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 nine months
ended April 30, 2019 are not necessarily indicative of the results that may be expected for other quarters or the year ending
July 31, 2019. The July 31, 2018 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, 2018 included
in our Annual Report on Form 10-K covering such period filed with the Securities and Exchange Commission, or SEC, on October 25,
2018.
The
preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect
the amounts reported in the financial statements and the accompanying notes. Actual results could differ from those estimates.
2.
Liquidity & Going Concern Uncertainty
These
unaudited condensed consolidated financial statements have been prepared and presented on a basis assuming we will continue as
a going concern. The factors below raise substantial doubt about our ability to continue as a going concern. The financial statements
do not include any adjustments that might be necessary from the outcome of this uncertainty.
Since
our inception, we have financed our operations primarily through public and private offerings of securities, debt financing, and
revenue from product sales and license agreements. We have a history of recurring losses, and as of April 30, 2019, we have incurred
a cumulative net loss of $122,659,000.
We do not have, and may never have, significant
cash inflows from product sales or from other sources of revenue to fund our operations. As of April 30, 2019, we had $340,000
in cash and cash equivalents, and $523,000 of current liabilities. As of April 30, 2019, we have no long-term debt.
We do not currently believe that our existing cash resources are sufficient to meet our anticipated needs over the next twelve
months from the date hereof.
Our
future capital requirements depend on numerous forward-looking factors. These factors may include, but are not limited to, the
following: the acceptance of, and demand for, our products; our success and the success of our partners in selling our products;
our success and the success of our partners in obtaining regulatory approvals to sell our products; the costs of further developing
our existing products and technologies; the extent to which we invest in new product and technology development; and the costs
associated with the continued operation, and any future growth, of our business. The outcome of these and other forward-looking
factors will substantially affect our liquidity and capital resources.
Until
we can generate significant cash from operations, we expect to continue to fund our operations with the proceeds of offerings
of our equity and debt securities. However, we cannot assure you that additional financing will be available when needed or that,
if available, financing will be obtained on terms favorable to us or to our stockholders. If we raise additional funds from the
issuance of equity securities, substantial dilution to our existing stockholders would likely result. If we raise additional funds
by incurring debt financing, the terms of the debt may involve significant cash payment obligations as well as covenants and specific
financial ratios that may restrict our ability to operate our business. Further, any contracts or license arrangements we enter
into to raise funds may require us to relinquish our rights to our products or technology, and we cannot assure you that we will
be able to enter into any such contracts or license arrangements on acceptable terms, or at all. Having insufficient funds may
require us to delay or scale back our marketing, distribution and other commercialization activities or cease our operations altogether.
We
do not have any unused credit facilities or other sources of capital available to us at this time. We intend to secure additional
working capital through sales of additional debt or equity securities. Our intended financing initiatives are subject to risk,
and we cannot provide any assurance about the availability or terms of these or any future financings.
The
condensed consolidated financial statements do not include any adjustment relating to recoverability or classification of recorded
assets and classification of recorded liabilities.
3.
Significant Accounting Policies
Revenue
Recognition
Effective
August 1, 2018, we adopted the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”),
Topic 606, Revenue from Contracts with Customers (“Topic 606”). Under Topic 606, revenue is recognized at an amount
that reflects the consideration to which we expect to be entitled in exchange for transferring goods or services to a customer.
This principle is applied using the following 5-step process:
|
1.
|
Identify
the contract with the customer
|
|
2.
|
Identify
the performance obligations in the contract
|
|
3.
|
Determine
the transaction price
|
|
4.
|
Allocate
the transaction price to the performance obligations in the contract
|
|
5.
|
Recognize
revenue when (or as) each performance obligation is satisfied
|
Under
Topic 606, we recognize revenue when we satisfy a performance obligation by transferring control of the promised goods or services
to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services.
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. We sell various configurations and dilutions of SDC direct to customers and through distributors. We currently
offer PURE
®
Hard Surface as a food contact surface sanitizer and disinfectant to restaurant chains, food processors
and food transportation companies. We also offer PURE Control
®
as a direct food contact processing aid.
Contract
terms for unit price, quantity, shipping and payment are governed by sales agreements and purchase orders which we consider to
be a customer’s contract in all cases. The unit price is considered the observable stand-alone selling price for the arrangements.
Any promotional or sales discounts are applied evenly to the units sold for purposes of calculating standalone selling price.
Product
sales generally consist of a single performance obligation that we satisfy at a point in time. We recognize product revenue when
the following events have occurred: (a) we have transferred physical possession of the products, (b) we have a present right to
payment, (c) the customer has legal title to the products, and (d) the customer bears significant risks and rewards of ownership
of the products.
Our
direct customer and distributer sales are invoiced based on received purchase orders. Our payment terms on invoiced direct customer
and distributor sales range between 30 and 90 days after we satisfy our performance obligation. The majority of our customers
are on 30 day payment terms. We currently offer no right of return on invoiced sales and maintain no allowance for sales returns.
Shipping
and handling are treated as activities to fulfill promises to customers and any amounts billed to a customer, if applicable, represent
revenues earned for the goods provided. Costs related to such shipping and handling billings are classified as cost of sales.
We
do not have significant categories of revenue that may impact how the nature, amount, timing and uncertainty of revenue and cash
flows are affected by economic factors.
Variable
Consideration
We
record revenue from customers in an amount that reflects the transaction price we expect to be entitled to after transferring
control of those goods or services. From time to time, we offer sales promotions on our products such as discounts. Variable consideration
is estimated at contract inception only to the extent that it is probable that a significant reversal of revenue will not occur.
Practical
Expedient
We
elected a practical expedient to expense sales commissions when the commissions are incurred because the amortization period would
have been one year or less. These costs are recorded as Selling, general and administrative expense on our Condensed Consolidated
Statements of Operations.
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 April 30, 2019 and 2018, 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 10,496,565 and 12,932,189 respectively.
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
nine months ended April 30, 2019 and 2018, our comprehensive loss consisted only of net loss.
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:
|
|
April 30, 2019
(Unaudited)
|
|
|
July 31, 2018
|
|
Raw materials
|
|
$
|
37,000
|
|
|
$
|
39,000
|
|
Finished goods
|
|
|
158,000
|
|
|
|
158,000
|
|
|
|
$
|
195,000
|
|
|
$
|
197,000
|
|
During
November 2017, we wrote-off $26,000 of inventory destroyed in a third-party warehouse fire. During the three months ended
April 30, 2018, we received $45,000 from an insurance claim for the replacement cost of the inventory destroyed in the fire. As
a result, we recorded a gain of $19,000 reflected in the other income section of our condensed consolidated statements of operations.
Share-Based
Compensation
We
recognize stock-based compensation expense associated with stock options and other stock-based awards in accordance with the authoritative
guidance for share-based compensation. The cost of a share-based award is measured at the grant date based on the estimated fair
value of the award, and is recognized as expense on a straight-line basis, net of estimated forfeitures over the requisite service
period of the award. The fair value of stock options is estimated using the Black-Scholes option valuation model, which 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. The fair value of restricted stock awards is based on the market value of the Company’s
common stock on the date of grant.
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 nine months ended April 30, 2019 and 2018, no impairment of long-lived assets was indicated
or recorded.
Fair
Value of Financial Instruments
Fair
value is defined as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability
in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined
based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions,
the authoritative guidance establishes a three-tier value hierarchy, which prioritizes the inputs used in measuring fair value
as follows:
|
●
|
Level
1 – Quoted prices in active markets for identical assets or liabilities.
|
|
|
|
|
●
|
Level
2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar
assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated
by observable market data for substantially the full term of the assets or liabilities.
|
|
|
|
|
●
|
Level
3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value
of the assets or liabilities.
|
In
connection with the October and November 2015 Private Placements, we issued warrants with derivative features. These instruments
were accounted for as derivative liabilities.
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 were 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.
4.
Derivative Liabilities
During
October and November of 2015 we closed two private placement financings (the “2015 Private Placement Financing”) and
issued 20,376,219 warrants. We accounted for 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.
On
September 25, 2017, we completed the first closing of a tender offer to amend and exercise outstanding warrants to purchase shares
of our common stock. As a result, 1,599,135 warrants issued in connection with the 2015 Private Placement Financing were exercised.
In addition, there was a net exercise on 118,057 warrants which resulted in the issuance of 63,811 shares of our common stock.
The change in fair value of the warrant liabilities on September 25, 2017 was recorded as a change in derivative liabilities in
the condensed consolidated statements of operations during the three months ended October 31, 2017. In addition, the fair value
on the exercise date was returned to additional paid in capital.
On
October 10, 2017, we completed a second and final closing of a tender offer to amend and exercise outstanding warrants to purchase
shares of our common stock. As a result, 268,909 warrants issued in connection with the 2015 Private Placement Financing were
exercised. The change in fair value of the warrant liabilities on October 10, 2017 was recorded as a change in derivative liabilities
in the condensed consolidated statements of operations during the three months ended October 31, 2017. In addition, the fair value
on the exercise date was returned to additional paid in capital.
During
the nine months ended April 30, 2018, all outstanding warrants containing derivative features issued in connection with the 2015
Private Placement Financing were exercised.
The
change in fair value of the warrant liabilities for the nine months ended April 30, 2018, was a decrease of $459,000, which was
recorded as a change in derivative liabilities in the condensed consolidated statements of operations. As of April 30, 2019, there
were no warrants classified as derivatives outstanding.
5.
Promissory Note Payable
On
June 28, 2018, we raised $500,000 to support our continued operations by issuing a one-year promissory note to Tom Y. Lee, a member
of the Company’s Board of Directors and our largest stockholder. The note accrued interest at 6.5% per annum, compounded
annually. On August 16, 2018, $500,000 of principal and approximately $4,000 of accrued interest was canceled and converted into
1,120,633 shares of common stock (See Note 6 to these condensed consolidated financial statements).
6.
Stockholders’ Equity
Preferred
Stock
As
of April 30, 2019, the Company’s Board of Directors is authorized to issue 5,000,000 shares of preferred stock with a par
value of $0.01 per share, in one or more series. As of April 30, 2019 and July 31, 2018, there were no shares of preferred stock
issued and outstanding.
Common
Stock
As
of April 30, 2019, 100,000,000 shares of common stock with a par value of $0.01 per share are authorized for issuance.
Private
Placement Financing
On
August 16, 2018, we completed a closing (the “Closing”) of a private placement financing to accredited investors.
We raised approximately $1.5 million in the Closing and issued an aggregate of 3,333,964 shares of our common stock at a purchase
price of $0.45 per share, including the conversion of approximately $0.5 million held in the form of a promissory note as of July
31, 2018. The shares issued in the private placement financing were issued pursuant to a securities purchase agreement entered
into with the investors. Mr. Tom Y. Lee, a member of the Company’s Board of Directors invested approximately $1.0 million
through his affiliates, including approximately $0.5 million of cash and the cancellation of existing indebtedness in the amount
of approximately $0.5 million that was held in the form of a promissory note payable as of July 31, 2018.
The
net proceeds to us from the Closing (including the cancellation of indebtedness), after deducting fees and other offering expenses,
are approximately $1.5 million. 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.
The
issuance and sale of the shares was not registered under the Securities Act of 1933, as amended (the “Securities Act”),
and these shares may not be offered or sold in the United States absent registration under or exemption from the Securities Act
and any applicable state securities laws. The shares were issued and sold in reliance upon an exemption from registration afforded
by Section 4(a)(2) of the Securities Act and Rule 506 of Regulation D promulgated under the Securities Act. The Investors represented
to the Company that each was an “accredited investor” within the meaning of Rule 501 of Regulation D under the Securities
Act, and that each was receiving the shares for investment for its own account and without a view to distribute them.
On February 19, 2019, we entered into warrants
amendments (each a “Warrant Amendment”, and together, the “Warrant Amendments”) with three holders of
warrants to purchase the Company’s common stock issued in August 2014 (the “2014 Warrants”). The Warrant Amendments
provided (i) for a reduction in the exercise price from $0.75 to $0.35 and (ii) that 2014 Warrants would expire unless otherwise
exercised on the date of the Warrant Amendments. In connection with the execution of the Warrant Amendments, on February 19, 2019,
the holders exercised the 2014 Warrants to purchase 2,399,999 shares of common stock for an aggregate exercise price
of $840,000.
Tom
Lee, the Company’s Chairman of the Board, and beneficial holder of a 2014 Warrant to purchase 2,133,333 shares of Common
Stock, entered into a Warrant Amendment and exercised his 2014 Warrant for an aggregate exercise price of $746,666. Additionally,
Dale Okuno, a member of the Company’s Board of Directors, and beneficial holder of a 2014 Warrant to purchase 213,333 shares
of Common Stock, entered into a Warrant Amendment and exercised his 2014 Warrant for an aggregate exercise price of $74,666.
Due
to the reduction in exercise price for the 2014 Warrants issued in connection with the Warrant Amendment, we determined it was
appropriate to record $960,000 of expense in the 2019 condensed consolidated statement of operations for the inducement to exercise
the 2014 Warrants.
Schedule
TO and Warrant Exercises
On October 10,
2017, we closed the offer to amend and exercise outstanding warrants to purchase shares of our common stock (the
“Tender Offer”). Specifically, we filed a Schedule TO with the SEC on August 25, 2017 offering to (i) reduce
the exercise price of the warrants to purchase 4,104,980 shares of common stock issued to investors participating in our
private placement financing completed on August 29, 2014, as amended (the “2014 Warrants”) from $0.75 per share
to $0.60 per share of common stock in cash, (ii) reduce the exercise price of outstanding warrants to purchase 1,986,101
shares of common stock issued to investors participating in our private placement financing completed on November 23, 2015
(the “2015 Warrants”) from $0.45 per share to $0.40 per share of common stock in cash, (iii) reduce the exercise
price of the outstanding warrants to purchase 1,572,941 shares of common stock issued to investors participating in our
private placement financing completed on January 23, 2017 (the “2017 Warrants”, together with the 2014 Warrants
and 2015 Warrants, the “Original Warrants”) from $1.25 per share to $0.85 per share of common stock in cash, (iv)
shorten the exercise period of the Original Warrants so that they expired concurrently with the expiration of the Offer to
Amend and Exercise at 5:00 p.m. (Pacific Time) on September 25, 2017 (“Expiration Date”) unless extended until
the Subsequent Expiration Date (as defined below), (v) delete the cashless exercise provisions in the Original Warrants and
(vi) delete the price-based anti-dilution provisions contained in the 2015 Warrants.
Additionally,
we requested the holders of a majority of the shares issuable upon exercise of the 2014 Warrants (the “2014 Requisite Majority”),
2015 Warrants (the “2015 Requisite Majority”) and 2017 Warrants (the “2017 Requisite Majority”) to approve
an amendment of all of the outstanding 2014 Warrants, 2015 Warrants and 2017 Warrants, respectively, to amend such Original Warrants
in the same manner as set forth above (the “Aggregate Warrant Amendment”), except the Expiration Date would be extended
until October 10, 2017 (the “Subsequent Expiration Date”) if such Aggregate Warrant Amendment was approved with respect
to such class of Original Warrants. The 2015 Requisite Majority approved an amendment of all of the outstanding 2015 Warrants
and holders of 2015 Warrants had until the Subsequent Expiration Date to exercise their 2015 Warrants (the “Subsequent Offer
Period”).
The
Offer to Amend and Exercise with respect to the 2014 Warrants and 2017 Warrants expired on the Expiration Date of September 25,
2017. As of September 25, 2017, 1,491,649 shares of common stock were issued upon exercise of 2014 Warrants, 1,599,135 shares
of common stock were issued upon exercise of 2015 Warrants and 1,396,470 shares of common stock were issued upon exercise of 2017
Warrants, for aggregate gross proceeds to us of approximately $2,720,000. During the Subsequent Offer Period, 2015 Warrants to
purchase 268,909 shares of common stock were exercised for aggregate gross proceeds to us of approximately $107,000. 2014 Warrants
to purchase 2,533,331 shares of common stock and 2017 Warrants to purchase 176,471 shares of common stock at exercise prices of
$0.75 per share and $1.25 per share, respectively, continue to remain outstanding and no 2015 Warrants remain outstanding.
Original
Warrants (including 2015 Warrants exercised during the Subsequent Offer Period) to purchase an aggregate of 4,756,163 shares of
common stock were tendered and exercised in the Offer to Amend and Exercise for aggregate net proceeds to us of approximately
$2,632,000. Garden State Securities Inc. assisted the Company as warrant solicitation agents with respect to the 2017 Warrants.
Due
to the reduction in exercise price for the Original Warrants issued in connection with the Schedule TO, we determined it was appropriate
to record $876,000 of expense in the 2018 condensed consolidated statement of operations for the inducement to exercise the Original
Warrants.
Additional
Warrant Exercise
During
the nine months ended April 30, 2018, there was a net exercise on 573,057 warrants which resulted in the issuance of 158,342 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. 198,057 of the warrants exercised during the period were issued in connection with the Original Warrants discussed
above.
Other
Activity
During
the three months ended October 31, 2017, we entered into a two-year service agreement for business development services. In accordance
with the agreement we issued 50,000 shares of common stock, with a value of $51,000. The value was capitalized to prepaid expense
and is being amortized over the term of the agreement. During the three and nine months ended April 30, 2019, we recognized $6,000
and $19,000 of expense related to these services, respectively. During the three and nine months ended April 30, 2018, we recognized
$6,000 and $15,000 of expense related to these services, respectively.
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 was being
amortized over the term of the agreement. During the three and nine months ended April 30, 2018, we recognized $28,000 and $100,000
of expense related to these services, respectively.
7.
Share-Based Compensation
Restricted
Stock Units
During
the nine months ended April 30, 2019, the Compensation Committee of the Board of Directors authorized the issuance of 725,000
Restricted Stock Units (“RSUs”) to officers and consultants. The RSUs vest over a two year period and carry a ten
year term. Each RSU represents the right to receive one share of common stock, issuable at the time the RSU subsequently settles,
as set forth in the Restricted Stock Unit Agreement. In addition, during the nine months ended April 30, 2019, 131,250 RSUs were
canceled.
On
October 4, 2018, the Board of Directors appointed Tom Myers as the Company’s Chief Operating Officer. In connection with
Mr. Myer’s appointment, the Board agreed to grant him 500,000 RSUs upon the achievement by the Company of cash flow breakeven
for a fiscal quarter, after which such RSUs shall vest annually over the following three years. Based on the applicable guidance,
we determined that these RSUs are not deemed to be granted and therefore there are no accounting implications as of April 30,
2019.
During
the nine months ended April 30, 2018, the Compensation Committee of the Board of Directors authorized the issuance of 300,000
RSUs to newly appointed members of our board of directors. The RSUs vest over a two year period and carry a ten year term. Each
RSU represents the right to receive one share of common stock, issuable at the time the RSU subsequently settles, as set forth
in the Restricted Stock Unit Agreement. In addition, during the nine months ended April 30, 2018, we issued 375,000 RSUs to third-party
consultants, of which 300,000 are performance based. We currently do not expect the 300,000 RSUs to vest.
Of
the 756,250 unvested RSUs outstanding, we currently expect 456,250 to vest. As of April 30, 2019, there was $262,000 of unrecognized
non-cash compensation cost related to RSUs we expect to vest, which will be recognized over a weighted average period of 1.87
years. During the nine months ended April 30, 2019, 1,362,500 RSUs vested based on service conditions. Of the 2,362,500 RSUs outstanding
as of April 30, 2019, 1,606,250 RSUs are vested and the underlying common stock has not been delivered and remains outstanding,
as set forth in the RSU agreements.
For
the three months ended April 30, 2019 and 2018, share-based compensation expense for RSUs was $53,000 and $151,000, respectively.
For
the nine months ended April 30, 2019 share-based compensation expense for RSUs was $1,007,000, of which $489,000 was due to the
accelerated vesting of RSU’s held by Dave Pfanzelter, the former Chairman of our Board. Mr. Pfanzelter retired from our
Board in August 2018. For the nine months ended April 30, 2018 share-based compensation expense for RSUs was $696,000.
Stock
Option Plans
2007
Equity Incentive Plan
In
February 2016, we amended and restated our 2007 Equity Incentive Plan, the (“2007 Plan”), to, among other changes,
increase the number of shares of common stock issuable under the 2007 Plan by 4,000,000 shares and extend the term of the 2007
Plan until February 4, 2026. The 2007 Plan provides for the grant of incentive and non-qualified stock options, as well as other
share-based payment awards, to our employees, directors, consultants and advisors. These awards have up to a 10-year contractual
life and are subject to various vesting periods, as determined by the Compensation Committee of the Board of Directors. As of
April 30, 2019, there were approximately 1,143,000 shares available for issuance under the 2007 Plan.
2017
Equity Incentive Plan
Our
shareholders approved our 2017 Equity Incentive Plan (the “2017 Plan”) in January 2018, which has a share reserve
of 5,000,000 shares of common stock that were registered under a Form S-8 filed with the SEC in February 2018. The 2017 Plan provides
for the grant of incentive and non-qualified stock options, as well as other share-based payment awards, to our employees, directors,
consultants and advisors. These awards have up to a 10-year contractual life and are subject to various vesting periods, as determined
by the Compensation Committee of the Board of Directors. As of April 30, 2019, there were approximately 1,971,000 shares available
for issuance under the 2017 Plan.
During
the three months ended April 30, 2019, the Compensation Committee of the Board of Directors authorized the issuance of 200,000
stock options to a newly appointed member of our board of directors. The options vest over a two year period and carry a ten year
term. In addition, during the nine months ended April 30, 2019, the Compensation Committee of the Board of Directors authorized
the issuance of 100,000 stock options to a consultant supporting our business development activities. The options vest monthly
over a two year period 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, 2018
|
|
|
7,626,093
|
|
|
$
|
1.09
|
|
|
$
|
—
|
|
Granted
|
|
|
300,000
|
|
|
$
|
0.52
|
|
|
|
—
|
|
Exercised
|
|
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
Cancelled
|
|
|
(253,125
|
)
|
|
$
|
1.28
|
|
|
|
—
|
|
Outstanding at April 30, 2019
|
|
|
7,672,968
|
|
|
$
|
1.07
|
|
|
$
|
3,000
|
|
The
weighted-average remaining contractual term of options outstanding at April 30, 2019 was 4.92 years.
At
April 30, 2019, options to purchase 6,602,135 shares of common stock were exercisable. These options had a weighted-average exercise
price of $1.10 and a weighted average remaining contractual term of 4.67 years. The weighted average grant date fair value for
options granted during the nine months ended April 30, 2019 was $0.30. The total unrecognized compensation cost related to unvested
stock option grants as of April 30, 2019 was approximately $387,000 and the weighted average period over which these grants are
expected to vest is 2.0 years.
For
the three months ended April 30, 2019 and 2018, share-based compensation expense for stock options was $83,000 and $226,000, respectively.
For
the nine months ended April 30, 2019 share-based compensation expense for stock options was $1,330,000, of which $739,000 was
due the accelerated vesting of stock options held by Dave Pfanzelter, the former Chairman of our Board. Mr. Pfanzelter retired
from our Board in August 2018. For the nine months ended April 30, 2018 share-based compensation expense for stock options was
$1,076,000.
We
use the Black-Scholes valuation model to calculate the fair value of stock options. Stock-based compensation expense is recognized
over the vesting period using the straight-line method. The fair value of stock options was estimated at the grant date using
the following weighted average assumptions:
|
|
Three
Months Ended April 30, 2019
|
|
|
Three
Months Ended April 30, 2018
|
|
|
Nine
Months Ended April 30, 2019
|
|
|
Nine
Months Ended April 30, 2018
|
|
Volatility
|
|
|
82.24
|
%
|
|
|
66.33
|
%
|
|
|
75.67
|
%
|
|
|
70.16
|
%
|
Risk-free interest rate
|
|
|
2.55
|
%
|
|
|
2.34
|
%
|
|
|
2.63
|
%
|
|
|
2.26
|
%
|
Dividend yield
|
|
|
—
|
%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
Expected life
|
|
|
5.68 years
|
|
|
|
2.93 years
|
|
|
|
4.80 years
|
|
|
|
3.41 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
expected life of options was estimated using the average between the contractual term and the vesting term of the options.
8.
Recent Accounting Pronouncements
In
May 2014, the FASB issued Topic 606, which supersedes most existing revenue recognition guidance in U.S. generally accepted accounting
principles (“GAAP”), including most industry-specific guidance. The standard requires an entity to recognize the amount
of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The new standard was
originally effective for public companies for annual reporting periods beginning after December 15, 2016, with no early application
permitted. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers, which deferred by one year
the effective date for all entities, with application permitted as of the original effective date. The standard allows for either
a full retrospective or modified retrospective method of adoption. We adopted the new standard for the fiscal year beginning August
1, 2018 using the modified retrospective application method. Under this method, entities recognize the cumulative impact of applying
the new standard at the date of adoption without restatement of prior periods presented. The cumulative effect of applying the
new standard to contracts that were not completed as of August 1, 2018 did not have a material impact on our consolidated financial
position, results of operations, or cash flows.
The
new standard also requires enhanced disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising
from customer contracts. See “Note 3. Significant Accounting Policies” for further discussion. Topic 606 supersedes
the revenue recognition requirements in ASC Topic 605, Revenue Recognition (“Topic 605”). While results for reporting
periods beginning after August 1, 2018 are presented under Topic 606, all prior period amounts are not adjusted and continue to
be reported under the accounting standards in effect during these prior periods. The accounting policies for revenue recognition
for periods prior to August 1, 2018 are described in “Note 2. Summary of Significant Accounting Policies” of the Notes
to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended July 31, 2018. Adoption
of this ASC did not have a material impact on our condensed consolidated financial statements. Refer to the revenue recognition
disclosure above.
In
July 2017, the Financial Accounting Standards Board (“FASB”) issued a two-part Accounting Standards Update (“ASU”)
No. 2017-11, I. Accounting for Certain Financial Instruments With Down Round Features and II. Replacement of the Indefinite Deferral
for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling
Interests With a Scope Exception (“ASU 2017-11”). ASU 2017-11 amends guidance in FASB ASC 260, Earnings Per Share,
FASB ASC 480, Distinguishing Liabilities from Equity, and FASB ASC 815, Derivatives and Hedging. The amendments in Part I of ASU
2017-11 change the classification analysis of certain equity-linked financial instruments (or embedded features) with down round
features. The amendments in Part II of ASU 2017-11 re-characterize the indefinite deferral of certain provisions of Topic 480
that now are presented as pending content in the Codification, to a scope exception. Those amendments do not have an accounting
effect. ASU 2017-11 is effective for public business entities for fiscal years, and interim periods within those fiscal years,
beginning after December 15, 2018 with early adoption permitted. The adoption of this guidance will have no impact on our financial
statements as all derivative liabilities were all exercised or expired as of July 31, 2018.
In
November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. The standard clarifies the
presentation of restricted cash and cash equivalents and requires companies to include restricted cash and cash equivalents in
the beginning and ending balances of cash and cash equivalents on the statement of cash flows. The standard also requires additional
disclosures to describe the amount and detail of the restriction by balance sheet line item. The new standard was effective for
us on August 1, 2018. We adopted this standard using the retrospective transition method by restating the condensed consolidated
statements of cash flows to include restricted cash of $75,000 in the beginning and ending cash, cash equivalents, and restricted
cash balance. Net cash flows for the nine months ended April 30, 2018, did not change as a result of including restricted cash
with cash and cash equivalents when reconciling the beginning-of-period and end-of-period amounts presented on the statements
of cash flows.
In
December 2017, the United States (“U.S.”) enacted the Tax Cuts and Jobs Act (the “2017 Act”), which changes
existing U.S. tax law and includes various provisions that are expected to affect public companies. The 2017 Act (i) changes U.S.
corporate tax rates, (ii) generally reduces a company’s ability to utilize accumulated net operating losses, and (iii) requires
the calculation of a one-time transition tax on certain previously unrepatriated foreign earnings and profits (“E&P”).
The 2017 Act will also impact estimates of a company’s deferred tax assets and liabilities. On December 22, 2017, the Securities
and Exchange Commission issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the application of U.S. GAAP
in situations when a registrant does not have the necessary information available, prepared, or analyzed in reasonable detail
to complete the accounting for certain income tax effects of the Tax Cuts and Jobs Act (“U.S. Tax Cuts and Jobs Act of 2017”).
This new law did not have a significant impact on our consolidated financial statements for the year ended July 31, 2018 because
we maintain a valuation allowance on the entirety of our deferred tax assets. However, the reduction of the U.S. federal corporate
tax rate from 35% to 21% resulted in a remeasurement of our deferred tax assets.
In
May 2017, the FASB issued ASU No. 2017-09, Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting, which
provides clarity and guidance around which changes to the terms or conditions of a stock-based payment award require an entity
to apply modification accounting. The new standard was effective for annual reporting periods beginning after April 1, 2018, and
interim periods within those annual reporting periods. The adoption of this guidance had no impact on our financial statements.
In
June 2018, the FASB issued ASU No. 2018-07, Compensation - Stock Compensation: Improvements to Nonemployee Share-Based Payment
Accounting, which aligns the measurement and classification guidance for share-based payment to non-employees with the guidance
for share-based payments to employees. Under the new guidance, the measurement period for equity-classified non-employee awards
will be fixed at the grant date. This update is effective for annual periods beginning after December 15, 2018, and interim periods
within those periods and early adoption is permitted. We elected to early adopt ASU No. 2018-07 during the nine months ended April
30, 2019. The adoption of this guidance had no material impact on our financial statements.
9.
Subsequent Events
On May 9, 2019, we completed a closing
(the “Closing”) of a private placement financing to accredited investors. We raised net proceeds of $285,000 in the
Closing and issued an aggregate of 982,757 shares of our common stock at a purchase price of $0.29 per share. The Shares issued
in the private placement financing were issued pursuant to a securities purchase agreement entered into with Dale Okuno and Ivan
Chen, each of whom are accredited investors. Mr. Okuno and Mr. Chen, members of the Company’s Board of Directors invested
$250,000 and $35,000, respectively, in the Private Placement Financing.
The
net proceeds to us from the Closing, after deducting fees and other offering expenses, are expected to be approximately $284,000.
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.
The
issuance and sale of the shares was not registered under the Securities Act of 1933, as amended (the “Securities Act”),
and these shares may not be offered or sold in the United States absent registration under or exemption from the Securities Act
and any applicable state securities laws. The shares were issued and sold in reliance upon an exemption from registration afforded
by Section 4(a)(2) of the Securities Act and Rule 506 of Regulation D promulgated under the Securities Act. The Investors represented
to the Company that each was an “accredited investor” within the meaning of Rule 501 of Regulation D under the Securities
Act, and that each was receiving the shares for investment for its own account and without a view to distribute them.