Item
1. Financial Statements
PURE
Bioscience, Inc.
Condensed
Consolidated Balance Sheets
|
|
January
31, 2017
|
|
|
July
31, 2016
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
3,893,000
|
|
|
$
|
5,194,000
|
|
Accounts receivable
|
|
|
142,000
|
|
|
|
263,000
|
|
Inventories, net
|
|
|
340,000
|
|
|
|
350,000
|
|
Restricted cash
|
|
|
75,000
|
|
|
|
75,000
|
|
Prepaid
expenses
|
|
|
189,000
|
|
|
|
260,000
|
|
Total current assets
|
|
|
4,639,000
|
|
|
|
6,142,000
|
|
Property, plant and equipment, net
|
|
|
568,000
|
|
|
|
440,000
|
|
Patents, net
|
|
|
901,000
|
|
|
|
980,000
|
|
Total assets
|
|
$
|
6,108,000
|
|
|
$
|
7,562,000
|
|
Liabilities and stockholders’
equity
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
424,000
|
|
|
$
|
479,000
|
|
Restructuring liability
|
|
|
29,000
|
|
|
|
39,000
|
|
Accrued liabilities
|
|
|
245,000
|
|
|
|
216,000
|
|
Derivative
liabilities
|
|
|
1,494,000
|
|
|
|
1,802,000
|
|
Total current liabilities
|
|
|
2,192,000
|
|
|
|
2,536,000
|
|
Deferred rent
|
|
|
13,000
|
|
|
|
3,000
|
|
Total liabilities
|
|
|
2,205,000
|
|
|
|
2,539,000
|
|
Commitments and contingencies (See Note
6)
|
|
|
|
|
|
|
|
|
Stockholders’ equity
|
|
|
|
|
|
|
|
|
Preferred stock, $0.01 par value:
|
|
|
|
|
|
|
|
|
5,000,000 shares authorized, no shares
issued
|
|
|
—
|
|
|
|
—
|
|
Common stock, $0.01 par value:
|
|
|
|
|
|
|
|
|
100,000,000 shares
authorized, 62,601,037 shares issued and outstanding at January 31, 2017, and 64,823,917 shares issued and outstanding at
July 31, 2016
|
|
|
627,000
|
|
|
|
649,000
|
|
Additional paid-in
capital
|
|
|
109,174,000
|
|
|
|
107,593,000
|
|
Accumulated
deficit
|
|
|
(105,898,000
|
)
|
|
|
(103,219,000
|
)
|
Total stockholders’
equity
|
|
|
3,903,000
|
|
|
|
5,023,000
|
|
Total liabilities
and stockholders’ equity
|
|
$
|
6,108,000
|
|
|
$
|
7,562,000
|
|
See
accompanying notes.
PURE
Bioscience, Inc.
Condensed
Consolidated Statements of Operations
(Unaudited)
|
|
Six
Months Ended
|
|
|
Three
months ended
|
|
|
|
January
31,
|
|
|
January
31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Net product sales
|
|
$
|
978,000
|
|
|
$
|
362,000
|
|
|
$
|
447,000
|
|
|
$
|
176,000
|
|
Operating costs and expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
|
399,000
|
|
|
|
102,000
|
|
|
|
134,000
|
|
|
|
48,000
|
|
Selling, general
and administrative
|
|
|
2,670,000
|
|
|
|
2,472,000
|
|
|
|
1,333,000
|
|
|
|
1,386,000
|
|
Research and development
|
|
|
462,000
|
|
|
|
474,000
|
|
|
|
214,000
|
|
|
|
238,000
|
|
Share-based
compensation
|
|
|
448,000
|
|
|
|
1,435,000
|
|
|
|
170,000
|
|
|
|
763,000
|
|
Total operating
costs and expenses
|
|
|
3,979,000
|
|
|
|
4,483,000
|
|
|
|
1,851,000
|
|
|
|
2,435,000
|
|
Loss from operations
|
|
|
(3,001,000
|
)
|
|
|
(4,121,000
|
)
|
|
|
(1,404,000
|
)
|
|
|
(2,259,000
|
)
|
Other income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of derivative
liabilities in excess of proceeds
|
|
|
—
|
|
|
|
(1,867,000
|
)
|
|
|
—
|
|
|
|
(859,000
|
)
|
Change in derivative
liabilities
|
|
|
300,000
|
|
|
|
(7,747,000
|
)
|
|
|
459,000
|
|
|
|
(7,790,000
|
)
|
Interest expense,
net
|
|
|
(3,000
|
)
|
|
|
(5,000
|
)
|
|
|
(2,000
|
)
|
|
|
(3,000
|
)
|
Other
income (expense), net
|
|
|
25,000
|
|
|
|
18,000
|
|
|
|
11,000
|
|
|
|
9,000
|
|
Total other income
(expense)
|
|
|
322,000
|
|
|
|
(9,601,000
|
)
|
|
|
468,000
|
|
|
|
(8,643,000
|
)
|
Net loss
|
|
$
|
(2,679,000
|
)
|
|
$
|
(13,722,000
|
)
|
|
$
|
(936,000
|
)
|
|
$
|
(10,902,000
|
)
|
Basic and diluted
net loss per share
|
|
$
|
(0.04
|
)
|
|
$
|
(0.27
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.19
|
)
|
Shares used in
computing basic and diluted net loss per share
|
|
|
64,220,473
|
|
|
|
50,848,785
|
|
|
|
63,617,030
|
|
|
|
58,678,242
|
|
See
accompanying notes.
PURE
Bioscience, Inc.
Condensed
Consolidated Statements of Cash Flows
(Unaudited)
|
|
Six
Months Ended
|
|
|
|
January
31,
|
|
|
|
2017
|
|
|
2016
|
|
Operating activities
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(2,679,000
|
)
|
|
$
|
(13,722,000
|
)
|
Adjustments to reconcile net loss to
net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Share-based compensation
|
|
|
448,000
|
|
|
|
1,435,000
|
|
Amortization of
stock issued for services
|
|
|
72,000
|
|
|
|
106,000
|
|
Fair value of derivative
liabilities in excess of proceeds
|
|
|
—
|
|
|
|
1,867,000
|
|
Depreciation and
amortization
|
|
|
134,000
|
|
|
|
103,000
|
|
Change in fair value
of derivative liability
|
|
|
(300,000
|
)
|
|
|
7,747,000
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
121,000
|
|
|
|
83,000
|
|
Inventories
|
|
|
10,000
|
|
|
|
(30,000
|
)
|
Prepaid expenses
|
|
|
(2,000
|
)
|
|
|
(7,000
|
)
|
Accounts payable
and accrued liabilities
|
|
|
(36,000
|
)
|
|
|
(33,000
|
)
|
Deferred
rent
|
|
|
10,000
|
|
|
|
(2,000
|
)
|
Net cash used
in operating activities
|
|
|
(2,222,000
|
)
|
|
|
(2,453,000
|
)
|
Investing activities
|
|
|
|
|
|
|
|
|
Investment in patents
|
|
|
(10,000
|
)
|
|
|
(8,000
|
)
|
Purchases of
property, plant and equipment
|
|
|
(173,000
|
)
|
|
|
(154,000
|
)
|
Net cash used
in investing activities
|
|
|
(183,000
|
)
|
|
|
(162,000
|
)
|
Financing activities
|
|
|
|
|
|
|
|
|
Net proceeds
from the sale of common stock
|
|
|
1,104,000
|
|
|
|
8,000,000
|
|
Net cash provided
by financing activities
|
|
|
1,104,000
|
|
|
|
8,000,000
|
|
Net decrease and increase in cash and
cash equivalents
|
|
|
(1,301,000
|
)
|
|
|
5,385,000
|
|
Cash and cash
equivalents at beginning of period
|
|
|
5,194,000
|
|
|
|
1,321,000
|
|
Cash and cash
equivalents at end of period
|
|
$
|
3,893,000
|
|
|
$
|
6,706,000
|
|
Supplemental disclosure
of cash flow information
|
|
|
|
|
|
|
|
|
Cash paid for
taxes
|
|
$
|
2,000
|
|
|
$
|
2,000
|
|
Warrant liabilities
removed due to settlements
|
|
$
|
8,000
|
|
|
$
|
—
|
|
Restricted stock
unit cancelation
|
|
$
|
38,000
|
|
|
$
|
—
|
|
See
accompanying notes.
PURE
Bioscience, Inc.
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 three and six months ended
January 31, 2017 are not necessarily indicative of the results that may be expected for other quarters or the year ending July
31, 2017. The July 31, 2016 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, 2016 included
in our Annual Report on Form 10-K covering such period filed with the Securities and Exchange Commission, or SEC, on October 27,
2016.
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
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 January 31, 2017, we have
incurred a cumulative net loss of $105,898,000.
As
of January 31, 2017, we had $3,893,000 in cash and cash equivalents, and $424,000 of accounts payable. As of January 31, 2017,
we have no long-term debt.
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.
We
expect that we will need to increase our liquidity and capital resources by one or more measures. These measures may include,
but are not limited to, the following: reducing operating expenses; obtaining financing through the issuance of equity, debt,
or convertible securities; entering into partnerships, licenses, or other arrangements with third parties; and reducing the exercise
price of outstanding warrants. Any one of these measures could substantially reduce the value to us of our technology and its
commercial potential. If we issue equity, debt or convertible securities to raise additional funds, our existing stockholders
may experience dilution, and the new equity, debt or convertible securities may have rights, preferences and privileges senior
to those of our existing stockholders. There is no guarantee that we would be able to obtain capital on terms acceptable to us,
or at all.
If
we are unable to obtain sufficient capital, it would 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 delay, scale back or eliminate some or all of our research and development
programs, to license to third parties the right to commercialize products or technologies that we would otherwise commercialize
ourselves, or to reduce or cease operations. If adequate funds are not available when needed, we may be required to significantly
modify our business model and operations to reduce spending to a sustainable level.
We
believe our available cash on-hand, our current efforts to market and sell our products, and our ability to significantly reduce
expenses, will provide sufficient cash resources to satisfy our needs over the next 12 months. However, we do not yet have, and
we may never have, significant cash inflows from product sales or from other sources of revenue to offset our ongoing and planned
investments in research and development projects, regulatory submissions, business development activities, and sales and marketing,
among other investments. Some or all of our ongoing or planned investments may not be successful. In addition, irrespective of
our cash resources, we may be contractually or legally obligated to make certain investments which cannot be postponed.
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 January 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 11,980,795 and 28,609,468, 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 and
six months ended January 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:
|
|
January
31, 2017
|
|
|
July
31, 2016
|
|
Raw materials
|
|
$
|
98,000
|
|
|
$
|
120,000
|
|
Finished goods
|
|
|
242,000
|
|
|
|
230,000
|
|
|
|
$
|
340,000
|
|
|
$
|
350,000
|
|
6.
Commitments and Contingencies
Severance
Agreement
On
August 13, 2013, the Company entered into a Severance and Release Agreement with Dennis Brovarone, a former Board member. Mr.
Brovarone will receive $91,000, payable in 60 monthly installments of approximately $1,600, commencing December 11, 2013 for amounts
previously accrued as of July 31, 2013. Approximately $29,000 remains payable under the agreement and is included in the accrued
restructuring liability section of the condensed consolidated balance sheets as of January 31, 2017.
7.
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 and six months ended January 31, 2017 and 2016, no impairment of long-lived assets was indicated
or recorded.
8.
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 Placement and a prior Bridge Loan, we issued warrants with derivative features.
These instruments are accounted for as derivative liabilities (See Note 9 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. Future changes in these factors will have a significant impact
on the computed fair value of the warrant liabilities. As such, we expect future changes in the fair value of the warrants to
vary significantly from quarter to quarter.
The
following table provides a reconciliation of the beginning and ending balances of the derivative liabilities for the six months
ended January 31, 2017:
Fair
Value of Significant Unobservable Inputs (Level 3)
|
|
Warrant
|
|
|
|
Liabilities
|
|
Balance
at July 31, 2015
|
|
$
|
4,000
|
|
Issuances
|
|
|
9,867,000
|
|
Settlement
of warrant liabilities
|
|
|
(13,550,000
|
)
|
Adjustments
to estimated fair value
|
|
|
5,481,000
|
|
Balance
at July 31, 2016
|
|
$
|
1,802,000
|
|
Issuances
|
|
|
—
|
|
Settlement
of warrant liabilities
|
|
|
(8,000
|
)
|
Adjustments
to estimated fair value
|
|
|
(300,000
|
)
|
Balance
at January 31, 2017
|
|
$
|
1,494,000
|
|
9.
Derivative Liabilities
On
October 23, 2015 (the “October Closing Date”), 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 (See Note 10 to these condensed consolidated financial statements).
On
November 23, 2015 (the “November Closing Date’), 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 (See Note 10 to these condensed consolidated financial statements).
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
the October Closing Date, the derivative liabilities were recorded at an estimated fair value of $7,008,000. Given that the fair
value of the derivative liabilities exceeded the total proceeds of the private placement of $6,000,000, no net amounts were allocated
to the common stock. The $1,008,000 amount by which the recorded liabilities exceeded the proceeds was charged to other expense
at the October Closing Date. Given that the fair value of the derivative liabilities issued on the November Closing Date exceeded
the total proceeds of the private placement of $2,000,000, as of the November Closing Date, no net amounts were allocated to the
common stock. The $859,000 amount by which the recorded liabilities exceeded the proceeds was charged to other expense at the
November Closing Date.
As
of January 31, 2017, we had a warrant liability of $1,494,000 related to the 2,222,217 warrants outstanding issued in connection
with the November closing of the 2015 Private Placement Financing. The following assumptions were used as inputs to the model
at January 31, 2017: stock price of $0.88 per share and a warrant exercise price of $0.45 per share as of the valuation date;
our historical stock price volatility of 85.00%; risk free interest rate on U.S. treasury notes of 1.7%; warrant expiration of
3.8 years.
During
the fourth quarter of 2012 we issued 132,420 warrants with derivative features pursuant to a Bridge Loan financing. During the
six months ended January 31, 2017, of the current 9,709 warrants outstanding, there was a net exercise on 5,335 warrants which
resulted in the issuance of 4,179 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 remaining 4,374 warrants issued in connection with the Bridge Loan
expired during the six months ended January 31, 2017. The fair value on the exercise date and the date of expiration was returned
to additional paid in capital and is reflected in the Settlement of warrant liability section on the table above.
On
January 31, 2017, the total value of the derivative liabilities was $1,494,000. The change in fair value of the warrant liabilities
for the three and six months ended January 31, 2017, was a decrease of $300,000 and $459,000, respectively, which was recorded
as a change in derivative liabilities in the condensed consolidated statement of operations. The change in fair value of the warrant
liability for the three and six months ended January 31, 2016, was an increase of $7,790,000 and $7,747,000, respectively, which
was recorded as a change in derivative liability in the condensed consolidated statement of operations. We have revalued the derivative
liabilities as of January 31, 2017, and will continue to do so on each subsequent balance sheet date until the securities to which
the derivative liabilities relate are exercised or expire, with any changes in the fair value between reporting periods recorded
as other income or expense.
10.
Stockholders’ Equity
Private
Placements
On
December 1, 2016, we completed an initial closing (the “Initial Closing”) of a private placement financing (the “Private
Placement Offering”) to accredited investors. We raised aggregate gross proceeds of $1,000,000 from the sale of (i) an aggregate
of 1,176,472 shares of the Company’s common stock at a purchase price of $0.85 per share and (ii) warrants to purchase up
to an aggregate of 1,176,472 shares of common stock with a term of five years at an exercise price of $1.25 per share.
On
January 23, 2017, we closed on a second and final closing (the “Final Closing”) of the Private Placement Offering.
In the Final Closing we raised aggregate gross proceeds of approximately $337,000 from the sale of (i) an aggregate of 396,469
shares of the Company’s common stock at a purchase price of $0.85 per share and (ii) warrants to purchase up to an aggregate
of 396,469 shares of common stock with a term of five years at an exercise price of $1.25 per share. The securities issued in
the Private Placement Offering were issued pursuant to a securities purchase agreement entered into with the accredited investors.
We
utilized the services of a placement agent for the Private Placement Offering. In connection with the Private Placement Offering,
we paid such placement agent an aggregate cash fee of $128,600 and issued to such placement agent or its designees warrants to
purchase 151,294 shares of common stock at an exercise price of $1.275 per share. The terms of the placement agent warrants are
substantially identical to the investor warrants, other than the exercise price and the holders’ ability to exercise the
placement agent warrants on a cashless basis at its discretion. Additionally, we agreed to pay the placement agent a $12,000 due
diligence fee and to reimburse the placement agent for fees of counsel up to $35,000.
The
net proceeds from the Private Placement Offering were approximately $1,104,000 and we expect to use the net proceeds for general
corporate purposes, including our research and development efforts, and for general administrative expenses and working capital.
We
also entered into a registration rights agreement with the Investors (the “Registration Rights Agreement”), pursuant
to which we were obligated to file with the Securities and Exchange Commission (the “SEC”) as soon as practicable,
but in any event, by February 6, 2017, this registration statement on Form S-1 to register 1,572,941 shares of common stock issued
to the selling security holders in the Private Placement Offering and up to 1,572,941 shares of our common stock issuable upon
the exercise of warrants issued to the selling security holders in the Private Placement Offering. We were obligated to use our
commercially reasonable best efforts to cause this registration statement to be declared effective by the SEC within 45 days after
the filing of this registration statement (or within 75 days if this registration statement is subject to a full review by the
SEC). Additionally, the Registration Rights Agreement provides for certain monetary penalties if the registration statement is
not filed or declared effective prior to certain dates, or it is not maintained effective, as set forth in the Registration
Rights
Agreement.
The
Private Placement Offering described above was made pursuant to the exemption provided by Section 4(a)(2) of the Securities Act,
and Regulation D promulgated thereunder.
On
February 6, 2017, we filed a resale registration statement on Form S-1 with the SEC, which was declared effective on February
15, 2017, registering the
1,572,941 shares of
common stock issued to the selling security holders in the Private Placement Offering and up to 1,572,941 shares of our common
stock issuable upon the exercise of warrants issued to the selling security holders in the Private Placement Offering.
In
the October closing of the 2015 Private Placement Financing we received aggregate gross proceeds to us of $6.0 million. We did
not engage a placement agent or investment banker to facilitate the Private Placement Financing.
In
the November closing of the 2015 Private Placement Financing we received aggregate gross proceeds to us of $2.0 million. We did
not engage a placement agent or investment banker to facilitate the Private Placement Financing.
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 of the
2015 Private Placement were exercised, (ii) the six-month warrants issued in the first closing of the 2015 Private Placement expired
and (iii) the five-year warrants issued in the first closing of the 2015 Private Placement were cancelled.
We
also entered into a registration rights agreement with the Investors in the 2015 Private Placement Financing (the “Registration
Rights Agreement”), pursuant to which we are obligated, upon request of the Investor in the October closing of the 2015
Private Placement Financing and subject to certain conditions, to file with the SEC as soon as practicable, but in any event within
60 days after receiving such applicable request, a registration statement on Form S-1 (the “2015 Resale Registration Statement”)
to register the Purchase Shares and the Warrant Shares for resale under the Securities Act of 1933, as amended (the “Securities
Act”) and other securities issued or issuable with respect to or in exchange for the Purchase Shares or Warrant Shares.
We are obligated to use our commercially reasonable efforts to cause the 2015 Resale Registration Statement to be declared effective
by the SEC as promptly as reasonably practicable after the filing of the Resale Registration Statement, but no monetary penalty
or liquidated damages will be imposed upon the Company if the Registration Statement is not declared effective by the SEC.
Other
Activity
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 and six months ended January 31, 2017, we recognized $36,000 and $72,000
of expense related to these services, respectively.
11.
Share-Based Compensation
Restricted
Stock Units
For
the three months ended January 31, 2017 and 2016, share-based compensation expense for outstanding restricted stock units (“RSUs”)
was $24,000 and $700,000, respectively. For the six months ended January 31, 2017 and 2016, share-based compensation expense for
outstanding RSUs was $75,000 and $1,357,000, respectively.
Of
the 1,110,000 RSUs outstanding, we currently expect 150,000 to vest based on service conditions. As of January 31, 2017, there
was $47,000 of unrecognized non-cash compensation cost related to RSUs we expect to vest, which will be recognized over a weighted
average period of 0.50 years.
RSU
Termination
On
December 13, 2016, we entered into an RSU Cancellation Agreement with our officers and directors who received RSUs in October
2013 as compensation for their continued services to us over a required vesting period. Under this Agreement, our officers and
directors agreed to cancel RSUs representing the right to receive an aggregate of 3.9 million vested shares of our common stock.
Pursuant to the terms of the cancelled RSUs, we would have been required to settle and deliver these vested shares to the individual
officers and directors prior to January 1, 2017, which would have triggered a taxable event. Our officers and directors, in their
individual capacities, voluntarily agreed to cancel their respective RSUs based on their determination that cancelling the RSUs
would be in the best interests of the Company and our stockholders. The individual officers and directors reached this conclusion
for the following reasons:
|
1.
|
Conserves
our Available Cash Resources
. The RSUs held by our officers provide these individuals
with the right to require us to pay the applicable state and federal taxes due upon the
settlement and delivery of their vested RSU shares in exchange for the individual cancelling
and returning to us that number of shares of common stock equal in value to the our contractual
tax payment obligation. By agreeing to cancel the RSUs, we will not be required to utilize
our available cash resources to pay the tax payments on behalf of our officers, and as
a result, we can conserve our available cash resources to support the continued implementation
of our business plan.
|
|
|
|
|
2.
|
Reduces
Pressure on Our Stock Price
. The RSUs held by our non-employee directors provide
these individuals with the right to immediately sell into the public market that number
of shares of common stock sufficient to cover the applicable state and federal taxes
payable as a result of the settlement and delivery of their vested RSU shares. Our common
stock currently has a limited daily trading volume, and the sale or the potential sale
of a substantial number of shares of common stock by our officers and directors to cover
their federal and state tax obligations would adversely affect the market price of our
common stock, which in turn, could harm our ability to raise funds to support our operations
or require us to raise funds at terms and valuations that would be more dilutive to our
existing stockholders.
|
Each
of our officers and directors who are parties to the RSU Cancellation Agreement agreed to cancel their RSUs and the shares of
common stock underlying the RSUs in their individual capacities as stockholders and equity award holders, and without any agreement
or promise from us or our officers or directors to issue them equity, equity-based awards or cash compensation in the future in
exchange for entering into the Agreement.
As
a result of the RSU cancelation, $87,000 of pre-vest expense was reversed.
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 or 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 January 31, 2017, there were approximately 2.2 million shares available for issuance under the Plan.
During
the six months ended January 31, 2017, we issued 100,000 options to purchase common stock to a member of our Scientific Advisory
Board. The options vest quarterly over one year and carry a five-year term. No stock options were granted during the three months
ended January 31, 2017.
During
the three and six months ended January 31, 2016, we issued 110,000 options to purchase common stock to key employees. The options
vested on the date of grant and carry a five-year term.
A
summary of our stock option activity is as follows:
|
|
Shares
|
|
|
Weighted-
Average
Exercise Price
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding at July 31, 2015
|
|
|
434,218
|
|
|
$
|
4.07
|
|
|
$
|
—
|
|
Granted
|
|
|
1,850,000
|
|
|
$
|
1.07
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
$
|
—
|
|
|
|
|
|
Cancelled
|
|
|
(6,250
|
)
|
|
$
|
14.72
|
|
|
|
|
|
Outstanding at July 31, 2016
|
|
|
2,277,968
|
|
|
$
|
1.60
|
|
|
$
|
48,000
|
|
Granted
|
|
|
100,000
|
|
|
$
|
1.02
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
$
|
—
|
|
|
|
|
|
Cancelled
|
|
|
(253,125
|
)
|
|
$
|
1.42
|
|
|
|
|
|
Outstanding at January 31, 2017
|
|
|
2,124,843
|
|
|
$
|
1.60
|
|
|
$
|
22,000
|
|
At
January 31, 2017, options to purchase 1,652,343 shares of common stock were exercisable. These options had a weighted-average
exercise price of $1.74, an aggregate intrinsic value of $22,000, and a weighted average remaining contractual term of 3.32 years.
The weighted average grant date fair value for options granted during the six months ended January 31, 2017 was $0.49.
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 options granted is estimated at the date of grant using
the following weighted average assumptions for the three and six months ended January 31, 2017 and 2016:
|
|
Three
Months Ended
|
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
January
31, 2017
|
|
|
January
31, 2016
|
|
|
January
31, 2017
|
|
|
January
31, 2016
|
|
Volatility
|
|
|
—
|
%
|
|
|
96.60
|
%
|
|
|
74.71
|
%
|
|
|
96.60
|
%
|
Risk-free interest rate
|
|
|
—
|
%
|
|
|
0.92
|
%
|
|
|
0.93
|
%
|
|
|
0.92
|
%
|
Dividend yield
|
|
|
—
|
%
|
|
|
0
|
%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
Expected life
|
|
|
—
|
|
|
|
2.50
years
|
|
|
|
2.81
years
|
|
|
|
2.50
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.
The
total unrecognized compensation cost related to unvested stock option grants as of January 31, 2017 was approximately $82,000
and the weighted average period over which these grants are expected to vest is 0.40 years.
For
the three months ended January 31, 2017 and 2016, share-based compensation expense for stock options was $234,000 and $62,000
respectively. For the six months ended January 31, 2017 and 2016, share-based compensation expense for stock options was $460,000
and $78,000 respectively.
12.
Recent Accounting Pronouncements
In
August 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-15,
Presentation
of Financial Statements—Going Concern: Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going
Concern,
which requires management to evaluate whether there is substantial doubt about the entity’s ability to continue
as a going concern and, if so, provide certain footnote disclosures. This ASU is effective for annual periods ending after December
15, 2016, and interim periods within annual periods beginning after December 15, 2016. We expect to adopt ASU 2014-15 in the third
quarter of 2017 and the impact of adoption will not be material to our consolidated financial statements.
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 third quarter of 2018 and the impact of adoption will not be material to our consolidated financial statements.
13.
Subsequent Events
Subsequent
to January 31, 2017, we received $79,500 from the exercise of warrants to purchase 106,000 shares of our common stock.
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
Company
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 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
and food processors. 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. 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. We have not,
however, received the required approval from the USDA to utilize PURE Control in OLR poultry processing, which effectively restricts
our ability to commercialize PURE Control for poultry processing until we receive such additional approval. We continue our on-going
plant trials to optimize the application of PURE Control, including with higher concentrations of SDC, in OLR to gain USDA approval
for use in that stage of poultry processing. Based on these on-going plant trials, we have submitted an additional FCN to the
FDA to allow us to use higher concentrations of SDC in poultry processing to have the flexibility to adjust to varying plant and
processing conditions. We are continuing to work with the FDA to obtain approval for the higher concentrations of SDC in poultry
processing and expect to receive FDA approval in the second calendar quarter of 2017. Additionally, we are currently testing and
continuing development of PURE Control to allow us to seek regulatory approval to also 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:
|
●
|
Expanding
sales and distribution for our products into the food industry with a focus on a dual track of food safety market opportunities:
|
|
|
●
|
Hard
Surface Disinfectant
- commercializing our current EPA registered PURE Hard Surface disinfectant and sanitizer for
use in foodservice operations and food manufacturing.
|
|
|
|
|
|
|
●
|
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
subject to further USDA approval for OLR poultry processing and FDA approval for higher concentrations of SDC; expecting to
commercialize, subject to both FDA and USDA approval, the use of SDC as a food processing and intervention aid for food processors
treating raw beef and pork.
|
|
●
|
Establishing
strategic alliances to maximize the commercial potential of our technology platform;
|
|
|
|
|
●
|
Developing
additional proprietary products and applications; and
|
|
|
|
|
●
|
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.
Our
Products
Our
near-term focus is on delivering leading antimicrobial products that address food safety risks across the food industry supply
chain. We currently offer PURE Hard Surface as a food contact surface sanitizer and disinfectant to restaurant chains and food
processors. 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.
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. We have not, however, received the required approval from the
USDA to utilize PURE Control in OLR poultry processing, which effectively restricts our ability to commercialize PURE Control
for poultry processing until we receive such additional approval. We continue our on-going plant trials to optimize the application
of PURE Control, including with higher concentrations of SDC, in OLR to gain USDA approval for use in that stage of poultry processing.
Based on these on-going plant trials, we have submitted an additional FCN to the FDA to allow us to use higher concentrations
of SDC in poultry processing to have the flexibility to adjust to varying plant and processing conditions. We are continuing to
work with the FDA to obtain approval for the higher concentrations of SDC in poultry processing and expect to receive FDA approval
in the second calendar quarter of 2017. Additionally, we are currently testing and continuing development of PURE Control to allow
us to seek regulatory approval to also 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. In addition to PURE Hard Surface and PURE Control, we manufacture and sell (i) SDC-based products
for end use, (ii) products preserved with SDC and (iii) SDC as a raw material ingredient for manufacturing use.
PURE
®
Hard Surface Disinfectant and Sanitizer (Ready to Use)
PURE
Hard Surface is our SDC-based, patented and EPA-registered, ready-to-use hard surface disinfectant and food contact surface sanitizer.
PURE Hard Surface combines high efficacy and low toxicity with bacterial and viral kill times as few as 30-seconds and 24-hour
residual protection. The product completely kills resistant pathogens such as MRSA and Carbapenem-resistant
Klebsiella pneumoniae
(NDM-1), and effectively eliminates dangerous fungi and viruses including HIV, Hepatitis B, Hepatitis C, Norovirus, Influenza
A, Avian Influenza and H1N1. It also eradicates hazardous food pathogens such as
E. coli
,
Salmonella
,
Campylobacter
and
Listeria
. PURE Hard Surface delivers broad-spectrum efficacy yet remains classified as least-toxic by the EPA.
The active ingredient, SDC, has been designated as “Generally Recognized as Safe”, or GRAS, for use on food processing
equipment, machinery and utensils.
PURE
Control
®
We
have the necessary regulatory approvals from the FDA to offer PURE Control as a direct food contact processing aid for fresh produce
and raw poultry. We also have regulatory approvals from the USDA for certain methods of application of PURE Control on poultry
and we are also performing additional trials to gain further USDA approvals for additional food contact applications for poultry.
Additionally, we are currently testing and continuing development of PURE Control to allow us to seek regulatory approval to also
utilize PURE Control as a direct food contact processing aid for raw meats, including beef and pork.
Poultry
Processing Aid.
In December 2015, we received the required approvals from the FDA stating that our FCN (food contact notification)
for SDC as a raw poultry processing aid is complete. We have 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. We have not,
however, received the required approval from the USDA to utilize PURE Control in OLR poultry processing, which effectively restricts
our ability to commercialize PURE Control for poultry processing until we receive such additional approval. We continue our on-going
plant trials to optimize the application of PURE Control, including with higher concentrations of SDC, in OLR to gain USDA approval
for use in that stage of poultry processing. Based on these on-going plant trials, we have submitted an additional FCN to the
FDA to allow us to use higher concentrations of SDC in poultry processing to have the flexibility to adjust to varying plant and
processing conditions. We are continuing to work with the FDA to obtain approval for the higher concentrations of SDC in poultry
processing and expect to receive FDA approval in the second calendar quarter of 2017.
Testing
data conducted by Dr. James Marsden at Kansas State University and submitted in support of our FCN showed that, SDC achieved an
average reduction in
Salmonella
of 2.75 log
10
CFU/cm
2
when applied as an OLR (online reprocessing)
spray and 6.28 log
10
CFU/cm
2
when combined with an immersion chilling process simulating current U.S. industry
practices. We believe that testing by Dr. Marsden provides support to the following benefits of SDC for poultry processing:
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The
use of SDC antimicrobial solution in poultry processing has the potential to enable plants to achieve non-detectable Salmonella
levels post-chill process.
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A
sensory evaluation of SDC showed no difference in color, appearance or odor in treated poultry.
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SDC
has a neutral to positive impact on yield.
|
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SDC
offers a highly effective alternative to hazardous and difficult to blend chemicals currently used as treatments in raw poultry
processing.
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SDC
is a significant improvement over current processing practices. The product is:
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○
|
Easier
to handle and dilute;
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○
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Non-corrosive
to processing equipment;
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○
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Does
not create noxious fumes; and
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○
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Poultry
processors will also benefit from the highly stable solution, ease of use and improved worker safety.
|
Produce
Processing Aid
. In January 2016, we received the required approvals from the FDA stating that our FCN for SDC as a spray
or dip on processed fruits and vegetables is complete. We were not required to obtain any approvals from the USDA to use PURE
Control as a produce processing aid.
Data
from testing conducted by Dr. James Marsden at Kansas State University and submitted in support of our FCN for produce showed
that SDC achieved average reductions up to 2.36 log10 CFU/cm2 when applied alone as a spray and up to 3.10 log10 CFU/cm2 when
combined with chlorine wash, simulating current processing practices. Sensory evaluations of produce treated with SDC indicated
no difference in color, appearance or odor to untreated controls; and SDC had no effect on the nutritional composition of the
produce.
Currently,
produce processors target achieving only a 1 log10 CFU/cm2 reduction per intervention treatment. Data suggests that by incorporating
SDC, processors can improve their results 100-fold with only one step. This represents a significant advantage to produce processors
as well as improvement to the safety of processed produce going to the consumer.
Other
Processing Aids under Development
. We are currently testing and continuing development of PURE Control to allow us to
seek regulatory approval to also utilize PURE Control as a direct food contact processing aid for raw meats, including beef and
pork. Subject to successful pilot testing results and development, we intend to submit for both FDA and USDA approval during calendar
2017. In addition, we may identify other food processing opportunities for SDC.
Additional
SDC-Based Products
In
addition to PURE Hard Surface and PURE Control, we manufacture and sell (i) SDC-based products for end use, (ii) products preserved
with SDC and (iii) SDC as a raw material ingredient for manufacturing use. These products include:
Product
Name
|
|
Product
Use
|
|
EPA
Registration
|
PURE
Complete Solution:
|
|
|
|
|
PURE
®
Multi-Purpose and Floor Cleaner Concentrate
|
|
Cleaner
|
|
Not
applicable
|
PURE
®
Multi-Purpose Hi-Foam Cleaner Concentrate
|
|
Cleaner
|
|
Not
applicable
|
Axen
®
30
|
|
Disinfectant
|
|
Axen30
|
Axenohl
®
|
|
Raw
material ingredient
|
|
Axenohl
|
SILVÉRION
®
|
|
Raw
material ingredient
|
|
Not
applicable
|
PURE
Complete Solution
Our
PURE Complete Solution is comprised of PURE Hard Surface and concentrated cleaning products that were launched as companion products
to PURE Hard Surface. The PURE Complete Solution offers a comprehensive, cost-effective and user-friendly cleaning, disinfecting
and sanitizing product line to end-users including our targeted foodservice, food manufacturing and food processing customers.
We can also target this product line to hospital and medical care facilities; janitorial service providers and the distributors
that supply them.
PURE
®
Multi-Purpose and Floor Cleaner Concentrate (End-User Dilutable)
PURE
Multi-Purpose and Floor Cleaner, is an environmentally responsible cleaning product that is protected by SDC. SDC ensures the
quality and safety of PURE Multi-Purpose and Floor Cleaner without human or environmental exposure to toxic chemical preservatives.
PURE Multi-Purpose and Floor Cleaner is non-toxic and non-flammable and contains no EDTA, phosphates, ammonia or bleach as well
as no VOCs or NPEs. This efficient cleaner provides professional strength cleaning in a concentrate formula that yields a 1:96
– 1:256 use dilution that is safe for use on all resilient surfaces, including floors, glass and food contact surfaces.
PURE
®
Multi-Purpose Hi-Foam Cleaner Concentrate (End-User Dilutable)
PURE
Multi-Purpose Hi-Foam Cleaner is an environmentally responsible, professional strength high foam forming cleaning product that
is protected by SDC. SDC ensures the quality and safety of PURE Multi-Purpose Hi-Foam Cleaner without human or environmental exposure
to toxic chemical preservatives. PURE Multi-Purpose Hi-Foam Cleaner is non-toxic and non-flammable and contains no EDTA, phosphates,
ammonia or bleach as well as no VOCs or NPEs. PURE Multi-Purpose Hi-Foam Cleaner provides high foam cleaning in a concentrate
formula that yields a 1:50 use dilution that is safe for use on stainless steel equipment, resilient floors, walls and painted
surfaces.
Axen
®
30 (Ready-to-Use)
Axen30
is our patented and EPA-registered hard surface disinfectant and is a predecessor ready-to-use product to PURE Hard Surface. Axen30
is currently sold on a limited basis by distributors under their respective private labels.
Axenohl
®
(Raw Material Ingredient)
Axenohl
is our patented and EPA-registered SDC-based antimicrobial formulation for use as a raw material ingredient in the manufacturing
of EPA-registered products. Axenohl is a colorless, odorless and stable solution that provides fast acting efficacy against bacteria,
viruses and fungi when manufactured into consumer and commercial disinfecting and sanitizing products.
SILVÉRION
®
(Raw Material Ingredient)
SILVÉRION
is our patented SDC-based antimicrobial formulation for use as a raw material ingredient in the manufacturing of personal care
products. It can be used as either an active ingredient or a preservative. SILVÉRION is a colorless, odorless and stable
solution that provides ionic silver in a water-soluble form. It provides fast acting efficacy at low concentrations against a
broad-spectrum of bacteria, viruses, yeast and molds. SILVÉRION is currently sold domestically and outside of the United
States in various personal care products.
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, 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 January 31, 2017 and 2016
Net
Product Sales
Net
product sales were $447,000 and $176,000 for the three months ended January 31, 2017 and 2016, respectively. The increase of $271,000
was primarily attributable to new customer sales in the food safety industry, as well as sales fluctuations within our existing
legacy customer base.
For
the three months ended January 31, 2017, one individual customer accounted for 56% 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 January 31, 2016, two individual customers accounted for 43% and 15%, of our net product sales, respectively.
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 $134,000 and $48,000 for the three months ended January 31, 2017 and 2016, respectively. The increase of $86,000
was attributable to increased net product sales.
Gross
margin as a percentage of net product sales, or gross margin percentage, was 70% and 73% for the three months ended January 31,
2017 and 2016, respectively. The decrease in gross margin percentage was primarily attributable to the sale of lower margin formulations
and packaging configurations of our products during the quarter ended January 31, 2017 as compared with the prior period.
Selling,
General and Administrative Expense
Selling,
general and administrative expense was $1,333,000 and $1,386,000 for the three months ended January 31, 2017 and 2016, respectively.
The decrease of $53,000 was primarily attributable to decreased marketing costs and legal fees offset by increased personnel costs.
Research
and Development Expense
Research
and development expense was $214,000 and $238,000 for the three months ended January 31, 2017 and 2016, respectively. The decrease
of $24,000 was primarily attributable to reductions in third-party testing and research supporting our FDA approval efforts.
Share-Based
Compensation
Share-based
compensation expense was $170,000 and $763,000 for the three months ended January 31, 2017 and 2016, respectively. The decrease
of $593,000 is primarily due to the vesting of restricted stock units granted to employees and directors supporting our selling,
general and administrative, and research and development functions during the prior fiscal year.
Fair
Value of Derivative Liabilities in Excess of Proceeds.
The
fair value of derivative liabilities in excess of proceeds was zero and $859,000 for the three months ended January 31, 2017
and 2016, respectively (See Note 9 to the condensed consolidated financial statements included in Item 1 of this Quarterly Report
on Form 10-Q).
Change
in Derivative Liabilities
Change
in derivative liabilities for the three months ended January 31, 2017 and 2016 was a decrease of $459,000 and an increase of $7,790,000,
respectively. The current period decrease is primarily due the assumptions used in the fair value pricing model for warrants at
the end of the reporting period. The prior period increase is due to the 5,042,887 warrants issued in connection with the November
2015 Private Placement Financing, as well as, updates to the assumptions used in the fair value pricing model for warrants 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).
Interest
Expense
Interest
expense for the three months ended January 31, 2017 and 2016 was $2,000 and $3,000, respectively.
Other
Income (Expense)
Other
income for the three months ended January 31, 2017 and 2016 was $11,000 and $9,000, respectively.
Comparison
of the Six Months Ended January 31, 2017 and 2016
Net
Product Sales
Net
product sales were $978,000 and $362,000 for the six months ended January 31, 2017 and 2016, respectively. The increase of $616,000
was primarily attributable to new customer sales in the food safety industry, as well as sales fluctuations within our existing
legacy customer base.
For
the six months ended January 31, 2017, two individual customers accounted for 35% and 26%, of our net product sales, respectively.
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 six months ended January 31, 2016, two individual customers accounted for 42% and 15%, of our net product sales, respectively.
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 $399,000 and $102,000 for the six months ended January 31, 2017 and 2016, respectively. The increase of $297,000
was attributable to increased net product sales.
Gross
margin as a percentage of net product sales, or gross margin percentage, was 59% and 72% for the six months ended January 31,
2017 and 2016, respectively. The decrease in gross margin percentage was primarily attributable to the sale of lower margin formulations
and packaging configurations of our products during the six months ended January 31, 2017 as compared with the prior period.
Selling,
General and Administrative Expense
Selling,
general and administrative expense was $2,670,000 and $2,472,000 for the six months ended January 31, 2017 and 2016, respectively.
The increase of $198,000 was primarily attributable to increased personnel costs offset by decreased marketing costs and legal
fees.
Research
and Development Expense
Research
and development expense was $462,000 and $474,000 for the six months ended January 31, 2017 and 2016, respectively. The decrease
of $12,000 was primarily attributable to reductions in third-party testing and research supporting our FDA approval efforts.
Share-Based
Compensation
Share-based
compensation expense was $448,000 and $1,435,000 for the six months ended January 31, 2017 and 2016, respectively. The decrease
of $987,000 is primarily due to the vesting of restricted stock units granted to employees and directors supporting our selling,
general and administrative, and research and development functions during the prior fiscal year.
Fair
Value of Derivative Liabilities in Excess of Proceeds.
The
fair value of derivative liabilities in excess of proceeds was zero and $1,867,000 for the six months ended January 31, 2017 and
2016, respectively (See Note 9 to the condensed consolidated financial statements included in Item 1 of this Quarterly Report
on Form 10-Q).
Change
in Derivative Liability
Change
in derivative liabilities for the six months ended January 31, 2017 and 2016 was a decrease of $300,000 and an increase of $7,747,000,
respectively. The current period decrease is primarily due the assumptions used in the fair value pricing model for warrants at
the end of the reporting period. The prior period increase is due to the 20,376,219 warrants issued in connection with the October
and November 2015 Private Placement Financing, as well as, updates to the assumptions used in the fair value pricing model for
warrants 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).
Interest
Expense
Interest
expense for the six months ended January 31, 2017 and 2016 was $3,000 and $5,000, respectively.
Other
Income (Expense)
Other
income for the six months ended January 31, 2017 and 2016 was $25,000 and $18,000, respectively.
Liquidity
and Capital Resources
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 January 31, 2017 we have incurred
a cumulative net loss of $105,898,000.
During
the six months ended January 31, 2017, we completed a private placement offering pursuant to which we sold 1,572,941 shares of
our common stock and warrants to purchase 1,572,941 shares of our common stock.
The shares
were sold at a per share purchase price of $0.85 per share, resulting in $1,337,000 in aggregate gross proceeds. After deducting
fees of approximately $233,000, the net proceeds to us were $1,104,000 (See Note 10
to the condensed consolidated financial
statements included in Item 1 of this Quarterly Report on Form 10-Q
).
As
of January 31, 2017, we had $3,893,000 in cash and cash equivalents compared with $5,194,000 in cash and cash equivalents as of
July 31, 2016. The net decrease in cash and cash equivalents was primarily attributable to the use of cash to fund our operations.
Additionally, as of January 31, 2017, we had $2,192,000 of current liabilities, including $424,000 in accounts payable, compared
with $2,536,000 of current liabilities, including $479,000 in accounts payable as of July 31, 2016. The net decrease in current
liabilities was primarily due to the timing of accounts payable and the derivative liability incurred from the issuance of warrants
associated with our November 2015 financing.
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 January
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.
We
expect that we will need to increase our liquidity and capital resources by one or more measures. These measures may include,
but are not limited to, the following: reducing operating expenses; entering into partnerships, licenses, or other arrangements
with third parties; and reducing the exercise price of outstanding warrants. These measures could substantially reduce the value
to us of our technology and its commercial potential as it may be necessary to enter into arrangements with less favorable terms
than otherwise possible. Additionally, we may issue equity, debt or convertible securities to obtain financing, which may cause
dilution to our existing stockholders, and the new equity, debt or convertible securities may have rights, preferences and privileges
senior to those of our existing stockholders. Further, a reduction in operating expenses will require a reduction in the sales,
marketing, and other commercialization activities required to bring our products to market. There is no guarantee that we would
be able to obtain capital on terms acceptable to us, or at all.
If
we are unable to obtain sufficient capital, it would 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 delay, scale back or eliminate some or all of our research and development
programs, to license to third parties the right to commercialize products or technologies that we would otherwise commercialize
ourselves, or to reduce or cease operations altogether. If adequate funds are not available when needed, we may be required to
significantly modify our business model and operations to reduce spending to a sustainable level.
We
believe our available cash on-hand, our current efforts to market and sell our products, and our ability to significantly reduce
expenses, will provide sufficient cash resources to satisfy our needs over the next 12 months. However, we do not yet have, and
we may never have, significant cash inflows from product sales or from other sources of revenue to offset 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. Some or all of our ongoing or planned investments may not be successful
and could result in further losses. In addition, irrespective of our cash resources, we may be contractually or legally obligated
to make certain investments which cannot be postponed.
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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|
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●
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loss
of legal ownership or title to the asset(s);
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|
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|
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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.
|
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.