to seek approval for the PURE Control in raw meats. Could you give me a time line when you're anticipating this to be the start?

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

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Sure. Thank you, [Bill]. Right now, we are focused on trying to optimize and validate PURE Control for use on poultry parts. Once we have that complete, we will then begin looking at other opportunities such as beef and pork. We right now need to ensure that we have a product that works on poultry at the most economical parts per million and flow rate and be able to commercialize that for use on poultry before we move on to other meats. And the reason why we're focused initially on poultry is that after produce, poultry is the most common source of foodborne illness outbreaks. Foodborne illness outbreaks associated with beef and pork are far fewer than poultry and produce. So that's where our focus is right now, and we will get to meats down the road once we have optimized in produce and poultry.

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Unidentified Participant, [7]

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Okay. And the poultry, if I heard you correctly on your prepared remarks, that will be finished -- the testing finished by mid-calendar '19?

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Henry R. Lambert, PURE Bioscience, Inc. - CEO & Director [8]

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That's our best estimate right now, yes.

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Operator [9]

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

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Unidentified Participant, [10]

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I have a question for Mark. Mark, if you project your cash flow breakeven to be March or April, at the current run rate, a revenue growth rate of 124% a quarter, I mean, by the end of next year, do you see logically you would be making money? Do you project that far out? Or...

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Mark Stuart Elliott, PURE Bioscience, Inc. - VP of Finance [11]

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Yes. No, logically, pulling in Taylor Farms, absolutely, we could achieve our cash flow breakeven run rate at our current margin and our expected margin based on the $6 million.

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Operator [12]

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There are no more questions at this time. This concludes the question-and-answer session. I would 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 & Director [13]

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Thanks, Shanay.

We continue to appreciate your support and patience as we move closer to that inflection point we've all been waiting for. Our pipeline is full, and our runway is clear. I look forward to reporting back to you with our continued progress on our next call. Thank you again for joining us today, and have a happy and food-safe holiday season.

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Operator [14]

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