U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 For the period ended October 31, 2004
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [No Fee Required]
For the transition period from ______ to _______
Commission File number 0-21019
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PURE Bioscience
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(Name of small business issuer in its charter)
California 33-0530289
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
1725 Gillespie Way, El Cajon, California 92020
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(Address of principal executive offices)
619 596 8600
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Issuer's telephone number
Check whether the issuer (1) filed all reports to be filed by Section
13 or 15(d) of the Exchange Act during the past 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
State the number of shares outstanding of each of the issuer's classes
of common equity as of the latest practicable date: 16,129,310 as of December
14, 2004.
Index
Part 1. Financial Information
Item 1. Financial Statements
Balance Sheets as of July 31, 2004 and October 31, 2004
Statements of Operations for the three and
nine months ended October 31, 2004 and 2003
Statements of Cash Flows for the nine months
ended October 31, 2004 and 2003
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Item 3. Controls and Procedures
Part II. Other Information
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults Upon Senior Securities: None
Item 4. Submission of Matters to a Vote of Security Holders: None
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures and Certifications
CONSOLIDATED BALANCE SHEETS
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(Unaudited)
October 31 July 31
2004 2004
------------ ------------
ASSETS
Current Assets
Cash and cash equivalents $ 40,717 $ 17,366
Accounts receivable, net of allowance for doubtful
accounts of $ 59,000 at July 31, 2004
and $18,000 at October 31, 2004 168,304 238,487
Inventories 164,086 172,933
Interest receivable 242,261 191,849
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Total current assets 615,368 620,635
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Property, Plant and Equipment
Property, plant and equipment 149,622 167,173
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Total property, plant and equipment 149,622 167,173
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Other Assets
Trust deed receivable 2,035,000 2,035,000
Deposits 9,744 9,744
Patents and licenses 2,393,900 2,343,235
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Total noncurrent assets 4,438,644 4,387,979
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Assets of the water division held for resale 312,948 306,258
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Total assets $ 5,516,582 $ 5,482,045
============ ============
LIABILITIES AND STOCKHOLDERS EQUITY
Current Liabilities
Accounts payable $ 1,133,660 $ 973,581
Accrued liabilities 681,576 594,633
Notes payable 300,000 300,000
Loans from shareholders 1,135,000 1,135,000
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Total current liabilities 3,250,236 3,003,214
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Liabilities of the water division held for resale 47,453 44,464
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Stockholders' Equity
Preferred Stock -- --
Class A common stock, no par value: authorized
50,000,000 shares, issued and outstanding
15,457,310 at July 31, 2004 and
15,989,310 at October 31, 2004 18,100,260 17,834,139
Warrants: issued and outstanding 1,397,723
warrants 839,048 837,894
Accumulated deficit (16,720,415) (16,237,666)
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Total stockholders' equity 2,218,893 2,434,367
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Total liabilities and stockholders' equity $ 5,516,582 $ 5,482,045
============ ============
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
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For the Three Months Ended
October 31
----------
2004 2003
---- ----
Net revenues $ 25,448 $ 39,293
Cost of sales 7,741 28,333
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Gross profit 17,707 10,960
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Selling expenses 92,922 46,697
General and administrative expenses 276,394 328,432
Research and development 283,256 376,941
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Total operating costs 652,572 752,070
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Loss from operations (634,865) (741,110)
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Other income and (expense):
Interest income 50,411 32,329
Interest expense (45,448) (73,102)
Other (3,017) (1,095)
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Total other income (expense) 1,946 (41,868)
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Loss from continuing operations (632,919) (782,978)
Discontinued operations:
Income from discontinued operations 150,170 126,506
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Net loss $(482,749) $(656,472)
========= =========
Net loss per common share, basic and diluted
Continuing operations $ (0.04) $ (0.06)
Discontinued operations 0.01 0.01
--------- ---------
Net loss $ (0.03) $ (0.05)
========= =========
(Unaudited)
Three Months Year
Ended Ended
October 31 July 31
CONSOLIDATED STATEMENTS OF ACCUMULATED DEFICITS 2004 2004
---------------------------------------------------------------------------------
Balance, beginning of period $(16,237,666) $(13,930,003)
Net income (loss) (482,749) (2,307,663)
------------ ------------
Balance, end of period $(16,720,415) $(16,237,666)
============ ============
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
--------------------------------------------------------------------------------------------------------
For the Three Months Ended
October 31
----------
2004 2003
---- ----
Cash flows from operating activities
Net loss $ (482,749) $ (656,472)
Adjustments to reconcile net income to net cash provided by operating
activities:
Amortization 39,335 40,511
Depreciation 20,657 27,473
Services and interest paid for with stock and warrants 87,275 74,872
Income from discontinued operations (150,170) (126,506)
Changes in assets and liabilities:
(Increase) decrease in accounts receivable 70,183 (92,588)
(Increase) decrease in due from officers and employees -- 61
(Increase) decrease in prepaid expense -- 3,655
(Increase) decrease in interest receivable (50,412) --
(Increase) decrease in inventory 8,847 6,699
(Increase) decrease in deposits -- (403)
Increase (decrease) in accounts payable 160,079 (98,366)
Increase (decrease) in accrued liabilities 86,943 65,808
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Net cash provided (used) by operating
activities (210,012) (755,256)
----------- -----------
Cash flows from investing activities
Purchase of patents and licenses -- (45,000)
Purchase of property, plant and equipment (3,106) --
----------- -----------
Net cash (used) in investing activities (3,106) (45,000)
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Cash flows from financing activities
Proceeds from sale of common stock 90,000 545,000
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Net cash provided by financing activities 90,000 545,000
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Cash flows from discontinued operations 146,468 149,996
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Net increase (decrease) in cash and cash equivalents 23,350 (105,260)
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Cash and cash equivalents at beginning of period 17,366 251,087
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Cash and cash equivalents at end of period $ 40,716 $ 145,827
=========== ===========
Supplemental disclosures of cash flow information
Cash paid for interest $ -- $ 43,230
Cash paid for taxes $ -- $ --
Noncash investing and financing activities:
Value of shares issued for assets and services $ 92,275 $ 45,000
Value of options issued for services $ 85,000 $ --
Trust Deed received in exchange for stock $ -- $ 2,035,000
NOTES TO FINANCIAL STATEMENTS
Note 1. Financial Statements
The financial statements included herein have been prepared by PURE Bioscience
(the Company) without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. 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, and PURE Bioscience believes that the
disclosures are adequate to make the information presented not misleading. It is
suggested that these financial statements be read in conjunction with the July
31, 2004 audited financial statements and the accompanying notes thereto. While
management believes the procedures followed in preparing these financial
statements are reasonable, the accuracy of the amounts are in some respects
dependent upon the facts that will exist and procedures that will be
accomplished by PURE Bioscience later in the year. The results of operations for
the interim periods are not necessarily indicative of the results of operations
for the full year.
The management of the Company believes that the accompanying unaudited financial
statements contain all adjustments (including normal recurring adjustments)
necessary to present fairly the operations and cash flows for the periods
presented.
Note 2. Business Segment and Sales Concentrations
In accordance with the provisions of SFAS No. 131, certain information is
disclosed based on the way management organizes financial information for making
operating decisions and assessing performance. In determining operating
segments, the Company 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.
The Company's business activity was divided, managed and conducted in two basic
business segments, the Water Treatment segment and the Bioscience segment. These
two segments were determined by management based upon the inherent differences
in the end use of the products, the inherent differences in the value added
processes made by the Company, the differences in the regulatory requirements
and the inherent differences in the strategies required to successfully market
finished products. The Water Treatment segment included Commercial Water and
Residential Retail products and the Nutripure Water Dealer program. Bioscience
includes the silver dihydrogen citrate antimicrobial and the Innovex line of
pest control products. Because the Company plans to sell the Water Treatment
segment, it is now reported as Discontinued Operations in the financial
statements.
Segment information is presented in accordance with SFAS 131, Disclosures about
Segments of an Enterprise and Related Information. This standard is based on a
management approach, which requires segmentation based upon the Company's
internal organization and disclosure of revenue and operating income based upon
internal accounting methods. The Company's financial reporting systems present
various data for management to run the business, including internal profit and
loss statements prepared on a basis not consistent with U.S. generally accepted
accounting principles.
Water
FOR THE THREE MONTHS ENDED Treatment Reconciling
OCTOBER 31, 2003 (Discontinued) Bioscience Amounts Consolidated
------------------------------------------ ------------- -------------- ----------- ------------
Revenues
Commercial Water Treatment
Fillmaster Products $ 236,000 $ - $ - $ 236,000
Replacement Filters (Includes CSP 2000) 184,200 - - 184,200
Residential Water Treatment 26,000 - - 26,000
Water Dealer Program 21,000 - (3,000) 18,000
Silver Ionization - 8,600 - 8,600
Pesticide - 30,700 - 30,700
------------- -------------- ------------ ------------
Total Revenues $ 467,200 $ 39,300 $ (3,000) $ 503,500
------------- -------------- ------------ ------------
Operating Income/(Loss) $ 126,500 $ (167,200) $ (615,800) $ (656,500)
------------- -------------- ------------ ------------
Segment Assets $ 306,300 $ 2,683,300
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Water
FOR THE THREE MONTHS ENDED Treatment Reconciling
OCTOBER 31, 2004 (Discontinued) Bioscience Amounts Consolidated
------------------------------------------ ------------- -------------- ------------- -------------
Revenues
Commercial Water Treatment
Fillmaster Products $ 322,200 $ - $ - $ 322,200
Replacement Filters (Includes CSP 2000) 168,900 - - 168,900
Silver Ionization - 24,100 - 24,100
Pesticide - 1,400 - 1,400
------------- -------------- ------------- -------------
Total Revenues $ 491,100 $ 25,500 $ - $ 516,600
------------- -------------- ------------- -------------
Operating Income/(Loss) $ 150,200 $ (265,600) $ (367,300) $ (482,700)
------------- -------------- ------------- -------------
Segment Assets $ 313,000 $ 2,717,400
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Significant customers of the water division primarily consisted of domestic
retail chain pharmacies. Sales concentrations to major chain stores were
approximately $342,200 and export sales were $56,500 for the quarter ended
October 31, 2004. Sales concentrations to major chain stores were approximately
$322,300 and export sales were $13,700 for the three months ended October 31,
2003. In the current quarter one of the major retail chain pharmacies accounted
for 23% of consolidated sales and another major retail chain accounted for 14%
of consolidated sales.
Note 3. Common Stock
In August we issued 200,000 options to purchase common stock in exchange for
consulting and legal services valued at $85,000. Also in August, we conducted a
private placement which consisted of 125,000 shares of common stock at a price
of $.39 per share and a one-year warrant to purchase 12,500 shares of common
stock at $1.50 valued at $1,154 ($0.01 per share based on the Black Scholes
Option Pricing Model assuming no dividend yield, volatility of 137.78% and a
risk-free interest rate of 2.25%) for a total of $50,000. In September we issued
7,000 shares valued at $2,275 ($0.33 per share) for payment of directors'
expenses. In addition, in September the Company issued 200,000 shares valued at
$90,000 ($0.45 per share) in exchange for the assignment of two patent rights.
Note 4. Warranty Liability
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others". Interpretation No. 45 is effective for financial
statements of interim or annual periods for fiscal years ending after December
15, 2002 and requires the following disclosures of the Company's product
warranties:
The Company provides a standard warranty of two years for replacement parts on
all Fillmaster systems sold. Most of the Company's chain customers have entered
into multi-year contracts for the Customer Service Plan 2000. The CSP 2000
provides an extended warranty on all PURE Bioscience pharmacy products;
significant discounts on maintenance item costs; annual software upgrades for
the Fillmaster 1000e and Scanmaster; automatic replacement filter shipments; and
simplified, annual invoicing. When the customer buys a dispenser on the Customer
Service Plan 2000 they agree to pay a fixed annual fee that covers replacement
filters and parts. The Company monitors the costs of providing replacement parts
other than filters. This cost has remained steady and is computed as a
percentage of related revenues. The following is a summary of changes in the
Company's product warranty liability.
Beginning Expense Warranty Ending
Liability Incurred Payments Liability
------------ ------------ ------------ -----------
Three months ended October 31, 2003 $ 42,430 $ 2,903 $ 3,068 $ 42,265
------------ ------------ ------------ -----------
Three months ended October 31, 2004 $ 44,463 $ 9,491 $ 6,501 $ 47,453
------------ ------------ ------------ --- -------
Note 5. Reclassifications
Certain reclassifications have been made to previously reported statements to
conform to the Company's current financial statement format.
Note 6. Sale of Water Treatment Division and Discontinued Operations
On October 29, 2003, PURE Bioscience and subsidiaries ("PURE") announced that it
had entered into an agreement to sell substantially all of the assets and
certain related liabilities of the water treatment division, including
substantially all of the related machinery, equipment, inventory, work in
process, licenses, customer lists and certain intellectual property and certain
agreements and contracts. The original buyer has not performed on the contract
and the Company is currently in negotiations with a new party to sell
substantially the same water treatment division assets and related liabilities.
In accordance with SFAS 144, the assets and liabilities of the water division
are classified as held for sale and are presented separately in the balance
sheet. In addition, the results of operations from the water division have been
reported as discontinued operations, and were historically shown as the
Company's water treatment segment for financial reporting.
Components of the results of discontinued operations are:
Three Months Ended Three Months Ended
October 31, 2004 October 31, 2003
-------------------- -------------------
Net revenues $ 491,100 $ 467,200
Cost of Sales 259,300 209,700
Other Expenses 81,600 131,000
-------------------- -------------------
Total $ 150,200 $ 126,500
-------------------- -------------------
Assets and liabilities of the water division held for sale include:
October 31, 2004 July 31, 2004
-------------------- -------------------
Inventories and other current assets $ 218,800 $ 198,100
Property, plant and equipment 94,200 108,100
-------------------- -------------------
Total 313,000 306,200
Accrued liabilities 47,500 44,500
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Net assets and liabilities of the water division held for sale $ 265,500 $ 261,700
-------------------- -------------------
Note 7. Subsequent Events
Subsequent to quarter end, in November 2004 we issued 200,000 shares valued at
$100,000 ($0.50 per share) of common stock in exchange for consulting and legal
services. Also in November, PURE received a $14.2 million award resulting from
its arbitration proceeding against NVID International, Inc. In addition, due to
the Arbitrator's determination of material breach by NVID International, PURE's
royalty and other contractual obligations to NVID are legally terminated. The
award is the result of PURE's October 2003 arbitration action against NVID
International and Falken Industries, Ltd. PURE sought damages and relief from
continued and ongoing public dissemination of false, misleading and disparaging
statements as well as complete cooperation in enforcing and defending the
Axenohl patent and related technology. PURE's management, with its legal team,
is evaluating the issue of collectibility.
The interim financial statements include all adjustments, which in the opinion
of management, are necessary in order to make the financial statements not
misleading.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
audited and unaudited financial statements of PURE Bioscience.
OVERVIEW
PURE Bioscience (formerly Innovative Medical Services) began as a provider of
pharmaceutical water purification products. Although our current revenues are
still primarily from the pharmacy industry, we have expanded from our niche
pharmacy market into other, broader markets with new, proprietary bioscience
products based upon our silver ion antimicrobial technologies and boric acid
based pesticide technologies. In November 2003, we announced that we signed a
definitive agreement to sell our water treatment business to Data Recovery
Continuum, Inc. (DRCI), a Delaware corporation based in California, for $2.75
million in cash plus up to $1.25 million in deferred payments over the next
year. The original buyer has not performed on the contract and we are currently
in negotiations with a new party to sell only the water treatment division
assets and related liabilities. In the meantime, we continue to operate the
water treatment division and retain the profits from that division, and we
continue to record the business as a discontinued operation.
After we sell the water treatment division, we will emerge as a focused
bioscience company that is essentially debt-free, and we believe that we will be
capitalized sufficiently to commercialize our powerful, least toxic and
environmentally friendly technologies including our silver dihydrogen citrate
antimicrobial technology.
Water Treatment Division (Discontinued Operation) The Fillmaster(R)
pharmaceutical water purification, dispensing and measuring products include the
Pharmapure(R) water purification system, the FMD 550 dispenser, the patented
Fillmaster 1000e computerized dispenser and the patented Scanmaster(TM) bar code
reader. We also market proprietary National Sanitation Foundation certified
replacement filters for the Fillmaster Systems. Our Nutripure(R) line of water
treatment and filtration systems includes a line of Nutripure whole-house water
softening systems, a line of Nutripure reverse osmosis point-of-use systems, the
Nutripure 2000 countertop water filtration system and the Nutripure Sport
filtered sport bottle. Results from this division are shown separately as
"Discontinued Operation."
Bioscience Division Our bioscience division features an aqueous disinfectant,
silver dihydrogen citrate (SDC). A patented new molecule, 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. SDC liquid is
colorless, odorless, tasteless and non-caustic and formulates well with other
compounds. As a platform technology, our SDC-based antimicrobial is
distinguished from competitors in the marketplace because of its superior
efficacy combined with reduced toxicity. We produce and market pre-formulated,
ready-to-use product, 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(R)) as well as for its Axen(R) and Axen(R)30 hard surface disinfectant
products for commercial, industrial and consumer applications including
restaurants, homes and medical facilities. The Axen30 EPA registration includes
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 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 disinfectant
products
Our technology also shows promise as a broad-spectrum antimicrobial for use in
human and veterinary healthcare products. We have chosen to pursue approvals
through the U.S. Food and Drug Administration (FDA) by partnering with
Therapeutics, Incorporated, which has assumed responsibility for funding and
managing the testing and regulatory process for potential FDA regulated
SDC-based products. Therapeutics, Incorporated is focusing on development of
SDC-based products for the treatment of bacterial, viral and fungal mediated
diseases and conditions, beginning with women's health products and acne
treatment products. Therapeutics, Incorporated expects its development work will
result in multiple Investigational New Drug (IND) filings with the US FDA.
The bioscience division also includes a patent-pending pesticide technology,
Triglycylboride(TM) which, like silver dihydrogen citrate, provides effective
results without human toxicity and is an alternative to traditional poisons.
Triglycylboride has been formulated into EPA registered RoachX(TM) and AntX(TM),
the key products in our Innovex(TM) line of pest control products. In addition,
the Innovex line features our EPA-exempt non-toxic TrapX rodent lure, and our
EPA registered CleanKill(TM), the SDC-based hard surface disinfectant for the
pest control industry. The pest control products are being marketed to both
commercial pest control and consumer products companies.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED OCTOBER 31, 2004 VERSUS
THREE MONTH ENDED OCTOBER 31, 2003
In November 2003 we decided to sell our water treatment division. Following the
closing of the divestment transaction, we will be focused on our bioscience
segment. Our current bioscience technologies include our silver dihydrogen
citrate antimicrobial product and our Innovex (Triglycylboride) pesticide
products. Revenues and expenses of the Water Division are now netted and shown
on the income statement as Income from Discontinued Operations.
During the quarter ended October 31, 2004, bioscience segment revenues of
$25,500 decreased 35% compared to $39,300 in the prior period. The antimicrobial
market is highly competitive, and we anticipate that market acceptance of a
brand new technology may be a long term achievement. In addition to competition
challenges, we believe that the investment necessary to pursue research testing
and regulatory approval for SDC products will continue to be significant. As we
receive additional regulatory approvals for SDC, however, we expect revenues to
develop quickly. For example, now that we have received EPA approval on Axen-30,
our SDC-based hard surface disinfectant, and we expect to see a shift toward
increasing bioscience division product sales in the coming year, and we believe
that sales of Axen-30 will have a significant impact on revenues in the future.
We continue to believe that pesticide technologies will have a material impact
on revenues in the coming year, and we continue to believe that the silver ion
technologies will ultimately become the largest revenue generator for PURE
Bioscience.
Gross profit for the quarter ended October 31, 2004 was $17,700 versus $11,000
in 2003. Gross profit percentage of 69% in 2004 increased compared to 28% in the
prior period because a larger percent of the revenues in the recent quarter were
from the sale of SDC-based products which are associated with higher margins.
Net loss from continuing operations for the quarter ended October 31, 2004 was
$632,900 versus net loss of $783,000 for the same period in 2003. During the
quarter, General and Administrative expenses decreased $52,000, or 16%, from
$328,400 in fiscal 2003 versus $276,400 in fiscal 2004. Administrative expenses
decreased mainly due to a decrease in consulting fees. Selling expense increased
approximately $46,200, or 99%, from $46,700 in 2003 to $92,900 in 2004. The
increase is primarily due to marketing costs associated with SDC products.
Research and Development decreased approximately 25%, or $93,600, over the same
period in 2003 from $376,900 to $283,300. This increase was the result of
continued time and resources devoted to the development and testing of our
emerging pesticide and silver ion technology product lines. Of the loss in the
current period, $147,300 is attributable to non-cash items: $87,300 of services
paid with stock and warrants, $39,300 of amortization and $20,700 of
depreciation.
DISCONTINUED OPERATION
Income from discontinued operations for the quarter ended October 31, 2004
consisted of revenues of $491,100, cost of sales of $259,300 and other costs of
$81,600 resulting in a net income of $150,200. Income from discontinued
operations for the same period in 2003 consisted of revenues of $467,200, cost
of sales of $209,700 and other costs of $131,000 resulting in a net income of
$126,500. At October 31, 2004 we had a backlog of $194,700 of water treatment
products because cash flow limited our ability to purchase raw materials. Had we
been able to fulfill these orders in the current quarter, water treatment
revenues would have been substantially higher than those of the same quarter in
2003.
LIQUIDITY AND CAPITAL RESOURCES
From inception through the present, we have financed our operations primarily
through our initial public offering in August of 1996 and by subsequent private
placement stock sales. In addition, we had obtained short term financing through
a $500,000 line of credit. In September 2002, we renegotiated our line of credit
and extended it until November 2003. The extension included an increase from
$500,000 to $600,000 at an interest rate of 1 1/2 % per month secured against
the entire assets of the Company excluding the Axenohl patent. In late December
2003, Charles Siddle, Colt Communications Money Purchase Pension Plan and LeeAnn
Newcomb, SPS Business Services, Inc. 401 (K) Profit Sharing Plan filed an action
in District Court of Arizona against PURE Bioscience for failure to perform
under the terms of their loan agreements. We intend to cure the default and
pay-off the loans from the proceeds of the sale of the Water Division. In July
2003, we issued a $300,000 convertible debenture at an interest rate of 10% per
annum due July 2004. This loan is in technical default and we also intend to
cure the default and pay-off the note from the proceeds of the sale of the Water
Division.
We are currently attempting to strengthen our liquidity position by working with
an investment banker because we require an outside source of capital to fund
planned projects relating to new product development and related product
launches, research and development projects and regulatory approvals. Our
operations alone may not generate cash flows, within the next twelve months,
sufficient to fund planned expansion.
On October 29, 2003, PURE Bioscience and subsidiaries ("PURE") announced that it
had entered into an agreement to sell substantially all of the assets and
certain related liabilities of the water treatment division, including
substantially all of the related machinery, equipment, inventory, work in
process, licenses, customer lists and certain intellectual property and certain
agreements and contracts. The original buyer has not performed on the contract
and we are currently in negotiations with a new party to sell substantially the
same water treatment division assets and related liabilities. We expect to close
the sale to the new buyer before December 31, 2004. We cannot provide assurance
that the transaction will close. We intend to use a portion of the proceeds of
this transaction to satisfy outstanding debt. The remaining proceeds should be
sufficient to sustain operations and fund product development and
commercialization until our bioscience technologies result in positive cash
flow.
If the above described asset sale is not completed, we will continue to operate
the water treatment division while we solicit other offers for its sale. We
believe that this transaction relieves the need for additional funding to
properly continue the marketing, selling and further development of our
bioscience technologies while still making the necessary investments in the
water treatment division to maintain our historical growth rates. To the extent
that we do not obtain needed capital through the sale of the water treatment
division, we will have to obtain it through the issuance of additional debt or
equity or through other means, any one of which may reduce the value to us,
perhaps substantially, of any commercialization of bioscience products. There is
no guarantee that we would be able to obtain such funding on terms acceptable to
us or at all.
By completing the asset sale, we lose our historical revenue stream and become
less diversified. By selling our water treatment division assets, we will be
selling approximately 87% of our current source of revenue generation (based
upon results from the July 31, 2004 fiscal year end). We will become a
bioscience company focused on the marketing, selling and continued development
of our SDC antimicrobial technology and our Triglycylboride pesticide
technology. We may invest in other complementary technologies in the future, but
we have no current specific plans to do so at this time. This transaction would
increase our business risk because we will be less diversified than before the
sale of the water treatment division assets and because our remaining business
is in the relatively high-risk, but potentially high reward, field of applied
biotechnology.
After the sale, we will become a biotechnology company in a highly regulated
field with high investment costs and high risks. We currently sell products
based upon our SDC antimicrobial technologies and boric acid based pesticide
technology. Our SDC 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 Environmental Protection Agency (EPA) registration for our
2400-parts per million (ppm) technical grade SDC concentrate (trade name
Axenohl(R)) as well as for our Axen(R) and Axen(R)30 hard surface disinfectant
products for commercial, industrial and consumer applications including
restaurants, homes and medical facilities. We intend to fund and manage
additional EPA regulated product development internally and in conjunction with
current regulatory consultants, and we do not expect to be able to introduce
additional EPA regulated antimicrobial products for several months.
Our technology also shows promise as a broad-spectrum antimicrobial for use in
human and veterinary healthcare products. We have chosen to pursue approvals
through the U.S. Food and Drug Administration (FDA) by partnering with
Therapeutics, Incorporated, which has assumed responsibility for funding and
managing the testing and regulatory process for potential FDA regulated
SDC-based products. We expect Therapeutics' experience with drug development and
FDA processing, especially with regard to dermal pharmaceuticals, could lead to
IND, NDA and/or 510-K filings for SDC-based healthcare products with the FDA.
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. It may be several years before we are able to introduce any FDA
regulated antimicrobial pharmaceutical products. Uses for which no specific
antimicrobial claims are made are typically unregulated by any government
agency.
Even after we have invested substantial funds in further development of our
SDC-based products and related technologies, and even if the results of our
efforts are favorable, there can be no guarantee that we will be granted
necessary regulatory approvals.
If we successfully bring additional EPA or FDA regulated products to market,
there is no assurance that we will be able to successfully manufacture or market
the products or that potential customers will buy them, if for example, a
competitive product has greater efficacy or is deemed more cost effective. In
addition, the market in which we will sell any such products is dominated by a
number of large, well-capitalized corporations, which may impact our ability to
successfully market our products or maintain any technological advantage we
might develop. We also would be subject to changes in regulations governing the
manufacture and marketing of our products, which could increase our costs,
reduce any competitive advantage we may have and/or adversely affect our
marketing effectiveness.
Although we have no plans to continue to fund operations with additional private
placements of stock following the sale of the water treatment division, we may
evaluate opportunities to sell additional equity or debt securities, or obtain
credit facilities from lenders to strengthen our financial position. The sale of
additional equity or convertible debt securities could result in additional
dilution to our stockholders.
At October 31, 2003, our current assets to liabilities ratio decreased from 0.21
to 0.19. Current assets remained virtually unchanged decreasing $5,200 from
$620,600 at July 31, 2004 to $615,400 at October 31, 2004. Current liabilities
increased $247,000 from $3,003,200 to $3,250,200. This increase was due mainly
an increase in trade accounts payable resulting from the purchase for materials
made late in the quarter.
Net fixed assets decreased approximately $17,600 due mainly to depreciation of
equipment. Other assets increased approximately $50,700 due to an increase in
patents and licenses. Total other assets for quarter ended October 31, 2004 were
$4,438,600, of which 99% is attributed to the trust deed receivable and patents
and licenses.
Cash flows used from continuing operations were $210,000 in quarter ended
October 31, 2004 and $755,300 in 2003. For fiscal 2004, cash flows used in
investing activities included $3,100 for the purchase of machinery and
equipment. In fiscal 2003 cash flows used in investing activities included
$45,000 for the purchase of patents and licenses.
Cash flows from financing activities were $90,000 in fiscal 2004 and $545,000 in
fiscal 2003. During the quarter ended October 31, 2004 we conducted a private
placement which consisted of 125,000 shares of common stock at a price of $.39
per share and a one-year warrant to purchase 12,500 shares of common stock at
$1.50 valued at $1,154 ($0.01 per share based on the Black Scholes Option
Pricing Model assuming no dividend yield, volatility of 137.78% and a risk-free
interest rate of 2.25%) for a total of $50,000. Cash flows from financing
activities in the current period also included an increase of common stock of
$40,000 from the exercise of stock options.
During the quarter ended October 31, 2003 we conducted three private placements
to three accredited investors in which we issued 950,000 shares of common stock
at prices that range from $0.50 to $0.75 per share for a total of $545,000. In
the prior period, cash flows from financing activities included the addition of
$100,000 in loans payable from a line of credit renegotiated in September 2002
which was reclassified to long-term debt.
VALUATION OF INTANGIBLE ASSETS
SFAS 142 requires that goodwill and other intangible assets be tested for
impairment on an annual basis and between annual tests in certain circumstances.
Recoverability of assets to be held for use is based on expectations of future
discounted cash flows from the related operations, and when circumstances
dictate, we adjust the asset to the extent the carrying value exceeds the fair
value of the asset. Our impairment review process is based on the discounted
future cash flow approach that uses our estimates of revenue driven by assumed
market segment share and estimated costs. Also included in our analysis is an
estimate of revenues expected from our agreement with Therapeutics, Inc. We have
entered into an agreement with Therapeutics Inc. for the development and
commercialization of FDA regulated SDC-based products where Therapeutics is
responsible for funding and directing all development activities and regulatory
filings. In the agreement Therapeutics Inc. has agreed to reimburse us for $2.2M
of pre-contract acquisition and development costs of the SDC intellectual
property as well as reimbursement for ongoing intellectual property costs
associated with SDC. Following reimbursement of costs, depending on the type of
product, we will receive 40% to 90% of all sales proceeds, licensing fees,
royalty payments and all other forms of cash and non-cash consideration. We will
also realize revenues from the sale of SDC raw material as an active ingredient.
Our judgments related to the expected useful lives of long-lived assets and our
ability to realize discounted cash flows in excess of the carrying amounts of
such assets are affected by factors such as the ongoing maintenance and
improvements of the assets and changes in economic and market conditions. As we
assess the ongoing expected cash flows and carrying amounts of our long-lived
assets, these factors could cause us to realize a material impairment charge,
which would result in decreased results of operations, and potentially decrease
the carrying value of these assets.
ITEM 3. 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
SEC's rules and forms, and that such information is accumulated and communicated
to the Company's management, including its Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions regarding required
disclosure based closely on the definition of "disclosure controls and
procedures" in Rule 13(a)-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.
As of the end of the period, we carried out an evaluation, under the supervision
and with the participation of the Company's management, including the Company's
Chief Executive Officer and the Company's Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures. Based on the foregoing, the Company's Chief Executive Officer and
Chief Financial Officer concluded that our disclosure controls and procedures
were effective.
There have been no significant changes in our internal controls or in other
factors that could significantly affect the internal controls subsequent to the
date we completed our evaluation.
PART II
ITEM 1. LEGAL PROCEEDINGS
On August 8, 2002, Billy Stapleton and Susie Stapleton filed a complaint for
patent infringement in the United States District Court Eastern District of
Tennessee at Knoxville, against PURE Bioscience' product RoachX. On August 12,
2002 Billy and Susie Stapleton filed an amended complaint. On May 2, 2003 PURE
Bioscience filed its answer to amended complaint, denying allegations generally
and specifically, and stating nine affirmative defenses to the amended
complaint. The trial is scheduled for April 21, 2005. PURE Bioscience believes
Stapleton's amended complaint is frivolous and without merit.
In late December 2003, Charles Siddle, Colt Communications Money Purchase
Pension Plan and LeeAnn Newcomb, SPS Business Services, Inc. 401 (K) Profit
Sharing Plan filed an action in the United States District Court for the
District of Arizona against PURE Bioscience for PURE's failure to perform under
the terms of its loan agreements. PURE Bioscience intends to cure the default
and pay-off the loans from the proceeds of the sale of the Water Division.
In November 2004, PURE received a $14.2 million award resulting from its
arbitration proceeding against NVID International, Inc. through the American
Arbitration Association International Center for Dispute Resolution. In
addition, due to the Arbitrator's determination of material breach by NVID
International, PURE's royalty and other contractual obligations to NVID are
legally terminated. The award is the result of PURE's October 2003 arbitration
action against NVID International and Falken Industries, Ltd. PURE sought
damages and relief from continued and ongoing public dissemination of false,
misleading and disparaging statements as well as complete cooperation in
enforcing and defending the Axenohl patent and related technology. The
arbitration was bifurcated and PURE proceeded first against NVID. The
arbitration against Falken Industries is pending, and a decision from the United
States District Court on PURE's motion to compel Falken's participation in the
arbitration is expected shortly. PURE is evaluating the issue of collectibility
and potential liability of related individuals and entities.
ITEM 2. CHANGES IN SECURITIES
In August we issued 200,000 shares of common stock in exchange for consulting
and legal services. Also in August, we conducted a private placement of stock in
which 125,000 shares and a one-year warrant to purchase 12,500 shares of common
stock at $1.50 were issued at $0.40 per share for a total of $50,000. Also in
August, an option on 80,000 shares was exercised. In September we issued 7,000
shares for payment of directors' expenses. In addition, in September we issued
200,000 shares in exchange for the assignment of two patent rights. Subsequent
to quarter end, in November 2004 we issued 200,000 shares of common stock in
exchange for consulting and legal services.
With respect to sales made, we relied on Section 4(2) of the Securities Act of
1933, as amended. No advertising or general solicitation was employed in
offering the securities. The securities were offered solely to accredited or
sophisticated investors who were provided all of the current public information
available on PURE Bioscience.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. The following Exhibits are filed as part of this report pursuant to Item 601
of Regulation S-B:
3.1 (1) -- Articles of Incorporation, Articles of Amendment and Bylaws
3.1.1(13) -- Articles of Amendment dated March 11, 2002
4.1 (1) -- Form of Class A Warrant
4.2 (1) -- Form of Class Z Warrant
4.3 (1) -- Form of Common Stock Certificate
4.4 (1) -- Warrant Agreement
4.5 (2) -- March 2000 Warrant
4.6 (3) -- January 2001 Warrant
4.7 (4) -- Convertible Debenture
4.8 (5) -- Convertible Debenture Purchase Agreement
4.9 (6) -- Convertible Debenture Warrant
10.1 (1) -- Employment Contract/Michael L. Krall
10.2 (7) -- Manufacturing, Licensing and Distribution Agreement dated
March 26, 2001
10.3 (8) -- Axenohl License Agreement
10.4 (9) -- Weaver - Roach X Assignment
10.5 (9) -- Dodo Agreement [CONFIDENTIAL TREATMENT REQUESTED FOR CERTAIN
OMITTED INFORMATION FILED SEPARATELY]
10.6 (8) -- Promissory Note of Michael Krall
10.7 (8) -- Promissory Note of Gary Brownell
10.8 (9) -- Nutripure Dealer Agreement
10.9 (9) -- Sales Finance Agreement
10.10 (10) -- ETIH2O, Inc., Acquisition Agreement
10.11 (11) -- NVID Litigation Settlement Agreement
10.12 (12) -- Addendum #1 to NVID Settlement Agreement
10.13 (14) -- Therapeutics, Inc. Agreement [CONFIDENTIAL TRREATMENT REQUESTED
FOR CERTAIN OMITTED INFORMATION FILED SEPARATELY]
10.14 (15) -- Promissory Note dated November 2003 $4,750,000
10.15 (15) -- Promissory Note dated January 26, 2004 $100,000
13 (13) -- Subsidiaries of the Registrant
14.1 (16) -- Code of Ethics
31.1 -- Section 302 Certification
31.2 -- Section 302 Certification
32.1 -- Section 906 Certification
32.2 -- Section 906 Certification
(1) Incorporated by reference from Form SB-2 registration statement SEC File
#333-00434 effective August 8, 1996
(2) Incorporated by reference from S-3 registration statement, SEC File
#333-36248 effective on May 17, 2000
(3) Incorporated by reference from S-3 registration statement, SEC File
#333-55758 effective on February 26, 2001
(4) Incorporated by reference from S-3 registration statement, SEC File
#333-61664 filed on May 25, 2001
(5) Incorporated by reference from pre-effective amendment no. 1 to S-3
registration statement, SEC File #333-61664 filed on July 10, 2001
(6) Incorporated by reference from pre-effective amendment no. 2 to S-3
registration statement, SEC File #333-61664 filed on August 13, 2001
(7) Incorporated by reference from Current Report on Form 8-K filed on May 24,
2001 as amended on October 19, 2001
(8) Incorporated by reference from the Amended Annual Report on Form 10KSB for
the fiscal year ended July 31, 2000 filed on October 19, 2001
(9) Incorporated by reference from Amended Form 10QSB for the nine month period
ended April 30, 2001 filed on October 19, 2001
(10) Incorporated by reference from the Amended Annual Report on Form 10KSB for
the fiscal year ended July 31, 2001 filed on November 13, 2001
(11) Incorporated by reference from Current Report on Form 8-K filed on December
6, 2001
(12) Incorporated by reference from Amended Current Report on Form 8-K filed on
December 7, 2001
(13) Incorporated by reference from the Annual Report on Form 10KSB for the
fiscal year ended July 31, 2002 filed on October 29, 2003
(14) Incorporated by reference from the Amended Annual Report on Form 10KSB for
the fiscal year ended July 31, 2003 filed on January 30, 2004
(15) Incorporated by reference from the Amended Quarterly Report for the three
month period ended October 31, 2003 filed on February 27, 2004
(16) Incorporated by reference from the Annual Report on Form 10KSB for the
fiscal year ended July 31, 2004 filed on October 29, 2004
B. Reports on Form 8-K: None.
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.
PURE BIOSCIENCE
By: /s/ Michael L. Krall
--------------------------------
Michael L. Krall, President/CEO
December 13, 2004
By: /s/ Gary Brownell
--------------------------------------
Gary Brownell, Chief Financial Officer
December 13, 2004