Notes
to Condensed Consolidated Financial Statements
(Unaudited)
1.
Basis of Presentation
The
accompanying unaudited condensed consolidated financial statements include the consolidated accounts of PURE Bioscience, Inc.
and its wholly owned subsidiary, ETI H2O Inc., a Nevada corporation. ETI H2O, Inc. currently has no business operations and no
material assets or liabilities and there have been no significant transactions related to ETI H2O, Inc. during the periods presented
in the condensed consolidated financial statements. All inter-company balances and transactions have been eliminated. All references
to “PURE,” “we,” “our,” “us” and the “Company” refer to PURE Bioscience,
Inc. and our wholly owned subsidiary.
The
accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America, or GAAP, for interim financial information pursuant to the instructions to
Form 10-Q and Article 10/Rule 8-03 of Regulation S-X. Accordingly, they do not include all of the information and disclosures
required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation have been included. Operating results for the quarter ended October
31, 2017 are not necessarily indicative of the results that may be expected for other quarters or the year ending July 31, 2018.
The July 31, 2017 balance sheet was derived from audited financial statements but does not include all disclosures required by
GAAP and included in our Annual Report on Form 10-K. For more complete information, these unaudited financial statements and the
notes thereto should be read in conjunction with the audited financial statements for the year ended July 31, 2017 included in
our Annual Report on Form 10-K covering such period filed with the Securities and Exchange Commission, or SEC, on October 26,
2017.
The
preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect
the amounts reported in the financial statements and the accompanying notes. Actual results could differ from those estimates.
2.
Liquidity & Going Concern Uncertainty
These
unaudited condensed consolidated financial statements have been prepared and presented on a basis assuming we will continue as
a going concern. The factors below raise substantial doubt about our ability to continue as a going concern. The financial statements
do not include any adjustments that might be necessary from the outcome of this uncertainty.
Since our inception, we have financed our
operations primarily through public and private offerings of securities, debt financing, and revenue from product sales and license
agreements. We have a history of recurring losses, and as of October 31, 2017, we have incurred a cumulative net loss of $111,821,000.
We
do not have, and may never have, significant cash inflows from product sales or from other sources of revenue to fund our operations.
As of October 31, 2017, we had $3,229,000 in cash and cash equivalents, and $425,000 of accounts payable. As of October 31, 2017,
we have no long-term debt. We do not currently believe that our existing cash resources are sufficient to meet our anticipated
needs over the next twelve months from the date hereof.
Our
future capital requirements depend on numerous forward-looking factors. These factors may include, but are not limited to, the
following: the acceptance of, and demand for, our products; our success and the success of our partners in selling our products;
our success and the success of our partners in obtaining regulatory approvals to sell our products; the costs of further developing
our existing products and technologies; the extent to which we invest in new product and technology development; and the costs
associated with the continued operation, and any future growth, of our business. The outcome of these and other forward-looking
factors will substantially affect our liquidity and capital resources.
Until
we can generate significant cash from operations, we expect to continue to fund our operations with the proceeds of offerings
of our equity and debt securities. However, we cannot assure you that additional financing will be available when needed or that,
if available, financing will be obtained on terms favorable to us or to our stockholders. If we raise additional funds from the
issuance of equity securities, substantial dilution to our existing stockholders would likely result. If we raise additional funds
by incurring debt financing, the terms of the debt may involve significant cash payment obligations as well as covenants and specific
financial ratios that may restrict our ability to operate our business. Further, any contracts or license arrangements we enter
into to raise funds may require us to relinquish our rights to our products or technology, and we cannot assure you that we will
be able to enter into any such contracts or license arrangements on acceptable terms, or at all. Having insufficient funds may
require us to delay or scale back our marketing, distribution and other commercialization activities or cease our operations altogether.
We
do not have any unused credit facilities or other sources of capital available to us at this time. We intend to secure additional
working capital through sales of additional debt or equity securities. Our intended financing initiatives are subject to risk,
and we cannot provide any assurance about the availability or terms of these or any future financings.
If
we are unable to obtain sufficient capital, it will have a material adverse effect on our business and operations. It could cause
us to fail to execute our business plan, fail to take advantage of future opportunities, or fail to respond to competitive pressures
or customer requirements. It also may require us to significantly modify our business model and operations to reduce spending
to a sustainable level, which may include delaying, scaling back or eliminating some or all of our ongoing and planned investments
in corporate infrastructure, research and development projects, regulatory submissions, business development initiatives, and
sales and marketing activities, among other investments. If adequate funds are not available when needed, we may be required to
reduce or cease operations altogether.
The
condensed consolidated financial statements do not include any adjustment relating to recoverability or classification of recorded
assets and classification of recorded liabilities.
3.
Net Loss Per Share
Basic
net loss per common share is computed as net loss divided by the weighted average number of common shares outstanding for the
period. Our diluted net loss per common share is the same as our basic net loss per common share because we incurred a net loss
during each period presented, and the potentially dilutive securities from the assumed exercise of all outstanding stock options,
restricted stock units, and warrants would have an anti-dilutive effect. As of October 31, 2017 and 2016, the number of shares
issuable upon the exercise of stock options, the vesting of restricted stock units, and the exercise of warrants, none of which
are included in the computation of basic net loss per common share, was 11,680,939 and 10,719,394, respectively.
4.
Comprehensive Loss
Comprehensive
loss is defined as the change in equity during a period from transactions and other events and circumstances from non-owner sources,
including unrealized gains and losses on marketable securities and foreign currency translation adjustments. For the three months
ended October 31, 2017 and 2016, our comprehensive loss consisted only of net loss.
5.
Inventory
Inventories
are stated at the lower of cost or net realizable value, and net of a valuation allowance for potential excess or obsolete material.
Cost is determined using the average cost method. Depreciation related to manufacturing is systematically allocated to inventory
produced, and expensed through cost of goods sold at the time inventory is sold.
Inventories
consist of the following:
|
|
October 31, 2017
|
|
|
July 31, 2017
|
|
Raw materials
|
|
$
|
80,000
|
|
|
$
|
82,000
|
|
Finished goods
|
|
|
194,000
|
|
|
|
191,000
|
|
|
|
$
|
274,000
|
|
|
$
|
273,000
|
|
6.
Impairment of Long-Lived Assets
In
accordance with GAAP, if indicators of impairment exist, we assess the recoverability of the affected long-lived assets by determining
whether the carrying value of such assets can be recovered through undiscounted future operating cash flows. If impairment is
indicated, we measure the amount of such impairment by comparing the carrying value of the asset to the fair value of the asset
and we record the impairment as a reduction in the carrying value of the related asset and a charge to operating results. Estimating
the undiscounted future cash flows associated with long-lived assets requires judgment, and assumptions could differ materially
from actual results. During the three months ended October 31, 2017, no impairment of long-lived assets was indicated or recorded.
7.
Fair Value of Financial Instruments
Fair
value is defined as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability
in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined
based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions,
the authoritative guidance establishes a three-tier value hierarchy, which prioritizes the inputs used in measuring fair value
as follows:
|
●
|
Level
1 – Quoted prices in active markets for identical assets or liabilities.
|
|
|
|
|
●
|
Level
2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar
assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated
by observable market data for substantially the full term of the assets or liabilities.
|
|
|
|
|
●
|
Level
3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value
of the assets or liabilities.
|
In
connection with the October and November 2015 Private Placements, we issued warrants with derivative features. These instruments
were accounted for as derivative liabilities (See Note 8 to these condensed consolidated financial statements).
We
used Level 3 inputs for the valuation methodology of the derivative liabilities. The estimated fair values were computed using
a Monte Carlo option pricing model based on various assumptions. Our derivative liabilities are adjusted to reflect estimated
fair value at each period end, with any decrease or increase in the estimated fair value being recorded in other income or expense
accordingly, as adjustments to the fair value of the derivative liabilities. Various factors are considered in the pricing models
we use to value the warrants, including the Company’s current stock price, the remaining life of the warrants, the volatility
of the Company’s stock price, and the risk free interest rate.
The
following table provides a reconciliation of the beginning and ending balances of the derivative liabilities for the three months
ended October 31, 2017:
Fair
Value of Significant Unobservable Inputs (Level 3)
|
|
Warrant
|
|
|
|
Liabilities
|
|
Balance at July 31, 2017
|
|
$
|
1,853,000
|
|
Issuances
|
|
|
—
|
|
Settlement of warrant liabilities
|
|
|
(1,394,000
|
)
|
Adjustments to estimated fair value
|
|
|
(459,000
|
)
|
Balance at October 31, 2017
|
|
$
|
—
|
|
8.
Derivative Liabilities
On
October 23, 2015, we completed a first closing of a private placement financing (the “2015 Private Placement Financing”),
where we issued, among other securities, a warrant to purchase up to an aggregate of 6,666,666 shares of common stock with a term
of five years and a warrant to purchase up to an aggregate of 8,666,666 shares of common stock with a term of six months.
On
November 23, 2015, we completed a second and final closing of the 2015 Private Placement Financing, where we issued, among other
securities, a warrant to purchase up to an aggregate of 2,222,217 shares of common stock with a term of five years and a warrant
to purchase up to an aggregate of 2,820,670 shares of common stock with a term of six months.
We
accounted for the combined 20,376,219 warrants issued in connection with the 2015 Private Placement Financing in accordance with
the accounting guidance for derivatives. The applicable accounting guidance sets forth a two-step model to be applied in determining
whether a financial instrument is indexed to an entity’s own stock, which would qualify such financial instruments for a
scope exception. This scope exception specifies that a contract that would otherwise meet the definition of a derivative financial
instrument would not be considered as such if the contract is both (i) indexed to the entity’s own stock and (ii) classified
in the stockholders’ equity section of the entity’s balance sheet. We determined the warrants were ineligible for
equity classification due to anti-dilution provisions set forth therein.
During
the fiscal year ended July 31, 2016, (i) all 2,820,670 of the six-month warrants issued in the second and final closing were exercised,
(ii) the six-month warrants issued in the first closing expired and (iii) the five-year warrants issued in the first closing were
cancelled.
On
September 25, 2017, we completed the first closing of a tender offer to amend and exercise outstanding warrants to purchase shares
of our common stock. As a result, 1,599,135 warrants issued in connection with the 2015 Private Placement Financing were exercised.
In addition, there was a net exercise on 118,057 warrants which resulted in the issuance of 63,811 shares of our common stock.
The net exercised warrants were issued in connection with the 2015 Private Placement Financing. The change in fair value of the
warrant liabilities on September 25, 2017 was recorded as a change in derivative liabilities in the condensed consolidated statements
of operations. The fair value on the exercise date was returned to additional paid in capital and is reflected in the settlement
of warrant liability section on the table in Note 8. The following assumptions were used as inputs to the fair value model at
September 25, 2017: stock price of $1.00 per share and a warrant exercise price of $0.45 per share as of the valuation date; our
historical stock price volatility of 70.00%; risk free interest rate on U.S. treasury notes of 1.6%; warrant expiration of 3.2
years (See Note 10 to these condensed consolidated financial statements).
On
October 10, 2017, we completed a second and final closing of a tender offer to amend and exercise outstanding warrants to purchase
shares of our common stock. As a result, 268,909 warrants issued in connection with the 2015 Private Placement Financing were
exercised. The change in fair value of the warrant liabilities on October 10, 2017 was recorded as a change in derivative liabilities
in the condensed consolidated statements of operations. The fair value on the exercise date was returned to additional paid in
capital and is reflected in the settlement of warrant liability section on the table in Note 8. The following assumptions were
used as inputs to the fair value model at October 10, 2017: stock price of $1.03 per share and a warrant exercise price of $0.45
per share as of the valuation date; our historical stock price volatility of 70.00%; risk free interest rate on U.S. treasury
notes of 1.6%; warrant expiration of 3.1 years (See Note 10 to these condensed consolidated financial statements).
During
the three months ended October 31, 2017, all warrants containing derivative features issued in connection with the 2015 Private
Placement Financing were exercised.
As
of October 31, 2017, the total value of the derivative liabilities was zero. The change in fair value of the warrant liabilities
for the three months ended October 31, 2017 and 2016, was a decrease of $459,000 and an increase of $159,000, respectively, which
was recorded as a change in derivative liabilities in the condensed consolidated statements of operations.
9.
Stockholders’ Equity
Preferred
Stock
As
of October 31, 2017, the Company’s Board of Directors is authorized to issue 5,000,000 shares of preferred stock with a
par value of $0.01 per share, in one or more series. As of October 31, 2017 and July 31, 2017, there were no shares of preferred
stock issued and outstanding.
Common
Stock
As
of October 31, 2017, 100,000,000 shares of common stock with a par value of $0.01 per share are authorized for issuance.
Schedule TO and Warrant Exercises
On October 10, 2017,
we closed a tender offer to amend and exercise outstanding warrants to purchase shares of our Common Stock. Specifically,
we filed a Schedule TO with the SEC on August 25, 2017 offering to (i) reduce the exercise price of the warrants to purchase 4,104,980
shares of Common Stock issued to investors participating in our private placement financing completed on August 29, 2014, as amended
(the “2014 Warrants”) from $0.75 per share to $0.60 per share of Common Stock in cash, (ii) reduce the exercise price
of outstanding warrants to purchase 1,986,101 shares of Common Stock issued to investors participating in our private placement
financing completed on November 23, 2015 (the “2015 Warrants”) from $0.45 per share to $0.40 per share of Common Stock
in cash, (iii) reduce the exercise price of the outstanding warrants to purchase 1,572,941 shares of Common Stock issued to investors
participating in our private placement financing completed on January 23, 2017 (the “2017 Warrants”, together with
the 2014 Warrants and 2015 Warrants, the “Original Warrants”) from $1.25 per share to $0.85 per share of Common Stock
in cash, (iv) shorten the exercise period of the Original Warrants so that they expired concurrently with the expiration of the
Offer to Amend and Exercise at 5:00 p.m. (Pacific Time) on September 25, 2017 (“Expiration Date”) unless extended
until the Subsequent Expiration Date (as defined below), (v) delete the cashless exercise provisions in the Original Warrants
and (vi) delete the price-based anti-dilution provisions contained in the 2015 Warrants.
Additionally,
we requested the holders of a majority of the shares issuable upon exercise of the 2014 Warrants (the “2014 Requisite Majority”),
2015 Warrants (the “2015 Requisite Majority”) and 2017 Warrants (the “2017 Requisite Majority”) to approve
an amendment of all of the outstanding 2014 Warrants, 2015 Warrants and 2017 Warrants, respectively, to amend such Original Warrants
in the same manner as set forth above (the “Aggregate Warrant Amendment”), except the Expiration Date would be extended
until October 10, 2017 (the “Subsequent Expiration Date”) if such Aggregate Warrant Amendment was approved with respect
to such class of Original Warrants. The 2015 Requisite Majority approved an amendment of all of the outstanding 2015 Warrants
and holders of 2015 Warrants had until the Subsequent Expiration Date to exercise their 2015 Warrants (the “Subsequent Offer
Period”).
The Offer to Amend and Exercise with respect
to the 2014 Warrants and 2017 Warrants expired on the Expiration Date of September 25, 2017. As of September 25, 2017, 1,491,649
shares of Common Stock were issued upon exercise of 2014 Warrants, 1,599,135 shares of Common Stock were issued upon exercise
of 2015 Warrants and 1,396,470 shares of Common Stock were issued upon exercise of 2017 Warrants, for aggregate gross proceeds
to us of approximately $2,720,000. During the Subsequent Offer Period, 2015 Warrants to purchase 268,909 shares of Common
Stock were exercised for aggregate gross proceeds to us of approximately $107,000. 2014 Warrants to purchase 2,533,331 shares
of Common Stock and 2017 Warrants to purchase 176,471 shares of Common Stock at exercise prices of $0.75 per share and $1.25 per
share, respectively, continue to remain outstanding and no 2015 Warrants remain outstanding.
Original Warrants (including 2015 Warrants
exercised during the Subsequent Offer Period) to purchase an aggregate of 4,756,163 shares of Common Stock were tendered and exercised
in the Offer to Amend and Exercise for aggregate net proceeds to us of approximately $2,632,000. Garden State Securities
Inc. assisted the Company as warrant solicitation agents with respect to the 2017 Warrants.
Due to the reduction in exercise price for
the Original Warrants issued in connection with the Schedule TO, we determined it was appropriate to record $876,000 of expense
in the condensed consolidated statement of operations for the inducement to exercise the Original Warrants.
Additional Warrant Exercise
During the three months ended October 31, 2017,
there was a net exercise on 198,057 warrants which resulted in the issuance of 82,545 shares of our common stock. As these warrants
were net exercised, as permitted under the respective warrant agreement, we did not receive any cash proceeds. The warrants were
issued in connection with the Original Warrants discussed above.
Other Activity
During the three months ended October 31,
2017, we entered into a two-year service agreement for business development services. In accordance with the agreement we issued
50,000 shares of common stock, with a value of $51,000. The value was capitalized to prepaid expense and is being amortized over
the term of the agreement. During the three months ended October 31, 2017, we recognized $3,000 of expense related to these services.
On
April 13, 2016, we entered into a two-year service agreement for general financial advisory services. In accordance with the agreement
we issued 250,000 shares of common stock, with a value of $290,000. The value was capitalized to prepaid expense and is being
amortized over the term of the agreement. During the three months ended October 31, 2017 and 2016, we recognized $36,000 of expense
related to these services.
10.
Share-Based Compensation
Restricted
Stock Units
During
the three months ended October 31, 2017, the Compensation Committee of the Board of Directors authorized the issuance of 150,000
Restricted Stock Units (“RSUs”) to Janet Risi Field, a member of our board of directors. 50% of the RSUs will vest
on the earlier of the date of our annual meeting of stockholders held in 2018 or January 15, 2018 and 50% of the RSUs will vest
on the earlier of the date of our annual meeting of stockholders held in 2019 or January 15, 2019. Each RSU represents the right
to receive one share of common stock, issuable at the time the RSU subsequently settles, as set forth in the Restricted Stock
Unit Agreement.
During the three months ended October 31,
2017, we issued 300,000 RSUs to purchase common stock to third-party consultants for business development services. The
RSUs vest based on performance conditions if sales milestones are achieved. We currently do not expect the 300,000 RSUs to
vest.
Of the 2,485,000 RSUs outstanding, we currently
expect 1,300,000 to vest. As of October 31, 2017, there was $1,278,000 of unrecognized non-cash compensation cost related to RSUs
we expect to vest, which will be recognized over a weighted average period of 3.02 years.
For
the three months ended October 31, 2017 and 2016, share-based compensation expense for RSUs was $312,000 and $52,000, respectively.
Stock
Option Plans
In
February 2016, we amended and restated our 2007 Equity Incentive Plan, or the Plan, to, among other changes, increase the number
of shares of common stock issuable under the Plan by 4,000,000 shares and extend the term of the Plan until February 4, 2026.
The Plan provides for the grant of incentive and non-qualified stock options, as well as other share-based payment awards, to
our employees, directors, consultants and advisors. These awards have up to a 10-year contractual life and are subject to various
vesting periods, as determined by the Compensation Committee of the Board of Directors. Our 2007 Equity Incentive Plan is the
only active plan pursuant to which options to acquire common stock or restricted stock awards can be granted and are currently
outstanding. As of October 31, 2017, there were approximately 561,000 shares available for issuance under the Plan.
During the three months ended October 31, 2017, the Compensation Committee of the Board of Directors authorized
the issuance of 200,000 options to purchase common stock to Janet Risi Field, a member of our board of directors. 50% of the options
will vest on the earlier of the date of our annual meeting of stockholders held in 2018 or January 15, 2018 and 50% of the options
will vest on the earlier of the date of our annual meeting of stockholders held in 2019 or January 15, 2019.
During
the three months ended October 31, 2016, we issued 100,000 options to purchase common stock to a member of our Scientific Advisory
Board. The options vested quarterly over one year and carry a five-year term.
None
of the options granted to our directors were granted pursuant to any compensatory, bonus, or similar plan maintained or otherwise
sponsored by the Company.
A
summary of our stock option activity is as follows:
|
|
Shares
|
|
|
Weighted-
Average
Exercise Price
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding
at July 31, 2017
|
|
|
5,759,843
|
|
|
$
|
1.25
|
|
|
$
|
1,120,000
|
|
Granted
|
|
|
200,000
|
|
|
$
|
1.21
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
$
|
—
|
|
|
|
|
|
Cancelled
|
|
|
—
|
|
|
$
|
—
|
|
|
|
|
|
Outstanding
at October 31, 2017
|
|
|
5,959,843
|
|
|
$
|
1.25
|
|
|
$
|
544,000
|
|
The
weighted-average remaining contractual term of options outstanding at October 31, 2017 was 5.55 years.
At
October 31, 2017, options to purchase 3,163,593 shares of common stock were exercisable. These options had a weighted-average
exercise price of $1.35, an aggregate intrinsic value of $432,000, and a weighted average remaining contractual term of 3.15 years.
The weighted average grant date fair value for options granted during the three months ended October 31, 2017 was $0.85. The total
unrecognized compensation cost related to unvested stock option grants as of October 31, 2017 was approximately $1,675,000 and
the weighted average period over which these grants are expected to vest is 3.04 years.
For
the three months ended October 31, 2017 and 2016, share-based compensation expense for stock options was $395,000 and $226,000
respectively.
We
use the Black-Scholes valuation model to calculate the fair value of stock options. Stock-based compensation expense is recognized
over the vesting period using the straight-line method. The fair value of stock options was estimated at the grant date using
the following weighted average assumptions:
|
|
For
the three months ended
October
31,
|
|
|
|
2017
|
|
|
2016
|
|
Volatility
|
|
|
86.98
|
%
|
|
|
74.71
|
%
|
Risk-free
interest rate
|
|
|
1.80
|
%
|
|
|
0.93
|
%
|
Dividend
yield
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
Expected
life
|
|
|
5.45
|
years
|
|
|
2.81
|
years
|
Volatility
is the measure by which our stock price is expected to fluctuate during the expected term of an option. 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.
The
risk-free interest rates used in the Black-Scholes calculations are based on the prevailing U.S. Treasury yield as determined
by the U.S. Federal Reserve.
We
have never paid dividends on our common stock and do not anticipate paying dividends on our common stock in the foreseeable future.
Accordingly, we have assumed no dividend yield for purposes of estimating the fair value of our share-based compensation.
The
weighted average expected life of options was estimated using the average of the contractual term and the weighted average vesting
term of the options. Certain options granted to consultants are subject to variable accounting treatment and are required to be
revalued until vested.
Stock-based
compensation expense is based on awards ultimately expected to vest, and therefore is reduced by expected forfeitures. We have
not had significant forfeitures of stock options granted to employees and directors as a significant number of our historical
stock option grants were fully vested at issuance or were issued with short vesting provisions. Therefore, we have estimated the
forfeiture rate of our outstanding stock options as zero.
11.
Recent Accounting Pronouncements
In
July 2017, the Financial Accounting Standards Board (“FASB”) issued a two-part Accounting Standards Update (“ASU”)
No. 2017-11, I. Accounting for Certain Financial Instruments With Down Round Features and II. Replacement of the Indefinite Deferral
for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling
Interests With a Scope Exception (“ASU 2017-11”). ASU 2017-11 amends guidance in FASB ASC 260, Earnings Per Share,
FASB ASC 480, Distinguishing Liabilities from Equity, and FASB ASC 815, Derivatives and Hedging. The amendments in Part I of ASU
2017-11 change the classification analysis of certain equity-linked financial instruments (or embedded features) with down round
features. The amendments in Part II of ASU 2017-11 re-characterize the indefinite deferral of certain provisions of Topic 480
that now are presented as pending content in the Codification, to a scope exception. Those amendments do not have an accounting
effect. ASU 2017-11 is effective for public business entities for fiscal years, and interim periods within those fiscal years,
beginning after December 15, 2018. We are evaluating the effect that this update will have on our consolidated financial statements
and related disclosures.
In
May 2014, the FASB issued ASU 2014-09,
Revenue from Contracts with Customers (Topic 606)
which amended the existing accounting
standards for revenue recognition. ASU 2014-09 establishes principles for recognizing revenue upon the transfer of promised goods
or services to customers, in an amount that reflects the expected consideration received in exchange for those goods or services.
In July 2015, the FASB deferred the effective date for annual reporting periods beginning after December 15, 2017. We expect to
adopt ASU 2014-09 in the first fiscal quarter of 2019. We currently do not have any material revenue contracts with customers
and will review any new contracts entered into prior to the adoption of the new standard. We are evaluating the effect that this
update will have on our consolidated financial statements and related disclosures.
12. Subsequent Events
Subsequent to October 31, 2017, we wrote-off
$26,000 of inventory destroyed in a third-party warehouse fire. We are currently exploring options to recover our loss.
Item
2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
All
references in this Item 2 and elsewhere in this Quarterly Report to “PURE,” “we”, “our,” “us”
and the “Company” refer to PURE Bioscience, Inc., a Delaware corporation, and our wholly owned subsidiary, ETI H2O,
Inc., a Nevada corporation. ETI H2O, Inc. currently has no business operations and no material assets or liabilities and there
have been no significant transactions related to ETI H2O, Inc. during the periods presented in the condensed consolidated financial
statements contained elsewhere in this Quarterly Report.
The
discussion in this section contains forward-looking statements. These statements relate to future events or our future financial
performance. We have attempted to identify forward-looking statements by terminology such as “anticipate,” “believe,”
“can,” “continue,” “could,” “estimate,” “expect,” “intend,”
“may,” “plan,” “potential,” “predict,” “should,” “would”
or “will” or the negative of these terms or other comparable terminology, but their absence does not mean that a statement
is not forward-looking. These statements are only predictions and involve known and unknown risks, uncertainties and other factors,
which could cause our actual results to differ from those projected in any forward-looking statements we make. Several risks and
uncertainties we face are discussed in more detail under “Risk Factors” in Part II, Item 1A of this Quarterly Report
or in the discussion and analysis below. You should, however, understand that it is not possible to predict or identify all risks
and uncertainties and you should not consider the risks and uncertainties identified by us to be a complete set of all potential
risks or uncertainties that could materially affect us. You should not place undue reliance on the forward-looking statements
we make herein because some or all of them may turn out to be wrong. We undertake no obligation to update any of the forward-looking
statements contained herein to reflect future events and developments, except as required by law. The following discussion should
be read in conjunction with the condensed consolidated financial statements and the notes to those financial statements included
elsewhere in this Quarterly Report on Form 10-Q.
Overview
We
are focused on developing and commercializing proprietary antimicrobial products that provide safe and cost-effective solutions
to the health and environmental challenges of pathogen and hygienic control. Our technology platform is based on patented stabilized
ionic silver, and our initial products contain silver dihydrogen citrate, or SDC. SDC is a broad-spectrum, non-toxic antimicrobial
agent, which offers 24-hour residual protection and formulates well with other compounds. As a platform technology, we believe
SDC is distinguished from existing products in the marketplace because of its superior efficacy, reduced toxicity, non-causticity,
and the inability of bacteria to form a resistance to it.
Our
SDC-based technology platform has potential application in a number of industries. Our near-term focus is on offering products
that address food safety risks across the food industry supply chain. In 2011, the Centers for Disease Control and Prevention
(CDC) reported that foodborne illnesses affect more than 48 million people annually in the U.S., causing 128,000 hospitalizations
and 3,000 fatalities. The CDC estimated that more than 9 million of these foodborne illnesses were attributed to major pathogens.
The CDC reported that contaminated produce was responsible for approximately 46% of the foodborne illnesses caused by pathogens
and 23% of the foodborne illness-related deaths in the US between 1998 and 2008. Among the top pathogens contributing to foodborne
illness in the U.S. are Norovirus,
Salmonella
,
Campylobacter
,
Staphylococcus
, Shiga toxin–producing
Escherichia coli
and
Listeria
.
Salmonella
is the leading cause of hospitalization, followed by Norovirus,
and is the leading cause of deaths related to foodborne illness.
Based
on these statistics, we believe there is a significant market opportunity for our safe, non-toxic and effective SDC-based solutions.
We currently offer PURE
®
Hard Surface as a food contact surface sanitizer and disinfectant to restaurant chains,
food processors, and food transportation companies. We also offer PURE Control
®
as a direct food contact processing
aid. We received the required FDA approvals to market PURE Control
®
as a direct food contact processing aid for
raw poultry and fresh produce in December 2015 and January 2016, respectively. Because additional USDA approval was not required,
we began marketing PURE Control as a direct food contact processing aid for fresh produce following our receipt of FDA approval
in January 2016.
In
July 2016, we received a “No Objection Letter” from the USDA’s Food Safety and Inspection Service (FSIS) granting
approval for SDC-based PURE Control to be used as a spray or dip applied to poultry carcasses, parts and organs in pre-OLR (on-line
reprocessing) and post chill processing of fresh poultry. In January 2017, we submitted an additional FCN to the FDA to allow
use of higher SDC concentrations in poultry processing, allowing the flexibility to adjust to varying plant and processing conditions.
In May 2017, we received a Final Letter from the FDA for this FCN as well as a “No Objection Letter” from the USDA’s
Food Safety and Inspection Service (FSIS) granting approval for the higher concentrations of SDC-based PURE Control to be used
as a spray or dip applied to poultry carcasses, parts and organs in pre-OLR (on-line reprocessing) and post chill processing of
fresh poultry. We are currently focused on completing in-plant validation trials for PURE Control in pre- and post OLR poultry
processing applications, which represents approximately 65 to 75% of the total processing aid market for poultry processing. We
are also conducting in-plant trials to optimize the application of PURE Control in OLR to attempt to gain USDA approval for use
in this stage of poultry processing.
Subject
to the results of our focused in-plant validation efforts for our approved produce and poultry solutions, we intend to seek approval
to utilize PURE Control as a direct food contact processing aid for raw meats, including beef and pork. In addition to our direct
sales efforts with PURE Hard Surface and PURE Control, we market and sell our SDC-based products indirectly through third-party
distributors.
Business
Strategy
Our
goal is to become a sustainable company by commercializing the SDC-based products we have developed with our proprietary technology
platform. We are focused on delivering leading antimicrobial products that address food safety risks across the food industry
supply chain. Key aspects of our business strategy include:
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Expanding
sales and distribution for our products into the food industry with a focus on a dual track of food safety market opportunities:
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Hard
Surface Disinfectant
- commercializing our current EPA registered PURE Hard Surface disinfectant and sanitizer for
use in foodservice operations, food manufacturing and food transportation.
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Direct
Food Contact
- commercializing FDA approved PURE Control as a direct food contact processing aid for fresh produce;
commercializing FDA approved PURE Control as a food processing and intervention aid for food processors treating raw poultry
in pre and post OLR applications. We also intend to continue our on-going in plant trials to optimize the application of PURE
Control in OLR to attempt to gain USDA approval for use in this stage of poultry processing. Additionally, subject to the
results of our focused in-plant validation efforts for our approved produce and poultry solutions, we intend to seek approval
to utilize PURE Control as a direct food contact processing aid for raw meats, including beef and pork.
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Establishing
strategic alliances to maximize the commercial potential of our technology platform;
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Developing
additional proprietary products and applications; and
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Protecting
and enhancing our intellectual property.
|
In
addition to our current products addressing food safety, we intend to leverage our technology platform through licensing and distribution
collaborations in order to develop new products and enter into new markets that could potentially generate multiple sources of
revenue.
Liquidity
& Going Concern Update
Our
condensed consolidated financial statements have been prepared and presented on a basis assuming we will continue as a going concern.
The factors below raise substantial doubt about our ability to continue as a going concern. The financial statements do not include
any adjustments that might be necessary from the outcome of this uncertainty.
Since
our inception, we have financed our operations primarily through public and private offerings of securities, debt financing, and
revenue from product sales and license agreements. We have a history of recurring losses, and as of October 31, 2017, we have
incurred a cumulative net loss of $111,869,000.
We
do not have, and may never have, significant cash inflows from product sales or from other sources of revenue to fund our operations.
As of October 31, 2017, we had $3,229,000 in cash and cash equivalents, and $425,000 of accounts payable. As of October 31, 2017,
we have no long-term debt. In October 2017, we completed a tender offer to amend and exercise outstanding warrants held by the
investors participating in our 2014, 2015 and 2017 private placement financings, resulting in net receipts of approximately $2.6
million in cash proceeds from the exercise of 4,756,163 outstanding warrants. We do not currently believe that our existing cash
resources are sufficient to meet our anticipated needs over the next twelve months from the date hereof.
Our
future capital requirements depend on numerous forward-looking factors. These factors may include, but are not limited to, the
following: the acceptance of, and demand for, our products; our success and the success of our partners in selling our products;
our success and the success of our partners in obtaining regulatory approvals to sell our products; the costs of further developing
our existing products and technologies; the extent to which we invest in new product and technology development; and the costs
associated with the continued operation, and any future growth, of our business. The outcome of these and other forward-looking
factors will substantially affect our liquidity and capital resources.
Until
we can generate significant cash from operations, we expect to continue to fund our operations with the proceeds of offerings
of our equity and debt securities. However, we cannot assure you that additional financing will be available when needed or that,
if available, financing will be obtained on terms favorable to us or to our stockholders. If we raise additional funds from the
issuance of equity securities, substantial dilution to our existing stockholders would likely result. If we raise additional funds
by incurring debt financing, the terms of the debt may involve significant cash payment obligations as well as covenants and specific
financial ratios that may restrict our ability to operate our business. Further, any contracts or license arrangements we enter
into to raise funds may require us to relinquish our rights to our products or technology, and we cannot assure you that we will
be able to enter into any such contracts or license arrangements on acceptable terms, or at all. Having insufficient funds may
require us to delay or scale back our marketing, distribution and other commercialization activities or cease our operations altogether.
We
do not have any unused credit facilities or other sources of capital available to us at this time. We intend to secure additional
working capital through sales of additional debt or equity securities. Our intended financing initiatives are subject to risk,
and we cannot provide any assurance about the availability or terms of these or any future financings.
If
we are unable to obtain sufficient capital, it will have a material adverse effect on our business and operations. It could cause
us to fail to execute our business plan, fail to take advantage of future opportunities, or fail to respond to competitive pressures
or customer requirements. It also may require us to significantly modify our business model and operations to reduce spending
to a sustainable level, which may include delaying, scaling back or eliminating some or all of our ongoing and planned investments
in corporate infrastructure, research and development projects, regulatory submissions, business development initiatives, and
sales and marketing activities, among other investments. If adequate funds are not available when needed, we may be required to
reduce or cease operations altogether.
Financial
Overview
This
financial overview provides a general description of our revenue and expenses.
Revenue
We
contract manufacture and sell SDC-based products for end use, and as a raw material for manufacturing use. We also license our
products and technology to development and commercialization partners. Revenue is recognized when realized or realizable and earned.
Any amounts received prior to satisfying revenue recognition criteria are recorded as deferred revenue.
Cost
of Goods Sold
Cost
of goods sold for product sales includes direct and indirect costs to manufacture products, including materials consumed, manufacturing
overhead, shipping costs, salaries, benefits, reserved inventory, and related expenses of operations. Depreciation related to
manufacturing is systematically allocated to inventory produced, and expensed through cost of goods sold at the time inventory
is sold.
Selling,
General and Administrative
Selling,
general and administrative expense consists primarily of salaries and other related costs for personnel in business development,
sales, finance, accounting, information technology, and executive functions. Other selling, general and administrative costs include
product marketing, advertising, and trade show costs, as well as public relations and investor relations, facility costs, and
legal, accounting and other professional fees.
Research
and Development
Our
research and development activities are focused on leveraging our technology platform to develop additional proprietary products
and applications. Research and development expense consists primarily of personnel and related costs, product registration expenses,
and third-party testing. We expense research and development costs as incurred.
Other
Income (Expense)
We
record interest income, interest expense, the change in derivative liabilities, as well as other non-operating transactions, as
other income (expense) in our condensed consolidated statements of operations.
Results
of Operations
Fluctuations
in Operating Results
Our
results of operations have fluctuated significantly from period to period in the past and are likely to continue to do so in the
future. We anticipate that our results of operations will be affected for the foreseeable future by several factors that may contribute
to these periodic fluctuations, including the demand for our products, the timing and amount of our product sales, and the progress
and timing of expenditures related to sales and marketing, as well as product development. Due to these fluctuations, we believe
that the period-to-period comparisons of our operating results are not a reliable indication of our future performance.
Comparison
of the Three Months Ended October 31, 2017 and 2016
Net
Product Sales
Net
product sales were $464,000 and $531,000 for the three months ended October 31, 2017 and 2016, respectively. The decrease of $67,000
was primarily attributable to reduced food safety sales and fluctuations within our existing legacy customer base.
For
the three months ended October 31, 2017, one individual customer accounted for 49% of our net product sales. No other individual
customer accounted for 10% or more of our net product sales. The geographic breakdown of net product sales was as follows: 100%
U.S.
For
the three months ended October 31, 2016, one individual customer accounted for 59% of our net product sales. No other individual
customer accounted for 10% or more of our net product sales. The geographic breakdown of net product sales was as follows: 100%
U.S.
Cost
of Goods Sold
Cost
of goods sold was $146,000 and $265,000 for the three months ended October 31, 2017 and 2016, respectively. The decrease of $119,000
was primarily attributable to decreased product sales.
Gross
margin as a percentage of net product sales, or gross margin percentage, was 69% and 50% for the three months ended October 31,
2017 and 2016, respectively. The increase in gross margin percentage was primarily attributable to the sale of higher margin formulations
and packaging configurations of our products during the quarter ended October 31, 2017, as compared with the prior period.
Selling, General and Administrative
Expense
Selling, general and administrative expense
was $1,445,000 and $1,337,000 for the three months ended October 31, 2017 and 2016, respectively. The increase of $108,000
was primarily attributable to increased personnel and business development fees.
Research and Development Expense
Research and development expense was $144,000
and $248,000 for the three months ended October 31, 2017 and 2016, respectively. The decrease of $104,000 was primarily attributable
to reduced spending on research supporting our FDA approvals.
Share-Based Compensation
Share-based compensation expense was $656,000
and $278,000 for the three months ended October 31, 2017 and 2016, respectively. The increase of $378,000 is primarily
due to the vesting of stock options and restricted stock units granted to employees, directors and consultants supporting our
selling, general and administrative, and research and development functions.
Change
in Derivative Liabilities
Change
in derivative liabilities for the three months ended October 31, 2017 and 2016 was a decrease of $459,000 and an increase of $159,000,
respectively. The overall decrease in the derivative liability is due to updates to the assumptions used in the fair value pricing
model for warrants at the date the warrants were exercised and at the end of the reporting period (See Notes 8 and 9 to the condensed
consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q).
Inducement
to exercise warrants
During the three months ended October 31,
2017, we completed a tender offer to amend outstanding warrants held by the investors participating in our 2014, 2015 and 2017
private placement financings. In accordance with the terms of the tender offer the strike price for all three series of
warrants was reduced. As a result, we recorded a one-time inducement expense of $876,000.
Interest
Expense
Interest
expense for the three months ended October 31, 2017 and 2016 was $1,000.
Other
Income (Expense)
Other
income for the three months ended October 31, 2017 and 2016 was $6,000 and $14,000, respectively.
Liquidity
and Capital Resources
Our
condensed consolidated financial statements have been prepared and presented on a basis assuming we will continue as a going concern.
The factors below raise substantial doubt about our ability to continue as a going concern. The financial statements do not include
any adjustments that might be necessary from the outcome of this uncertainty.
Since our inception, we have financed our
operations primarily through public and private offerings of securities, debt financing, and revenue from product sales and license
agreements. We have a history of recurring losses, and as of October 31, 2017 we have incurred a cumulative net loss of $111,821,000.
In
October 2017, we completed a tender offer to amend and exercise outstanding warrants held by the investors participating in our
2014, 2015 and 2017 private placement financings, resulting in net receipts of approximately $2.6 million in cash proceeds from
the exercise of 4,756,163 outstanding warrants. We do not currently believe that our existing cash resources are sufficient to
meet our anticipated needs over the next twelve months from the date hereof.
(See Notes
8 and 9
to the condensed consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q
).
We
do not have, and may never have, significant cash inflows from product sales or from other sources of revenue to fund our operations.
As of October 31, 2017, we had $3,229,000 in cash and cash equivalents compared with $1,640,000 in cash and cash equivalents as
of July 31, 2017. The net increase in cash and cash equivalents was primarily attributable to the successful closing of the tender
offer discussed above. Additionally, as of October 31, 2017, we had $637,000 of current liabilities, including $425,000 in accounts
payable, compared with $2,528,000 of current liabilities, including $426,000 in accounts payable as of July 31, 2017. The net
decrease in current liabilities was primarily due to the removal of the derivative liability incurred from the issuance of warrants
associated with our November 2015 financing
(See Notes 8 and 9
to the condensed consolidated
financial statements included in Item 1 of this Quarterly Report on Form 10-Q
).
In
addition, from time to time we have entered into employment agreements with our executives that, under certain cases, provide
for the continuation of salary and certain other benefits if these executives are terminated under specified circumstances. These
agreements generally expire upon termination for cause or when we have met our obligations under these agreements. As of October
31, 2017, no events have occurred resulting in the obligation of any such payments.
Our
future capital requirements depend on numerous forward-looking factors. These factors may include, but are not limited to, the
following: the acceptance of, and demand for, our products; our success and the success of our partners in selling our products;
our success and the success of our partners in obtaining regulatory approvals to sell our products; the costs of further developing
our existing products and technologies; the extent to which we invest in new product and technology development; and the costs
associated with the continued operation, and any future growth, of our business. The outcome of these and other forward-looking
factors will substantially affect our liquidity and capital resources.
Until
we can generate significant cash from operations, we expect to continue to fund our operations with the proceeds of offerings
of our equity and debt securities. However, we cannot assure you that additional financing will be available when needed or that,
if available, financing will be obtained on terms favorable to us or to our stockholders. If we raise additional funds from the
issuance of equity securities, substantial dilution to our existing stockholders would likely result. If we raise additional funds
by incurring debt financing, the terms of the debt may involve significant cash payment obligations as well as covenants and specific
financial ratios that may restrict our ability to operate our business. Further, any contracts or license arrangements we enter
into to raise funds may require us to relinquish our rights to our products or technology, and we cannot assure you that we will
be able to enter into any such contracts or license arrangements on acceptable terms, or at all. Having insufficient funds may
require us to delay or scale back our marketing, distribution and other commercialization activities or cease our operations altogether.
We
do not have any unused credit facilities or other sources of capital available to us at this time. We intend to secure additional
working capital through sales of additional debt or equity securities. Our intended financing initiatives are subject to risk,
and we cannot provide any assurance about the availability or terms of these or any future financings.
If
we are unable to obtain sufficient capital, it will have a material adverse effect on our business and operations. It could cause
us to fail to execute our business plan, fail to take advantage of future opportunities, or fail to respond to competitive pressures
or customer requirements. It also may require us to significantly modify our business model and operations to reduce spending
to a sustainable level, which may include delaying, scaling back or eliminating some or all of our ongoing and planned investments
in corporate infrastructure, research and development projects, regulatory submissions, business development initiatives, and
sales and marketing activities, among other investments. If adequate funds are not available when needed, we may be required to
reduce or cease operations altogether.
Critical
Accounting Policies and Estimates
The
discussion and analysis of our financial condition and results of operations are based on our condensed consolidated financial
statements, which have been prepared in accordance with accounting principles generally accepted in the United States, or GAAP.
The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues, expenses, and related disclosures. We evaluate our estimates on an ongoing basis. We base our estimates
on historical experience and on other assumptions that we believe to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other
sources. Actual results may differ from these estimates under different assumptions or conditions.
In
addition, the condensed consolidated financial statements included in this Quarterly Report have been prepared and presented on
a basis assuming we will continue as a going concern. Until we can generate significant cash from operations, we expect to continue
to fund our operations with the proceeds of offerings of our equity and debt securities. However, we cannot assure you that additional
financing will be available when needed or that, if available, financing will be obtained on terms favorable to us or to our stockholders.
If we raise additional funds from the issuance of equity securities, substantial dilution to our existing stockholders would likely
result. If we raise additional funds by incurring debt financing, the terms of the debt may involve significant cash payment obligations
as well as covenants and specific financial ratios that may restrict our ability to operate our business. Further, any contracts
or license arrangements we enter into to raise funds may require us to relinquish our rights to our products or technology, and
we cannot assure you that we will be able to enter into any such contracts or license arrangements on acceptable terms, or at
all. Having insufficient funds may require us to delay or scale back our marketing, distribution and other commercialization activities
or cease our operations altogether. Our financial statements do not include any adjustment relating to recoverability or classification
of recorded assets and classification of recorded liabilities.
We
believe the following accounting policies and estimates are critical to aid you in understanding and evaluating our reported financial
results.
Revenue
Recognition
We
sell our products to distributors and end users. We record revenue when we sell products to our customers, rather than when our
customers resell products to third parties. When we sell products to our customers, we reduce the balance of our inventory with
a corresponding charge to cost of goods sold. We do not currently have any consignment sales.
Terms
of our product sales are generally FOB shipping point. Product sales are recognized when delivery of the products has occurred
(which is generally at the time of shipment), title has passed to the customer, the selling price is fixed or determinable, collectability
is reasonably assured and we have no further obligations. Any amounts received prior to satisfying these revenue recognition criteria
are recorded as deferred revenue. We record product sales net of discounts at the time of sale and report product sales net of
such discounts.
We
also license our products and technology to development and commercialization partners. License fee revenue consists of product
and technology license fees earned. If multiple-element arrangements require on-going services or performance, then upfront product
and technology license fees under such arrangements are deferred and recognized over the period of such services or performance.
Non-refundable amounts received for substantive milestones are recognized upon achievement of the milestone. Any amounts received
prior to satisfying these revenue recognition criteria are recorded as deferred revenue.
Share-Based
Compensation
We
grant equity-based awards under share-based compensation plans or stand-alone contracts. We estimate the fair value of share-based
payment awards using the Black-Scholes option valuation model. This fair value is then amortized over the requisite service periods
of the awards. The Black-Scholes option valuation model requires the input of subjective assumptions, including price volatility
of the underlying stock, risk-free interest rate, dividend yield, and expected life of the option. Share-based compensation expense
is based on awards ultimately expected to vest, and therefore is reduced by expected forfeitures. Changes in assumptions used
under the Black-Scholes option valuation model could materially affect our net loss and net loss per share.
Impairment
of Long-Lived Assets
In
accordance with GAAP, if indicators of impairment exist, we assess the recoverability of the affected long-lived assets by determining
whether the carrying value of such assets can be recovered through undiscounted future operating cash flows. If impairment is
indicated, we measure the amount of such impairment by comparing the carrying value of the asset to the fair value of the asset
and we record the impairment as a reduction in the carrying value of the related asset and a charge to operating results. Estimating
the undiscounted future cash flows associated with long-lived assets requires judgment, and assumptions could differ materially
from actual results.
For
purposes of testing impairment, we group our long-lived assets at the lowest level for which there are identifiable cash flows
independent of other asset groups. Currently, there is only one level of aggregation for our intangible assets. We assess the
impairment of long-lived assets, consisting of property, plant, and equipment and our patent portfolio, whenever events or circumstances
indicate that the carrying value may not be recoverable. Examples of such events or circumstances include:
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an
asset group’s ability to continue to generate income from operations and positive cash flow in future periods;
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loss
of legal ownership or title to the asset(s);
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significant
changes in our strategic business objectives and utilization of the asset(s); and
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the
impact of significant negative industry or economic trends.
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Additionally,
on a quarterly basis we review the significant assumptions underlying our impairment assessment to determine whether our previous
conclusions remain valid.
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, require
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 assets. 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.
Derivative
Financial Instruments
We
do not use derivative instruments to hedge exposures to cash flow or market or foreign currency risks.
We
review the terms of the common stock, warrants and convertible debt we issue to determine whether there are derivative instruments,
including embedded conversion options that are required to be bifurcated and accounted for separately as derivative financial
instruments. In circumstances where the host instrument contains more than one embedded derivative instrument, including a conversion
option, that is required to be bifurcated, the bifurcated derivative instruments are accounted for as a single, compound derivative
instrument.
Derivatives
are initially recorded at fair value and are then revalued at each reporting date with changes in the fair value reported as non-operating
income or expense. When the equity or convertible debt instruments contain embedded derivative instruments that are to be bifurcated
and accounted for as liabilities, the total proceeds received are first allocated to the fair value of all the bifurcated derivative
instruments. The remaining proceeds, if any, are then allocated to the host instruments themselves, usually resulting in those
instruments being recorded at a discount from their face value.
Recent
Accounting Pronouncements
See
Note 12 to the condensed consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q.
Off
Balance Sheet Arrangements
We
do not have any off balance sheet arrangements.