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Edited Transcript of PURE earnings conference call or presentation 6-Mar-19 9:30pm GMT

Q2 2019 PURE Biosciences Inc Earnings Call

EL CAJON Mar 8, 2019 (Thomson StreetEvents) -- Edited Transcript of PURE Biosciences Inc earnings conference call or presentation Wednesday, March 6, 2019 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, Secretary & Director

* Mark Stuart Elliott

PURE Bioscience, Inc. - VP of Finance

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Conference Call Participants

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* Christian Bozorth

* 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 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 + MacInnis, Inc. Please go ahead.

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

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Thank you, Shenae, and good afternoon, everyone. It's my pleasure to welcome you to the company's conference call to discuss fiscal 2019 Q2 and 6-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 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, provides 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 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 6 months ended January 31, 2019 were $984,000, an increase of 12% compared with net product sales of $875,000 for the 6 months ended January 31, 2018. Core food safety revenues increased 68% as compared with food safety revenues during the 6 months ended 2018.

Total operating costs and expenses, excluding cost of goods sold and share-based compensation, for the 6 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 6 months ended January 31, 2019, was $1.7 million as compared with $2.6 million for the 6-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 6 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?

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

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Thanks, Mark, and good afternoon, everyone. We certainly appreciate your 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 6-month period. We anticipate that next quarter, fiscal Q3, comparable results will also show strong growth, continuing the validation of the game-changing nature of our nontoxic, 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 4 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. 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 customers' adoption plans materialize as they project, we'll reach our 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, 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 combined PURE Control with its own SmartWash processing aid, and now the newly named SmartWash Boost is being actively marketed to their foodservice and retail customers and is in use at 3 Taylor plants today.

As Jim Brennan, President of SmartWash, said, the introduction of SmartWash Boost is "The most advanced risk management approach for prepared salads." Boost is truly a game-changing food safety innovation. Boost enhances food safety by eliminating pathogens causing foodborne illness, including the leading causes, Salmonella, E. coli and Listeria. Once fully deployed, we estimate that each of Taylor's plants represents up to $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 4 new plants online. They have ordered equipment needed to begin their installation process, and work has been initiated at the first of the 4 plants. As Taylor's customer adoption grows, it will bring additional plants online in 2019. They're in the midst of testing treated lettuce for a household name, fast-casual restaurant chain, and they anticipate chain-wide adoption once that 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 8 processors last quarter. We expect that as Taylor begins 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 have 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 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 sizable 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 push-button application equipment into its entire New Jersey facility. It will be used for a daily, 4-minute mist application of PURE Hard Surface in all 10 production rooms. Taylor has already committed to starting installation in their Maryland plant, and we have a meeting tomorrow with their QA and engineers to 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'm 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 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, represented $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. We continue making inroads into 3 super distribution centers, which deploy 3x the number of trucks as the average center. And we continue to expect that we'll reach our 2019 calendar year-end 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 5 largest foodservice distributors in the country, with 1,600 trucks, 27 distribution centers and 7 processing plants, which serve restaurants, schools, venues and institutions. I can report that following a meeting with corporate last week, we have been given the go-ahead for a system-wide rollout, and it is the top priority of their food safety and QA teams this year. At this company, corporate controls all distribution centers, and we look forward to their calendar Q2 orders for disinfection on trucks, environmental and surface disinfection inside distribution centers and meat processing plants.

Word-of-mouth drives interest, 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 non-refrigerated trucks.

Our solution 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 it now takes carriers or distributors to less effectively 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 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 precleaned 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 "clean" truck. After a 4-minute mist treatment with PURE Hard Surface, we had 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 a 7,600-pathogen count. We found continued, dramatic residual kill results for up to 2 weeks when counts were only 42,000, again, after continuous use. Remember, we started at 840,000 2 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 True Leaf Farms, Saputo Dairy and Garden Fresh. We are 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 plants 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-store system in the U.S., 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 2 other restaurant chains.

In our new market initiative for PURE Hard Surface for disinfection, egg hatcheries, we are continuing testing at egg hatcheries of 2 of the top 5 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 you 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.

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 imminent.

Now I'd like to turn our call back over to our operator, Shenae, 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 Christian Bozorth with Kanawha-Gauley Coal.

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Christian Bozorth, [2]

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Mr. Lambert, regarding the trucking industry, I was wondering how many trucking companies you have onboard so far.

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

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So far, we have 4 companies that are using our truck sanitizing solution, and we are in discussions with up to 10 additional potential customers.

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Christian Bozorth, [4]

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And of the 14, 4 plus 10, are any of them in the, let's say, the top 10 largest refrigerated truck companies in the United States?

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Henry R. Lambert, PURE Bioscience, Inc. - CEO, Secretary & Director [5]

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Yes. We're working with 2 of the top 5 foodservice distributors, including the largest.

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Operator [6]

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

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Unidentified Participant, [7]

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Yes. Hank, can you be more specific on when you expect cash flow positive? Since we already changed it from the first quarter to last time, I think, you said by the end of the second quarter. Now it looks like we don't know, maybe, because of the Taylor Farms mishap.

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

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Right. And again, [Gloria], I mean, that's a great question we ask all the time around 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 the romaine outbreak, 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.

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Operator [9]

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There are no more questions at this time. 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, Secretary & Director [10]

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Thanks, Shenae. 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.

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Operator [11]

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