U.S. Securities and
Exchange Commission
Washington, D.C. 20549
Form 10-Q
(Mark One)
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[X]
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QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the period ended
October 31, 2007
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[ ]
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TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from______ to _______
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Commission
File number
0-21019
PURE Bioscience
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(Exact name of registrant as specified in its charter)
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California
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33-0530289
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(State or other jurisdiction of incorporation or
organization)
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(IRS Employer Identification No.)
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1725 Gillespie Way, El
Cajon, California 92020
(Address of principal
executive offices)
(619) 596-8600
(Issuers telephone
number, including area code)
Indicate by check mark whether the
registrant (1) has filed all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days: Yes
|X| No |_|
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.
See definition of accelerated filer and large accelerated filer in
Rule 12b-2 of the Exchange Act:
Large Accelerated Filer
|_| Accelerated Filer |_| Non-accelerated Filer |X|
Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yes |_|
No |X|
The number of shares of the
registrants Common Stock, no par value, outstanding as of December 13, 2007 was
27,194,133 shares.
PURE Bioscience
FORM 10-Q
For the Three Months
Ended October 31, 2007
TABLE OF CONTENTS
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PART 1--
PART II--
SIGNATURES
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FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (unaudited):
Consolidated Balance Sheets as of July 31, 2007 and October 31, 2007
Consolidated Statements of Operations for the three months ended October 31, 2007 and 2006
Consolidated Statements of Cash Flows for the three months ended October 31, 2007 and 2006
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
OTHER INFORMATION
Item 1. Legal Proceedings
Item 1A Risk Factors
Item 2. Unregistered Sales of Equity Securities
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
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2
PURE Bioscience
CONSOLIDATED BALANCE
SHEETS
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(Unaudited)
October 31,
2007
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July 31,
2007
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ASSETS
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Current Assets
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Cash and cash equivalents
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$
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3,670,955
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$
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735,654
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Short-term investments
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4,759,520
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708,058
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Accounts receivable, net of allowance for doubtful accounts
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of $0 at July 31, 2007 and $0 at October 31, 2007
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33,565
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7,548
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Inventories, net
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233,353
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242,899
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Prepaid expenses
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23,000
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Total current assets
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8,720,393
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1,694,159
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Total property, plant and equipment, net
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940,787
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968,737
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Other Assets
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Prepaid consulting
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3,253
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13,011
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Deposits
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7,308
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9,744
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Patents
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2,165,864
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2,176,388
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Total other assets
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2,176,425
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2,199,143
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Total assets
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$
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11,837,605
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$
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4,862,039
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LIABILITIES AND STOCKHOLDERS' EQUITY
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Current Liabilities
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Accounts payable
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$
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164,956
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$
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422,753
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Accrued liabilities
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108,270
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77,228
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Taxes payable
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2,400
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2,400
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Total current liabilities
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275,626
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502,381
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Deferred rent
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9,817
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Total liabilities
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285,443
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502,381
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Stockholders' Equity
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Preferred Stock, no par value:
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5,000,000 shares authorized, no shares issued
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Class A common stock, no par value:
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50,000,000 shares authorized
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24,961,805 issued and outstanding at July 31, 2007, and
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27,187,883 issued and outstanding at October 31, 2007
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33,107,924
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26,519,543
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Additional Paid-In Capital
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2,576,964
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2,486,829
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Warrants:
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391,698 issued and outstanding at July 31,2007, and
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880,351 issued and outstanding at October 31, 2007
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1,766,159
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245,825
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Accumulated other comprehensive income
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2,358
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Accumulated deficit
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(25,901,243
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)
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(24,892,539
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)
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Total stockholders' equity
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11,552,162
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4,359,658
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Total liabilities and stockholders' equity
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$
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11,837,605
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$
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4,862,039
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The accompanying notes
are an integral part of the consolidated financial statements
3
PURE Bioscience
CONSOLIDATED
STATEMENTS OF OPERATIONS (Unaudited)
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For the Three Months Ended
October 31,
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2007
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2006
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Net revenues
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$
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95,290
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$
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27,704
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Cost of sales
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31,693
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12,162
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Gross profit
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63,597
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15,542
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Selling expenses
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88,202
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182,166
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General and administrative expenses
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707,609
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468,665
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Research and development
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288,205
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274,350
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Total operating expenses
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1,084,016
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925,181
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Loss from operations
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(1,020,419
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)
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(909,639
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)
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Other income and (expense):
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Interest income
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11,657
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47,349
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Other
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58
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(5,000
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)
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Total other income (expense)
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11,715
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42,349
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Net loss before income taxes
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(1,008,704
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)
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(867,290
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)
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Income tax provision
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Net loss
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(1,008,704
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)
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(867,290
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)
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Net loss per common share, basic and diluted
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$
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(0.04
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)
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$
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(0.04
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)
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Shares used in computing basic and diluted net loss per share
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25,333,567
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24,014,073
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The accompanying notes
are an integral part of the consolidated financial statements
4
PURE Bioscience
CONSOLIDATED
STATEMENTS OF CASH FLOWS (Unaudited)
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For the Three Months
Ended October 31,
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2007
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2006
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Cash flows from operating activities:
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Net loss
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$
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(1,008,704
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)
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$
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(867,290
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)
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Adjustments to reconcile net loss to net cash
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used in operating activities:
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Amortization and depreciation
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97,373
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60,111
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Stock-based compensation
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78,331
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166,047
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Changes in assets and liabilities:
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Accounts receivable
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(26,017
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)
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6,218
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Prepaid expense
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(20,564
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)
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61,242
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Inventories
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9,546
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(41,402
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)
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Deferred rent
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9,817
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Accounts payable and accrued liabilities
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(226,755
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)
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(160,747
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)
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Net cash (used) in operating activities
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(1,086,973
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)
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(775,821
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)
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Cash flows from investing activities
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Investment in patents
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(32,873
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)
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(15,867
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)
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Purchase of property, plant and equipment
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(26,026
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)
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(103,664
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)
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Purchases of short-term investments
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(4,749,973
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)
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(2,000,000
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)
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Sales of short-term investments
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700,869
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Net cash (used) in investing activities
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(4,108,003
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)
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(2,119,531
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)
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Cash flows from financing activities
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Net proceeds from the sale of common stock
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7,740,967
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Proceeds from exercise of options and warrants
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389,310
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51,500
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Net cash provided by (used in) financing activities
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|
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8,130,277
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51,500
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Net increase (decrease) in cash and cash equivalents
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2,935,301
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(2,843,852
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)
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Cash and cash equivalents at beginning of period
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735,654
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4,720,362
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|
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Cash and cash equivalents at end of period
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$
|
3,670,955
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$
|
1,876,510
|
|
|
|
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The accompanying notes
are an integral part of the consolidated financial statements
5
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
Note 1. Basis of
Presentation
The financial statements included herein
have been prepared by PURE Bioscience without audit, in accordance with the instructions
to Securities and Exchange Commission (SEC) Form 10-Q and Article 10 of
Regulation S-X. Certain information and footnote disclosures normally included in the
financial statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted as allowed by such rules and regulations, however we
believe that the accompanying unaudited financial statements contain all adjustments
(including normal recurring adjustments) necessary to present fairly the financial
condition, results of operations and cash flows for the periods presented. These unaudited
consolidated financial statements presented herein should be read in conjunction with our
audited financial statements for the period ended July 31, 2007, and their accompanying
notes, as filed with the Securities and Exchange Commission in our 10K-SB on October 29,
2007.
While
management believes the procedures followed in preparing the financial statements included
in this quarterly report on Form 10Q are reasonable, the accuracy of the amounts are at
least partially dependent upon facts that will exist and results that will be accomplished
in subsequent periods. The preparation of the consolidated financial statements requires
management to make estimates and assumptions that affect the amounts reported in the
statements and accompanying notes, and actual results could differ materially from those
estimates. The results of operations for the three months ended October 31, 2007 are not
necessarily indicative of the results of operations for the full year, or any future
periods.
The accompanying unaudited financial
statements include the consolidated accounts of PURE Bioscience and its subsidiaries. All
inter-company balances and transactions have been eliminated.
Note 2. Summary of
Significant Accounting Policies
Reclassifications
Certain comparative figures for prior
periods have been reclassified. Specifically, we have reclassified $2,000,000 from cash
and cash equivalents to short-term investments on the consolidated balance sheets at
October 31, 2006. The balance sheets at October 31, 2006 are not presented herein, however
the reclassification resulted in a $2,000,000 increase in short-term investments and a
corresponding decrease in cash and cash equivalents at the end of the period, as reflected
on the consolidated statement of cash flows for the three months ended October 31, 2006.
Revenue
Recognition
During the periods presented herein
our revenue was derived from the sale of SDC concentrate and the sale of finished packaged
products containing SDC. We recognize revenue from sales of these products under the
provisions of Staff Accounting Bulletin (SAB) No. 104, Revenue Recognition,
which is generally when we ship the products free on board from either our facility or
from third party packagers, we have transferred title to the goods, and we have eliminated
our risk of loss.
Intangible
Assets / Long-Lived Assets
Our intangible assets primarily
consist of the worldwide patent portfolio of our silver ion technologies, and to a lesser
extent our Triglycylboride technology. Outside legal costs and filing fees related to
obtaining patents are capitalized as incurred. The total amounts capitalized for pending
patents was $32,873 and $15,867 in the three month periods ended October 31, 2007 and
2006, respectively. Patents are stated net of accumulated amortization of $1,032,139 and
$988,742 at October 31, 2007 and July 31, 2007, respectively.
The cumulative cost of acquiring
patents is amortized on a straight-line basis over the estimated remaining useful lives of
the patents, generally between 17 and 20 years from the date of issuance. At October 31,
2007 the weighted average remaining amortization period for all patents was approximately
12.5 years. Amortization expense for the three month periods ended October 31, 2007 and
2006 was $43,396 and $40,631, respectively.
Accounting
for Stock-Based Compensation
In December 2004, the Financial
Accounting Standards Board (FASB) revised SFAS 123(R), Share-Based Payment,
which establishes accounting for share-based awards exchanged for employee and Director
services and requires us to expense the estimated fair value of these awards over the
applicable service period. Under SFAS No. 123(R), share-based compensation cost is
measured at the grant date based on the estimated fair value of the award, and is
recognized as expense over the applicable service period. We do not have, and have not had
during the three month periods ended October 31, 2007 or 2006, any stock option awards
with market or performance conditions.
We
adopted the accounting provisions of SFAS No. I23(R) in the three month period ended
October 31, 2006, using the modified prospective application. Under the modified
prospective application, prior fiscal periods are not revised for comparative purposes. Prior
to August 1, 2006, we followed Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees, as amended, in our accounting for share-based compensation. The
valuation provisions of SFAS No. I23(R) apply to new awards and to awards that were
outstanding on the adoption date and were or are subsequently modified or cancelled. As at
July 31, 2006, all outstanding share-based awards were fully vested, with the exception of
the consultant options recorded in our balance sheets as prepaid consulting
(as further discussed in Note 6).
Stock
Options to Non-Employees
Charges for stock options granted to
non-employees have been determined in accordance with SFAS No. 123(R) and EITF No. 96-18,
Accounting for Equity Instruments that are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling, Goods or Services, whereby we use the
estimated fair value of the consideration received or the estimated fair value of the
stock options issued, whichever is more reliably measured. The fair value for these stock
options is based on the Black-Scholes Option Pricing Model. For such stock options, during
the three month period ended October 31, 2007 we recorded $9,758 in research and
development expense; and during the three month period ended October 31, 2006 we recorded
$65,038 in selling expense, $91,250 in general and administrative expense, and $9,758 in
research and development expense. Included in these amounts is the amortization of
consultant options recorded in our consolidated balance sheets as prepaid
consulting and further discussed in Note 6.
6
Cash,
Cash Equivalents and Short-term Investments
We consider all liquid investments
with maturities of ninety days or less when purchased to be cash equivalents. Our
short-term investments have maturities of greater than ninety days from our date of
purchase. We classify securities as available-for-sale in accordance with SFAS
115, Accounting for Certain Investments in Debt and Equity Securities, and carry these
investments at fair market value with any unrealized gains and losses reported as a
component of stockholders equity on the consolidated balance sheets and in the
statements of stockholders equity. All of our short-term investments as at July 31
or October 31, 2007 are carried at fair value, based upon market prices quoted on the last
day of the fiscal period, and are considered available for sale. We use the specific
identification method to determine the cost of debt securities sold, and include gross
realized gains and losses in investment income. Realized gains and losses recorded for the
three month periods ended October 31, 2007 and 2006 were $5,902 and zero, respectively.
All interest and dividends received from short-term investments are included in interest
income.
As at October 31 and July 31, 2007
all cash deposits and short-term investments were invested in either U.S. FDIC insured
bank accounts; institutional money market mutual funds investing in A-1 (S&P), Prime-1
(Moodys) or F1 (Fitch) short-term corporate debt obligations; U.S. Treasury
Securities, or United States Government obligations issued by or backed by a federal
agency of the United States Government.
Comprehensive
Income
SFAS 130, Reporting Comprehensive
Income, requires us to display comprehensive income or loss and its components as part of
our consolidated financial statements. Our comprehensive loss includes our net loss and
certain changes in equity that are excluded from our net loss, including unrealized
holding gains and losses on available-for-sale securities. SFAS 130 requires such changes
in stockholders equity to be included in accumulated other comprehensive income or
loss. Our comprehensive loss was $1,006,346 and $867,290 for the three month periods ended
October 31, 2007 and 2006, respectively, and includes unrealized holding gains on
available-for-sale securities of $2,358 and zero for the three month periods ended October
31, 2007 and 2006, respectively .
Net
Loss Per Common Share
In accordance with FASB Statement No.
128, Earnings Per Share (SFAS 128), the Company computes basic loss per share
by dividing the applicable net loss by the weighted average number of common shares
outstanding during the respective period. Diluted per share amounts assume the conversion,
exercise or issuance of all potential common stock equivalents, including stock options
and warrants, unless the effect is to reduce a loss or increase the income per common
share from continuing operations. As we incurred losses in three month periods ended
October 31 2007 and 2006, we did not include common stock equivalent shares in the
computation of net loss per share as the effect would have been anti-dilutive. Therefore,
both the basic and diluted loss per common share for the three month periods ended October
31, 2007 and July 31, 2006 are based on the weighted average number of shares of our
common stock outstanding during the periods.
Recent
Accounting Pronouncements
In September 2006, the FASB issued
Statement of Financial Accounting Standards (SFAS) No. 157, Fair Value
Measurements, which provides a single definition of fair value, a framework for measuring
fair value, and expanded disclosures concerning fair value. Previously, different
definitions of fair value were contained in various accounting pronouncements creating
inconsistencies in measurement and disclosures. SFAS No. 157 applies under those
previously issued pronouncements that prescribe fair value as the relevant measure of
value, except Statement No. 123R and related interpretations and pronouncements that
require or permit measurement similar to fair value but are not intended to measure fair
value. This pronouncement is effective for fiscal years beginning after November 15, 2007
(our fiscal year ending July 31, 2009). We do not expect the adoption of SFAS No. 157 to
have a material impact on our consolidated financial statements or results of operations.
In February 2007, the FASB issued
SFAS No. 159, The Fair Value Option for Financial Assets and Financial
LiabilitiesIncluding an Amendment of FASB Statement No. 115. This standard permits
an entity to choose to measure many financial instruments and certain other items at fair
value. Most of the provisions in SFAS No. 159 are elective, however the amendment to SFAS
No. 115, Accounting for Certain Investments in Debt and Equity Securities, applies to all
entities with available-for-sale and trading securities. The fair value option established
by SFAS No. 159 permits all entities to choose to measure eligible items at fair value at
specified election dates. Under SFAS No. 159 we would report unrealized gains and losses
on items for which the fair value option has been elected in earnings at each subsequent
reporting date. The fair value option: (a) may be applied instrument by instrument, with a
few exceptions, such as investments otherwise accounted for by the equity method; (b) is
irrevocable (unless a new election date occurs); and (c) is applied only to entire
instruments and not to portions of instruments. SFAS No. 159 is effective as of the
beginning of the first fiscal year that begins after November 15, 2007 (our fiscal year
ending July 31, 2009), however we do not currently expect the adoption of SFAS No. 159 to
have a material impact on our consolidated financial statements.
In December 2007, the FASB issued
SFAS No. 141 (revised 2007), Business Combinations (SFAS 141R). This Statement
replaces SFAS No. 141, Business Combinations and requires an acquirer in a business
combination to recognize the assets acquired, the liabilities assumed, including those
arising from contractual contingencies, any contingent consideration, and any
non-controlling interest in the acquiree at the acquisition date, measured at their fair
values as of that date, with limited exceptions specified in the Statement. SFAS 141R also
requires the acquirer in a business combination achieved in stages (sometimes referred to
as a step acquisition) to recognize the identifiable assets and liabilities, as well as
the non-controlling interest in the acquiree, at the full amounts of their fair values (or
other amounts determined in accordance with SFAS 141R). In addition, SFAS 141Rs
requirement to measure the non-controlling interest in the acquiree at fair value will
result in recognizing the goodwill attributable to the non-controlling interest in
addition to that attributable to the acquirer. SFAS 141R amends SFAS No. 109, Accounting
for Income Taxes, to require the acquirer to recognize changes in the amount of its
deferred tax benefits that are recognizable because of a business combination either in
income from continuing operations in the period of the combination, or directly in
contributed capital, depending on the circumstances. It also amends SFAS 142, Goodwill and
Other Intangible Assets, to provide guidance on the impairment testing of acquired
research and development intangible assets and assets that the acquirer intends not to
use. SFAS 141R applies prospectively to business combinations for which the acquisition
date is on or after the beginning of the first annual reporting period beginning on or
after December 15, 2008 (our fiscal year commencing August 1, 2009). We do not currently
expect the adoption of the provisions of SFAS 141R to have a material effect on our
financial condition, results of operations or cash flows.
7
In December 2007, the FASB issued
Statement of Financial Accounting Standards No. 160, Non-controlling Interests in
Consolidated Financial Statements (SFAS 160). SFAS 160 amends Accounting
Research Bulletin 51, Consolidated Financial Statements, to establish accounting and
reporting standards for the non-controlling interest in a subsidiary and for the
deconsolidation of a subsidiary. It also clarifies that a non-controlling interest in a
subsidiary is an ownership interest in the consolidated entity that should be reported as
equity in the consolidated financial statements. SFAS 160 also changes the way the
consolidated income statement is presented by requiring consolidated net income to be
reported at amounts that include the amounts attributable to both the parent and the
non-controlling interest. It also requires disclosure, on the face of the consolidated
statement of income, of the amounts of consolidated net income attributable to the parent
and to the non-controlling interest. SFAS 160 requires that a parent recognize a gain or
loss in net income when a subsidiary is deconsolidated and requires expanded disclosures
in the consolidated financial statements that clearly identify and distinguish between the
interests of the parent owners and the interests of the non-controlling owners of a
subsidiary. SFAS 160 is effective for fiscal periods, and interim periods within those
fiscal years, beginning on or after December 15, 2008 (our fiscal year commencing August
1, 2009). We do not currently expect the adoption of the provisions of SFAS No. 160 to
have a material effect on our financial condition, results of operations or cash flows.
Note 3. Private Placement
On October 19, 2007 we sold 1,677,596
unregistered securities units to accredited investors, at $5.03 per unit. Each unit
consisted of one share of our common stock and one quarter of a five-year warrant to
purchase our common stock at $7.17 per share. A total of 419,394 such five-year warrants
were issued to the investors and the fair value of the warrants, based on their fair value
relative to the common stock issued, was $1,143,676 (based on the Black-Scholes Option
Pricing Model assuming no dividend yield, volatility of 95.38% and a risk-free interest
rate of 4.75%). Additionally, Taglich Brothers, Inc. acted as placement agent and in
accordance with the placement agent agreement, they received a cash fee of $675,065 and a
five-year warrant to purchase 167,759 shares of our common stock at $8.60 per share. The
fair value of the 167,759 placement agent warrants, based on their fair value relative to
the common stock issued, was $441,970 (based on the Black-Scholes Option Pricing Model
assuming no dividend yield, volatility of 95.38% and a risk-free interest rate of 4.75%).
Other cash fees paid to third parties, for legal and other fees associated with the
private placement, were $22,277. The gross proceeds of the private placement were
$8,438,308 and the net proceeds to us, after fees and expenses, were $7,740,967.
Under the terms of the placement
agreement, we are required to file a registration statement with the Securities and
Exchange Commission within 90 days of the private placement, or by January 17, 2008, for
the resale of shares issued in the private placement and the shares to be issued upon the
exercise of the warrants. We plan to file the registration statement on Form S-1 by that
date, however if the registration statement is not filed within the 90-day period, we
would be required to repay 2% of the gross proceeds (or $168,767) for each thirty day
period, or any part thereof, beyond the 90-day period until the registration statement is
filed. In addition, if the registration statement is not declared effective, or the common
stock may not be sold without any restriction pursuant to Rule 144, within 210 days after
the filing date, we would be required to repay 2% of the gross proceeds (or $168,767) for
each thirty day period (or any part of a 30-day period) beyond the 210-day period until
the shares are registered, up to a maximum repayment of 18% of the gross proceeds (or
$1,518,899). No registration penalties are payable with respect to the shares underlying
either the investor or the placement agent warrants.
In December 2006, the FASB approved
FASB Staff Position (FSP) No. EITF 00-19-2, Accounting for Registration Payment
Arrangements, or FSP EITF 00-19-2, which specifies that the contingent obligation to
make future payments or otherwise transfer consideration under a registration payment
arrangement, whether issued as a separate agreement or included as a provision of a
financial instrument or other agreement, should be separately recognized and measured in
accordance with SFAS No. 5, Accounting for Contingencies. FSP EITF 00-19-2
also requires additional disclosure regarding the current carrying amount of the
liability, if any. The guidance in FSP EITF 00-19-2 amends FASB Statements No. 133,
Accounting for Derivative Instruments and Hedging Activities, and No. 150,
Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity, and FASB Interpretation No. 45, Guarantors
Accounting and Disclosure requirement for Guarantees, Including Indirect Guarantees of
Indebtedness of Others, to include scope exceptions for registration payment
arrangements. We do not currently believe that the transfer of consideration under the
October 2007 private placement agreement is probable and have therefore not recorded any
amount as a contingent liability on the consolidated balance sheets as at October 31,
2007. Based on the relative fair value of the common stock and warrants, we booked
$6,155,321 to common stock and $1,585,646 to warrants; a total of $7,740,967 of net
proceeds recorded within shareholders equity on the consolidated balance sheets at
October 31, 2007.
Note 4. Other Equity and
Common Stock Transactions
We paid no cash dividends during any
of the periods presented, and have never paid cash dividends.
In August 2007 we issued 12,500
unregistered shares of common sock to a third party as part of a legal settlement, with an
estimated fair value of $43,750 based on a market price of $3.50 per share.
8
During the three months ended October
31, 2007 we received an aggregate of $318,750 from the exercise of non-employee options on
390,000 shares of common stock at an average exercise price of $0.82, received $45,000
from the exercise of options on 75,000 shares of common stock issued under employee stock
option plans, received $25,560 from the exercise of common stock warrants on 10,000 shares
of common stock at an average exercise price of $2.56, and recorded $24,822 of employee
stock option expense. Additionally during the three months ended October 31, 2007 there
were net exercises of 88,500 warrants that resulted in the issuance of 60,982 shares of
common stock based on the exercise price of the warrants and the market price of our
common stock on the date of exercise.
Note 5. Stock-Based
Compensation
We have, or have had during the
fiscal years presented herein, the following equity incentive plans (the Plans) pursuant
to which options to acquire common stock have been granted: the 1998 Directors And
Officers Stock Option Plan; the 2001 Directors And Officers Stock Option Plan: the 2001
ETIH2O Stock Option Plan; the 2001 Consultants and Advisors Stock Option Plan; the 2002
Non-Qualified Stock Option Plan; the 2002 Employee Incentive Stock Option Plan; the 2004
Consultants and Advisors Stock Option Plan; and the 2007 Equity Incentive Plan. The Plans
are administered by an Administrative Committee. The exercise price for stock options, or
the value of other incentive grants granted under the Plans, are set by the Administrative
Committee but may not be for less than the fair market value of the shares on the date the
award is granted. The period in which options can be exercised is set by the
Administrative Committee but is not to exceed five years from the date of grant. Options
granted to new Executive Officers or Directors vest one year from date of appointment or
election. Options granted to continuing Officers or Directors are immediately exercisable
and vest upon exercise.
On August 1, 2006, we adopted the
provisions of Statement of Financial Accounting Standards (SFAS) No. 123
(revised 2004), Share-Based Payment (SFAS123(R)), requiring us to recognize
expense related to the fair value of share-based compensation awards to employees and
Directors. We elected to use the modified-prospective-transition method as permitted by
SFAS 123R and therefore have not restated our financial results for prior fiscal years. As
at July 31, 2006, all outstanding share-based awards were fully vested, with the exception
of the consultant options recorded in our balance sheets as prepaid consulting
(as further discussed in Note 6). We recognize compensation expense for stock option
awards on a straight-line basis over the applicable service period of the award, which is
the vesting period. Share-based compensation expense for awards granted subsequent to July
31, 2006 is based on the grant date fair value estimated in accordance with the provisions
of SFAS 123R, using the Black-Scholes Option Pricing Model. The following methodology and
assumptions were used to calculate share based compensation for the three month periods
ended October 31, 2007 and 2006:
|
For the Three month periods ended October 31,
|
|
2007
|
|
2006
|
Expected volatility
|
|
|
|
|
88.27% - 91.36%
|
|
|
70.88% - 70.88%
|
Risk-free interest rate
|
|
|
|
|
5.25%
|
|
|
5.25%
|
Expected rate of Forfeiture
|
|
|
|
|
0.0%
|
|
|
0.0%
|
Expected Dividend Yield
|
|
|
|
|
0.0%
|
|
|
0.0%
|
Weighted Average Expected Term
|
|
|
|
|
1.63 years
|
|
|
3.0 years
|
Expected price volatility is the
measure by which our stock price is expected to fluctuate during the expect term of an
option. Expected volatility is derived from the historical daily change in the market
price of our common stock, as we believe that historical volatility is the best indicator
of future volatility. For stock options granted subsequent to July 31, 2006 we have
excluded the period prior to November 1, 2005 from our historical price volatility, as
during this period our market price reflected significant uncertainty associated with both
our arbitration proceedings against Falken Industries and our ability to close the sale of
the assets of the Water Treatment Division. We believe that the volatility of the market
price of our common stock during periods prior to November 1, 2005 is not reflective of
future expected volatility.
Following the guidance of Staff
Accounting Bulletin No. 107, we follow the shortcut method to determine the
expected term of plain vanilla options issued to employees and Directors. The expected
term is presumed to be the mid-point between the vesting date and the end of the
contractual term. Our estimation of expected term for non-employee options is the
contractual term of the option award.
For the purposes of estimating the
fair value of stock option awards, the risk-free interest rate used in the Black-Scholes
calculation is based on the prevailing U.S Treasury yield as determined by the U.S.
Federal Reserve. We have never paid any cash dividends on our common stock and do not
anticipate paying cash dividends on our common stock in the foreseeable future.
Stock-based compensation expense
recognized in the consolidated statements of operations is based on awards ultimately
expected to vest, reduced for estimated forfeitures. SFAS 123R requires forfeitures to be
estimated at the time of grant, and revised, if necessary, in subsequent periods if actual
forfeitures differ from those estimates. Historically, we have not had significant
forfeitures of unvested stock options granted to employees and Directors. A significant
number of our stock option grants are fully vested at issuance or have short vesting
provisions. Therefore, we have estimated the forfeiture rate of our outstanding stock
options as zero.
9
The following table sets forth the
share-based compensation expense recorded in our consolidated statements of operations for
the three months ended October 31, 2007 and 2006 resulting from share-based compensation
awarded to our employees, Directors and third party service providers, excluding the
amortization of prepaid consulting as detailed in Note 6:
|
Three Months Ended
October 31, 2007
|
|
Three Months Ended
October 31, 2006
|
|
Share-based compensation for employees and directors:
|
|
|
|
|
|
|
|
|
Selling expense
|
|
|
$
|
|
|
$
|
|
|
General and administrative expenses
|
|
|
|
24,822
|
|
|
|
|
Research and development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total share-based compensation for employees and directors
|
|
|
|
24,822
|
|
|
|
|
Share-based compensation for third party service providers:
|
|
|
Selling expense
|
|
|
$
|
|
|
$
|
|
|
General and administrative expenses
|
|
|
|
43,750
|
|
|
91,290
|
|
Research and development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total share-based compensation for third party service providers
|
|
|
|
43,750
|
|
|
91,290
|
|
|
|
|
|
|
Total share-based compensation expense
|
|
|
$
|
68,572
|
|
$
|
91,290
|
|
|
|
|
|
|
A summary of stock option activity is
as follows:
|
Number of
Shares
|
|
Weighted-Average
Exercise Price ($)
|
|
Aggregate Intrinsic
Value ($000's)
|
Balance at July 31, 2007
|
|
|
|
10,293,750
|
|
|
$1
|
.18
|
|
|
|
|
|
|
|
|
Granted
|
|
|
|
38,300
|
|
|
$3
|
.69
|
|
|
|
Exercised
|
|
|
|
(465,000
|
)
|
|
$0
|
.78
|
|
|
|
Forfeited / Cancelled
|
|
|
|
(650,000
|
)
|
|
$1
|
.42
|
|
|
|
|
|
|
|
|
Balance at October 31, 2007
|
|
|
|
9,217,050
|
|
|
$1
|
.19
|
|
$
|
62,400
|
|
|
|
|
|
|
|
Outstanding
|
Exercisable
|
Range of Exercise Prices
|
Number
Shares
Outstanding
|
Weighted Average
Remaining
Contractual Life
(in years)
|
Weighted
Average
Exercise
Price
|
Number
Exercisable
|
Weighted
Average
Exercise
Price ($)
|
$0.50 to $0.75
|
|
|
|
3,860,000
|
|
|
1
|
.92
|
$
|
0
|
.53
|
|
3,860,000
|
|
$
|
0
|
.53
|
$0.80 to $1.20
|
|
|
|
1,411,100
|
|
|
2
|
.38
|
$
|
0
|
.89
|
|
1,411,100
|
|
$
|
0
|
.89
|
$1.50 to $3.95
|
|
|
|
3,945,950
|
|
|
2
|
.88
|
$
|
1
|
.94
|
|
3,313,900
|
|
$
|
1
|
.83
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,217,050
|
|
|
2
|
.40
|
$
|
1
|
.19
|
|
8,585,000
|
|
$
|
1
|
.09
|
|
|
|
|
|
|
|
|
|
|
|
Cash received from options exercised
for the three month periods ended October 31, 2007 and 2006, was $363,750 and $51,500,
respectively. The intrinsic value of all options exercised during the three month periods
ended October 31, 2007 and 2006, was $3,337,650 and $52,530, respectively, and the
weighted-average grant date fair value of equity options granted during the three month
periods ended October 31, 2007 and 2006, was $3.69 and $1.83, respectively.
As of October 31, 2007, there was
$157,277 of unrecognized non-cash compensation cost related to unvested options to be
recognized over a weighted average period of 1.6 years.
Note 6. Prepaid
Consulting
In January 2006, we entered into a
two-year consulting agreement with Mr. Michael Sitton for domestic and international
business development, the compensation being a fee of $12,500 per month and an option on
2,000,000 shares of unregistered common stock, vesting over three years. We also entered
into a two-year consulting agreement with Secretary Tommy Thompson, for domestic and
international business development, the compensation being a fee of $12,500 per month and
an option on 300,000 shares of unregistered common stock, vesting over three years. Mr.
Sitton subsequently transferred the rights to 700,000 options to Secretary Thompson. Mr.
Sitton was therefore the beneficial owner of 1,300,000 and Secretary Thompson the
beneficial owner of 1,000,000 of these options.
On their granting in January 2006, we
recorded the value of the aggregate of 2,300,000 unvested options as a prepaid asset to be
amortized over the life of the consulting agreements. The options were valued at an
aggregate of $598,372 based on their weighted average exercise prices of between $1.00 to
$2.75, and the Black-Scholes Option Pricing Model assuming no dividend yield, volatility
of 82.23% and a risk-free interest rate of 4.25%, to be amortized over the two year life
of the consulting agreements at $24,932 per month.
During the three months ended October
31, 2007 we amortized $9,758 of the prepaid asset to selling expense, and reported a
prepaid asset of $3,253 as Prepaid consulting on the face of the consolidated
balance sheets at October 31, 2007. In August 2007, Mr. Sittons consulting agreement
was terminated, and Mr. Sittons 1,300,000 options are no longer exercisable.
10
Note 7. Inventory
Inventories are stated at the lower
of cost or net realizable value using the average cost method. Inventories at October 31,
2007 and 2006 consisted of:
|
October 31, 2007
|
|
July 31, 2007
|
|
Raw Materials
|
|
|
$
|
79,235
|
|
$
|
78,816
|
|
Work in Progress
|
|
|
|
|
|
|
|
|
Finished Goods
|
|
|
|
154,118
|
|
|
164,083
|
|
|
|
|
|
|
|
|
|
$
|
233,353
|
|
$
|
242,899
|
|
|
|
|
|
|
Note 8. Commitments and
Contingencies
During the three months ended October
31, 2007 we issued 12,500 shares of common stock with a fair value of $43,750 and paid an
additional $30,000, for a legal settlement.
Note 9. Taxes
In June 2006, the Financial
Accounting Standards Board, or FASB, issued FASB Interpretation No. 48 (FIN
48), Accounting for Uncertainty in Income Taxesan interpretation of FASB
Statement No. 109, which prescribes a recognition threshold and measurement attribute for
the financial statement recognition and measurement of a tax position taken or expected to
be taken in a tax return. FIN 48 also provides guidance on de-recognition, classification,
interest and penalties, accounting in interim periods, disclosure and transition. Under
FIN 48, we must recognize the tax benefit from an uncertain tax position if it is more
likely than not that the tax position will be sustained on examination by the taxing
authorities, based on the technical merits of the position.
FIN 48 became effective for us on
August 1, 2007, however the adoption of FIN 48 did not have a material impact on our
consolidated results of operations and financial position as we had no unrecognized tax
benefits that, if recognized, would affect our effective income tax rate in future
periods. Our practice is to recognize interest and/or penalties related to income tax
matters in income tax expense, however we had no accrued interest or penalties at either
August 1 or October 31, 2007. We are subject to taxation in the United States and in
California, and our historical tax years remain subject to future examination by the U.S.
and California tax authorities.
At October 31, 2007 we had federal
and California tax net operating loss carry-forwards of approximately $25,564,000 and
$15,462,700, respectively. The difference between federal and California tax loss
carry-forwards is primarily due to limitations on California loss carry-forwards. The
federal tax loss carry-forwards will begin expiring in the year ending July 31, 2017
unless previously utilized, and will completely expire in the year ending July 31, 2027.
The California tax loss carry-forwards will begin to expire in the year ended July 31,
2013 and will completely expire in the year ending July 31, 2017.
Realization of our deferred tax
assets, which relate to operating loss carry-forwards and timing differences, is dependant
on future earnings. The timing and amount of future earnings are uncertain and therefore
we establish a 100% valuation allowance.
Note 10. Business
Segment and Sales Concentrations
In accordance with the provisions of
SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, certain
information may be disclosed based on the way we organize financial information for making
operating decisions and assessing performance. SFAS 131 requires that we apply standards
based on a management approach, and requires segmentation based upon our internal
organization and disclosure of revenue and operating income based upon internal accounting
methods. In determining operating segments, we have reviewed the current management
structure reporting to the chief operating decision-maker (CODM) and analyzed
the reporting the CODM receives to allocate resources and measure performance.
We have determined that based upon
the end use of our products, the value added contributions made by us, the regulatory
requirements, the customers and partners, and the strategy required to successfully market
finished products, we are operating in a single segment.
During the three month period ended
October 31, 2007, 99% of sales were made to two strategic partners that are also
developing markets for our products. 99% of sales for the period were made to U.S.
domestic customers, and 1% were made to international customers.
All of our tangible assets are
located in the United States.
Note 11. Subsequent
Events
In November, 2007 we received $12,000
from the exercise of an employee stock option on 6,250 shares of common stock.
11
ITEM 2. MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following
discussion and analysis by our management of our financial condition and results of
operations in conjunction with our audited consolidated financial statements and related
notes thereto included as part of our Annual Report on Form 10-KSB for the year ended July
31, 2007 and our unaudited consolidated financial statements for the three months ended
October 31, 2007 included in this Quarterly Report on Form 10-Q. Our consolidated
financial statements have been prepared in accordance with U.S. generally accepted
accounting principles and are presented in U.S. dollars.
The information in this discussion
contains forward-looking statements and information within the meaning of Section 27A of
the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 which
are subject to the safe harbor created by those sections. These
forward-looking statements may include, but are not limited to, statements concerning our
strategy, future operations, future financial position, future revenues, projected costs,
prospects and plans and objectives of management. The words anticipate,
believe, estimate, expect, intend,
may, plans, projects, will,
would and similar expressions are intended to identify forward-looking
statements, although not all forward-looking statements contain these identifying words.
We may not actually achieve the plans, intentions or expectations disclosed in our
forward-looking statements and you should not place undue reliance on our forward-looking
statements. Actual results or events could differ materially from the plans, intentions
and expectations disclosed in the forward-looking statements that we make. These
forward-looking statements involve risks and uncertainties that could cause our actual
results to differ materially from those in the forward-looking statements, including,
without limitation, the risks set forth in Item 1A, Risk Factors in this
Quarterly Report on Form 10-Q and in our other filings with the Securities and Exchange
Commission, including our Annual Report on Form 10-KSB for the year ended July 31, 2007.
We do not assume any obligation to update any forward-looking statements.
OVERVIEW
PURE Bioscience began as a provider
of pharmaceutical water purification products, however we are now expanding into markets
with broader potential by developing new, proprietary bioscience products based upon our
patented silver ion antimicrobial technologies and patent-pending boric acid based
pesticide technologies. In May 2005, we sold the assets of our Water Treatment Division
and are now focused exclusively on the development and commercialization of our current
and future bioscience products.
We are expanding into markets with
broad potential by developing new, proprietary bioscience products based upon our patented
silver ion antimicrobial technologies and to a lesser extent our patent-pending boric acid
based pesticide technologies. We are developing technology-based bioscience products,
including our silver dihydrogen citrate-based antimicrobials, which we believe will
provide best in class, non-toxic solutions to numerous global health challenges and
represent innovative advances in diverse markets. We believe that our technologies are in
a position to contribute significantly to todays global trend toward industrial and
consumer use of green products, while providing competitive advantages in
efficacy and safety.
Bioscience Technology
Our flagship technology is a
patented, aqueous antimicrobial called silver dihydrogen citrate (SDC). SDC is an
electrolytically generated source of stabilized ionic silver that can serve as the basis
for a broad range of products in diverse markets. Colorless, odorless, tasteless and
non-caustic, the aqueous SDC formulates well with other compounds. We produce and have
begun to market, through our distributors, pre-formulated, ready-to-use product for
private label distribution, as well as varying strengths of SDC concentrate as an additive
or raw material for inclusion in other companies products.
We currently have Environmental
Protection Agency (EPA) registration for our 2400-parts per million (ppm) technical grade
SDC concentrate (trade name Axenohl) as well as for our Axen and Axen30 hard surface
disinfectant products for commercial, industrial and consumer applications including
restaurants, homes and medical facilities. The Axen30 EPA registration includes claims
such as a 30-second kill time on standard indicator bacteria, a 24 hour residual kill on
standard indicator bacteria, a 2-minute kill time on some resistant strains of bacteria,
10-minute kill time on fungi, 30-second kill time on HIV Type I, and 10-minute kill time
on other viruses. These claims distinguish the efficacy of Axen30 from many of the leading
commercial and consumer products currently on the market, while maintaining lower toxicity
ratings. Based on the EPA toxicity categorization of antimicrobial products that ranges
from Category I (high toxicity) down to Category IV, Axen30, with its combination of the
biocidal properties of ionic silver and citric acid, is an EPA Category IV antimicrobial
for which precautionary labeling statements are normally not required. This compares with
Category II warning statements for most leading brands of antimicrobial products
The tests conducted to obtain the EPA
registration were performed by nationally recognized independent laboratories Nelson
Laboratories of Salt Lake City, Utah and AppTec ATS of St. Paul, Minnesota, under AOAC
protocol and GLP regulations in accordance with EPA regulations.
In June 2004, we received EPA
registration to expand claims made for our Axen30 hard surface disinfectant to include use
on hard surfaces in childcare facilities. The EPA previously approved Axen30 for
disinfection of hard surfaces including those in restaurants, homes and medical
facilities. Expanded use claims for our Axen30 disinfectant feature childrens toys,
toy boxes, play tables and activity centers, jungle gyms, playpens, child car seats,
strollers and diaper changing tables. The EPAs registration of such sensitive use
sites emphasizes the least-toxic characteristics of Axen30 while expanding its
versatility in the professional and consumer disinfection markets. We are currently
investigating market opportunities for products in the childcare segment which includes
daycare centers, preschools, schools, gymnasiums and childrens activity centers.
During the year ending July 31, 2007
we began a program whereby we utilize our expertise to source, assemble and build SDC
blending systems for sale to our distributors. These systems allow our distributors to
blend our SDC concentrate into lower concentrations, thereby significantly reducing the
cost of shipping products from our El Cajon facility, particularly for overseas markets.
No information regarding the method of making SDC is passed to our distributors as in all
of our third party agreements we are, and intend to continue to be, the sole manufacturer
and sole source of SDC concentrate.
12
We plan to pursue additional EPA and
FDA regulatory approvals for other applications. For example, in September 2003, we
announced an agreement with Therapeutics, Inc. (Therapeutics), a drug
development company based in La Jolla, California, for the development and
commercialization of certain Food and Drug Administration (FDA) regulated silver
dihydrogen citrate-based products. Therapeutics funds and directs all development
activities and FDA regulatory filings under the agreement, initially focusing on
development of silver dihydrogen citrate-based products for the treatment of bacterial,
viral and fungal mediated diseases and conditions. In May 2004, Therapeutics began
development of SDC within the first two groups of products subject to FDA regulation;
womens health products and acne products. In May 2006 we announced that we had
expanded our joint development initiative with Therapeutics to include development of SDC
as an active pharmaceutical ingredient in products for treatment of dermatophytoses such
as Tinea pedis (athletes foot), onychomycosis (nail fungus), among others, as well
as development of antimicrobial skin wash products, beginning with a hand sanitizer. In
December 2006 Therapeutics submitted an Investigational New Drug (IND) application with
the FDA for an SDC-based hand sanitizer, to enable initiation of the first clinical trial
of a product containing SDC as an active pharmaceutical ingredient. After reviewing the
submission the FDA determined that the product testing in man may begin as proposed.
Multiple hand sanitizer formulations containing SDC are currently being tested for safety
and efficacy in proof of concept studies. We do not currently anticipate any additional
IND applications to the FDA under our agreement with Therapeutics, or under any agreement
with another potential partner, for products containing SDC until 2008 or later.
Our SDC technology also shows promise
as a broad-spectrum antimicrobial for multiple other medical indications, including wound
and burn care, as well as for dental and veterinary indications, though these
opportunities are not currently under active development.
In September 2007, we announced that
we had developed a new SDC-based antimicrobial product that provides what we believe to be
the first 24-hour residual protection against norovirus. The highly concentrated product
is designed to be mixed with water at the point of use to create a low toxicity hard
surface antimicrobial. We intend to initially market, through a distributor relationship,
the product, under the name Cruise Control, to the cruise ship industry, which in
recent years has suffered significant economic and reputation damage as a result of common
and well-publicized outbreaks of norovirus. We commissioned an independent, third-party
study entitled Residual Virucidal Efficacy of a Disinfectant for Use on Inanimate
Environmental Surfaces Utilizing Feline Calicivirus as a Surrogate Virus for
Norovirus. The study was conducted by a third party microbiology and virology
testing laboratory in accordance with U.S. Environmental Protection Agency Good Laboratory
Practice regulations. The testing laboratory modified an existing EPA protocol for testing
bacterial residual efficacy to a protocol that appropriately evaluated the residual
efficacy of our new formulation against the Feline Calicivirus. Our new disinfectant
demonstrated greater than 99.9999% reduction in viral titer of Feline Calicivirus after 12
hours and at least a 99.98% reduction after 24 hours.
Triglycylboride
In addition to our antimicrobial
technology, we own the marketing rights to a line of pesticide technologies. Like the
silver dihydrogen citrate antimicrobial technology, we believe the boric acid based
pesticides may offer competitive advantages in the market place with regard to efficacy
when compared to leading brands, while maintaining lower toxicity ratings.
Branded as Innovex, the product
line launched in October 2001 with our EPA-approved, patent-pending RoachX®.
Subsequently, we have developed additional products in the Innovex product line, including
the EPA-approved AntX75®, EPA-exempt non-toxic TrapX rodent lure and EPA approved
CleanKill, the SDC-based hard surface disinfectant for the pest control industry.
United States Department of Agriculture testing confirms that RoachX is over 96% effective
in three to four days with one application for indoor and outdoor eradication of
cockroaches, and can be used near children and food preparation areas. Boric acid is a
well-known and effective deterrent of cockroaches and will kill them on contact, but
cockroaches do not naturally eat the repellent. Although many pesticide products contain
boric acid as the listed active ingredient, we believe RoachX to be new because of the
endothermic reaction caused by the combination of boric acid and polyglycol that produces
three unique results: 1) The formula protects the boric acid from water and humidity, 2)
When combined with an attractant, the cockroaches perceive the formulation as food and
will actually eat the polyglycol-encapsulated boric acid, and 3) The formula acts as a
time-released pesticide, allowing the cockroach to return to the nest before it dies and
then becomes a bait station for other roaches in the colony. We believe the
product line, containing particular formulas and attractants for specific pests, is
effective against cockroaches, ants, palmetto bugs, silverfish, waterbugs, ticks, fleas,
lice and garden pests.
Marketing efforts behind these
products to date, and resulting sales, have been very limited. We believe that investment
in additional formulations, greater marketing efforts and wider distribution could result
in significantly greater sales and profits than we have historically achieved with the
technology. We continue to evaluate such investments, however in recent years and months
we have entirely focused our resources on the development of SDC, which we believe has
greater market potential than the Triglycylboride technology. If we decide not to make
additional investments ourselves, we may pursue alternatives for our Triglycylboride
technology that could include discontinuing to actively market the Innovex line of
products and selling or licensing our rights to the technology.
CRITICAL ACCOUNTING
POLICIES
Accounting for
Long-Lived Assets / Intangible Assets
We assess the impairment of
long-lived assets, consisting of property, plant, equipment and finite-lived intangible
assets, whenever events or circumstances indicate that the carrying value may not be
recoverable. Examples of such events or circumstances include:
An
assets ability to continue to generate income from operations and positive cash flow
in future periods
Loss
of legal ownership or title to an asset
Significant
changes in our strategic business objectives and utilization of the asset(s)
The
impact of significant negative industry or economic trends
13
Recoverability of assets to be held
and used in operations is measured by a comparison of the carrying amount of an asset to
the future net cash flows expected to be generated by the assets. The factors used to
evaluate the future net cash flows, while reasonable, requires a high degree of judgment
and the results could vary if the actual results are materially different than the
forecasts. In addition, we base useful lives and amortization or depreciation expense on
our subjective estimate of the period that the assets will generate revenue or otherwise
be used by us. If such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of the assets exceeds
the fair value of the assets. Assets to be disposed of are reported at the lower of the
carrying amount or fair value less selling costs.
We also periodically review the lives
assigned to our intangible assets to ensure that our initial estimates do not exceed any
revised estimated periods from which we expect to realize cash flows from the
technologies. If a change were to occur in any of the above-mentioned factors or
estimates, the likelihood of a material change in our reported results would increase.
Accounting for
Stock-Based Compensation
We adopted the fair value provisions
of SFAS 123(R) on August 1, 2006. Stock-based compensation expense for all stock-based
compensation awards granted after August 1, 2006 is based on the grant date fair value
estimated in accordance with the provisions of SFAS 1(R). Specifically, we estimate the
weighted-average fair value of options granted using the Black-Scholes Option Pricing
Model based on evaluation assumptions regarding expected volatility, dividend yield,
risk-free interest rates, the expected term of the option and the expected forfeiture
rate. Each of these assumptions, while reasonable, requires a certain degree of judgment
and the fair value estimates could vary if the actual results are materially different
than those initially applied. Prior to the adoption of SFAS 123(R), we did not record
compensation cost in the consolidated financial statements for stock options issued to
employees or Directors.
RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED OCTOBER 31, 2007 VS. THREE MONTHS ENDED OCTOBER 31, 2006
Revenues
For the three months ended October
31, 2007 revenues of $95,300 increased by $67,600, or 244%, compared with the three months
ended October 31, 2006. 99% of sales for the three month period ended October 31, 2007
were made to two strategic partners that are pursuing regulatory approvals and developing
markets for our products. Gross profit for the three months ended October 31, 2007 was
$63,600, compared with $15,500 in the same period of the prior fiscal year. The gross
margin percentage improved from 56% in the prior year to 67% in the current period, due
primarily to product and customer mix. During the three month period ended October 31,
2007, a higher proportion of revenues were from bulk SDC concentrate and bulk Axen30 than
in the same period of the prior fiscal year when finished packaged products contributed a
higher proportion of sales.
Operating Costs
Operating costs increased by 17.2%,
from $925,200 in the three months ended October 31, 2006, to $1,084,000 in the three
months ended October 31, 2007. Within these aggregate operating costs, selling expenses
declined by $94,000, to $88,200 in the current period compared with the same period in the
prior fiscal year. The decrease in selling expenses is primarily due to a reduction of
$103,000 in consulting fees and amortization of prepaid consulting costs. For a further
discussion of this expense, please see Note 6 to the consolidated financial statements.
General and administrative expenses increased by $238,900 or 51%, to $707,600 in the three
months ended October 31, 2007, compared with the three months ended October 31, 2006.
During the three months ended October 31, 2007 we issued 12,500 shares of common stock
with a fair value of $43,750 and paid an additional $30,000, for a legal settlement, and
general and administrative payroll expense increased by $74,000 year over year due to new
hires and salary increases. Increases in expense for accounting fees, travel, employee
stock option expense, depreciation, information technology, facility rent, employee
medical expense and legal fees accounted for $189,600 of the increase in general and
administrative expense for the three months ended October 31, 2007 compared with the three
months ended October 31, 2006. These increases were partially offset by a decline of
$111,500 in consulting costs, including $95,300 of stock option expense in the three month
period ended October 31, 2006 for options issued under a consulting contract. We
recognized employee stock option non-cash expense in general and administrative expenses
for the three months ended October 31, 2007 of $24,800, and for the three months ended
October 31, 2006 of zero.
Research and development costs,
including in-house costs, patent amortization, outside legal costs for maintaining
approved patents, and product registration expenditures, increased for the three month
period ended October 31, 2007 by 5.1% to $288,200, compared with the same period in the
prior fiscal year. During the three month period ended October 31, 2007, $60,800 of the
costs charged to R&D related to manufacturing and R&D facility overheads incurred
during periods in which we were designing and implementing new manufacturing and bottling
processes. We do not currently expect our research and development expense to grow
significantly in future periods, however if opportunities arise, particularly in the
development and testing of new formulations, we will evaluate the need for additional
research expenditures based on potential market sizes and our estimation of the likelihood
of our technology achieving successful results.
Our loss from operations before taxes
increased by $110,800, from a loss of $909,600 for the three months ended October 31, 2006
to a loss of $1,020,400 for the three months ended October 31, 2007.
Other Income
Other income declined by $30,600 in
the current period compared to the same period of the prior fiscal year, primarily due to
decreased interest income from lower average cash balances and lower interest rates.
14
Income Taxes
Income tax expense for each of the
periods presented was zero as our tax liabilities were offset by current period losses or
available federal and California net operating loss carry-forwards. In June 2006, the
Financial Accounting Standards Board, or FASB, issued FASB Interpretation No. 48
(FIN 48), Accounting for Uncertainty in Income Taxesan interpretation of
FASB Statement No. 109, which prescribes a recognition threshold and measurement attribute
for the financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. FIN 48 also provides guidance on de-recognition,
classification, interest and penalties, accounting in interim periods, disclosure and
transition. Under FIN 48, we must recognize the tax benefit from an uncertain tax position
if it is more likely than not that the tax position will be sustained on examination by
the taxing authorities, based on the technical merits of the position.
FIN 48 became effective for us on
August 1, 2007. The adoption of FIN 48 did not have a material impact on our consolidated
results of operations and financial position as we had no unrecognized tax benefits that,
if recognized, would affect our effective income tax rate in future periods. Our practice
is to recognize interest and/or penalties related to income tax matters in income tax
expense, however we had no accrued interest or penalties at either August 1 or October 31,
2007.
At October 31, 2007 we had federal
and California tax net operating loss carry-forwards of approximately $25,564,000 and
$15,462,700, respectively. The difference between federal and California tax loss
carry-forwards is primarily due to limitations on California loss carry-forwards.
Realization of our deferred tax assets, which relate to operating loss carry-forwards and
timing differences, is dependant on future earnings. The timing and amount of future
earnings are uncertain and therefore we establish a 100% valuation allowance.
Net Income (Loss)
Our net loss after taxes increased by
$141,400, from a net loss of $867,300 for the three months ended October 31, 2006 to a net
loss of $1,008,700 for the three months ended October 31, 2007.
LIQUIDITY AND CAPITAL
RESOURCES
From inception through the present,
we have financed our operations primarily through our initial public offering in August of
1996, by subsequent private placement stock sales, through lines of credit and the
issuance of debentures, and in May 2005 by the sale of our Water Treatment Division. At
October 31, 2007 we had net working capital (current assets less current liabilities) of
$8.44 million and no long-term debt.
As of October 31, 2007, we had
current assets of $8,720,400, an increase of $7,026,200 from July 31, 2007. The increase
primarily relates to a private placement completed in October 2007 in which we sold
1,677,596 unregistered securities units to accredited investors, at $5.03 per unit. Each
unit consisted of one share of our common stock and one quarter of a five-year warrant to
purchase our common stock at $7.17 per share. A total of 419,394 such five-year warrants
were issued to the investors and the fair value of the warrants, based on their fair value
relative to the common stock issued, was $1,143,676. Additionally, Taglich Brothers, Inc.
acted as placement agent and in accordance with the placement agent agreement, they
received a cash fee of $675,065 and a five-year warrant to purchase 167,759 shares of
common stock at $8.60 per share. The fair value of the 167,759 placement agent warrants,
based on their fair value relative to the common stock issued, was $441,970. Other cash
fees paid to third parties, for legal and other fees associated with the private
placement, were $22,277. The gross proceeds of the private placement were $8,438,308 and
the net proceeds to us, after fees and expenses, were $7,740,967. Under the terms of the
placement agreement, we are required to file a registration statement with the Securities
and Exchange Commission within 90 days of the private placement, or by January 17, 2008,
for the resale of shares issued in the private placement and the shares to be issued upon
the exercise of the warrants. We plan to file the registration statement on Form S-1 by
that date, however if the registration statement is not filed within the 90-day period, we
would be required to repay 2% of the gross proceeds (or $168,767) for each thirty day
period, or any part thereof, beyond the 90-day period until the registration statement is
filed. In addition, if the registration statement is not declared effective, or the common
stock may not be sold without any restriction pursuant to Rule 144, within 210 days after
the filing date, we would be required to repay 2% of the gross proceeds (or $168,767) for
each thirty day period (or any part of a 30-day period) beyond the 210-day period until
the shares are registered, up to a maximum repayment of 18% of the gross proceeds (or
$1,518,899). We do not currently believe that the transfer of consideration under the
October 2007 private placement agreement is probable and have therefore not recorded any
amount as a contingent liability on the consolidated balance sheets as at October 31,
2007. No registration penalties are payable with respect to the shares underlying either
the investor or the placement agent warrants.
Total proceeds from the sale of
common stock for the three months ended October 31, 2007 were $8,130,300, which included
proceeds of $389,300 from the exercise of options and warrants, in addition to the
$7,741,000 of net proceeds from the October 2007 private placement as discussed above.
During the three months ended October 31, 2007 we received an aggregate of $318,750 from
the exercise of non-employee options on 390,000 shares of common stock at an average
exercise price of $0.82, received $45,000 from the exercise of options on 75,000 shares of
common stock issued under employee stock option plans, and received $25,560 from the
exercise of common stock warrants on 10,000 shares of common stock at an average exercise
price of $2.56. Cash and cash equivalents at October 31, 2007 were $3,671,000, an increase
for the quarter of $2,935,300, while short-term investments increased over the same period
by $4,051,500, to $4,759,500. During the three months ended October 31, 2007 cash used in
investing activities was $4,108,000, of which $4,049,100 related to the purchase of
short-term investments from the October 2007 private placement proceeds.
Cash used in operating activities for
the three months ended October 31, 2007 was $1,087,000, compared with $740,700 for the
three month period of the prior fiscal year. The increase in operating cash expenditures
is primarily as a result of increased general and administrative expenses including
payroll, and patent related research and development expenditures.
During the three months ended October
31, 2007 we invested $32,900 of cash in patents, however the capitalized value of our
patents at October 31, 2007, primarily related to our silver ion technology, declined by
$10,500 from July 31, 2007, to $2,165,900 due to an excess of patent amortization over
capitalization. Total property, plant and equipment at October 31, 2007 of $940,800
declined by $28,000 from July 31, 2007 due to an excess of depreciation over new asset
acquisitions.
At October 31, 2007 we had current
liabilities of $275,600, a decrease of $226,800 from July 31, 2007, primarily due to the
timing of the payment of accounts payable.
15
During the fiscal year ended July 31,
2007 we redeveloped the manufacturing and office areas of our facility in El Cajon,
California and invested in new manufacturing equipment. While this redevelopment is
complete, we expect to continue to invest in our manufacturing processes, to improve
efficiency and to ensure that we are able to meet anticipated demand. Additionally, during
the next twelve months we anticipate making significant investments in information
technology, in regulatory applications for new products or additional claims, in our
corporate and business development infrastructure, and in programs required for us to
maintain our compliance with the Securities Acts and/or the listing standards of any
exchange on which we may list our securities. However, we believe that our existing cash
resources are sufficient to meet our anticipated needs during the next twelve months.
OFF BALANCE SHEET
ARRANGEMENTS
We do not have any off balance sheet
arrangements.
16
ITEM 3. QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK
From time to time our investments may
be exposed to market risk related to changes in interest rates. Our current investment
policy is to maintain an investment portfolio consisting only of diversified institutional
money market mutual funds investing in A-1 (S&P), Prime-1 (Moodys) or F1 (Fitch)
short-term corporate debt obligations; U.S. Treasury Securities, or United States
Government obligations issued by or backed by a federal agency of the United States
Government. We do not enter into investments for trading or speculative purposes, and our
cash is deposited in and invested through highly rated financial institutions in the
United States. While our available for sale securities are subject to interest rate risk
and would fall in value if market interest rates increased, we estimate that the fair
value of our investment portfolio would not decline by a material amount in the event of
an increase in market interest rates. We therefore would not expect our operating results
or cash flows to be affected to any significant degree by the effect of a change in market
interest rates on our investments.
ITEM 4. CONTROLS AND
PROCEDURES
We maintain disclosure controls and
procedures that are designed to ensure that information required to be disclosed in our
Exchange Act reports is recorded, processed, summarized and reported within the time
periods specified in the SECs rules and forms, and that such information is
accumulated and communicated to our management, including our Chief Executive Officer and
Chief Financial Officer, who also acts as our Principal Accounting Officer, as
appropriate, to allow timely decisions regarding required disclosure based closely on the
definition of disclosure controls and procedures in Rule 13a-14(c). In
designing and evaluating the disclosure controls and procedures, management recognized
that any controls and procedures, no matter how well designed and operated, can provide
only reasonable assurance of achieving the desired control objectives, and management
necessarily was required to apply its judgment in evaluating the cost-benefit relationship
of possible controls and procedures.
We have carried out an evaluation
under the supervision and with the participation of our management, including our Chief
Executive Officer and our Chief Financial Officer/Principal Accounting Officer, of the
effectiveness of the design and operation of our disclosure controls and procedures. Based
on the foregoing, our Chief Executive Officer and Chief Financial Officer/Principal
Accounting Officer concluded that our disclosure controls and procedures were effective as
of October 31, 2007.
There have been no changes in our
internal controls or in other factors that could materially affect the internal controls
subsequent to the date we completed our evaluation.
17
PART II OTHER
INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are not currently involved in any
material legal proceedings that could result in claims against us. However, we may be
subject to various legal actions and claims arising in the ordinary course of business.
ITEM 1A. RISK FACTORS
You should consider carefully the
following information regarding the risks of investing in our common stock, together with
the other information contained in this quarterly report on Form 10-Q, in our annual
report on form 10K-SB for the year ended July 31, 2007, and in our other filings with the
Securities and Exchange Commission, before you decide to buy or maintain an investment in
our common stock. We believe that the risks described below fairly describe the risks that
are material to us as of the date of this annual report. If any of the events described
below were to occur, our financial condition, results of operations and future growth
prospects would likely be materially and adversely affected and the market price of our
common stock could decline. As a result you could lose some or all of any investment you
may have made or may make in our common stock.
We may not generate positive cash
flows from our operations to meet our anticipated capital needs
We do not yet have significant cash
inflows from product sales to offset our ongoing planned investments in corporate
infrastructure, research and development projects, regulatory submissions, business
development activities, and sales and marketing, among other investments. Some of these
investments cannot be postponed and we may be contractually or legally to make them. In
future periods we may need to seek additional capital through the issuance of debt,
equity, convertible securities or through other means, any one of which could reduce the
value to us, perhaps substantially, of our technology and its commercial potential. The
issuance of debt, equity or convertible securities, or the conversion of existing
convertible securities, could lead to the dilution of our existing shareholders. There is
no guarantee that we would be able to obtain capital on terms acceptable to us, or at all.
Insufficient funds could require us to delay, scale back or eliminate some or all of our
research and product development programs, license to third parties the right to
commercialize products or technologies that we would otherwise commercialize ourselves, or
to reduce or cease operations.
We have a history of
losses, and we may not achieve or maintain profitability
We had a loss of $1,008,704 after
taxes for the three month period ended October 31, 2007, a loss of $4,654,900 after taxes
for the fiscal year ended July 31, 2007, and a loss of $3,682,900 after taxes for the
fiscal year ended July 31, 2006. We may continue to have losses in the future. If the
penetration into the marketplace of SDC is later than anticipated, revenue growth is
slower than anticipated or operating expenses exceed expectations, it may take an
unforeseen period of time to achieve or sustain profitability and we may never achieve or
sustain profitability. We continue to use our capital resources to invest in the
development of our technology, in our manufacturing operations and in our corporate
infrastructure, among other investments, however our future revenues may not provide an
adequate return, if any, on such investments. We may never achieve or sustain cash inflows
that exceed our cash outflows. Slower than anticipated revenue growth would or could force
us to scale back research, testing, development and marketing of our technology and/or
force us to reduce the size and scope of our operations, or cease operations altogether.
If we do become profitable in future periods, the Company has an employment contract with
its Chief Executive Officer/President which includes a provision for him to be paid an
amount equal to 3% of the Companys net income before taxes, if any.
We may be liable for liquidated
damages if we fail to register the shares issued in the October 2007 private placement
with the Securities and Exchange Commission, or fail to have such registration declared
effective
On October 19, 2007 we completed a
private placement in which we sold 1,677,596 unregistered securities units to accredited
investors, at $5.03 per unit. The gross proceeds of the private placement were $8,438,308
and the net proceeds to us, after fees and expenses, were $7,740,967. See Note 3 to the
consolidated financial statements for further details of this transaction. Under the terms
of the placement agreement, we are required to file a registration statement with the
Securities and Exchange Commission within 90 days of the private placement, or by January
17, 2008, for the resale of shares issued in the private placement and the shares to be
issued upon the exercise of the warrants. We plan to file the registration statement on
Form S-1 by that date, however if the registration statement is not filed within the
90-day period, we would be required to repay 2% of the gross proceeds (or $168,767) for
each thirty day period, or any part thereof, beyond the 90-day period until the
registration statement is filed. In addition, if the registration statement is not
declared effective, or the common stock may not be sold without any restriction pursuant
to Rule 144, within 210 days after the filing date, we would be required to repay 2% of
the gross proceeds (or $168,767) for each thirty day period (or any part of a 30-day
period) beyond the 210-day period until the shares are registered, up to a maximum
repayment of 18% of the gross proceeds (or $1,518,899). There is no guarantee that we will
be able to file the registration statement by January 17, 2008 and we may have to repay
part of the gross proceeds of the private placement until we are able to file the
registration statement. Further, there is no guarantee that the SEC will ever declare the
registration statement effective, and we could have to repay up to $1,518,899 to the
investors. This would substantially reduce our future growth prospects and our ability to
commercialize our technology, and the market price of our common stock could decline.
18
If our efforts to increase
awareness and expand sales of our technology are not successful, or we fail to obtain
necessary governmental approval, we may not be able to generate sufficient revenue to
obtain profitability
We are marketing our new
antimicrobial silver ion technology to industrial and consumer markets, and have also
begun marketing our environmentally safe pesticides. These products have not yet been
accepted into the marketplace, and may never be accepted. Other risks involved in
introducing these new products include liability for product effectiveness and safety, and
competition from existing or emerging sources. Additionally, government regulation in the
United States and in other countries is a significant factor in the development,
manufacturing and marketing of many of our products and in our ongoing research and
development activities. Complying with applicable government regulations and obtaining
necessary clearances or approvals can be time consuming and expensive, and there can be no
assurance that regulatory review will not involve delays or other actions adversely
affecting the marketing and sale of our products. We also cannot predict the extent or
impact of future legislation or regulation. Some of our new bioscience applications for
the healthcare markets and food preparation markets will require approval by government
agencies prior to marketing or sale in the United States. We have not yet applied for Food
and Drug Administration or Department of Agriculture approval to market any such products.
If any future applications are not approved, we will not be able to market or sell such
products, which would limit the revenues which may be realized. Even after approval, if
any, we will remain subject to changing governmental policies regulating antimicrobial
products. We also intend to take these technologies to the international marketplace, and
doing business internationally carries a great deal of risk, with regard to foreign
government regulation, banking and other factors.
Our silver ion, pesticide and other
products will be competing in markets dominated by extremely large, well financed and
internationally recognized chemical and pharmaceutical companies. Our ability to compete
will depend upon our ability, and the ability of our distributors, to develop brand
recognition and novel distribution methods. We or our distributors may never be successful
in doing so. Many of our competitors already have well established brands and
distribution, as well as many times our financial resources or those of our distributors.
Focused competition by chemical and pharmaceutical giants could substantially limit our
potential market share and ability to profit from our products and technologies.
The industries in which we operate
are heavily regulated and we may be unable to compete effectively
We are a bioscience company focused
on the marketing and continued development of our electrolytically generated stabilized
ionic silver technology, including our flagship silver dihydrogen citrate antimicrobial,
and to a much lesser extent our Triglycylboride pesticide technology. While the rewards in
these fields are potentially great, the risks, the regulatory hurdles and the costs of
doing business are also high. Our silver dihydrogen citrate is a platform technology
rather than a single use applied technology. As such, products developed from the platform
fall under the jurisdiction of multiple U.S. and international regulatory agencies. We
currently have U.S. Environmental Protection Agency (EPA) registration for our
2400-parts per million (ppm) technical grade SDC concentrate (trade name Axenohl), as well
as for our Axen and Axen30 hard surface disinfectant products for commercial, industrial
and consumer applications including restaurants, homes and medical facilities. We intend
to fund and manage additional U.S. EPA-regulated product development internally, in
conjunction with our regulatory consultants and potentially by partnering with other third
parties. We are also partnering, or intend to partner, with third parties who are seeking,
or intend to seek, approvals to market SDC-based products in markets outside the United
States. However, the introduction of additional regulated antimicrobial products in the
U.S. or in markets outside the U.S. could take several months or years, or may never be
achievable.
Our future sales are heavily
dependent on a single core technology, and a decrease in sales or anticipated sales of
products based on this core technology could seriously harm our business
Although we believe SDC has
applications in multiple industries, we expect that sales of SDC will constitute a
substantial portion of our revenues in future periods. Any material decrease in the
overall level of sales or expected sales of, or the prices for SDC, whether as a result of
competition, change in consumer demand, or any other factor, would have a materially
adverse effect on our business, financial condition and results of operations.
If we are unable to successfully
develop or commercialize new products, our operating results will suffer
In addition to its use on inanimate
surfaces, we believe that our technology also shows promise as a broad-spectrum
antimicrobial for use in human and veterinary healthcare products. We are pursuing certain
approvals through the U.S. Food and Drug Administration (FDA) by partnering with
Therapeutics, Inc. (Therapeutics) which has assumed responsibility for the
testing and regulatory process for selected potential FDA regulated silver dihydrogen
citrate-based products. The development of SDC-based products could lead to multiple IND,
NDA and/or 510-K filings for silver dihydrogen citrated-based healthcare products with the
FDA. In December 2006 Therapeutics submitted an Investigational New Drug (IND) application
with the FDA for an SDC-based hand sanitizer, to enable initiation of the first clinical
trial of a product containing SDC as an active pharmaceutical ingredient. After reviewing
the submission the FDA determined that the product testing in man may begin as proposed.
However, Therapeutics resources are very limited and progress to date on other human
and veterinary indications has been slow. Additionally, the FDA and comparable agencies in
many foreign countries impose substantial limitations on the introduction of new products
through costly and time-consuming laboratory and clinical testing and other procedures.
The process of obtaining FDA and other required regulatory approvals is lengthy, expensive
and uncertain. There is no guarantee that either Therapeutics, any other potential
partner, or we will be able to obtain the resources necessary to further develop our
technology or obtain regulatory approvals, or that the products will be successful in
meeting the strict criteria imposed by the FDA. It may be several years before we, or a
third party to whom we grant rights to use our silver ion technologies, are able to
introduce any FDA regulated antimicrobial pharmaceutical products containing our
technology. Such products may never achieve regulatory approval and may never be
commercialized. If they are commercialized, we may not receive a share of future revenues
that provides an adequate return on our historical or future investment.
19
If we are unable to obtain,
maintain or defend patent and other intellectual property ownership rights relating to our
technology, we may not be able to develop and market products based on our technology,
which would have a material adverse impact on our results of operations and the price of
our common stock
We rely and may in the future rely on
a combination of patent, trademark, trade secret and copyright law and contractual
restrictions to protect the proprietary aspects of our technology and business. These
legal protections afford only limited protection for our intellectual property and trade
secrets. Despite efforts to protect our proprietary rights, unauthorized parties may
attempt to copy aspects of our proprietary technology or otherwise obtain and use
information that we regard as proprietary.
We have filed for U.S. and foreign
patent applications and trademark registrations for our patents and trademarks. It is
possible that competitors or others will create and use products in violation of our
patents and/or adopt service names similar to our service names. Such patent infringement
could have a material, adverse effect on our business. Adopting similar names and
trademarks by competitors could lead to customer confusion. Any claims or customer
confusion related to our trademarks could negatively affect our business.
Litigation may be necessary to
enforce our intellectual property rights and protect our trade secrets. If third parties
prepare and file applications in the United States or other countries that claim
trademarks used or registered by us, we may oppose those applications and may be required
to participate in proceedings before the regulatory agencies who determine priority of
rights to such trademarks. Any litigation or adverse priority proceeding could result in
substantial costs and diversions of resources, and could seriously harm our business and
operating results.
To the extent that we operate
internationally, the laws of many countries may not protect our proprietary rights to as
great an extent as do the laws of the United States. Many countries have a
first-to-file trademark registration system. As a result, we may be prevented
from registering or using our trademarks in certain countries if third parties have
previously filed applications to register or have registered the same or similar
trademarks. Our means of protecting our proprietary rights may not be adequate, and our
competitors could independently develop similar technology.
We may become subject to
product liability claims
As a business which manufactures and
markets products for use by consumers, we may become liable for any damage caused by our
products when used in the manner intended. Any such claim of liability, whether
meritorious or not, could be time-consuming and/or result in costly litigation. Although
we maintain general liability insurance, our insurance may not cover potential claims of
the types described above and may not be adequate to indemnify for all liabilities that
may be imposed. Any imposition of liability that is not covered by insurance or is in
excess of insurance coverage could harm our business and operating results, and you may
lose some or all of any investment you have made, or may make, in our common stock.
Maintaining compliance with our
obligations as a public company may strain our resources and distract management, and if
we do not remain compliant our stock price may be adversely affected
Our common stock is registered under
the Securities Exchange Act of 1934, as amended (the Exchange Act). It is
therefore subject to the information, proxy solicitation, insider trading and other
restrictions and requirements of the SEC under the Exchange Act. On July 30, 2002, the
Sarbanes-Oxley Act of 2002 was signed into law. The Sarbanes-Oxley Act relates to us and
adds to our obligations for regulatory reporting, accounting, corporate governance,
internal controls and business practices. The SEC continues to issue new and proposed
rules implementing various provisions of the Sarbanes-Oxley Act, and meeting these rules
will substantially increase the cost to us of being a public company, including
substantial costs during the year ending July 31, 2008. This additional cost will reduce
our future profits or increase our future losses, and a greater proportion of management
time and effort will be needed to meet our regulatory obligations than before.
During the year ending July 31, 2008
we will be required to evaluate our internal controls systems in order to allow management
to report on our internal controls as required by Section 404 of the Sarbanes-Oxley Act.
During the year, we could meet the requirements for becoming an accelerated filer, which
would require us to also have our Independent Registered Public Accounting Firm attest to
our internal controls under Section 404 of the Sarbanes-Oxley Act for the year ending July
31, 2008. During the same period, in order to meet our compliance obligations we will need
to invest in our corporate and accounting infrastructure. As a result of these
requirements and investments, we will incur significant additional expenses and will
suffer a significant diversion of managements time. There is no guarantee that we
will be able to meet the requirements of Section 404 or our other compliance obligations
in a timely manner, and we could therefore be subject to sanctions or investigation by
regulatory authorities such as the Securities and Exchange Commission, the Public Company
Accounting Oversight Board (PCAOB) or any stock market on which we may list our securities
subsequent to the date of this report on Form 10Q. Any such actions could adversely affect
our financial results and the market price of our common stock, perhaps significantly.
Since becoming a public company in
August 1996 and until this report on Form 10-Q, we have filed our annual and period
reports as a small business issuer using forms 10K-SB and 10Q-SB. We no longer meet the
requirements for filing within the small business reporting category under the Exchange
Act, and based on the aggregate market value of our common stock at January 31, 2008 we
could also be required to file our periodic and annual reports on an accelerated basis.
The increased reporting requirements and heightened corporate governance obligations that
we will face or are already facing will further increase the cost to us, perhaps
substantially, of remaining compliant with our obligations under the Exchange Act or
Sarbanes-Oxley Act.
20
Our Board of Directors has
significant powers, which may delay or prevent a change of control of the company or
adversely affect our stock price
Certain provisions of our charter and
by-laws may delay or frustrate the removal of incumbent Directors and may prevent or delay
a merger, tender offer or proxy contest involving the Company that is not approved by the
Board of Directors of the Company, even if such events may be beneficial to the interests
of stockholders. For example, our Board of Directors, without stockholder approval, has
the authority and power to issue all authorized and unissued shares of common stock and
preferred stock which have not otherwise been reserved for issuance on such terms as the
Board of Directors determines. The Board of Directors could also issue 5,000,000 shares of
preferred stock and such preferred stock could have voting or conversion rights which
could adversely affect the voting power of the holders of common stock. In addition,
California law may contain provisions that have the effect of making it more difficult for
others to gain control of the Company.
Our management and our Board of
Directors has significant influence over the direction and policies of the Company, and
may be able to delay or prevent a change of control of our company, which could adversely
affect our stock price
As of December 13, 2007, Michael L.
Krall, our President and Chief Executive Officer, beneficially owned, including
exercisable options, approximately 8% of our common stock. As of the same date, our
Directors and Officers as a group beneficially owned, including exercisable options and
warrants, approximately 28% of our common stock. As a result, our management, and Mr.
Krall in particular, are in a position to significantly influence the direction and
policies of the Company, the election of the Board of Directors of the Company and the
outcome of any other matters requiring stockholder approval.
The price of our common stock may
be volatile, which may limit our ability to raise capital in the future or cause
investment losses for our stockholders
Since our initial public offering in
August 1996, the price and trading volume of our common stock have been highly volatile.
The price has ranged from below $1 per share to over $8 per share, and the monthly trading
volume has varied from under 200,000 shares to over 7.8 million shares. During the twelve
months prior to December 2007, the closing price of our common stock on any given day has
ranged from $1.75 to $8.50, and the monthly trading volume has varied from approximately
1.3 million shares to approximately 7.9 million shares. This volatility could adversely
affect an investors ability to sell shares of our common stock and/or the available
price for such shares, and could result in lower prices being available to an investor if
the investor wishes to sell their shares at any given time.
Our common stock has previously
been and may again be considered in the future to be penny stock, which may
make it more difficult for investors to resell their shares to third parties
Although our common stock is not
currently characterized as a penny stock under SEC regulations, it has been so
characterized in the past and may be so characterized in the future. Were our common stock
to be characterized as penny stock, broker-dealers dealing in our common stock
would be subject to the disclosure rules for transactions involving penny stocks, which
generally require that, prior to a purchase, the broker-dealer determine if purchasing the
common stock is suitable for the applicable purchaser. The broker-dealer would also have
to obtain the written consent of the applicable purchasers to purchase the common stock
and disclose the best bid and offer prices available for the common stock and the price at
which the broker-dealer last purchased or sold the common stock. These additional burdens
imposed upon broker-dealers could discourage them from effecting transactions in our
common stock, which could make it difficult for an investor to sell their shares at any
given time.
If outstanding options and
warrants to purchase shares of our common stock are exercised, or if other remaining
authorized shares of common stock are issued, the interests of our stockholders could be
diluted
We have approximately 10,935,401
shares of common stock reserved for issuance, which includes shares under equity
compensation plans, vested and unvested options, and warrants. These shares have a
weighted-average exercise price of approximately $1.61. An additional approximately
11,870,466 authorized shares of common stock remain available for future issuance under
equity compensation plans or otherwise. The exercise of options and warrants, and the sale
of shares underlying such options or warrants, could have an adverse effect on the market
for our common stock, including the price that an investor could obtain for their shares.
Investors may experience dilution in the net tangible book value of their investment upon
the exercise of outstanding options and warrants granted under our stock option plans, and
options and warrants yet to be granted or issued.
It is uncertain whether
we will ever pay dividends
We have never paid any cash dividends
on our common stock and do not anticipate paying cash dividends on our common stock in the
foreseeable future. The future payment of dividends on our common stock will depend on our
earnings, financial condition and other business and economic factors, which the Board of
Directors of the Company may consider relevant.
21
ITEM 2. UNREGISTERED
SALES OF EQUITY SECURITIES
Not Applicable.
ITEM 3. DEFAULTS UPON
SENIOR SECURITIES
Not Applicable.
ITEM 4. SUBMISSION OF
MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
ITEM 5. OTHER INFORMATION
Not Applicable.
ITEM 6. EXHIBITS AND
REPORTS ON FORM 8-K
A. Exhibits
The
following Exhibits are filed as part of this report pursuant to Item 601 of Regulation
S-K:
|
31.1
|
Certification
by Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
31.2
|
Certification
by Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
32.1
|
Certification
Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
B. Reports on Form 8-K:
1.
|
Current
Report Items 4.01 and 9.01: Changes in the Registrant's Certifying Accountant filed on
September 24, 2007.
|
2.
|
Current
Report Items 3.02 and 9.01: Unregistered Sales of Equity Securities filed on October 25,
2007.
|
SIGNATURES
Pursuant to the requirement of the
Securities Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
|
|
|
By:
By:
|
|
PURE BIOSCIENCE
/s/ Michael L. Krall
Michael L. Krall, President/CEO
December 17, 2007
/s/ Andrew J. Buckland
Andrew J. Buckland, CFO/Principal Accounting Officer
December 17, 2007
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22
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