PURE: One Year after Restructuring, Business Is Bound to Take Off in Fiscal 2015 - Analyst Blog

By Grant Zeng, CFA

In mid-2013, PURE initiated management change and corporate restructuring in order to establish new and experienced leadership focused on commercialization of SDC technology in the food industry as a unique and proprietary antimicrobial agent to protect consumer safety against various pathogens.

The Company's near-term business focus is to drive customer adoption of its products in the food safety industry. Its proprietary SDC-based products uniquely address food safety issues across the supply chain and help to prevent or mitigate food contamination and the potential for food-borne illness. The Company's target customers will be foodservice operators, food processors and food manufacturers.

As part of its new commercialization focus on food safety segment, PURE also strengthened its sales and marketing leadership team. In late August 2013, PURE appointed Cliff Wechsler as its new Executive Vice President of Sales, and Tom Myers assumed the position of Executive Vice President of Marketing and Product Development.

With the new strategy and focus, PURE has reduced costs and personnel in all departments other than sales and marketing as the company continues the push toward meaningful revenues. The company has also established high-capacity outsourcing options for manufacturing to remain positioned to timely fill orders as necessary.

PURE has cut total wage expenditures by more than 30% through the elimination of manufacturing, research and development, administrative and executive positions. The company has also reduced G&A expenses related to professional services, including legal and consulting fees, public relations and investor relations. Furthermore, PURE's corporate officers and directors have elected to defer the majority of cash compensation.

In summary, with the change in governance, PURE Bioscience implemented a new business strategy focused on:

- Commercialization of its SDC-based products as a food safety solution, with a focus on food service and food processing;

- Optimization of operations and termination of non-core activities;

- Implementation of a lean organization with the relevant experience to drive commercialization and accelerate growth;

- Active and experienced board members contributing incremental insight and guidance on business strategy and execution.

One year after the execution of the restructuring, PURE has achieved multiple accomplishments in several business fronts.

For Quick Service Restaurant (QSR),

- In July 2014, PURE successfully completed the commercial market test launch of PURE® Hard Surface disinfectant in over 650 SUBWAY® Restaurant stores.

- In October, 2014, PURE announced that SUBWAY® Restaurants authorized PURE® Hard Surface disinfectant to be sold for use in all of its 27,000 U.S. stores. Plans in development for phased U.S. national sales rollout.

- During 2013 -2014, first pilot orders from several national food manufacturers and processors to initiate pilot adoption and operating protocol development for various pathogen and hygiene control points in their plants. PURE is developing rollout plans with processors/manufacturers for wider plant adoption.

At the direct food contact processing aid front,

- PURE submitted Food Contact Notification (FCN) to the FDA for raw poultry processing in July, 2014 based on test results that indicated the ability to reduce Salmonella below detectable levels.

- PURE submitted Food Contact Notification (FCN) to the FDA for produce processing in October, 2014 based on test results that indicated over a 100-fold improvement over current industry practices in reducing pathogens such as Listeria, E.coli and Salmonella.

- In September, 2014, PURE started initial commenced testing for use as a processing aid for beef and pork.  The Company expects to submit a Food Contact Notification (FCN) to the FDA for beef and pork processing in early calendar 2015.   The poultry, produce and meats processing market in the US is estimated over $1 billion. If approved, the SDC product will generate significant revenue for the Company and accelerate its growth.

At the strategic manufacturing & distribution agreement front,

- In December, 2013, PURE out-sourced its manufacturing and supply chain of SDC-based products to and established distribution agreement with Intercon Chemical Company (ICC). This agreement increases PURE's manufacturing capacity for SDC-based products and provides potential future royalty income for SDC-based products sold through ICC's institutional cleaning and sanitation distribution channel.  

We Expect Strong Revenue Growth in Fiscal 2015 and Beyond  

Revenue for the fiscal 4Q14 ended July 31, 2014 was $133,000, compared with revenue of $189,000 for the fourth fiscal quarter of 2013. 

Operating expenses, excluding share-based compensation and restructuring costs, for the fourth fiscal quarter of 2014 and 2013, were $2.0 million and $1.7 million, respectively.

For fiscal year ended July 31, 2014, total revenue was $550,000, compared with $820,000 for the fiscal year ended July 31, 2013.

Total operating expenses, excluding share-based compensation and restructuring costs, were $6.4 million, and $7.4 million, respectively, a reduction of 14%.

The Fiscal 2014 net loss was $11.1 million compared with $7.7 million for Fiscal 2013.

Non-GAAP pro forma net loss for Fiscal 2014 and 2013 was $4.3 million and $6.4 million, respectively. 

According to management, as the Company continues to build on the early successes of its new business strategy, it intends to accelerate and expand sales and distribution for its products into the food industry with a focus on a dual track of food safety market opportunities: 

- Commercialize the current EPA registered PURE® Hard Surface disinfectant and sanitizer for use in food service operations and food manufacturing.
- Subject to receiving both FDA and USDA approval,  commercialize the use of SDC as a food processing and intervention aid for food processors for treating poultry, produce, beef and pork.

PURE will establish strategic alliances to maximize the commercial potential of its technology platform and develop additional proprietary products and applications; and protect and enhance its intellectual property estate.

In calendar 2015, PURE plans to secure customer adoption of its product in food safety with 2+ national restaurant chains and 5+ national food processors.

Based on the Company's current marketing plan and recent developments, we expect that strong revenue growth will be achieved in fiscal 2015 and beyond.

We remind investors that PURE recently completed the restructuring, and is reborn as a new company with refocused strategy on food safety.  We think the new management team has built significant momentum on its refocused business strategy to commercialize its SDC-based technology as a food safety solution.

During the second half of fiscal 2014, the new management team generated significant momentum in advancing its business strategy to commercialize its SDC-based technology as a food safety solution. PURE extended commercial market test launch of PURE® Hard Surface Disinfectant to over 650 Subway stores and will sell this product in all of its 27,000 stores. Customer feedback on both SDC product performance and ease of use are very positive. The phased U.S. national rollout is under development for expected system-wide launch. Rollout plans are in development for wider plant adoption from five national food processors that placed commercial pilot orders.

During third quarter, PURE reported outstanding initial test results for the application of SDC as a direct food contact processing aid for raw poultry. Estimated potential addressable U.S. market opportunity for this new application exceeds $1 billion for poultry, produce and meats.

In July, PURE filed for required regulatory authorization from the FDA and USDA for poultry and will file soon for produce and meats. Approval for U.S. commercial use is expected by end of calendar 2014 for poultry. PURE will begin commercialization of SDC in 1Q15 for use in poultry processing.

In order to further penetrate the market, PURE recently hired Bridget Tinsley as Vice President Market Development.  Tinsley will be responsible for both expanding the market for SDC as a food contact surface disinfectant and sanitizer and leading the future commercial applications of SDC as a food safety aid in the processing of poultry, meat and produce. Tinsley has nearly fifteen years of food industry and food safety experience with diverse expertise across global food programs, territory sales, account management, and laboratory research and business development.

With new management and new strategy, we believe revenue will grow significantly in fiscal 2015 and beyond. Specifically, we estimate total revenue for fiscal 2015 will reach $2.0 million, representing an increase of 273% over fiscal 2014.  We estimate PURE will achieve positive quarterly EBITDA by end of calendar Q4 2015. The Company will become profitable in fiscal 2017 based on total revenue of $15 million according to our financial model. Earnings per share will reach $0.26 by fiscal 2020 based on revenue of $40 million.

Balance Sheet Cleaned and Boosted

As of July 31, 2014, PURE had $86,000 in cash and cash equivalents.

In March 2014, PURE raised $1.3 million from the sale of 1.35 million shares of common stock through private equity placements.

In August, 2014, PURE raised $7.9 million in an equity placement (includes $4 million from strategic investor Franchise Brands, LLC, created by the founders of SUBWAY® Restaurants).

This new financing provided adequate capital to fund operations for at least the next twelve months enabling the Company to focus on commercialization and revenue generation. This new financing will also help position PURE to pursue its stated objective of up-listing to a national exchange.

During the fiscal 2Q14, PURE extinguished early a promissory note of $1.125 million in principal and other accrued costs for approximately $500,000, resulting in a gain on extinguishment of debt of $727,000. As a consequence, as of April 30, 2014, the Company has no long-term debt.

New management has been working diligently to strengthen PURE's balance sheet since they took office. Specific measures included raising new funds and reducing non-core operating activities.

By reducing its non-core operating activities, PURE should be able to reduce its burn rate significantly in the next few quarters.

PURE Shares Are Undervalued

We maintain our Outperform rating on PURE shares and reiterate our 12-month price target of $3.00 per share.

Our call is based on the recent progress the company has achieved and positive developments within the company as well as the attractive valuation.

PURE is a technology-based bioscience company that provides solutions to numerous global health challenges. PURE's proprietary high efficacy/low toxicity SDC-based antimicrobials represent innovative advances in diverse markets and lead today's global trend toward industry and consumer use of “green” products. Patented SDC is an electrolytically generated source of stabilized ionic silver, which formulates well with other compounds. As a platform technology, SDC is distinguished from competitors in the marketplace because of itssuperior efficacy, reduced toxicity and the inability of bacteria to form a resistance to it. 

PURE's SDC is the first new disinfectant registered with EPA in over 30 years. SDC's competitive advantages in efficacy and safety make it outstanding among its competitors and represent a paradigm shift in the disinfectant/sanitizer market place.

Another key feature of SDC is that SDC-based products have broad applicability in diverse markets. The Company's current focus is to expand distribution of currently approved disinfectant/sanitizer products to consumers in the food safety industry.

Recent corporate governance change led to a new management, which is experienced, disciplined and results—oriented. New board will play key incremental role providing strategic insight to accelerate near term market penetration.

In terms of valuation, currently, the Company trades around $1.05 per share with a market cap of $42 million based on 40 million shares outstanding. We think this is a deep discount based on the company's fundamentals. According to our model, revenue will grow at 81% CAGR in the next fiscal 5 years. PURE will become profitable in fiscal 2017 with an EPS of 0.03 based on total revenue of $15.0 million. EPS will grow to $0.26 per share in fiscal 2020 based on total revenue of $40 million. With this in mind, we think PURE shares should be traded at a P/E ratio of 30 x.  Applying this P/E multiple with our estimated EPS of $0.26 per share in fiscal 2020, discounted at 20% for 5 years, we come up with a target price of $3.00. This values PURE at $120 million in market cap, which we think is still conservative.

But keep in mind the risks. Although its lead product PURE Hard Surface is increasingly gaining recognition, sales may take longer time to gain traction since PURE is still in its early stage of commercialization of its SDC technology. Sales so far have not been impressive. SDC technology is quite new to most customers in the disinfectant market, and the costs for SDC are also higher than those for most existing technologies. Therefore, rollout of the SDC platform will take time.

Cash burn is another concern. Current cash will only provide funding for the next 12 months and the Company may need to tap the capital market again. Equity financing will dilute existing shareholder base. A financing deal with a strategic partner should be positive to the Company's long term growth.

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