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Edited Transcript of PURE earnings conference call or presentation 25-Oct-18 8:30pm GMT

Full Year 2018 PURE Biosciences Inc Earnings Call

EL CAJON Jan 22, 2019 (Thomson StreetEvents) -- Edited Transcript of PURE Biosciences Inc earnings conference call or presentation Thursday, October 25, 2018 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 & 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 Year 2018 Results Conference Call. As a reminder, the conference is being recorded. (Operator Instructions)

I would now like to turn the conference over to Terri MacInnis, VP 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, Saveese, and good afternoon, everyone. It's my pleasure to welcome you to the company's conference call to discuss fiscal year-end 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 year-end report on Form 10-K, 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-Questions, 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 fiscal year 2018 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 $1.5 million financing, we now have estimated funding in place to support our operations through our third fiscal quarter of 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 fiscal 2018 operating results. Net product sales for the fiscal year ended July 31, 2018, were $1,774,000, a decrease of 3% compared with net product sales of $1,831,000 for the fiscal year ended July 31, 2017. Revenue from our core business, food safety, continued to gain traction, increasing 23% year over year. Our fiscal Q4 food safety revenues increased 165%, and we anticipate that in fiscal Q1 2019, triple-digit year-over-year food safety revenue growth will continue.

Total operating costs and expenses, excluding cost of goods sold and share-based compensation for the fiscal year ended July 31, 2018, and 2017 was $5.7 million and $6 million, respectively. Net loss, excluding inducement expense, derivative expense, and share-based compensation for fiscal 2018 was $4.7 million, $7 million, as compared with $4.9 million for fiscal 2017.

We ended the year with a cash position of $851,000. Cash received from financing activities during fiscal 2018 was $3.1 million, offset by cash used in operating and investing activities of $3.9 million.

On August 16, 2018, we completed a closing of a private placement financing to accredited investors. We raised approximately $1.5 million in net proceeds from the private placement and issued an aggregate of 3.3 million shares of our common stock at a purchase price of $0.45 per share, including the conversion of approximately $500 held in the form of a promissory note as of July 31, 2018.

In management's efforts to prudently manage our cash position and our opportunities against anticipated revenue flow, in April and in August of 2018, management implemented a number of wide-ranging cost-cutting initiatives to reduce expense and bring down our cash flow breakeven point. We now target an annual revenue breakeven run rate of approximately $6 million. These overhead reductions remain in various areas, including board and management compensation and vendor fees.

The Board continues to the 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 previously stated cash flow breakeven target in calendar Q1 of 2019. No future financing determinations have been made at this time regarding size, type or timing.

This concludes my financial review. I'll 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, and we certainly appreciate you joining us for today's call.

As Mark mentioned, our annual core food safety revenues continue to show strong double-digit growth and momentum is building. Fiscal Q4 core revenues increased 165%, and we anticipate that fiscal Q1 2019 comparable revenues will also increase by triple digits. This solidly validates our strategic focus and the game-changing nature of our SDC-based antimicrobial food safety solutions.

Based upon that validation and the revenue momentum being generated, the continued expense control actions Mark discussed, and the 3 key initiatives that I'll update you on in a moment, we remain optimistic that we will achieve our goal of a cash flow breakeven revenue run rate in calendar Q1 2019. Once we've achieved that milestone, we then expect to have better visibility for you into the remainder of calendar 2019 regarding projected revenues and the path for us to achieve our goal of uplisting the stock to a national exchange which, among other criteria, requires a minimum $2 stock price.

As we discussed in our fiscal Q3 call, our cash flow breakeven timing forecast is based on our current expectations of customer adoption and rollout in these 3 areas. First, Taylor Farms rollout plan for FDA-approved PURE Control in produce processing for calendar 2018 and beyond. Second, the encouraging feedback and sales progress from our food transportation customers using EPA-approved PURE Hard Surface disinfectant. And third, the continued addition of customers and expansion of use of PURE Hard Surface at food processors, manufacturers and restaurant chains. These 3 areas build upon our base of approximately $2 million in existing annualized sales.

Turning first to produce processing; the key driver of revenue generation. Taylor Farms, the largest U.S. produce processor, is our first customer for PURE Control, our direct food contact antimicrobial applied directly onto food during processing. Taylor Farms continues to deploy capital to support the rollout and use of PURE Control in its 14-plant network. You may recall, Taylor Farms is using PURE Control first on shredded lettuce as an added processing step to enhance 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 represents approximately $1 million per year in revenue. In other words, an annual $14 million revenue opportunity for PURE.

Taylor is combining PURE Control, or Boost as they have branded it, as a pretreatment with its SmartWash wash system. And they've launched SmartWash Boost as a game-changing antimicrobial treatment for produce. Taylor Farms has begun sales and marketing of the solution to its key food service and retail customers. In the introductory video supporting the launch, a Taylor spokesperson states that SmartWash Boost provides a "virtual kill step" that would have prevented the recent romaine E. coli outbreak, and is quote, "The next generation of prevention of outbreaks, period."

Today, PURE Control, or more correctly SmartWash Boost, is used by Taylor Farms to process produce in 2 plants in Salinas, California for its food service customers initially. Use has grown from 4 lines in Q3 to 19 lines today. Taylor's plans to complete the next phase of its rollout, adding 2 additional plants before the end of this calendar year. As Taylor's customer adoption grows, additional plants will be brought online early in 2019. Taylor has begun testing SmartWash Boost on additional produce items, such as cabbage, onions, broccoli and strawberries, with positive results. And this is expected to drive incremental usage in 2019 and beyond.

Last quarter, we previewed a new application for our PURE Hard Surface disinfectant that was being tested by Taylor. The development of protocols for use of PURE Hard Surface disinfectant on the collection bins which transport vegetables from the field into Taylor's processing plant. That work is progressing, and we anticipate 2019 sales for this new application, at which point we expect to have more information to share with you. In the meantime, what is important to note is this validation by Taylor Farms, after successfully using PURE Hard Surface extensively for environmental disinfection inside its processing plant, was initiated by them to seek to expand the use of our uniquely safe and effective SDC antimicrobial.

We routinely attend relevant trade shows in an effort to educate and increase awareness of our food safety solutions. Last week, we exhibited at the Produce Marketers (sic) [Marketing] Association, or PMA Fresh Summit, in Orlando to feature both our PURE Control antimicrobial and PURE Hard Surface to more than 20,000 attendees. PMA is the premier event for the global fresh produce supply chain. As a result of our advance awareness building campaign and the meetings held during the summit, we generated dozens of leads among leading produce companies that we are aggressively following up on. Not surprisingly, significant interest has been stimulated by our offering of a solution that can prevent future outbreaks like the industry experienced with romaine lettuce.

Looking toward expansion of PURE Control with other produce processors, today we already have 10 additional companies conducting or evaluating their own in-house validation and optimization testing, which is industry standard operating procedure before placing an initial order. We're making important progress with several of those larger new processors that bodes well for calendar 2019, and I expect to have more information in our fiscal Q1 call in December.

Turning now to food transport sanitization. Our safe, cost-effective and superior 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.

There are more than 200,000 refrigerated and non-refrigerated food transport trucks in the U.S. We have a targeted prospect list, and our sales and business development teams routinely highlight our reference account as part of those efforts. To continue to expand awareness on the food transportation market, next week we will exhibit at the International Foodservice Distributors Association, or IFDA, in San Antonio. IFDA is the premier annual event where leaders in operations, transportation and technology gather with speakers, innovators and disruptors to chart the future of food service distribution.

We sell directly into each operating company at our reference account client, and we perform the training and installation at each company individually. To date, we have shipped product and equipment to 19 of those operating companies, and adoption is accelerating. We are currently working with 3 of their super distribution centers, which deploy 3x the number of trucks as the average center and could help us reach our year-end goal of being in 50% of their operating company systems by calendar year-end, and then build from there to reach the $2 million to $3 million annual revenue opportunity.

Taylor Farms also continues to be a customer for our truck sanitization solution. The word of mouth from users is what continues to drive interest, and we're gaining traction. We are actively presenting that solution to more than half a dozen other trucking companies.

PURE Hard Surface disinfectant is the 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. PURE Hard Surface saves time and money, providing several compelling competitive advantages for disinfecting refrigerated and non-refrigerated trucks. It is mist-spay applied as a non-toxic disinfection treatment to a trailer and its refrigeration unit, generating a dramatic 5 log pathogen reduction in just 15 minutes versus the 2 hours it 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 non-corrosive to refrigeration units. In addition, we have demonstrated extended residual kill in food transport trucks.

Continuing our discussion of PURE Hard Surface, we are building upon the gains made in early fiscal Q3 when PURE Hard Surface was adopted by 2 household brand names for plant and equipment and environmental sanitization. And Taylor Farms continued expanding environmental usage in applications within its network of plants. Early in fiscal Q4, we gained adoption by national brands, including Butterball, Ben and Jerry's and Chicken of the Sea, and have added additional plants in the Del Monte network. We also brought on 2 new distributors. We continue to add customers and plants and expanded applications within existing customers at the rate of more than 1 per week.

We've been asked about our overall ongoing sales and marketing efforts to expand awareness of our food safety solutions. We continue both push and pull marketing. While we do approach larger retailers and restaurant chains directly to pull sales, we find that an even more effective route is to have the suppliers, such as Taylor Farms, make these retailer introductions.

PURE Hard Surface usage for plant equipment and environmental disinfection is now up to 85 national food manufacturers and processors in a wide range of industry segments including produce, bakeries, pet food, cheese and dairy and meats. We are well on our way toward our calendar goal to supply 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. The Cheesecake Factory initially is using PURE in the front of the house on dining tables, and it will soon begin testing for back of the house usage. We continue to expect, as mentioned last quarter, another new national restaurant chain to become a customer in fiscal Q4. Also, we are beginning testing with another national quick-service restaurant chain. We look forward to announcements along the way to achieving our goal to add at least 3 new restaurant chains in calendar 2018.

Last quarter, we began an initiative into a new market for PURE Hard Surface for disinfection in egg hatcheries. We are finalizing protocols and we'll begin testing at 2 hatcheries in 2 weeks. Until we complete testing sometime in mid-calendar 2019, it's too early to comment on market metrics or expected penetration. We 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 the pathogen-free environment; reducing cross-contamination risk for egg laying, hatching and growing birds; lowering the very high mortality rates; and ensuring cleaner birds entering processing.

While we're on the subject of poultry, now I'll discuss PURE Control use in poultry processing for which we have FDA approval and have USDA approval for use in pre-online reprocessing and post-chill raw poultry processing. We continue in-plant testing and validation efforts with major poultry processors for poultry parts and still expect that optimization work to continue into calendar 2019. Poultry parts represent approximately 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 non-toxic solution and believe PURE Control is the breakthrough solution the poultry industry needs.

In initial testing, PURE Control dramatically reduced Salmonella at a rate that interventions currently being used are not consistently achieving. While ounce for ounce PURE Control is more expensive than existing chemistries, we continue to believe our total value proposition is compelling. In addition to seeking a superior answer to reducing Salmonella, the poultry processors that we have talked to and are working with are seeking ways to get rid of the legacy product, PAA, or peracetic acid, because of its toxicity and the fact that it's an irritant to employees. PAA, which is less expensive and currently in general use, has a negative impact on the environment and equipment and has a negative impact on yield.

Before I open up the call for our Q&A session, I want to reiterate that we are increasingly confident that the revenues needed to drive us to cash flow breakeven and beyond are achievable. Our customers control the timing of any rollout, and based on their communications to us, and evidenced by investments they are making to implement our solutions, our path to cash flow breakeven is clearly in focus.

Toward that end, earlier this month we promoted Tom Myers, a 7-year PURE veteran, to the newly created position of Chief Operating Officer. Tom has led the implementation and application of our SDC technology in customer facilities. He is now overseeing operations and our go-to-market strategy and team. We have begun to realize early benefits of Tom's initiatives to focus and manage the sales group, regionalize sales support to improve customer engagement while controlling costs and reinvigorate our distributor network.

Our sales and marketing team consists of 3 direct sales and technical service personnel, which are augmented by existing strategic distributor and marketing partnerships. We also have relationships with industry experienced business development agents as well as technical service and equipment groups who can assist with implementation. Over time, as revenues build and can support it, we would certainly expand our direct sales and technical service teams here internally.

I'd now like to turn our call over to Saveese, our operator, to begin the question-and-answer session.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from [K. Farley], a private investor.

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Unidentified Participant, [2]

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Mr. Lambert, I'm very happy to hear the report that you just given us. And I was listening to the details, and I just want a little more – well, I was listening to your stages, and I want a little more detail as to what we have to go through to get breakeven and listed on the national exchange. I realize you cannot predict the future, and so I'm not asking for anything specific. But what I'm asking for is the milestone that PURE has to go through to be selling PURE Hard Surface and PURE Control to the food processors and restaurant chains and everybody else. So if you could break down by market segment the milestones and just approximately how long it's going to take for each of those milestones to be completed so that I can figure out for myself how long it's going to take.

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

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Thank you, K. I appreciate your question. In terms of the milestones, if we go through the 3 key initiatives that I've outlined here, first and foremost is produce processing and Taylor Farms' adoption and rollout of PURE Control to their 14-plant network. That is underway. It is being accelerated. We are getting updates on a weekly basis regarding their plans and adoption by their customers of produce being treated with SmartWash Boost or PURE Control. We are projecting right now that we will have growing revenues toward the goal of $1 million per plant in the 4 plants that we will be in within the Taylor network by the end of the year, and then they will be adding additional plants early next year. Our revenue projections and the timing of those projections is really dependent upon their -- the speed with which they invest in capital, install the equipment necessary, and bring new lines up and running on PURE Control. But in terms of a benchmark, I would look toward the first calendar quarter of 2019 for us to be showing significant and growing revenues from PURE Control sales to Taylor Farms. At the same time, we are talking with roughly 5 additional top 10 produce processors. They are very interested in PURE Control also. To the extent that we can get them to adopt and bring us online in the next 6 months, that will be additional revenue on top of what we're looking for from Taylor. As far as the food transportation sanitization solution, as I indicated our lead customer, largest food distributor in North America, we are looking to be in 50% of their operating companies by the end of the calendar year. If we can achieve that milestone, that will contribute to our getting to cash flow breakeven by the end of the first quarter of calendar 2019. And then we continue to add new customers for equipment and environmental disinfection with PURE Hard Surface; processors, manufacturers as well as restaurant chains. So those 3 revenue streams are going to be what gets us to cash flow breakeven and then beyond after the first calendar quarter of 2019. So that will be the first milestone that we have to hit in order to really qualify for and move toward uplisting on a national stock exchange. As you well know, the requirement for listing on NYSE Market, for example, is to have a minimum $2 share price. The only way we're going to get to a $2 share price is to show significant, sustained revenue growth and momentum. And we believe that once we're able to show that by getting to cash flow breakeven and continuing to grow revenues at a substantial rate, that the stock price will take care of itself. That's the key hurdle that we have to get to. There are other criteria for uplisting. You need 12 to 18 months of operating cash on the balance sheet. And there's some equity hurdles as well, but we should be in good shape to meet those once we get to cash flow breakeven.

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Operator [4]

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Our next question comes from [Jim Despiro], a private investor.

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Unidentified Participant, [5]

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Mr. Lambert, two questions for you. The cash position of the company, you said you have enough cash on hand to run through the third quarter. Does that mean that you'll be doing another issuance or seeking private funding to keep the company afloat? And also on the revenue stream, currently your -- the way that it looks like, you're generating about $150,000 a month between 3 sales reps and distributors and X, Y, Z. Where do you need to be on a monthly run rate to hit your breakeven point?

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

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To the first question, what we had said is that given our current revenue projections, and I've kind of given you the underlying assumptions under those revenue projections, and the amount of cash that we currently have on hand, that should be enough to fund our way to cash flow breakeven sometime near the end of the first calendar quarter of 2019. If -- and in that case, if we are able to fund our way to cash flow breakeven with our existing cash on hand, and revenues continue to grow beyond that, we should not need to do an additional financing. If the revenues do not come in on the pace that we have projected, then we would most likely have to do a small financing sometime in the first calendar quarter. We as a board are looking at a number of different options. We haven't made any determination at this point as to how much or what we would do to generate that financing. So we're looking at all our options. But best case, we don't have to do another financing and revenues take us to cash flow breakeven and beyond. In terms of the monthly run rate that we need, again, just to emphasize, this is a very good point at which to emphasize. I know a lot of you have been listening to these calls for some time now. And as recently as 6 to 9 months ago, we were talking about the need to be at a $10 million to $12 million revenue run rate to get to cash flow breakeven. We have taken a hard look at our expenses, and we have made significant reductions in expenses in terms of headcount, payroll, board fees, outside service providers like legal and investor relations, et cetera. We have significantly reduced and focused our marketing expenditures. And the result of all of that is that our revenue run rate required to reach cash flow breakeven is now down to roughly $6 million. So if we get to the point where we're generating $500,000 in revenue a month, that will be the point at which we can say we're at an annualized revenue run rate that gets us to cash flow breakeven.

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Operator [7]

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Our next question comes from [Gloria Gaddy], a private investor.

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Unidentified Participant, [8]

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As usual, I have a couple of questions. Can you give us any more information about how much business that iGPS is doing with the pallet sanitization, and if they -- I think their 1-year exclusive wins would end tomorrow, whether or not anybody else is looking to do it. And then just what is the problem with these poultry companies that they aren't getting this done since we started the testing in September of 2017?

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Henry R. Lambert, PURE Bioscience, Inc. - CEO & Director [9]

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With regard to iGPS, they have -- after their initial thrust into the market, they have been working on gaining customer adoption for their pallet sanitization program, and they're charging a fairly significant upcharge for that. The traction hasn't been as great as they had hoped or we had hoped. So iGPS has not been a significant source of ongoing revenues. As far as poultry, we have been struggling, as I think we've discussed in the past, with the fact that at 160 ppm, which is where we had to go in order to generate the efficacy that we wanted on poultry parts, at 160 ppm, PURE Control is significantly more expensive ounce per ounce versus existing interventions that are being used like peracetic acid. Now we do believe that we have a compelling value proposition because we're nontoxic, they're highly toxic. We do not corrode equipment, they corrode equipment. We don't contaminate the wastewater as they do. We're not an irritant to employees. And we have a positive to neutral impact on yield, and theirs is negative. All of that being said, that hasn't been enough to date to offset the cost differential. So we are continuing to work on trying to optimize the ppm, see if we can achieve acceptable efficacy at a lower ppm and therefore a lower cost. We're also working to optimize the amount of PURE Control that is applied per application or the flow rate. If we can reduce the flow rate, we can also reduce the cost. So those are the areas that we're working on. We're wrestling with it. We're not there yet. And we hope to have some better learning and more encouraging results in the coming months.

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Operator [10]

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This concludes the question-and-answer session. I would now like to turn the conference back over to Hank Lambert for brief closing remarks.

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Henry R. Lambert, PURE Bioscience, Inc. - CEO & Director [11]

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Thanks, Saveese. Well, we certainly continue to appreciate all of your support and patience as we move closer to that inflection point that we've all been waiting for. When I review our pipeline and our runway, I'm solidly optimistic about the success of our company and our ability to get to cash flow breakeven in the first calendar quarter of 2019. I look forward to reporting our continued progress to you on our next call. Thanks again for joining us today.

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Operator [12]

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