PART
I
Item
1. Business
Overview
We
are focused on developing and commercializing proprietary antimicrobial products that provide safe and cost-effective solutions
to the health and environmental challenges of pathogen and hygienic control. Our technology platform is based on patented stabilized
ionic silver, and our initial products contain silver dihydrogen citrate, or SDC. SDC is a broad-spectrum, non-toxic antimicrobial
agent, which offers 24-hour residual protection and formulates well with other compounds. As a platform technology, we believe
SDC is distinguished from existing products in the marketplace because of its superior efficacy, reduced toxicity, non-causticity
and the inability of bacteria to form a resistance to it.
We
believe there is a significant market opportunity for our
safe, non-toxic, non-caustic and effective SDC-based solutions. We currently offer PURE® Hard Surface as a food
contact surface sanitizer and disinfectant to restaurant chains, food processors and food transportation companies. We also offer
PURE Control® as a direct food contact processing aid. We received the required FDA approvals to market PURE Control
as a direct food contact processing aid for raw poultry and fresh produce in December 2015 and January 2016, respectively. Because
additional USDA approval was not required, we began marketing PURE Control as a direct food contact processing aid for fresh produce
following our receipt of FDA approval in January 2016.
In
July 2016, we received a “No Objection Letter” from the USDA’s Food Safety and Inspection Service (FSIS) granting
approval for SDC-based PURE Control to be used as a spray or dip applied to poultry carcasses, parts and organs in pre-OLR (on-line
reprocessing) and post chill processing of fresh poultry. In January 2017, we submitted an additional FCN to the FDA to allow
use of higher SDC concentrations in poultry processing, allowing the flexibility to adjust to varying plant and processing conditions.
In May 2017, we received a Final Letter from the FDA for this FCN as well as a “No Objection Letter” from the USDA’s
Food Safety and Inspection Service (FSIS) granting approval for the higher concentrations of SDC-based PURE Control to be used
as a spray or dip applied to poultry carcasses, parts and organs in pre-OLR (on-line reprocessing) and post chill processing of
fresh poultry. We are currently focused on completing in-plant validation trials for PURE Control in pre- and post OLR poultry
processing applications, which represents approximately 65% to 75% of the total processing aid market for poultry processing.
We are continuing to optimize the application of PURE Control in OLR to attempt to gain USDA approval for use in this stage of
poultry processing.
Subject
to the results of our focused in-plant validation efforts for our approved produce and poultry solutions, we intend to seek approval
to utilize PURE Control as a direct food contact processing aid for raw meats, including beef and pork. In addition to our direct
sales efforts with PURE Hard Surface and PURE Control, we market and sell our SDC-based products indirectly through third-party
distributors.
Technology
Platform
The
foundation of our technology platform is a proprietary electrochemical process that allows us to generate ionized silver in the
presence of organic acid. This process creates a solution containing stabilized ionic silver that can function as an antimicrobial.
Our current products all contain SDC, which we produce by ionizing silver in citric acid. SDC is a natural, non-toxic, non-caustic,
colorless, odorless antimicrobial agent, which offers 24-hour residual protection, and that formulates well with other compounds.
We have also produced ionic silver-based molecular entities using other organic acids, and we believe these compounds may provide
a platform for future product development.
Silver
as an Antimicrobial
The
use of silver as an antimicrobial dates back to ancient times when water, wine and other beverages were kept in silver vessels
to maintain freshness. Ancient Egyptians applied thin strips of beaten silver around wounds to avoid infection, and early royalty
ate from silver plates and with silver utensils to stay healthy. In the past half-century, silver in colloidal and ionic forms
has been used successfully in a wide array of antimicrobial applications, including water purification and topical treatments
for burn victims. Silver must be in an ionic form to be effective at killing microorganisms. The short shelf-life of previous
ionic silver solutions has limited the development of ionic-silver based antimicrobials. SDC, as a stabilized silver ion complex,
has a shelf life of more than a decade because the weak bond of the silver ion to the citric acid allows the ion to remain stable
in solution while at the same time making it bioavailable for antimicrobial action.
Mechanisms
of Action
The
rapid and broad-spectrum efficacy of SDC is attributed to its dual mechanisms of action, both with respect to killing bacteria
and other microorganisms and acting against viruses. SDC can kill microorganisms at both the extracellular and intracellular levels.
SDC attracts bacteria because the citric acid is recognized by the organism as a food source. SDC easily enters the microorganism
through membrane transport proteins. Once inside the organism, SDC binds to DNA and intracellular proteins causing irreversible
damage to the DNA and protein structure. Metabolic and reproductive functions halt, and the organism dies. SDC can also act on
an organism’s outer membrane. Silver ions are highly attracted to sulfur-containing thiol groups found in metabolic and
structural proteins bound to the membrane surface. SDC targets these critical proteins and destroys their structure. This disruption
of the organism’s membrane function and integrity leads to its death.
Viruses
are much smaller than bacteria and present fewer target sites on which a biocide can act. The efficacy of SDC against enveloped
and non-enveloped viruses comes from its ability to destroy not only the viral envelope, preventing the virus from attaching to
a host cell, but also the infectious component of the virus, the nucleic acid.
Safety
Profile
Research
has shown that silver is an effective antimicrobial and not toxic to humans at the residual levels following the use of our SDC-based
products. In addition, our data shows the components of SDC, ionic silver and citric acid, to be non-toxic, particularly at the
low concentrations required to eliminate microorganisms. At higher concentrations, citric acid can be an eye irritant. We have
tested a concentrated SDC formulation using standard protocols to measure acute toxicity. Acute oral and dermal toxicity was not
observed at doses up to and including 5000 mg/kg. Data from eye and skin studies showed only slight irritation and no dermal sensitization.
GRAS
Status as Contact Biocide
A
committee of independent experts critically reviewed efficacy and toxicity data for SDC and the SDC-based PURE Hard Surface disinfectant
and food contact surface sanitizer. The committee found no evidence that SDC demonstrates a hazard to the public when used as
a contact biocide on food contact surfaces and food-use utensils. The committee, therefore, concluded such use to be generally
recognized as safe, consistent with the EPA registration (discussed below), allowing for use on food manufacturing and processing
equipment and food preparation surfaces.
Efficacy
Formulations
containing SDC provide complete, quick and broad-spectrum antimicrobial efficacy against gram positive and gram negative bacteria,
enveloped and non-enveloped viruses, and fungi. In addition to quick kill times, SDC provides residual antimicrobial activity.
SDC also provides rapid kill times against multiple drug resistant bacteria, including Methicillin-resistant Staphylococcus
aureus, or MRSA, Vancomycin resistant Enterococcus faecium, or VRE, Carbapenem resistant Escherichia coli, Carbapenem
resistant Klebsiella pneumoniae and Carbapenem resistant Klebsiella pneumoniae, NDM-1+. See “EPA Registrations”
below for more detailed efficacy data.
Natural
and Environmentally Responsible
SDC
is made of simple and all-natural ingredients: water, citric acid and minute amounts of ionic silver. SDC does not present a threat
to the environment. If introduced to water systems, the low concentrations of ionic silver in SDC would react with naturally present
substances such as chlorides, sulfides and organic matter. These reactions would create insoluble silver complexes and render
the silver inert. In addition, we manufacture SDC through a “zero waste” process in which no byproducts or environmental
effluent are created.
Market
Opportunity
U.S.
Incidence and Cost of Foodborne Illness
According
to an Ohio State University study published in the Journal of Food Protection, completed by Dr. Scharff, a consumer science professor,
foodborne illness poses a $77.7 billion economic burden in the United States annually. This cost estimate includes health related
costs, associated medical costs, productivity losses, mortality, and pain and suffering. The study noted that excluding the estimated
costs for pain and suffering, health related costs exceeded $51 billion. The study does not include costs to the food industry,
including reduced consumer confidence, reduced brand value, product recall costs, and litigation, nor does it include the cost
to public health agencies (local, state and federal) that are required to respond to illnesses and outbreaks. In addition, the
study cited Salmonella as the most costly pathogen with an economic burden estimated to be in excess of $11 billion. This
is primarily due to its high incidence and mortality rate.
Increased
Regulatory Requirements in the U.S.
The
increasing trend of reported foodborne illness over the last decade has resulted in heightened awareness by various government
agencies, national media and social media outlets thereby affecting consumer confidence and elevating federal and state regulatory
scrutiny.
In
2011, the Food Safety Modernization Act was passed by the U.S. Congress, resulting in increased regulatory requirements for preventive
controls, verification and validation of food safety plans by food processors. Additionally, in December 2013, the Food Safety
and Inspection Service (FSIS) of the USDA, announced its Salmonella Action Plan (SAP), which is focused on identifying
solutions to reduce the incidence of Salmonella in meat and poultry. We believe that the implementation of the SAP will
increase the need for new, effective interventions to assist in reducing the incidence of Salmonella in meat and poultry.
Limitations
of Existing Food Safety Solutions
The
statistics of the U.S. public health problems attributed to pathogens in the food supply chain demonstrate the increasing need
for more effective, efficient and safer interventions. The U.S. food industry continues to rely on the use of toxic chemicals
as processing aids or interventions during food processing operations for which pathogens are becoming increasingly resistant
and rendering current interventions less efficacious. Most of these chemicals carry various warning labels for their toxic and/or
caustic characteristics, which can negatively affect the safety of processing plant personnel, plant operating equipment and the
plant environment and its surroundings.
Among
the chemicals in current use are: peracetic acid, acidified sodium chlorite (ASC), ozone, trisodium phosphate, cetylpyridinium
chloride (CPC), organic acid rinses (lactic acid), hypobromous acid and chlorine dioxide. Some of these chemicals can be difficult
to work with as a processing aid as they require heating to become effective or are difficult to mix and stabilize prior to use.
Additionally, some of these chemicals damage the food being processed, resulting in decreased yields. Further, the use of certain
of these chemicals is limited to treating only specific pathogens and/or only certain foods. In addition, some of these chemicals
can produce noxious fumes that over time have been linked to upper respiratory illness and typically require in-plant decontamination
of their effluence.
Several
large and established corporations currently supply these chemicals. They may also provide other related food safety services
such as environmental sanitation programs and food safety consultation and audit services.
Our
SDC-Based Products as a Food Safety Solution
Based
on the limitations of the existing food safety solutions, we believe that our SDC-based products, including PURE Hard Surface
and PURE Control, are well positioned as new and disruptive solutions for the food safety industry. Given their broad spectrum
antimicrobial efficacy and non-toxic properties, our SDC-based products provide significant improvements over current chemical
interventions that can both strengthen our customers’ food safety practices and help them control and eliminate pathogens
present during their food processing operations.
Our
studies indicate that our SDC-based products are more effective in reducing or eliminating pathogens than existing chemical interventions.
Pilot poultry processing studies showed that SDC achieved an average reduction in Salmonella of 2.75 log 10
CFU/cm2 when applied as an OLR spray and 6.28 log10 CFU/cm2 when combined with an immersion chilling
process simulating current U.S. industry practices. This data suggests that the use of SDC in poultry processing has the potential
to achieve non-detectable Salmonella levels. We are currently focused on completing in-plant validation trials to test
both the effectiveness of PURE Control in actual in-plant use for pre and post OLR poultry processing and to attempt to gain USDA
approval for its use in OLR poultry processing.
Similarly,
pilot produce processing studies 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. Currently, produce processors hope to achieve only a 1 log10 CFU/cm2 reduction per
intervention treatment. This data suggests that by incorporating SDC, produce processors can improve their results 100-fold with
only one step. Moreover, sensory evaluations of both poultry and produce treated with SDC indicated no difference in color, appearance
or odor to untreated controls. Additionally, SDC had no effect on the nutritional composition of either poultry or produce.
In
addition to providing better efficacy, our SDC-based products can provide users with the following benefits compared to the current
processing chemicals they are using:
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Easier
to handle and dilute;
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Non-corrosive
to processing equipment;
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Non-toxic
to manufacturing personnel by not creating noxious fumes or other detrimental environmental effluence; and
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Neutral
to positive yield impact on the processed food
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Based
on their performance and characteristics, we believe our SDC-based products can provide our customers with significant advantages
to the chemical interventions they are currently using and help them achieve their goal of improving the safety of processed foods
they offer to consumers.
Business
Strategy
Our
goal is to become a sustainable company by commercializing the SDC-based products we have developed with our proprietary technology
platform. We are focused on delivering leading antimicrobial products that address food safety risks across the food industry
supply chain. Key aspects of our business strategy include:
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Expanding
sales and distribution for our products into the food industry with a focus on a dual track of food safety market opportunities:
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Hard
Surface Disinfectant - commercializing our current EPA registered PURE Hard Surface disinfectant and sanitizer for
use in foodservice operations, food manufacturing and food transportation.
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Direct
Food Contact - commercializing FDA approved PURE Control as a direct food contact processing aid for fresh produce;
commercializing FDA approved PURE Control as a food processing and intervention aid for food processors treating raw poultry
in pre and post OLR applications. We are continuing to optimize the application of PURE Control in OLR to attempt to gain
USDA approval for use in this stage of poultry processing. Additionally, subject to the results of our focused in-plant validation
efforts for our approved produce and poultry solutions, we intend to seek approval to utilize PURE Control as a direct food
contact processing aid for raw meats, including beef and pork.
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Establishing
strategic alliances to maximize the commercial potential of our technology platform;
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Developing
additional proprietary products and applications; and
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Protecting
and enhancing our intellectual property.
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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, food processors and food transportation companies. We also offer PURE Control® as a direct food contact
processing aid. We received the required FDA approvals to market PURE Control® as a direct food contact processing
aid for raw poultry and fresh produce in December 2015 and January 2016, respectively. Because additional USDA approval was not
required, we began marketing PURE Control as a direct food contact processing aid for fresh produce following our receipt of FDA
approval in January 2016.
In
July 2016, we received a “No Objection Letter” from the USDA’s Food Safety and Inspection Service (FSIS) granting
approval for SDC-based PURE Control to be used as a spray or dip applied to poultry carcasses, parts and organs in pre-OLR (on-line
reprocessing) and post chill processing of fresh poultry. In January 2017, we submitted an additional FCN to the FDA to allow
use of higher SDC concentrations in poultry processing, allowing the flexibility to adjust to varying plant and processing conditions.
In May 2017, we received a Final Letter from the FDA for this FCN as well as a “No Objection Letter” from the USDA’s
Food Safety and Inspection Service (FSIS) granting approval for the higher concentrations of SDC-based PURE Control to be used
as a spray or dip applied to poultry carcasses, parts and organs in pre-OLR (on-line reprocessing) and post chill processing of
fresh poultry. We are currently focused on completing in-plant validation trials for PURE Control in pre- and post OLR poultry
processing applications, which represents approximately 65% to 75% of the total processing aid market for poultry processing.
We are continuing to optimize the application of PURE Control in OLR to attempt to gain USDA approval for use in this stage of
poultry processing.
Subject
to the results of our focused in-plant validation efforts for our approved produce and poultry solutions, we intend to seek approval
to utilize PURE Control as a direct food contact processing aid for raw meats, including beef and pork. In addition to our direct
sales efforts with PURE Hard Surface and PURE Control, we market and sell our SDC-based products indirectly through third-party
distributors.
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 in as few as 30-seconds and 24-hour
residual protection. The product 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 attempt to gain further USDA approvals for additional food contact applications
for poultry. Additionally, subject to the results of our focused in-plant validation efforts for our approved produce and poultry
solutions, we intend to seek approval to utilize PURE Control as a direct food contact processing aid for raw meats, including
beef and pork.
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. In January 2017,
we submitted an additional FCN to the FDA to allow use of higher SDC concentrations in poultry processing, allowing the flexibility
to adjust to varying plant and processing conditions. In May 2017, we received a Final Letter from the FDA for this FCN as well
as a “No Objection Letter” from the USDA’s Food Safety and Inspection Service (FSIS) granting approval for the
higher concentrations of SDC-based PURE Control to be used as a spray or dip applied to poultry carcasses, parts and organs in
pre-OLR (on-line reprocessing) and post chill processing of fresh poultry.
We
are currently focused on completing in-plant validation trials to test the effectiveness of PURE Control in actual in-plant use
for pre and post OLR poultry processing. We are continuing to optimize the application of PURE Control, including with higher
concentrations of SDC, in OLR to attempt to gain USDA approval for use in that stage of poultry processing.
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 log10 CFU/cm2 when applied as an OLR (online reprocessing)
spray and 6.28 log10 CFU/cm2 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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Non-corrosive
to processing equipment;
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Does
not create noxious fumes; and
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Poultry
processors will also benefit from the highly stable solution, ease of use and improved worker safety.
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We
are currently focused on completing in-plant validation trials to test the effectiveness of PURE Control in actual in-plant use
and to optimize the application of PURE Control for poultry processing.
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 market 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. Subject to the results of our focused in-plant validation efforts for our approved
produce and poultry solutions, we intend to seek approval to utilize PURE Control as a direct food contact processing aid for
raw meats, including beef and pork. In addition, 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
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Product
Use
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EPA
Registration
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PURE
Complete Solution:
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PURE®
Multi-Purpose and Floor Cleaner Concentrate
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Cleaner
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Not
applicable
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PURE®
Multi-Purpose Hi-Foam Cleaner Concentrate
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Cleaner
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Not
applicable
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Axen®30
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Disinfectant
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Axen30
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Axenohl®
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Raw
material ingredient
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Axenohl
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SILVÉRION®
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Raw
material ingredient
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Not
applicable
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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 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. Axenohl is currently sold
on a limited basis to distributors who manufacture their own respective end-use 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.
EPA
Registrations
We
sell our EPA-regulated products under the following three EPA registrations: (i) SDC3A, our hard surface disinfectant and food
contact surface sanitizer, (ii) Axen30, our hard surface disinfectant, and (iii) Axenohl, our antimicrobial formulation for use
as a raw material in the manufacturing of EPA-registered products.
PURE
Hard Surface SDC3A Registration
The
EPA registration for SDC3A, marketed as PURE Hard Surface, our disinfectant and food contact surface sanitizer, includes the following
efficacy claims:
Organism
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Kill
Time
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Pseudomonas
aeruginosa
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30
seconds
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Salmonella
enterica
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30
seconds
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Staphylococcus
aureus
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2
minutes
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Listeria
monocytogenes
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2
minutes
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Vancomycin
resistant Enterococcus faecium (VRE)
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2
minutes
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Methicillin
resistant Staphylococcus aureus (MRSA)
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2
minutes
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Community
Associated Methicillin resistant Staphylococcus aureus (CA-MRSA)
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2
minutes
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Community
Associated Methicillin resistant Staphylococcus aureus (CA-MRSA-PVL)
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2
minutes
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Escherichia
coli O157:H7
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2
minutes
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Acinetobacter
baumannii
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2
minutes
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Campylobacter
jejuni
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2
minutes
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Carbapenem
resistant Escherichia coli
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2
minutes
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Carbapenem
resistant Klebsiella pneumoniae
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2
minutes
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Carbapenem
resistant Klebsiella pneumonia, NDM-1 +
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2
minutes
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Trichophyton
mentagrophytes (Athlete’s Foot Fungus)
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5
minutes
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HIV
type 1
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30
seconds
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Rotavirus
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30
seconds
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Human
Coronavirus
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30
seconds
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Influenza
A (H1N1)
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30
seconds
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Swine
Influenza A (H1N1)
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30
seconds
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Respiratory
Syncytial Virus
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30
seconds
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Adenovirus
Type 2
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30
seconds
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Avian
Influenza A
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30
seconds
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Influenza
A
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30
seconds
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Hepatitis
B Virus (HBV)
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60
seconds
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Hepatitis
C Virus (HCV)
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60
seconds
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Murine
Norovirus
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60
seconds
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Norovirus
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60
seconds
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Herpes
Simplex Type 1
|
|
60
seconds
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Rhinovirus
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|
60
seconds
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Polio
Type 2
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|
60
seconds
|
The
EPA registration for SDC3A also claims 24-hour residual protection against certain bacteria.
Toxicity
Categories
The
EPA categorizes the toxicity of antimicrobial products from Category I to Category IV. The following table shows the EPA toxicity
categories and required signal words.
Toxicity
Category
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|
Signal
Word
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I
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DANGER,
POISON
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|
II
|
|
WARNING
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III
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CAUTION
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IV
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|
None
required
|
|
SDC3A
is a Category IV product for which no signal words are required.
Axen30
Registration
Axen30
is a hard surface disinfectant and is a predecessor product to SDC3A. It offers similar broad-spectrum efficacy but longer kill
times. Axen30 is not approved for use on food contact surfaces. Axen30 is currently sold on a limited basis by distributors under
their respective private labels.
Axenohl
Registration
Axenohl
is registered as a raw material ingredient for the manufacturing of EPA-registered products and as such does not carry specific
efficacy claims. Axenohl is sold to distributors who manufacture their own respective end-use products.
Intellectual
Property
Our
policy is to pursue patents and trademarks, maintain trade secrets and use other means to protect our technology, inventions and
improvements that are commercially important to the development of our business.
We
have applied for U.S. and foreign patent protection for our SDC technology. Currently, we own twelve U.S. issued patents. Approximately
thirty patents have been issued outside of the U.S., and we own approximately four patents pending around the world. The expiration
dates for our twelve U.S. issued patents begin in 2018 and end in 2030. In September 2013, we decided to abandon pending and issued
patents in non-strategic international territories. We intend to focus our future patent prosecution and defense efforts primarily
to North America, Europe, Asia and Mexico.
Additional
patent applications may not be granted, or, if granted, may not provide adequate protection to us. We also intend to rely on whatever
protection the law affords to trade secrets, including unpatented know-how. Other companies, however, may independently develop
equivalent or superior technologies or processes and may obtain patents or similar rights with respect thereto.
Although
we believe that we have developed our technology independently and have not infringed, and do not infringe, on the patents of
others, third parties may make claims that our technology does infringe on their patents or other intellectual property. In the
event of infringement, we may, under certain circumstances, be required to modify our infringing product or process or obtain
a license. We may not be able to do either of those things in a timely manner if at all, and failure to do so could have a material
adverse effect on our business. In addition, we may not have the financial or other resources necessary to enforce a patent infringement
or proprietary rights violation action or to defend ourselves against such actions brought by others. If any of the products we
develop infringe upon the patent or proprietary rights of others, we could, under certain circumstances, be enjoined or become
liable for damages, which would have a material adverse effect on our business.
We
also rely on confidentiality and nondisclosure agreements with our employees, customers, consultants, advisors, licensees and
potential partners to protect our technology, intellectual property and other proprietary property. Pursuant to the foregoing
and for other reasons, we face the risk that our competitors may acquire information which we consider to be proprietary, that
such parties may breach such agreements or that such agreements will be inadequate or unenforceable.
Further,
we own the registered trademarks or pending trademark applications for PURE Bioscience®, Powered by SDC Ag+®,
PURE®, Axenohl®, Axen®, SILVÉRION®, and PURE Control®
. In addition, we have applications for other trademarks pending around the world, which may or may not be granted. We previously
allowed the marks Kinderguard®, Cruise Control®, Staphacide® , Nutripure®,
Elderguard®, and Critterguard® to go abandoned, as they were no longer in line with our food safety
business strategy.
Research
and Development
We
recognize the importance of innovation to our business strategy and long-term success. A key aspect of our business strategy is
to leverage our technology platform to develop additional proprietary products and applications, including end use products and
raw material formulations derived from our technology platform. We conduct our primary research and development activities in-house
and use third-party laboratories to conduct independent testing. We also engage development partners to perform research and development
activities at their own expense for specific products and processes using SDC.
Sales
and Marketing
A
critical aspect of our business strategy is to leverage the industry experience of our internal sales force, the members of our
Board of Directors and our management team in order to maximize the commercial potential of our technology platform in the food
industry.
According
to the CDC, FDA and other food industry sources, food contamination and food borne illnesses have been increasing. We believe
our focus on food safety is addressing a significant need to provide safe, non-toxic and effective solutions to mitigate the increase
of food contamination and food borne illnesses. We believe our products can be used effectively to prevent or mitigate the risk
of food contaminants in various stages of the food supply chain. Our current sales and marketing efforts include demonstrating
our SDC products’ effectiveness as a hard surface disinfectant and sanitizer for:
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1.
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Foodservice
operators and food transportation companies – such as food preparation and cooking surfaces; consumer eating and other
common areas; drink and ice dispensers; and trucks used to transport food.
|
|
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|
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2.
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Food
manufacturers and processors – such as food production and transportation equipment.
|
Our
sales team is actively developing customer relationships with certain segments of foodservice operators, food processors, food
manufacturers and food transportation companies. Due to the recent introduction of our food safety products and the importance
of food safety to our customers, the sales cycle to secure a new customer is long and unpredictable. We have recently completed
and are currently conducting numerous product evaluation trials and comparative testing of our SDC-based products with prospective
customers, which we believe will result in future revenue. We believe our products provide superior pathogen and hygiene control
performance characteristics as compared with legacy chemical products, which also have higher toxicity profiles than our SDC-based
products.
In
addition to our direct sales and marketing efforts, we intend to selectively form partnerships with industry leaders for a variety
of uses and applications of our products and technology. These partnerships may be for both U.S. and international markets where
we believe we may leverage the product development, sales and marketing resources of business partners to commercialize our SDC
technology in their respective markets.
A
significant portion of our historical revenues were generated by an international chemical distributor who sold our SDC-based
formulations to other manufacturers for use as a raw material ingredient in the production of personal care products. Other historical
revenues were primarily to U.S. distributors who sold our SDC-based products into the consumer, industrial janitorial and sanitization
market.
Sales
Concentration
Net
product sales were $1,909,000 and $1,774,000 for the years ended July 31, 2019 and 2018, respectively. For the year ended July
31, 2019, one individual customer accounted for 15%, and two individual customers accounted for 11% of our net product sales.
No other individual customer accounted for 10% or more of our net product sales. For the year ended July 31, 2018, three individual
customers accounted for 20% and 16% and 11%, of our net product sales, respectively. No other individual customer accounted for
10% or more of our net product sales. For the years ended July 31, 2019 and 2018, all net product sales occurred in the United
States.
From
time to time, one or a small number of our customers may represent a significant percentage of our revenue. Our three largest
customers accounted for 36% of our revenue for the fiscal year ended July 31, 2019. Although we have agreements with many of our
customers, these agreements typically do not prohibit customers from purchasing products and services from competitors. A decision
by any of our major customers to significantly reduce the amount of product ordered or license fees paid, or their failure or
inability to pay amounts owed to us in a timely manner, or at all, could have a significant adverse effect on our business.
Competition
The
markets for our SDC-based products and each of their potential applications are highly competitive. We have a number of competitors
that vary in size, scope and breadth of products offered. These competitors include some of the largest global corporations, and
most of our competitors have significantly greater financial resources than we do and offer multiple service and product offerings
as well as consulting services to their customers. We expect to face additional competition from other competitors and technologies
in the future.
Because
SDC is a new antimicrobial technology to the food industry, our success will depend, in part, upon our ability to achieve a share
of our target markets at the expense of established and future products. Even where SDC may have technological competitive advantages
over competing products, we, our partners or our distributors, will need to invest significant resources in order to attempt to
displace traditional technologies sold by, what are in many cases, well-known industry leaders.
Our
SDC-based products (especially at higher silver ion concentration levels) are typically more expensive to produce than existing
treatment chemicals, and as a result, customers may not purchase our products for cost reasons, even if we are successful in demonstrating
the superior efficacy our products. Further, customers may determine that the other benefits offered by our products (e.g., non-toxic,
non-caustic, and neutral to positive yield impact) are not sufficient to overcome the lower cost products offered by our competitors.
Manufacturing
Effective
June 9, 2019, we entered into a five-year manufacturing
supply agreement with Intercon Chemical Company (ICC) with a three-year renewal term option (the “Manufacturing Supply
Agreement”). The agreement consists of manufacturing, packaging, and distribution of PURE’s SDC-based products.
The Manufacturing Supply Agreement provides:
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ICC
licenses PURE’s patents and technology know-how for the non-exclusive manufacture
of PURE’s SDC-based products.
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●
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ICC
will invest in plant improvements to allow for expanded SDC production.
|
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●
|
ICC’s
R&D team will collaborate on SDC product line development.
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The
Manufacturing Supply Agreement may be terminated by mutual written consent, or by either party upon the material breach of the
terms of the agreement by the other party.
Silver
is the primary active ingredient in SDC and is a readily available commodity. The other active and inactive ingredients in our
products are readily available from multiple sources.
Government
Regulation
Our
business is subject to various government regulations relating to the protection of public health and the environment. Among these
are laws that regulate the manufacture, storage, distribution and labeling of our products, as well as the use, handling, storage
and disposal of certain materials in the manufacturing of our products.
Regulation
in the United States
Certain
environmental and regulatory matters significant to us are discussed below.
Requirements
Imposed by the EPA and Similar State Agencies
We
manufacture and sell in the U.S. certain disinfecting products that kill or reduce microorganisms (bacteria, viruses, fungi).
The manufacture, labeling, handling and use of these products are regulated by the EPA under the Federal Insecticide, Fungicide,
and Rodenticide Act, or FIFRA. We currently sell three products registered by the EPA under FIFRA, certain of which are approved
for use on food contact surfaces and others of which are approved for use on non-food contact hard surfaces. EPA product registration
requires meeting certain efficacy, toxicity and labeling requirements and paying ongoing registration fees.
Although
states do not generally impose substantive requirements different from those of the EPA, each state in which our products are
sold requires registration and payment of a fee. California and certain other states have adopted additional regulatory programs
applicable to these types of products that, in some cases, impose a fee on total product sales in the state.
Based
on our experience and our knowledge of current trends, we expect the costs and delays in receiving necessary federal and state
approvals for these types of products may increase in the coming years.
Requirements
Imposed by the FDA and USDA
The
FDA’s Food Contact Notification (“FCN”) Program is intended to ensure the safety of Food Contact Substances
(FCS) used in food processing and packaging.
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●
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The
FCN review period is 120 days from filing, after which, if there are no concerns from the FDA, the FCN automatically becomes
effective.
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●
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An
FCN is considered to be proprietary as it applies only to the specific product and manufacturer or supplier identified in
the FCN.
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In
addition to the FDA’s FCN Program, the Company will be required to obtain USDA approval for the use of PURE Control on meat
or dairy products.
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●
|
Upon
the FDA’s granting of an FCN on a meat or dairy product, PURE will be required to submit the FCN to the Food Safety
and Inspection Service (FSIS) of the USDA for a new technology review.
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●
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As
part of the FSIS review process, PURE may be required to conduct up to three in-plant process validation and optimization
trials with the authorization of the USDA.
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After
successful completion of the in-plant validation trials, the USDA will issue a “Letter of No Objection” and list
the Company’s SDC-based product as an OLR processing aid in Attachment 1 of FSIS Directive 7120.1, Safe and Suitable
Ingredients Used in the Production of Meat and Poultry Products.
|
Requirements
Imposed by Ingredient Legislation
Numerous
federal, state and local laws regulate the sale of products containing certain identified ingredients that may impact human health
and the environment. For instance, California has enacted Proposition 65, which requires the disclosure of specified listed ingredient
chemicals on the labels of products. Although none of the ingredients in our current products is reportable under Proposition
65, this and other similar legislation may become more comprehensive in the future and/or new products we may develop could be
subject to these regulations.
Requirements
Imposed by Other Environmental Laws
A
number of federal, state and local environmental, health and safety laws govern the use, handling, storage and disposal of certain
materials. Our current manufacturing process for SDC-based products is a “zero waste” process, meaning that no byproducts
are created, and we do not use hazardous materials, as defined by applicable environmental laws, in the manufacturing of these
products. As such, some of these U.S. environmental laws are not generally applicable to us in their current form. However, these
laws may in the future identify as hazardous materials certain materials that we use in our manufacturing processes, or we may
opt to or be forced to change our manufacturing procedures in a way that subjects our products or operations to these laws.
Requirements
Imposed by the FDA and USDA
Various
laws and regulations have been enacted by federal, state, local and foreign jurisdictions regulating certain products we anticipate
manufacturing and selling for controlling microbial growth in or on foods. In the United States, these requirements generally
are administered by the FDA. However, the U.S. Department of Agriculture and EPA also may share in regulatory jurisdiction of
antimicrobials applied directly to food as it pertains to poultry and meats.
Regulation
Outside the United States
The
commercialization of SDC-based products in countries other than the U.S. may require that we, or companies with whom we partner
for such foreign commercialization, obtain necessary approvals from foreign regulatory authorities comparable to the EPA and USDA,
among others. Applicable approval processes and ongoing requirements vary from country to country and may involve more time and
expense than that required to obtain approvals in the U.S. In international markets, we currently sell our products under active
registrations held by us, or by our distributors. We intend to continue to process registrations ourselves or through distributors
as required.
We
currently hold a registration from Health Canada for our disinfectant product. Other third-party distributors hold registrations
in China and are actively pursuing registrations for our disinfectant products in various Asian markets. Additionally, an opinion
has been granted under the Scientific Committee on Consumer Products to sell SDC in the European Union for use in cosmetics, which
includes personal care products.
Employees
As
of October XX, 2019, we employed 10 full-time and 1 part-time employee. We believe that we have been successful in attracting
skilled and experienced personnel, but competition for personnel is intense and there can be no assurance that we will be able
to attract and retain qualified personnel in the future. None of our employees are covered by collective bargaining agreements
and we consider relations with our employees to be good.
Company
Information
We
were incorporated in the state of California in August 1992 as Innovative Medical Services. In September 2003, we changed our
name to PURE Bioscience. In March 2011, we reincorporated in the state of Delaware under the name “PURE Bioscience, Inc.”
Our
corporate offices are located at 9669 Hermosa Avenue, Rancho Cucamonga, California 91730. Our telephone number is (619) 596-8600.
Our website address is www.purebio.com. We make available free of charge on our website our periodic and current reports, proxy
statements and other information as soon as reasonably practicable after such reports are filed with the Securities and Exchange
Commission, or SEC. Information contained on, or accessible through, our website is not part of this report or our other filings
with the SEC. Our SEC filings are also available to the public from the SEC’s website at www.sec.gov.
Item
1A. Risk Factors
You
should carefully consider the following information about risks and uncertainties that may affect us or our business, together
with the other information appearing elsewhere in this Annual Report on Form 10-K, including our consolidated financial statements
and the related notes thereto. If any of the following events, described as risks, actually occur, either alone or taken together,
our business, financial condition, results of operations and future growth prospects would likely be materially and adversely
affected. In these circumstances, the market price of our common stock could decline, and you may lose all or part of your investment
in our securities. An investment in our securities is speculative and involves a high degree of risk. You should not invest in
our securities if you cannot bear the economic risk of your investment for an indefinite period of time and cannot afford to lose
your entire investment. There may be additional risks that we do not presently know of or that we currently believe are immaterial
which could also impair our business and financial position.
Risks
Related to Our Business and Industry
As
a result of our historical lack of financial liquidity, we do not currently have sufficient working capital to fund our planned
operations and may not be able to continue as a going concern.
We
have a history of recurring losses, and as of July 31, 2019, we have incurred a cumulative net loss of approximately $124 million.
As of July 31, 2019, we had $398,000 in cash and cash equivalents and $553,000 in accounts payable.
On
October 2, 2019, we entered into and completed a closing of a private placement financing to accredited investors. We raised net
proceeds of $830,000 in the closing of an aggregate of 2,862,068 shares of the Company’s common stock at a purchase price
of $0.29 per share. Tom Y. Lee and Dale Okuno, each of whom are accredited investors and members of the Company’s Board
of Directors invested $290,000 and $250,000, respectively, in the private placement financing. Mr. Lee also serves as the Company’s
President and Chief Executive Officer.
During
year ended July 31, 2019, our cash outflows for operating activities and for investments in patents and fixed assets were $3.0
million. As a result, our existing cash resources are not sufficient to meet our anticipated needs over the next twelve months
from the date hereof, and we will need to raise additional capital to continue our operations and to implement our business plan,
which capital may not be available on acceptable terms or at all. To help extend our operating window, we have reduced our headcount
and limited our research and product development activities. Based on our current plans and available resources, we believe we
can maintain our current operations through the end of January 2020. We estimate that the costs to wind-down our operations in
an orderly manner will cost approximately $500,000. As a result, we need to secure significant additional capital to continue
to fund our operations beyond January 2020.
Our
capital requirements will depend on many factors, including, among others:
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the
market acceptance of, and demand for, our products;
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the
timing and costs of executing our sales and marketing strategies;
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our
ability to successfully complete the in-plant validation trials requested by potential customers and our ability to convert
these trials into customer orders for our products;
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the
costs and time required to obtain the necessary regulatory approvals for our products, including the required USDA approval
for use of PURE Control in OLR processing of raw poultry;
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the
extent to which we invest in new testing and product development, including in-plant optimization trials;
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the
extent to which our customers continue to place product orders as expected and expand their existing use of our products;
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the
cost and time to satisfy unique customer requirements regarding validation trials or to support the value proposition and
benefits of our products;
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the
timing of vendor payments and the collection of receivables, among other factors affecting our working capital;
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our
ability to control the timing and amount of our operating expenses, including the costs to attract and retain personnel with
the skills required to implement our business plan; and
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the
costs to file, prosecute and defend our intellectual property rights.
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The
above factors, along with our history and near term forecast of incurring net losses and negative operating cash flows, raise
substantial doubt about our ability to continue as a going concern.
If
we do not obtain additional capital from external sources, we will not have sufficient working capital to fund our planned operations
and research and development and other activites or be able to continue as a going concern. Further, if we further reduce
our expenses and capital expenditures, we may not be able to effectively execute our business plan We cannot assure you that additional
financing will be available when needed or that, if available, we can obtain financing 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
have a history of losses, and we may not achieve or maintain profitability.
We
had a loss of $6.6 million for the fiscal year ended July 31, 2019, and a loss of $7.4 million for the fiscal year ended July
31, 2018. As of July 31, 2018, we have incurred a cumulative net loss of approximately $124 million. Although we believe we are
making progress on implementing our business plan focused on the food safety market, we expect to continue to have losses in future
periods. None of our existing agreements, including those with Subway and Chipotle, contain provisions that guarantee us any minimum
revenues. If the penetration into the marketplace of PURE Hard Surface, PURE Control and our other SDC-based products is unsuccessful,
our revenue growth is slower than anticipated or our operating expenses exceed expectations, it may take an unforeseen period
of time to achieve or maintain profitability, and we may never achieve or maintain profitability. Slower than anticipated revenue
growth could force us to reduce our sales and marketing efforts, our product testing and optimization, and our product development
and regulatory initiatives, and/or force us to reduce the size and scope of our operations, to sell or license our technologies
to third parties, or to cease operations altogether. Given our recent introduction of our SDC-based products in the food safety
market, we are unable to predict the extent of our future losses or when we will generate sufficient revenues to become profitable,
and it is possible we will never become profitable. Even if we do achieve profitability, we may not be able to sustain or increase
profitability on an ongoing basis.
Raising
additional funds by issuing securities or through collaboration and licensing arrangements may cause dilution to existing stockholders,
restrict our operations or require us to relinquish proprietary rights.
We
will need to increase our liquidity and capital resources in future periods. We have a history of raising funds through offerings
of our common stock and warrants to purchase shares of our common stock, and we may in the future raise additional funds through
public or private equity offerings, debt financings or corporate collaborations and licensing arrangements. To the extent that
we raise additional capital by issuing equity securities, our stockholders’ ownership will be diluted. Additionally, any
debt financing we obtain may involve covenants that restrict our operations. These restrictive covenants may include, among other
things, limitations on borrowing, specific restrictions on the use of our assets, as well as prohibitions on our ability to create
liens on our assets, pay dividends on or redeem our capital stock or make investments. In addition, if we raise funds through
collaboration and licensing arrangements, it may be necessary to grant licenses on terms that are not favorable to us or relinquish
potentially valuable rights to our products or proprietary technologies. We may be required in future collaborations to relinquish
all or a portion of our sales and marketing rights with respect to our products or license intellectual property that enable licensees
to develop competing products in order to complete any such transaction.
As
of October 24, 2019, we have 86,712,161 shares of common stock issued and outstanding or reserved for issuance under equity compensation
plans, vested and unvested options, warrants, and unvested restricted stock units. Our current authorized capital stock is limited
to 100,000,000 shares of common stock and 5,000,000 shares of preferred stock. Any increase in our authorized capital stock would
require the approval of a majority of our shareholders as well as the approval of our Board of Directors. If we were unable to
increase our authorized capital stock for any reason, our ability to raise additional capital through the issuance of equity or
convertible debt would be severely compromised and we may be unable to obtain equity or convertible debt capital at all.
Because
we only recently focused our business on the food safety market, it is difficult to evaluate our prospects.
Our
success will depend on our ability to increase customer awareness and adoption of our food safety product offerings, PURE Hard
Surface and PURE Control. We only began focusing our business on developing and offering products that address food safety risks
across the food industry supply chain in August 2013. In addition, we only recently received the required FDA and USDA approvals
to market PURE Control as a direct food contact processing aid for fresh produce and as a spray or dip applied to raw poultry
carcasses, parts and organs in pre-OLR (on-line reprocessing) and post chill processing. We are still pursuing the required USDA
approval for use of PURE Control in OLR processing of raw poultry. Further, we are currently working on completing in-plant validation
trials to test the effectiveness of PURE Control in actual in-plant use and to optimize the application of PURE Control for poultry
processing. Due to the recent introduction of our food safety products and the importance of food safety to our customers, the
sales cycle to secure new customers is long and unpredictable. We have encountered and likely will continue to encounter risks
and difficulties associated with introducing or establishing new commercial products in this highly competitive and rapidly evolving
market. These risks include the following, among others:
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we
may not be successful in demonstrating the effectiveness of PURE Control in actual in-plant use situations or satisfy the
requirements of our potential customers;
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we
may not be successful in converting in-plant trials into customer product orders;
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our
SDC-based product offerings (especially at higher silver-ion concentrations) are typically more expensive to produce than
existing treatment chemicals, and as a result, customers may not purchase our products for cost reasons, even if we are successful
in demonstrating the superior efficacy or other benefits of our products;
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our
customers may not continue to place product orders as expected or may not expand their use of our products;
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we
may not be successful in demonstrating the value proposition of our products, including its non-corrosive and non-toxic characteristics
and its neutral to positive processing yield impact;
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we
may not succeed in materially penetrating the food safety markets with our SDC products and technology;
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we
may not be successful in developing an effective sales and marketing infrastructure to commercialize our products;
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we
may not generate sufficient revenues or raise sufficient funds to support our operations or the implementation of our business
plan;
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we
may not be successful in controlling our operating expenses;
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we
may not be successful in obtaining any required regulatory approvals on a timely basis, or at all;
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we
may not attract and retain key sales and marketing, technical and management personnel;
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we
may not successfully comply with or maintain the regulatory approvals we obtain for our technology and products;
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we
may not succeed in locating strategic partners and licensees of our technology;
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we
may not effectively manage our anticipated growth, if any; and
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we
may not be able to adequately protect our intellectual property.
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Any
failure to successfully address these risks and uncertainties could seriously harm our business and prospects.
We
may not be able to correctly estimate our future revenues and operating expenses, which could lead to cash shortfalls, and require
us to secure additional financing sooner than planned.
We
may not correctly predict the amount or timing of future revenues and our operating expenses may fluctuate significantly in the
future as a result of a variety of factors, many of which are outside of our control. These factors include:
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our
expectations regarding revenues from sales of our products;
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the
time and resources required to complete in-plant validation and optimization trials;
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the
time and cost of obtaining any necessary regulatory approvals;
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the
cost and time to develop and obtain regulatory approvals for additional products as part of our long-term business plan;
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the
cost and time required to create effective sales and marketing capabilities and commercialization strategies;
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the
expenses we incur to maintain and improve our platform technology;
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the
cost and time to satisfy unique customer requirements regarding validation and optimization trails;
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the
costs to attract and retain personnel with the skills required for effective operations; and
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the
costs of preparing, filing, prosecuting, defending and enforcing patent claims and other patent related costs, including litigation
costs and the results of such litigation.
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In
addition, our budgeted expense levels are based in part on our expectations concerning future revenues from sales of our products
and services, and from collaborations with third parties. However, we may not correctly predict the amount or timing of future
revenues. In addition, we may not be able to adjust our operations in a timely manner to compensate for any unexpected shortfall
in our revenues or we may increase our expenses as part of implementing our long-term business plan. As a result, a significant
shortfall in our planned revenues or a significant increase in our planned expenses could have an immediate and material adverse
effect on our business and financial condition. In such case, we may be required to issue additional equity or debt securities
or enter into other commercial arrangements, including relationships with corporate and other partners, sooner than anticipated
to secure the additional financial resources to support our development efforts and future operations.
Our
quarterly operating results may vary, which could negatively affect the market price of our common stock.
Because
of our limited operating history and the early commercial stage of our SDC-based products in the food safety market, we have limited
insight into trends that may emerge and affect our business. Forecasting future revenues is difficult, especially because our
products are novel, and market acceptance of our products is reliant on our customers’ confidence, based on scientific data
and actual in-plant trials, that our product can improve their food safety efforts. Because food safety is such a critical factor
to our customers and potential customers, we often experience long sales cycles and our customers often require extensive evaluation
and in-plant trial periods before agreeing to use our products throughout their systems. In addition, fluctuations in the buying
patterns of our current or potential customers could significantly affect the level of our sales on a period to period basis.
Additional factors that could cause our financial results to fluctuate unexpectedly, include: the mix of product sales, the cost
of product sales, our ability to meet customer demand, delays in achieving our regulatory milestones, changes in our operating
expenses, including non-cash expenses such as the fair value of stock options granted to our employees, and manufacturing or supply
issues. As a result, our quarterly operating results may vary, which could negatively affect the market price of our common stock.
If
we are unable to obtain the required regulatory approvals from the FDA and USDA, or if such efforts are delayed, our ability to
commercialize PURE Control as a direct food contact processing aid will be harmed and our business and operating results will
suffer.
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. No additional approval from the USDA is required for fresh produce. In July 2016,
we received a “No Objection Letter” from the USDA’s Food Safety and Inspection Service (FSIS) granting approval
for SDC-based PURE Control to be used as a spray or dip applied to poultry carcasses, parts and organs in pre-OLR (on-line reprocessing)
and post chill processing of fresh poultry. In January 2017, we submitted an additional FCN to the FDA to allow use of higher
SDC concentrations in poultry processing, allowing the flexibility to adjust to varying plant and processing conditions. In May
2017, we received a Final Letter from the FDA for this FCN as well as a “No Objection Letter” from the USDA’s
Food Safety and Inspection Service (FSIS) granting approval for the higher concentrations of SDC-based PURE Control to be used
as a spray or dip applied to poultry carcasses, parts and organs in pre-OLR (on-line reprocessing) and post chill processing of
fresh poultry. We have not, however, received the required approval from the USDA to utilize PURE Control in OLR poultry processing.
We are continuing to optimize the application of PURE Control, including with higher concentrations of SDC, in OLR to attempt
to gain USDA approval for use in that stage of poultry processing, but there is no assurance that we will obtain such approval
on a timely basis, or at all. Further, even if we elect to seek regulatory approval, there is no assurance we will be successful
in obtaining the required approvals from the FDA and USDA to utilize PURE Control as a direct food contact processing aid for
raw meats, including beef and pork. If we are unable to obtain the required regulatory approvals from the FDA and USDA, or if
such efforts are delayed, our ability to commercialize PURE Control as a direct food contact processing aid for poultry and as
a direct food contact processing aid for raw meets will be restricted and our business and operating results will suffer.
A
loss of one or more of our key customers could adversely affect our business.
From
time to time, one or a small number of our customers may represent a significant percentage of our revenue. Our three largest
customers accounted for 36% of our net product sales for the fiscal year ended July 31, 2019. Our three largest customers accounted
for 15%, 11% and 11% of net product sales, respectively. No other individual customer accounted for 10% or more of our
net product sales. Although we have agreements with many of our customers, these agreements typically do not prohibit customers
from purchasing products and services from competitors or contain minimum purchase obligations. A decision by any of our major
customers to significantly reduce the amount of product ordered or license fees paid, or their failure or inability to pay amounts
owed to us in a timely manner, or at all, could have a significant adverse effect on our business.
We
are dependent on our core SDC technology and if our efforts to achieve or maintain market acceptance of our core SDC technology
are not successful, we are unlikely to attain profitability.
We
have and are currently focusing substantially all of our time and financial resources in the development and commercialization
of our core SDC technology to address food safety risks across the food industry supply chain. Although our SDC technology has
applications in multiple industries, we expect that sales of SDC and SDC-based products as a food safety solution will constitute
a substantial portion, or all, of our revenues in future periods. We are marketing our SDC-based products to restaurant chains,
food manufacturers, food processors and food transportation companies. Our SDC-based products have not yet been broadly accepted
into the food safety market, and may never be broadly accepted. Any material decrease or significant delay in the overall level
of sales or expected sales of, or the prices for, our SDC-based products, whether as a result of competition, delays in obtaining
regulatory approvals, long sales cycles, change in customer demands or requirements, or any other factor, would have a materially
adverse effect on our business, financial condition and results of operations. In addition, even if our products achieve market
acceptance, we may not be able to maintain product sales or other forms of revenue over time if new products or technologies are
introduced by competitors that are more favorably received than our products, are more cost-effective or otherwise render our
products less attractive or obsolete.
We
are subject to intense competition in the food safety market.
Our
SDC-based products compete in the highly competitive food safety market. Our SDC-based product offerings (especially at higher
silver ion concentration levels) are typically more expensive to produce than existing treatment chemicals, and as a result, customers
may not purchase our products for cost reasons, even if we are successful in demonstrating the superior efficacy of our products.
In addition, customers may determine that the other benefits offered by our products (e.g., non-toxic, non-caustic, and neutral
to positive yield impact) are not sufficient to overcome the lower cost products offered by our competitors. Further, most of
our competitors have been in business for a longer period of time than we have, and offer a greater number of products and services
than we do and have greater financial, technical, sales and other resources than we do. Many of our competitors already have well
established brands and distribution capabilities, and in some cases are able to leverage the sale of other products with more
favorable terms for products competing with our own. We also have significantly fewer sales personnel than virtually all of our
competitors. Furthermore, recent trends in this industry are for large food safety companies to consolidate into a smaller number
of very large entities, which further concentrates financial, technical and market strength and increases competitive pressure
in the industry. If we directly compete with these very large entities for the same markets and/or products, their financial strength
could prevent or delay us from capturing a meaningful share the food safety market. It is also possible that developments by our
competitors will make our technologies or products noncompetitive or obsolete. Our ability to compete will depend upon our ability,
and the ability of our distributors and other partners, to develop brand recognition, develop the scientific and plant trial data
to demonstrate the efficacy of our products, and to displace existing, established and future products in our relevant target
markets. We, or our distributors and partners, may not be successful in doing so, which would have a materially adverse effect
on our business, financial condition and results of operations.
We
have limited sales, marketing and product distribution experience.
We
have limited experience in the sales, marketing and distribution of our products in the food safety market. We began to focus
on the food safety market in August 2013. We received the required FDA approvals to market PURE Control as a direct food contact
processing aid for fresh produce in January 2016. We received the required USDA and FDA approvals to market PURE Control for use
as a spray or dip applied to poultry carcasses, parts and organs in pre-OLR (on-line reprocessing) and post chill processing of
fresh poultry in July 2016 and May 2017, respectively We have not, however, received the required approval from the USDA to utilize
PURE Control in OLR poultry processing, and there is no assurance we will receive USDA approval, which limits our ability to market
PURE Control for poultry processing. As a result, our sales and marketing experience with these products are limited, and our
current sales, distribution and marketing strategies and programs may not be successful. Further, due to the recent introduction
of our food safety products and the importance of food safety to our customers, the sales cycle to secure a new customer is long
and unpredictable. Potential customers typically require that we complete extensive in-plant validation studies with our products.
We may not be successful in demonstrating the effectiveness of PURE Control in actual in-plant use situations or satisfy the requirements
of our potential customers. Moreover, we may not be successful in converting in-plant trials into customer product orders. We
also have a relatively small sales and marketing organization and a limited number of distributors. We may not be able to establish
the sales, marketing, and distribution capabilities necessary to build our business and generate sufficient revenues to support
our operations and the implementation of our business plan.
We
are dependent on a third-party, over whom we have limited control, to manufacture our SDC-based products.
On
June 9, 2019, we entered into a five-year strategic collaboration agreement with St. Louis-based Intercon Chemical Company
(“ICC”) where we granted ICC the right to be the exclusive manufacture for all our SDC-based products. We do not have
any manufacturing facilities ourselves and we currently rely on ICC to manufacture our SDC-based products and may in the future
rely on one or more third-party manufacturers to properly manufacture our products. We may not be able to quickly replace our
manufacturing capacity if ICC is unable to manufacturer our products as a result of a fire, natural disaster (including an earthquake),
equipment failure or other difficulty, or if such ICC facilities are deemed not in compliance with current “good manufacturing
practices,” and the noncompliance could not be rapidly rectified. ICC is our single manufacturer for our SDC-based products
and may not be replaced without significant effort and delay in production. A supply interruption or an increase in demand beyond
our current manufacturer’s capabilities could harm our ability to manufacturer such products until new manufacturers are
identified and qualified, which would have a significant adverse effect on our business and results. Any third-party manufacturer
that we find may not match our quality standards or be able to meet customer requirements.
Additionally,
our inability or reduced capacity to have our products manufactured would prevent us from successfully evaluating or commercializing
our proposed products. Our dependence upon third parties for the manufacture of our products may adversely affect our profit margins
and our ability to develop and deliver proposed products on a timely and competitive basis.
We
rely on third parties to develop SDC-based products, and they may not do so successfully or diligently.
We
have granted ICC and other third parties to whom we license rights to our technology certain distribution and development rights
to products containing SDC for applications and markets outside the U.S. food safety market. Our reliance on ICC and other third
parties for development and distribution activities reduces our control over these activities. In such arrangements, we have relied,
and expect in the future to rely, on the third party to fund and direct product development activities and appropriate regulatory
filings. Any of these third parties may not be able to successfully develop such SDC-based products due to, among other factors,
a lack of capital, a lack of appropriate diligence, insufficient devotion to sales efforts, a change in the evaluation by the
third party of the market potential for SDC-based products, technical failures, and poorer than expected results from testing
or trial use of any products that may be developed. If the third parties on which we rely are not successful in such development
activities, our business and operating results would be adversely affected.
Pricing
and supply issues may have a material impact on our margins and our ability to supply our customers.
All
of the supply ingredients used to manufacture our SDC-based products are available from multiple suppliers. However, commodity
prices for some ingredients can vary significantly and the margins that we are able to generate could decline if prices rise.
For example, both silver and citric acid prices have been volatile in recent periods.
In
addition to such commodities, we also rely on producers of specialized packaging inputs such as bottles and labels for finished
products. Due to their specialized nature, the supply of such inputs can be periodically constrained and result in additional
costs to obtain these items, which may in turn inhibit our ability to supply products to our customers.
We
are generally unable to increase our product prices to our customers, partners and distributors quickly in order to maintain our
margins, and significant price increases for key inputs could therefore have an adverse effect on our results of operations. Price
increases can also result in lost sales, and any inability to supply our customers’ orders can lead to lost future sales
to such customers.
We
expect ICC to be the sole source supplier of our SDC concentrate and we may use other third parties to blend, package and provide
fulfillment activities for our finished products in future periods. We expect that our margins may be reduced by using ICC and
other such third parties, and our ability to maintain product quality may not be as extensive or effective as when we produce
these products in our own facility(ies). Any quality control issues could lead to product recalls and/or the loss of future sales,
which would reduce our revenues and/or profits.
If
we are not able to manage any growth we achieve effectively, our business and operating results will be harmed.
In
order to implement our business plan and achieve and maintain market acceptance of our SDC-based products, we will need to expand
our business operations and hire additional sales and support personnel. We may not have sufficient resources to do so. If we
hire additional personnel and invest in additional infrastructure, we may not be effective in expanding our operations and our
systems, procedures or controls may not be adequate to support any such expansion. Failure to properly manage our growth could
have a material adverse effect on our business and our operating results.
The
industries in which we operate are heavily regulated.
We
are focused on the marketing and continued development of our SDC antimicrobial technology for use in the food safety market.
Our existing products, PURE Control and PURE Hard Surface, and any additional products we develop based on our SDC technology
in future periods, require or will require approval by government agencies prior to marketing or sale in the U.S. or in foreign
markets. Complying with applicable government regulations and obtaining necessary regulatory approvals can be, and has historically
been, time consuming and expensive, due in part, we believe, to the novel nature of our technology. Regulatory review could involve
delays or other actions adversely affecting the development, manufacture, marketing and sale of our products. While we cannot
accurately predict the outcome of any pending or future regulatory review processes or the extent or impact of any future changes
to legislation or regulations affecting review processes, we expect such processes to remain time consuming and expensive as we,
or our partners, apply for approval to make new or additional efficacy claims for current products or to market new product formulations.
Obtaining approvals for new SDC-based products in the U.S., or in markets outside the U.S., could take several years, or may never
be accomplished.
SDC
is a platform technology rather than a single use applied technology. As such, products developed from the platform may fall under
the jurisdiction of multiple U.S. and international regulatory agencies. Our disinfectant and sanitizer products are regulated
in the U.S. by the EPA. In addition to the EPA, each of the 50 states in the U.S. has its own government agencies that regulate
the sale or shipment of our products into their state. We have obtained registration for these products from the EPA and all states
into which such products are currently marketed and sold. We are required to meet certain efficacy, toxicity and labeling requirements
and pay ongoing fees in order to maintain such registrations. We may not be able to maintain these registrations in the future,
which may eliminate our continued ability to market and sell our products in some or all parts of the U.S. We also may not be
able to obtain necessary registrations with the EPA and applicable states for other SDC disinfectant and sanitizer products that
we or our partners may develop, which would limit our ability to sell any such products in the future.
Some
potential applications of SDC, such as those aimed at healthcare, veterinary and certain food preparation markets, may require
approval of other government agencies prior to marketing or sale in the U.S. or in foreign markets, such as the U.S. Food and
Drug Administration, or FDA, or the United States Department of Agriculture, or USDA. Obtaining FDA and/or USDA approval is a
complicated and expensive process and such approvals may never be obtained for any SDC products. If FDA and/or USDA approvals
are obtained, the approvals may limit the uses for which SDC products may be marketed such that they may not be profitable to
us, and the applicable products would be subject to pervasive and continuing regulation by the FDA and/or USDA that could lead
to withdrawal or limitation of any product approvals.
For
example, in November 2014, we withdrew, without prejudice, our FCN for raw poultry due to receipt of a Deficiency Letter from
the FDA stating that the agency has developed new data that is currently under review, which data calls into question the long
established safety levels of the dietary intake of silver in the U.S. from food contact uses previously approved by the FDA. As
a result, the FDA indicated that it would not approve our FCN absent new data or additional information that adequately addresses
its new toxicity concerns. We also received a similar Deficiency Letter from the FDA for the FCN we submitted in October 2014
for the use of SDC to reduce Salmonella, E. coli and Listeria in the processing of produce. In January 2015, we withdrew, without
prejudice, our produce FCN and postponed the filing of our FCN for the use of SDC as a processing aid for beef and pork. We resubmitted
our poultry FCN in June 2015. In September 2015, we received an Acknowledgement Letter from the FDA stating that our FCN for SDC
as a raw poultry processing aid is complete and setting an effective date of December 2015. Following the completion of additional
testing demonstrating further reduction of silver residues to levels approaching non-detectable, and subsequent encouraging discussions
held with the FDA, we resubmitted our produce FCN in September 2015. 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. In January 2017, we submitted an additional FCN to the FDA to allow
use of higher SDC concentrations in poultry processing, allowing the flexibility to adjust to varying plant and processing conditions.
In May 2017, we received a Final Letter from the FDA for this FCN as well as a “No Objection Letter” from the USDA’s
Food Safety and Inspection Service (FSIS) granting approval for the higher concentrations of SDC-based PURE Control to be used
as a spray or dip applied to poultry carcasses, parts and organs in pre-OLR (on-line reprocessing) and post chill processing of
fresh poultry. We have not, however, received the required approval from the USDA to utilize PURE Control in OLR poultry processing.
We are continuing to optimize the application of PURE Control, including with higher concentrations of SDC, in OLR to attempt
to gain USDA approval for use in that stage of poultry processing, but there is no assurance that we will obtain such approval
on a timely basis, or at all. Further, even if we elect to seek regulatory approval, there is no assurance we will be successful
in obtaining the required approvals from the FDA and USDA to utilize PURE Control as a direct food contact processing aid for
raw meats, including beef and pork. If we are unable to obtain the required regulatory approvals from the FDA and USDA, or if
such efforts are delayed, our ability to commercialize PURE Control as a direct food contact processing aid for poultry and as
a direct food contact processing aid for raw meets will be restricted and our business and operating results will suffer.
We
intend to fund and manage certain of our EPA-regulated product development internally, in conjunction with engaging regulatory
consultants and partnering with other third parties. We have partnered, or intend to partner, with third parties who are seeking,
or intend to seek, approvals to market SDC-based products in markets outside the U.S., and with other third parties who are developing
FDA-regulated SDC-based products who, upon such development, would seek FDA approvals of such products. Our ability to market
and sell our products is dependent on our and our partners’ ability to obtain and maintain required registrations and approvals
of applicable regulatory agencies. Failure by our partners or us to comply with applicable regulations could result in fines or
the withdrawal of approval for us or our partners and distributors to market our products in some or all jurisdictions or for
certain indications, which could cause us to be unable to successfully commercialize SDC or otherwise achieve revenues from sales
of such products.
We
are subject to substantial regulation related to quality standards applicable to our manufacturing and quality processes, and
our partners, including our third-party manufacturer, failure to comply with applicable quality standards could affect our ability
to commercialize SDC products.
The
EPA and other applicable U.S. and foreign government agencies regulate our and our partners’ systems and processes, including
those of ICC, for manufacturing SDC-based products. These regulations require that we and our partners observe “good manufacturing
practices” in order to ensure product quality, safety and effectiveness. Failure by us or our partners to comply with current
or future government regulations and quality assurance guidelines could lead to temporary manufacturing shutdowns, product recalls
or related field actions, product shortages, and/or delays in product manufacturing, any or all of which could cause significant
cost to us. Further, efficacy or safety concerns and/or manufacturing quality issues with respect to our products or those of
our partners could lead to product recalls, fines, withdrawal of approvals, and/or declining sales, any or all of which could
result in our failure to successfully commercialize SDC or otherwise achieve revenue growth.
If
we suffer negative publicity concerning the safety or efficacy of our products, our sales may be harmed.
If
concerns should arise about the safety or efficacy of any of our products that are marketed, regardless of whether or not such
concerns have a basis in generally accepted science or peer-reviewed scientific research, such concerns could adversely affect
the market for those products. Similarly, negative publicity could result in an increased number of product liability claims,
whether or not those claims are supported by applicable law.
Third
parties may claim that we infringe their proprietary rights and may prevent us from manufacturing and selling some of our products.
Our
manufacture, use and sale of SDC-based products may subject us to lawsuits relating to the validity and infringement of patents
or other proprietary rights of third parties. Litigation may be costly and time-consuming, and could divert the attention of our
management and technical personnel. If we are found to have violated the trademark, trade secret, copyright, patent or other intellectual
property or proprietary rights of others, such a finding could result in the need to cease use of a trademark, trade secret, copyrighted
work or patented invention in our business and our obligation to pay a substantial amount for past infringement. If the rights
holders are willing to permit us to continue to use their intellectual property rights, it may be necessary for us to enter into
license arrangements with unfavorable terms and pay substantial amounts in royalty and other license fees. Either having to cease
use or pay such fees could prevent us, or our third-party manufacturer, from manufacturing and selling our products, which could
make us much less competitive in our industry and have a material adverse impact on our business, operating results and financial
condition.
We
may become subject to product liability claims.
As
a business that manufactures and markets products for use by consumers and institutions, we may become liable for any damage caused
by our products, whether used in the manner intended or not, including potentially damage to our customers’ businesses.
Regardless of merit or potential outcome, product liability claims against us may result in, among other effects, the inability
to commercialize our products, impairment of our business reputation, and distraction of management’s attention from our
primary business. If we cannot successfully defend ourselves against product liability claims we could incur substantial liabilities.
Although we maintain general and product liability insurance, our insurance may not cover potential claims and may not be adequate
to indemnify for liabilities that may be imposed. Any imposition of liability that is not covered by insurance or is in excess
of insurance coverage could harm our business and operating results.
Litigation
or the actions of regulatory authorities may harm our business or otherwise distract our management.
Substantial,
complex or extended litigation could cause us to incur major expenditures and would distract our management. For example, lawsuits
against us or our officers or directors by employees, former employees, stockholders, partners, customers, or others, or actions
taken by regulatory authorities, could be very costly and substantially disrupt our business. Such lawsuits and actions are not
uncommon, and we may not be able to resolve such disputes or actions on terms favorable to us, and there may not be sufficient
capital resources available to defend such actions effectively, or at all.
Compliance
with the reporting requirements of federal securities laws can be expensive.
We
are a public reporting company in the United States, and accordingly, subject to the information and reporting requirements of
the Exchange Act and other federal securities laws, including the compliance obligations of the Sarbanes-Oxley Act. The costs
of complying with the reporting requirements of the federal securities laws, including preparing and filing annual and quarterly
reports and other information with the SEC and furnishing audited reports to stockholders, can be substantial.
If
we fail to maintain an effective system of internal controls, we may not be able to accurately determine our financial results
or prevent fraud. As a result, the Company’s stockholders could lose confidence in our financial results, which could harm
our business and the value of the Company’s common shares.
Effective
internal controls are necessary for us to provide reliable financial reports and effectively prevent fraud. Section 404 of the
Sarbanes-Oxley Act of 2002 requires us to evaluate and report on our internal controls over financial reporting. Our internal
controls and financial reporting are not subject to attestation by our independent registered public accounting firm pursuant
to the exemption provided to issuers that are not “large accelerated filers” or “accelerated filers” under
the Dodd-Frank Act of 2010. We cannot be certain that we will be successful in maintaining adequate internal controls over our
financial reporting and financial processes in the future. We may in the future discover areas of our internal controls that need
improvement. Furthermore, to the extent our business grows, our internal controls may become more complex, and we would require
significantly more resources to ensure our internal controls remain effective. If we or our independent auditors discover a material
weakness, the disclosure of that fact, even if quickly remedied, could reduce the market value of the Company’s common stock.
Additionally, the existence of any material weakness or significant deficiency would require management to devote significant
time and incur significant expense to remediate any such material weaknesses or significant deficiencies and management may not
be able to remediate any such material weaknesses or significant deficiencies in a timely manner.
We
depend on key personnel for our continued operations and future success, and a loss of certain key personnel could significantly
hinder our ability to move forward with our business plan.
Our
success depends largely on the execution of our business strategy by our management team and the members of our Board of Directors.
Our Board and management will be evaluating how to best execute our near-term strategy to drive customer adoption in the food
industry by addressing food safety solutions across the supply chain in order to prevent or mitigate food contamination or the
potential for food-borne illness with specific customer focus in foodservice providers, food processors and food manufacturers.
Our directors, executive officers and key personnel could terminate their services with us at any time without notice and without
penalty. For example in August 2019, Mr. Lambert retired from the Board and his position as Chief Executive Officer and President.
Additionally, we do not maintain key person life insurance policies on our directors, executive officers or other employees.
The loss of one or more of our directors, executive officers or key employees could seriously harm our ability to execute on our
business strategy, which could harm our business, results of operations, financial condition, and/or the market price of our common
stock. We cannot assure you that in such an event we would be able to recruit qualified personnel able to replace these individuals
in a timely manner, or at all, on terms acceptable to either us or to any qualified candidate. Even if we were able to replace
any such individuals in a timely manner, if we are unable to effectively integrate new executive officers or key employees, our
operations and prospects could be harmed.
Because
competition for highly qualified sales and marketing and management personnel is intense, we may not be able to attract and retain
the employees we need to support our potential growth.
To
successfully meet our objectives, we must attract and retain highly qualified sales and marketing and management personnel with
specialized skill sets focused on the industries in which we compete, or intend to compete. Competition for qualified business
development and bioengineering personnel can be intense. Our ability to meet our business development objectives will depend in
part on our ability to recruit, train and retain top quality people with advanced skills who understand our technology and business.
In addition, it takes time for our new personnel to become productive and to learn our business. If we are unable to hire or retain
qualified personnel, it will be difficult for us to sell our products or to license our technology or to achieve or maintain regulatory
approvals, and we may experience a shortfall in revenue and not achieve our anticipated, or any, growth.
We
may engage in strategic transactions that could impact our liquidity, increase our expenses and present significant distractions
to our management.
From
time to time we may consider engaging in strategic transactions, such as acquisitions of companies, asset purchases and out-licensing
or in-licensing of products, product candidates or technologies. Any such transaction may require us to incur non-recurring or
other charges, may increase our near and long-term expenditures and may pose significant integration challenges or disrupt our
management or business, which could adversely affect our operations and financial results. For example, these transactions may
entail numerous operational and financial risks, including, among others, exposure to unknown liabilities, disruption of our business
and diversion of our management’s time and attention in order to develop acquired products, product candidates or technologies,
difficulty and cost in combining the operations and personnel of any acquired businesses with our operations and personnel, and
inability to retain key employees of any acquired businesses. Accordingly, although we may not choose to undertake or may not
be able to successfully complete any transactions of the nature described above, any transactions that we do undertake or complete
could have a material adverse effect on our business, results of operations, financial condition and prospects.
We
may invest or spend our cash in ways with which you may not agree or in ways which may not yield a significant return.
Our
management has considerable discretion in the use of our cash. Our cash may be used for purposes that do not increase our operating
results or market value. Until the cash is used, it may be placed in investments that do not produce significant income or that
may lose value. The failure of our management to invest or spend our cash effectively could result in unfavorable returns and
uncertainty about our prospects, each of which could cause the price of our common stock to decline.
We
may not be able to utilize all, or any, of our tax net operating loss carry-forwards and our future after-tax earnings, if any,
could be reduced.
At
July 31, 2019, we had federal and state tax net operating loss carry-forwards of approximately $108.3 million and $62.1 million,
respectively. Utilization of these net operating loss carry-forwards may be subject to a substantial annual limitation due to
ownership change limitations that may have occurred, including with respect to our recent private placements, or that could occur
in the future, as required by Section 382 of the Internal Revenue Code as well as similar state provisions. These ownership changes
may limit the amount of net operating loss carry-forwards that can be utilized annually to offset future taxable income and tax,
respectively. In general, an ownership change, as defined by Section 382 of the Internal Revenue Code, results from a transaction
or series of transactions over a three-year period resulting in an ownership change of more than 50 percentage points of the outstanding
stock of a company by certain stockholders or public groups. Since our formation, we have raised capital through the issuance
of capital stock on several occasions (both before and after our initial public offering in 1996) which, combined with the purchasing
stockholders’ subsequent disposition of those shares, may have resulted in such an ownership change, or could result in
an ownership change in the future based upon subsequent disposition. While we believe that we have not experienced an ownership
change, the pertinent tax rules related thereto are complex and subject to varying interpretations, and thus the applicable taxing
authorities may take an alternative position.
Our
current federal tax loss carry-forwards began to expire during the year ended July 31, 2019 and, unless previously utilized, will
completely expire in the year ending July 31, 2039. The balance of our current federal net operating loss carry-forwards will
expire between July 31, 2019 and July 31, 2039. Our state tax loss carry-forwards began to expire in the year ending July 31,
2018, and will completely expire in the year ending July 31, 2039. If we are unable to earn sufficient profits to utilize the
carry-forwards by these dates, they will no longer be available to offset future profits, if any.
We
are subject to tax audits by various tax authorities in multiple jurisdictions.
From
time to time we may be audited by tax authorities to whom we are subject. Any assessment resulting from such audits, if any, could
result in material changes to our past or future taxable income, tax payable or deferred tax assets, and could require us to pay
penalties and interest that could materially adversely affect our financial results.
Risks
Related to Our Intellectual Property
If
we are unable to obtain, maintain or defend the patent and other intellectual property rights relating to our technology, we or
our collaborators and distributors may not be able to develop and market proprietary products based on our technology, which would
have a material adverse impact on our results of operations.
We
rely and expect in the future to continue to rely on a combination of patent, trademark, trade secret and copyright protections,
as well as contractual restrictions, to protect the proprietary aspects of our technology and business.
Legal
protections of our intellectual property and proprietary rights afford only limited protection. For instance, we currently own
twelve U.S. patents related to our SDC technology. The lives of these patents, and any patents that we may obtain in the future,
are not indefinite, and the value to us of some or all of our patents may be limited by their terms. Further, although we have
a number of U.S. and international patent applications pending, some or all of those applications may not result in issued patents,
and the intellectual property claims therein would be unprotected. Additionally, obtaining and maintaining patent protection depends
on our compliance with various procedural, document submission, fee payment and other requirements imposed by government patent
agencies, and our patent protection could be reduced or eliminated for non-compliance with these requirements. Furthermore, the
patent positions of bioscience companies can be highly uncertain and often involve complex legal, scientific and factual questions,
and, therefore, we cannot predict with certainty whether we will be able to ultimately enforce our patents or other intellectual
property rights. Third parties may challenge, invalidate or circumvent our patents and patent applications relating to our products,
product candidates and technologies. In addition, our patent positions might not protect us against competitors with similar products
or technologies because competing products or technologies may not infringe our patents.
In
addition, to the extent that we operate internationally, the laws of foreign countries may not protect our proprietary rights
to the same extent as the laws of the U.S. Many countries have a “first-to-file” trademark registration system, which
may prevent us from registering or using our trademarks in certain countries if third parties have previously filed applications
to register or have registered the same or similar trademarks. Additionally, changes in the patent and/or trademark laws or interpretations
of such laws in the U.S. or other countries could diminish the value of our intellectual property rights. Moreover, our competitors
may develop competing technologies that are not covered by the claims of, and therefore do not infringe upon, our issued patents,
which could render our patents less valuable to us. If our proprietary rights cannot be, or are not sufficiently, protected by
patent and trademark registrations, it could have a material adverse impact on our business and our ability to commercialize or
license our technology and products.
Our
own efforts to protect our intellectual property and other proprietary rights may also be insufficient. Despite efforts to protect
our proprietary rights, including without limitation through confidentiality and other similar contractual restrictions, our means
of protecting such rights may not be adequate and unauthorized parties may attempt to copy aspects of our proprietary technology,
obtain and use information that we regard as proprietary, or otherwise misappropriate our intellectual property. In addition,
unpatented proprietary rights, including trade secrets and know-how, can be difficult to protect and may lose their value if they
are independently developed by a third party or if their secrecy is lost. It is possible that, despite our efforts, competitors
or others will create and use products, adopt service names similar to our service names or otherwise violate or misappropriate
our proprietary rights. The infringement of such rights could have a material negative impact on our business and on our results
of operations.
Litigation
may be necessary to enforce our intellectual property and other proprietary rights, which would be expensive and could consume
time and other resources. The result of any such litigation may be the court’s ruling that our patents or other intellectual
property rights are invalid and/or should not be enforced. Additionally, even if the validity of such rights is upheld, the court
could refuse to stop a third party’s infringing activity on the ground that such activities do not infringe our rights.
The U.S. Supreme Court has recently revised certain tests regarding granting patents and assessing the validity of patents to
make it more difficult to obtain patents. As a consequence, issued patents may be found to contain invalid claims according to
the newly revised standards. Some of our patents may be subject to challenge and subsequent invalidation or significant narrowing
of claim scope in a reexamination proceeding, or during litigation, under the revised criteria.
We
may incur substantial costs as a result of litigation or other proceedings relating to patent and other intellectual property
rights and we may be unable to protect our rights to, or use, our technology.
If
we choose to go to court to attempt to stop someone else from using the inventions claimed in our patents, that individual or
company has the right to ask the court to rule that our patents are invalid and/or should not be enforced against that third party.
These lawsuits are expensive and would consume time and other resources even if we were successful in stopping the infringement
of these patents. In addition, there is a risk that the court will decide that these patents are not valid and that we do not
have the right to stop the other party from using the inventions. There is also the risk that, even if the validity of these patents
is upheld, the court will refuse to stop the other party on the ground that such other party’s activities do not infringe
our rights to these patents.
Furthermore,
a third party may claim that we are using inventions covered by the third party’s patent rights and may file an injunction
to stop us from engaging in our normal operations and activities, including making or selling our products. These lawsuits are
costly and could affect our results of operations and divert the attention of managerial and technical personnel. There is a risk
that a court would decide that we are infringing the third party’s patents and would order us to stop the activities covered
by the patents. In addition, there is a risk that a court will order us to pay the other party damages for having violated the
other party’s patents. The biotechnology industry has produced a proliferation of patents, and it is not always clear to
industry participants, including us, which patents cover various types of products or methods of use. The coverage of patents
is subject to interpretation by the courts, and the interpretation is not always uniform. If we are sued for patent infringement,
we would need to demonstrate that our products or methods of use either do not infringe the patent claims of the relevant patent
and/or that the patent claims are invalid, and we may not be able to do this. Proving invalidity, in particular, is difficult
since it requires a showing of clear and convincing evidence to overcome the presumption of validity enjoyed by issued patents.
Because
some patent applications in the United States may be maintained in secrecy until the patents are issued, patent applications in
the United States and many foreign jurisdictions are typically not published until eighteen months after filing, and publications
in the scientific literature often lag behind actual discoveries, we cannot be certain that others have not filed patent applications
for technology covered by our issued patents or our pending applications or that we were the first to invent the technology. Our
competitors may have filed, and may in the future file, patent applications covering technology similar to ours. Any such patent
application may have priority over our patent applications and could further require us to obtain rights to issued patents covering
such technologies. If another party has filed a United States patent application on inventions similar to ours, we may have to
participate in an interference proceeding declared by the PTO, to determine priority of invention in the United States. The costs
of these proceedings could be substantial, and it is possible that such efforts would be unsuccessful, resulting in a loss of
our United States patent position with respect to such inventions.
Some
of our competitors may be able to sustain the costs of complex patent litigation more effectively than we can because they have
substantially greater resources. In addition, any uncertainties resulting from the initiation and continuation of any litigation
could have a material adverse effect on our ability to raise the funds necessary to continue our operations.
Confidentiality
agreements with employees and others may not adequately prevent disclosure of our trade secrets and other proprietary information
and may not adequately protect our intellectual property, which could limit our ability to compete.
We
may rely in part on trade secret protection in order to protect our proprietary trade secrets and unpatented know-how. However,
trade secrets are difficult to protect, and we cannot be certain that others will not develop the same or similar technologies
on their own. We have taken steps, including entering into confidentiality agreements with our employees, consultants, outside
scientific collaborators, sponsored researchers and other advisors, to protect our trade secrets and unpatented know-how. These
agreements generally require that the other party keep confidential and not disclose to third parties all confidential information
developed by the party or made known to the party by us during the course of the party’s relationship with us. We also typically
obtain agreements from these parties which provide that inventions conceived by the party in the course of rendering services
to us will be our exclusive property. However, these agreements may not be honored and may not effectively assign intellectual
property rights to us. Enforcing a claim that a party illegally obtained and is using our trade secrets or know-how is difficult,
expensive and time consuming, and the outcome is unpredictable. In addition, courts outside the United States may be less willing
to protect trade secrets or know-how. The failure to obtain or maintain trade secret protection could adversely affect our competitive
position.
We
may be subject to claims that our employees have wrongfully used or disclosed alleged trade secrets of their former employers.
As
is common in the biotechnology, food, chemical and pharmaceutical industries, we employ individuals who were previously employed
at other biotechnology, food, chemical or pharmaceutical companies, including our competitors or potential competitors. Although
no claims against us are currently pending, we may be subject to claims that these employees or we have inadvertently or otherwise
used or disclosed trade secrets or other proprietary information of their former employers. Litigation may be necessary to defend
against these claims. Even if we are successful in defending against these claims, litigation could result in substantial costs
and be a distraction to management.
Risks
Related to our Common Stock
The
price of our common stock may be volatile.
Our
common stock is approved for quotation on the OTC Markets’ OTCQB marketplace under the symbol “PURE.” The OTCQB
is a regulated quotation service that displays real-time quotes, last-sale prices and volume information in over-the-counter equity
securities and provides significantly less liquidity than a listing on the Nasdaq Stock Markets or other national securities exchange.
The OTCQB securities are traded by a community of market makers that enter quotes and trade reports. This market is limited in
comparison to the national stock exchanges and any prices quoted may not be a reliable indication of the value of our common stock.
Quotes for stocks included on the OTCQB are not listed in the financial sections of newspapers as are those for the Nasdaq Stock
Market or the NYSE. Therefore, prices for securities traded solely on the OTCQB may be difficult to obtain.
Trading
on the OTCQB Marketplace as opposed to a national securities exchange has resulted and may continue to result in a reduction in
some or all of the following, each of which could have a material adverse effect on the price of our common stock and our company:
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liquidity of our common stock;
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the
market price of shares of our common stock;
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our
ability to obtain financing to support our operations and the implementation of our business plan;
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the
number of institutional and other investors that will consider investing in shares of our common stock;
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the
number of market markers in shares of our common stock;
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the
availability of information concerning the trading prices and volume of shares of our common stock; and
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the
number of broker-dealers willing to execute trades in shares of our common stock.
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The
price and trading volume of our common stock have historically been volatile.
In
addition, the market price and trading volume of our common stock may be subject to wide fluctuations in the future in response
to:
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actual
or anticipated fluctuations in our results of operations;
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announcements
regarding the status of our regulatory efforts;
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the
determination that our shares of common stock are “penny stock” which will require brokers trading in our shares
of common stock to adhere to more stringent rules, likely resulting in a reduced level of trading activity in the secondary
trading market for our shares of common stock;
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the
sale by us of our common or preferred stock or other securities, or the anticipation of sales of such securities;
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the
trading volume of our common stock, particularly if such volume is light;
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the
introduction of new products or services, or product or service enhancements by us or our competitors;
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developments
with respect to our or our competitors’ intellectual property rights or regulatory approvals or denials;
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announcements
of significant acquisitions or other agreements by us or our competitors;
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sales
or anticipated sales of our common stock by our insiders (management and directors);
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conditions
and trends in our industry;
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changes
in our pricing policies or the pricing policies of our competitors;
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changes
in the estimation of the future size and growth of our markets; and
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general
economic conditions.
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addition, the stock market in general, the OTCQB, and the market for shares of novel technology companies in particular, have
experienced extreme price and volume fluctuations that in some cases may be unrelated or disproportionate to the operating performance
of those companies. These broad market and industry factors may materially harm the market price of our common stock, regardless
of our operating performance. In addition, this volatility could adversely affect an investor’s ability to sell shares of
our common stock, and/or the available price for such shares, at any given time.
Potential
sales or issuances of our common stock to raise capital, or the perception that such sales could occur, could cause dilution to
our current stockholders and the price of our common stock to fall.
We
have historically supported our operations through the issuance of equity securities and expect to continue to do so in the future.
For example, during May, June and July of 2019, we completed three closings of a private placement financings to accredited
investors, in which we raised net proceeds of approximately $716,000 in the Closings and issued an aggregate of 2,468,963 shares
of our common stock at a purchase price of $0.29 per share. The investors included Messrs. Dale Okuno and Ivan Chen, each of whom
are accredited investors and members of the Company’s Board of Directors and who each invested $250,000 and $35,000, respectively,
in the private placement financings. Although we may not be successful in obtaining financing through equity sales on terms
that are favorable to us in the future, if at all, any such sales that do occur could result in substantial dilution to the interests
of existing holders of our common stock. Additionally, the sale of a substantial number of shares of our common stock or other
equity securities to any new investors, or the anticipation of such sales, could cause the trading price of our common stock to
fall.
Our
common stock is deemed to be “penny stock,” which may make it more difficult for investors to sell their shares due
to suitability requirements.
Shares
of our common stock are subject to the so-called “penny stock” rules as that term is defined in Rule 3a51-1 promulgated
under the Securities Exchange Act of 1934. These requirements may reduce the potential market for our common stock by reducing
the number of potential investors. This may make it more difficult for investors in our common stock to sell shares to third parties
or to otherwise dispose of them. This could cause our stock price to decline.
Broker-dealers
dealing in penny stocks are required to provide potential investors with a document disclosing the risks of penny stock. Moreover,
broker-dealers are required to determine whether an investment in a penny stock is a suitable investment for a prospective investor.
Such requirements may discourage broker-dealers from effecting transactions in our common stock, which could limit the market
price and liquidity of our common stock.
We
have never paid dividends on our capital stock, and we do not anticipate paying any cash dividends in the foreseeable future.
The
continued operation and expansion of our business will require substantial funding. Investors seeking cash dividends in the foreseeable
future should not purchase our common stock. We have paid no cash dividends on any of our capital stock to date and we currently
intend to retain our available cash to fund the development and growth of our business. Any determination to pay dividends in
the future will be at the discretion of our Board and will depend upon results of operations, financial condition, contractual
restrictions, restrictions imposed by applicable law and other factors our Board deems relevant. We do not anticipate paying any
cash dividends on our common stock in the foreseeable future. Any return to stockholders will therefore be limited to the appreciation
of their stock, which may never occur.
Anti-takeover
provisions under our charter documents and Delaware law could delay or prevent a change of control and could also limit the market
price of our stock.
Certain
provisions of our charter and bylaws may delay or frustrate the removal of incumbent directors and may prevent or delay a merger,
tender offer, or proxy contest involving us that is not approved by our Board, even if such events may be beneficial to the interests
of stockholders. For example, our Board, without stockholder approval, has the authority and power to authorize the issuance of
up to 5,000,000 shares of preferred stock and such preferred stock could have voting or conversion rights that could adversely
affect the voting power of the holders of our common stock. Further, the one-for-eight reverse stock split of our outstanding
common stock that we effected on August 14, 2012 has increased the proportion of unissued and authorized common shares to issued
and outstanding common shares, which could allow our Board to issue large numbers of additional shares of our common stock that
could significantly reduce the voting power of our current stockholders. In addition, we are governed by the provisions of Section
203 of the Delaware General Corporation Law, which may discourage, delay or prevent certain business combinations with stockholders
owning 15% or more of our outstanding voting stock. These and other provisions in our charter documents may make it more difficult
for stockholders or potential acquirers to initiate actions that are opposed by our then-current board of directors, including
delaying or impeding a merger, tender offer, or proxy contest or other change of control transaction involving the Company. Any
delay or prevention of a change of control transaction could cause stockholders to lose a substantial premium over the then-current
market price of their shares.
Item
1B. Unresolved Staff Comments
None.
Item
2. Properties
We
lease a facility in Rancho Cucamonga, California. This is our only facility and it includes our corporate offices, research and
development laboratory and warehouse. Our current lease on this facility expires in December 2020.
Item
3. Legal Proceedings
From
time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business.
The impact and outcome of litigation, if any, is subject to inherent uncertainties, and an adverse result in these or other matters
may arise from time to time that may harm our business. We are not currently aware of any such legal proceedings or claims to
which we or our wholly owned subsidiary is a party or of which any of our property is subject that we believe will have, individually
or in the aggregate, a material adverse effect on our business, financial condition or results of operations.
Item
4. Mine Safety Disclosures
Not
applicable.
PART
II
Item
5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Information
About Our Common Stock
Our
common stock is approved for quotation on the OTC Markets’ OTCQB marketplace under the symbol “PURE.” The OTCQB
is a regulated quotation service that displays real-time quotes, last-sale prices and volume information in over-the-counter equity
securities. The OTCQB securities are traded by a community of market makers that enter quotes and trade reports. This market is
limited in comparison to the national stock exchanges and any prices quoted may not be a reliable indication of the value of our
common stock.
Holders
As
of October 29, 2019, we had approximately 230 holders of record of our common stock. This does not include beneficial
owners holding common stock in street name.
Dividend
Policy
We
have never paid dividends and have no current plans to do so. We currently anticipate that we will retain all of our future earnings,
if any, for use in the development and expansion of our business and for general corporate purposes. Any determination to pay
dividends in the future will be at the discretion of our Board and will depend upon our results of operations, financial condition
and other factors that the Board, in its discretion, may deem relevant.
Repurchase
of Equity Securities
None.
Information
About Our Equity Compensation Plans
The
information required under this heading is incorporated herein by reference to the applicable information set forth in Item 12
of this Annual Report on Form 10-K.
Item
6. Selected Financial Data
As
a Smaller Reporting Company, as defined by Rule 12b-2 of the Exchange Act and in Item 10(f)(1) of Regulation S-K, we are electing
scaled disclosure reporting obligations and therefore are not required to provide the information requested by this Item.
Item
7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
All
references to “PURE,” “we,” “our,” “us” and the “Company” in this
Item 7 refer to PURE Bioscience, Inc. and our wholly owned subsidiary.
The
discussion in this section contains forward-looking statements. These statements relate to future events, our future operations
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 I, Item 1A of this
Annual 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 consolidated financial statements and the notes to those statements included elsewhere in this
Annual Report on Form 10-K.
Overview
We
are focused on developing and commercializing proprietary antimicrobial products that provide safe and cost-effective solutions
to the health and environmental challenges of pathogen and hygienic control. Our technology platform is based on patented stabilized
ionic silver, and our initial products contain silver dihydrogen citrate, or SDC. SDC is a broad-spectrum, non-toxic antimicrobial
agent, which offers 24-hour residual protection and formulates well with other compounds. As a platform technology, we believe
SDC is distinguished from existing products in the marketplace because of its superior efficacy, reduced toxicity, non-causticity,
and the inability of bacteria to form a resistance to it.
We
believe there is a significant market opportunity for our safe, non-toxic and effective SDC-based solutions. We currently offer
PURE® Hard Surface as a food contact surface sanitizer and disinfectant to restaurant chains, food processors,
and food transportation companies. We also offer PURE Control® as a direct food contact processing aid. We received
the required FDA approvals to market PURE Control® as a direct food contact processing aid for raw poultry and
fresh produce in December 2015 and January 2016, respectively. Because additional USDA approval was not required, we began marketing
PURE Control as a direct food contact processing aid for fresh produce following our receipt of FDA approval in January 2016.
In
July 2016, we received a “No Objection Letter” from the USDA’s Food Safety and Inspection Service (FSIS) granting
approval for SDC-based PURE Control to be used as a spray or dip applied to poultry carcasses, parts and organs in pre-OLR (on-line
reprocessing) and post chill processing of fresh poultry. In January 2017, we submitted an additional FCN to the FDA to allow
use of higher SDC concentrations in poultry processing, allowing the flexibility to adjust to varying plant and processing conditions.
In May 2017, we received a Final Letter from the FDA for this FCN as well as a “No Objection Letter” from the USDA’s
Food Safety and Inspection Service (FSIS) granting approval for the higher concentrations of SDC-based PURE Control to be used
as a spray or dip applied to poultry carcasses, parts and organs in pre-OLR (on-line reprocessing) and post chill processing of
fresh poultry. We are currently focused on completing in-plant validation trials for PURE Control in pre- and post OLR poultry
processing applications, which represents approximately 65% to 75% of the total processing aid market for poultry processing.
We are continuing to optimize the application of PURE Control in OLR to attempt to gain USDA approval for use in this stage of
poultry processing.
Subject
to the results of our focused in-plant validation efforts for our approved produce and poultry solutions, we intend to seek approval
to utilize PURE Control as a direct food contact processing aid for raw meats, including beef and pork. In addition to our direct
sales efforts with PURE Hard Surface and PURE Control, we market and sell our SDC-based products indirectly through third-party
distributors.
Liquidity
& Going Concern Uncertainty
Our
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 July 31, 2019, we have incurred
a cumulative net loss of $123,478,000.
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 July 31, 2019, we had $398,000 in cash and cash equivalents, and $738,000 of current liabilities, including $553,000 in
accounts payable. On October 2, 2019, we entered into and completed a closing of a private placement financing to accredited investors.
We raised net proceeds of approximately $830,000 in the closing of an aggregate of 2,862,068 shares of the Company’s
common stock at a purchase price of $0.29 per share. Tom Y. Lee and Dale Okuno, each of whom are accredited investors and members
of the Company’s Board of Directors invested $290,000 and $250,000, respectively, in the private placement financing. Mr.
Lee also serves as the Company’s President and Chief Executive Officer.
Our
future capital requirements depend on numerous forward-looking factors. These factors may include, but are not limited to, the
following: the acceptance of, and demand for, our products; our success and the success of our partners in selling our products;
our success and the success of our partners in obtaining regulatory approvals to sell our products; the costs of further developing
our existing products and technologies; the extent to which we invest in new product and technology development; and the costs
associated with the continued operation, and any future growth, of our business. The outcome of these and other forward-looking
factors will substantially affect our liquidity and capital resources.
Until
we can generate significant cash from operations, we expect to continue to fund our operations with the proceeds of offerings
of our equity and debt securities. However, we cannot assure you that additional financing will be available when needed or that,
if available, financing will be obtained on terms favorable to us or to our stockholders. If we raise additional funds from the
issuance of equity securities, substantial dilution to our existing stockholders would likely result. If we raise additional funds
by incurring debt financing, the terms of the debt may involve significant cash payment obligations as well as covenants and specific
financial ratios that may restrict our ability to operate our business. Further, any contracts or license arrangements we enter
into to raise funds may require us to relinquish our rights to our products or technology, and we cannot assure you that we will
be able to enter into any such contracts or license arrangements on acceptable terms, or at all. Having insufficient funds may
require us to delay or scale back our marketing, distribution and other commercialization activities or cease our operations altogether.
We
do not have any unused credit facilities or other sources of capital available to us at this time. We intend to secure additional
working capital through sales of additional debt or equity securities. Our intended financing initiatives are subject to risk,
and we cannot provide any assurance about the availability or terms of these or any future financings.
If
we are unable to obtain sufficient capital, it will have a material adverse effect on our business and operations. It could cause
us to fail to execute our business plan, fail to take advantage of future opportunities, or fail to respond to competitive pressures
or customer requirements. It also may require us to significantly modify our business model and operations to reduce spending
to a sustainable level, which may include delaying, scaling back or eliminating some or all of our ongoing and planned investments
in corporate infrastructure, research and development projects, regulatory submissions, business development initiatives, and
sales and marketing activities, among other investments. If adequate funds are not available when needed, we may be required to
reduce or cease operations altogether.
Financial
Overview
This
financial overview provides a general description of our revenue and expenses.
Net
Product Sales
We
contract manufacture and sell SDC-based products for end use, and as a raw material for manufacturing use. 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. Any amounts received prior
to satisfying revenue recognition criteria are recorded as deferred revenue. See “Critical Accounting Policies and Estimates
– Revenue Recognition”.
Cost
of Goods Sold
Cost
of goods sold for product sales includes direct and indirect costs to manufacture products, including materials consumed, manufacturing
overhead, shipping costs, salaries, benefits, reserved inventory, and related expenses of operations. Depreciation related to
manufacturing is systematically allocated to inventory produced, and expensed through cost of goods sold at the time inventory
is sold.
Selling,
General and Administrative
Selling,
general and administrative expense consists primarily of salaries and other related costs for personnel in business development,
sales, finance, accounting, information technology, and executive functions. Other selling, general and administrative costs include
product marketing, advertising, and trade show costs, as well as public relations and investor relations, facility costs, and
legal, accounting and other professional fees.
Research
and Development
Our
research and development activities are focused on leveraging our technology platform to develop additional proprietary products
and applications. Research and development expense consists primarily of personnel and related costs, product registration expenses,
and third-party testing. We expense research and development costs as incurred.
Other
Income (Expense)
We
record interest income, interest expense, the change in derivative liabilities, as well as other non-operating transactions, as
other income (expense) in our consolidated statements of operations.
Results
of Operations – Comparison of the Years Ended July 31, 2019 and 2018
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 fluctuations in the buying patterns of our current or potential customers for which
we have no visibility, the mix of product sales including a change in the percentage of higher or lower margin formulations and
packaging configurations of our products, the cost of product sales including component costs, our inability for any reason to
be able to meet demand, the achievement and timing of research and development and regulatory milestones, unforeseen changes in
expenses, including non-cash expenses such as the fair value of equity awards granted and the fair value change of derivative
liabilities, the calculation of which includes several variable assumptions, and unforeseen manufacturing or supply issues, among
other issues. 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. As of the date of this filing, we are not aware of any trends in these factors or events
or conditions that we believe are reasonably likely to impact our results of operations in the future.
Net
Product Sales
Net product sales were $1,909,000 and $1,774,000
for the years ended July 31, 2019 and 2018, respectively. The increase of $135,000 was attributable to increased food safety customer
adoption. Our top three customers accounted for $711,000 of net product sales for the year ended July 31, 2019.
For the year ended July 31, 2019, one individual
customer accounted for 15%, and two individual customers accounted for 11% of our net product sales. No other individual customer
accounted for 10% or more of our net product sales. All of our net product sales occurred in the United States.
For
the year ended July 31, 2018, three individual customers accounted for 20%, 16% and 11%, of our net product sales, respectively.
No other individual customer accounted for 10% or more of our net product sales. All of our net product sales occurred in the
United States.
Cost
of Goods Sold
During
the year ended July 31, 2018, we wrote off $58,000 for damaged and slow moving finished goods inventory.
Cost
of goods sold was $728,000 and $763,000 for the years ended July 31, 2019 and 2018, respectively. Cost of goods sold, excluding
the inventory write-off discussed above, was $728,000 and $705,000 for the years ended July 31, 2019 and 2018, respectively.
Gross
margin, as a percentage of net product sales, excluding the inventory write-off discussed above, was 62% and 60% for the years
ended July 31, 2019 and 2018, respectively. The increase in gross margin percentage was primarily attributable to the sale of
higher margin formulations and packaging configurations of our products during the fiscal year ended July 31, 2019 as compared
with the prior year.
Selling,
General and Administrative Expense
Selling,
general and administrative expense was $3,967,000 and $5,235,000 for the years ended July 31, 2019 and 2018, respectively. The
decrease of $1,268,000 was primarily attributable to decreased personnel costs, as well as decreased business development expenses,
board of director’s expense, marketing and legal fees.
Research
and Development Expense
Research
and development expense was $354,000 and $459,000 for the years ended July 31, 2019 and 2018, respectively. The decrease of $105,000
was primarily attributable to reduced personnel costs and reductions in third-party testing and research supporting our FDA approval
efforts.
Share-Based
Compensation
Share-based
compensation expense was $2,449,000 and $2,359,000 for the years ended July 31, 2019 and 2018, respectively. The increase of $90,000
is primarily due to the accelerated vesting of stock options and restricted stock units held by Dave Pfanzelter, the former Chairman
of our Board. Mr. Pfanzelter retired from our Board in August 2018.
Change
in Derivative Liability
The
change in fair value of the warrant liabilities for the fiscal year ended July 31, 2018, was a decrease of $459,000. The overall
decrease in the derivative liability was due to updates to the assumptions used in the fair value pricing model for warrants at
the date the warrants were settled. During the fiscal year ended July 31, 2019, there were no warrants classified as derivatives
outstanding, therefore there was no income or loss activity.
Inducement
to Exercise Warrants
Inducement
expense for the fiscal year ended July 31, 2019 was $960,000. During the fiscal year ended July 31, 2019, we amended outstanding
warrants held by investors participating in our 2014 private placement financings. In accordance with the terms of the amendment
the strike price for the warrants was reduced. As a result, we recorded an inducement expense of $960,000 during the fiscal
year ended July 31, 2019.
During
the fiscal year ended July 31, 2018, we completed a tender offer to amend outstanding warrants held by the investors participating
in our 2014, 2015 and 2017 private placement financings. In accordance with the terms of the tender offer the strike price for
all three series of warrants was reduced. As a result, we recorded inducement expense of $876,000 during the fiscal year ended
July 31, 2018.
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 July 31, 2019 we have incurred
a cumulative net loss of $123,478,000.
Private
Placement
On
October 2, 2019, we entered into and completed a closing of a private placement financing to accredited investors. We raised net
proceeds of $830,000 in the closing of an aggregate of 2,862,068 shares of the Company’s common stock at a purchase price
of $0.29 per share. Tom Y. Lee and Dale Okuno, each of whom are accredited investors and members of the Company’s Board
of Directors invested $290,000 and $250,000, respectively, in the private placement financing. Mr. Lee also serves as the Company’s
President and Chief Executive Officer.
As
of July 31, 2019, we had $398,000 in cash and cash equivalents compared with $851,000 in cash and cash equivalents as of July
31, 2018. The net decrease in cash and cash equivalents was primarily attributable to the use of cash to fund our operations.
Additionally, as of July 31, 2019, we had $738,000 of current liabilities, including $553,000 in accounts payable,
compared with $1,281,000 of current liabilities, including $608,000 in accounts payable as of July 31, 2018. The net decrease
in current liabilities was primarily due to the conversion of the promissory note payable to common stock.
The
following table summarizes our contractual obligations as of July 31, 2019.
|
|
Payments
due by period
|
|
|
|
Total
|
|
|
Less
than
1
year
|
|
|
1-3
years
|
|
|
3-5
years
|
|
|
More
than
5
years
|
|
Operating
lease obligations
|
|
$
|
51,000
|
|
|
$
|
37,000
|
|
|
$
|
14,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
$
|
51,000
|
|
|
$
|
37,000
|
|
|
$
|
14,000
|
|
|
|
—
|
|
|
|
—
|
|
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 July
31, 2019, no events have occurred resulting in the obligation of any such payments.
We
do not have, and may never have, significant cash inflows from product sales or from other sources of revenue to fund our operations.
Our existing cash resources are not sufficient to meet our anticipated needs over the next twelve months from the date hereof.
The uncertainties surrounding our ability to continue to fund our operations raise substantial doubt about our ability to continue
as a going concern.
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, including through private placements of our securities.
Our intended financing initiatives are subject to risk, and we cannot provide any assurance about the availability or terms of
these or any future financings.
If
we are unable to obtain sufficient capital, it will have a material adverse effect on our business and operations. It could cause
us to fail to execute our business plan, fail to take advantage of future opportunities, or fail to respond to competitive pressures
or customer requirements. It also may require us to significantly modify our business model and operations to reduce spending
to a sustainable level, which may include delaying, scaling back or eliminating some or all of our ongoing and planned investments
in corporate infrastructure, research and development projects, regulatory submissions, business development initiatives, and
sales and marketing activities, among other investments. If adequate funds are not available when needed, we may be required to
reduce or cease operations altogether.
Critical
Accounting Policies and Estimates
The
discussion and analysis of our financial condition and results of operations are based on our audited 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.
We
believe the following accounting policies and estimates are critical to aid you in understanding and evaluating our reported financial
results.
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 Consolidated Statements
of Operations.
Share-Based
Compensation
We
grant equity-based awards under share-based compensation plans. 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. There were no patent impairments during the fiscal years ended July 31, 2019 or 2018.
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, equipment and finite-lived intangible assets primarily consisting
of the worldwide patent portfolio of our silver ion technologies, annually, or whenever events or circumstances indicate that
the carrying value may not be recoverable. Examples of such events or circumstances include:
|
●
|
an
asset group’s inability to continue to generate income from operations and positive cash flow in future periods;
|
|
|
|
|
●
|
loss
of legal ownership or title to an asset;
|
|
|
|
|
●
|
significant
changes in our strategic business objectives and utilization of the asset(s); and
|
|
|
|
|
●
|
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 that our previous
conclusions remain valid. As part of our review, we consider changes in revenue growth rates, operating margins, working capital
needs and other expenditures. With the exception of the impairment discussed above we have not identified any asset groups where
undiscounted cash flows were not substantially in excess of carrying value.
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 technologies. If a change were to occur in any of the above-mentioned
factors or estimates, the likelihood of a material change in our reported results would increase.
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.
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 liability. As such, we expect
future changes in the fair value of the warrants to vary significantly from quarter to quarter.
Going
Concern
We
assess and determine our ability to continue as a going concern under the provisions of ASC Topic 205-40, Presentation of Financial
Statements—Going Concern, which requires us to evaluate whether there are conditions or events that raise substantial doubt
about our ability to continue as a going concern within one year after the date that our annual and interim financial statements
are issued. Certain additional financial statement disclosures are required if such conditions or events are identified. If and
when an entity’s liquidation becomes imminent, financial statements should be prepared under the liquidation basis of accounting.
Determining
the extent, if any, to which conditions or events raise substantial doubt about our ability to continue as a going concern, or
the extent to which mitigating plans sufficiently alleviate any such substantial doubt, as well as whether or not liquidation
is imminent, requires significant judgment by us. We have determined that there is substantial doubt about our ability to continue
as a going concern for the one-year period following the date that our financial statements for the year ended July 31, 2019 were
issued, which have been prepared assuming that we will continue as a going concern. We have not made any adjustments to reflect
the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities
that may result from the possible inability of us to continue as a going concern.
Recent
Accounting Pronouncements
Information
regarding recent accounting pronouncements is contained in Note 2 to the Consolidated Financial Statements, included elsewhere
in this report.
Off
Balance Sheet Arrangements
We
do not have any off balance sheet arrangements.
Item
7A. Quantitative and Qualitative Disclosures About Market Risk
As
a Smaller Reporting Company as defined by Rule 12b-2 of the Exchange Act and in Item 10(f)(1) of Regulation S-K, we are electing
scaled disclosure reporting obligations and therefore are not required to provide the information requested by this Item.
Item
8. Consolidated Financial Statements and Supplementary Data
The
consolidated financial statements and supplementary data required by this Item 8 are set forth at the end of this Annual Report.
Item
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not
applicable.
Item
9A. Controls and Procedures
Evaluation
of Disclosure Controls and Procedures
We
maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange
Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms,
and that such information is accumulated and communicated to our management, including our Principal Executive Officer and Principal
Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure
controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can
provide only reasonable assurance of achieving the desired control objectives.
As
required by Rule 13a-15(e) under the Exchange Act, our management conducted an evaluation, under the supervision and with the
participation of our Principal Executive Officer and our Principal Financial Officer, of the effectiveness of the design and operation
of our disclosure controls and procedures as of the end of the period covered by this Annual Report. Based on the foregoing evaluation,
our principal executive officer and principal financial officer concluded that as of the end of the period covered by this report
our disclosure controls and procedures were effective.
Changes
in Our Internal Controls over Financial Reporting
There
were no changes in our internal controls over financial reporting during our most recent fiscal quarter that have materially affected,
or are reasonably likely to materially affect our internal controls over financial reporting.
Management’s
Report on Internal Control Over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Exchange
Act Rules 13a-15(f) and 15d-15(f). With the participation of our Principal Executive Officer and Principal Financial Officer,
management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework
in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Based on its evaluation under this framework, our management concluded that our internal control over financial reporting was
effective as of July 31, 2019.
Inherent
Limitations on Effectiveness of Controls
Our
management, including our Principal Executive Officer and Principal Financial Officer, do not expect that our disclosure controls
or our internal control over financial reporting will prevent or detect all error and all fraud. A control system, no matter how
well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will
be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls
must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation
of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues
and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making
can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual
acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system
of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that
any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of
controls effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in
conditions or deterioration in the degree of compliance with policies or procedures.
Item
9B. Other Information
None.
PART
III
Item
10. Directors, Executive Officers and Corporate Governance
Information
Regarding Our Board of Directors
Pursuant
to our bylaws, the number of directors is fixed and may be increased or decreased from time to time by resolution of our Board
of Directors, or the Board. The Board has fixed the number of directors at three members.
Information
with respect to our directors as of October 29, 2019 is shown below.
Name
|
|
Age
|
|
Director
Since
|
|
Position(s)
Held
|
Tom
Y. Lee, CPA
|
|
70
|
|
2014
|
|
Director,
Chief Executive Officer
|
Ivan
Chen
|
|
37
|
|
2018
|
|
Director
|
Dale
Okuno
|
|
67
|
|
2019
|
|
Director
|
Tom
Y. Lee, CPA was appointed to our Board on October 24, 2014 and, effective August 7, 2019, appointed as our President and Chief
Executive Officer. Mr. Lee is currently the Chairman and CEO of Swabplus, Inc., a contract manufacturer of single-dose applicator
and formulation OEM products, and has served as Chairman and CEO since 2008. Mr. Lee has experience in manufacturing and selling
applicator and formulation OEM products, manufacturing and distributing products in Asia and is experienced in accounting matters.
Mr. Lee was formerly audit committee chairman at First Continental Bank (which merged with United Commercial Bank in 2003). Mr.
Lee has been an active CPA since 1983 and earned his Master of Science in accounting from California State University Long Beach
and his Bachelors in Business Administration from TamKang University in Taipei, Taiwan.
Ivan
Chen was appointed to our Board on June 29, 2018. Mr. Chen, an attorney and entrepreneur, brings extensive experience in
the healthcare and technology industries, with deep legal and strategic experience in areas including licensing, joint
ventures, mergers & acquisitions, securities and corporate governance, and has been admitted to the bar in the states of
California and New York. His experience includes serving as Director, Mergers & Acquisitions at eBay, Inc., a
publicly-traded e-commerce platform. In this role, he led the negotiation and execution of numerous US and cross-border
transactions. Prior to eBay, Mr. Chen focused on transactional, securities, and corporate governance matters while serving as
an associate at Morrison & Foerster LLP and at Skadden, Arps, Meagher & Flom LLP, both large international law firms.
Mr. Chen earned a J.D. from Harvard Law School, a master’s degree from the University of Cambridge, and a
bachelor’s degree from Northwestern University.
Dale
Okuno was appointed to our Board on January 30, 2019. Mr. Okuno is Chief Executive Officer of Okuno Associates, Inc. an investment
firm that focuses investments in technology companies. Prior to founding Okuno Associates, Mr. Okuno was founder and Chief Executive
Officer of E-Z Data, Inc., a SaaS company, which he sold in 2009, a company that he founded in 1986. Mr. Okuno holds a BA in Philosophy
and Psychology from San Jose State University.
Information
Regarding Our Executive Officers
Information
with respect to our executive officers as of October 24, 2019 is shown below. Since Tom Y. Lee also serve on the Board, his biography
is set forth under “Information Regarding the Board of Directors” above.
Name
|
|
Age
|
|
Position(s)
Held
|
|
Position(s)
Held Since
|
Tom
Y. Lee, CPA
|
|
70
|
|
Chief
Executive Officer
|
|
2019
|
Mark
Elliott
|
|
44
|
|
Vice
President, Finance
|
|
2015
|
Tom
Meyers
|
|
67
|
|
Chief
Operating Officer
|
|
2018
|
Mark
Elliott was appointed as our Vice President Finance and Principal Financial and Accounting Officer on July 31, 2015. Mr. Elliott
joined the Company in 2004 and has been responsible for managing all accounting and regulatory reporting activities since he was
promoted to Controller in May 2006. He has also been responsible for establishing all current financial and reporting systems.
Prior to joining the Company, Mr. Elliott worked in government accounting. He earned a Bachelor of Science, Business Administration-Accountancy
at California State University-San Marcos.
Mr.
Myers was appointed as our Chief Operating Officer on October 4, 2018 had been serving
as the Company’s Executive Vice President, Technical Support and Services since September 2016 and had previously served
as Executive Vice President, Marketing and Product Development since August 2011 when he joined the Company. In his previous role,
Mr. Myers led the implementation and application of the Company’s SDC-based technology in customer facilities, the development
of the Company’s food transport sanitation solution and other marketing and sales efforts. Prior to joining the Company,
Mr. Myers served as the President and Principal of Idaho Milk Products. Mr. Myers has also held executive management roles at
Weider Nutrition International, Puritan Quartz Pharmaceuticals, FruitSource Associates and FruitSource Confections, Nancy’s
Specialty Foods, Izaki Glico and Berkshire Hathaway Corporation. Mr. Myers holds a Bachelor of Science degree from California
State University Long Beach.
Family
Relationships
Mr.
Ivan Chen is the nephew of Mr. Tom Y. Lee. There are no other family relationships between any current director executive officer,
or any director or executive offer during the fiscal year ended July 31, 2019.
Corporate
Governance
Overview
We
are committed to maintaining high standards of business conduct and corporate governance, which we believe are fundamental to
the overall success of our business, serving our stockholders well and maintaining our integrity in the marketplace. Our Corporate
Governance Guidelines and Code of Business Conduct and Ethics, together with our Certificate of Incorporation, Bylaws and the
charters of our Board Committees, form the basis for our corporate governance framework. As discussed below, our Board of Directors
has established two standing committees to assist it in fulfilling its responsibilities to the Company and its stockholders: the
Audit Committee and the Compensation Committee. The Board of Directors performs the functions typically assigned to a Nominating
and Corporate Governance Committee.
Corporate
Governance Guidelines
Our
Corporate Governance Guidelines are designed to ensure effective corporate governance of our Company. Our Corporate Governance
Guidelines cover topics including, but not limited to, director qualification criteria, director responsibilities, director compensation,
director orientation and continuing education, communications from stockholders to the Board, succession planning and the annual
evaluations of the Board and its Committees. Our Corporate Governance Guidelines are reviewed regularly by the Board and revised
when appropriate. The full text of our Corporate Governance Guidelines can be found in the “Corporate Governance”
section of our website accessible at www.purebio.com. A printed copy may also be obtained by any stockholder upon request
to our Corporate Secretary.
Code
of Business Conduct and Ethics
We
have adopted a Code of Business Conduct and Ethics that applies to all of our employees, officers and directors. This Code constitutes
a “code of ethics” as defined by the rules of the SEC. This Code also contains “whistle blower” procedures
adopted by our Audit Committee regarding the receipt, retention and treatment of complaints related to accounting, internal accounting
controls or auditing matters and procedures for confidential anonymous employee complaints related to questionable accounting
or auditing matters. Copies of the code may be obtained free of charge from our website, www.purebio.com. Any amendments
to, or waivers from, a provision of our code of ethics that applies to any of our executive officers will be posted on our website
in accordance with the rules of the SEC. Other than as specifically referenced herein, the information contained on, or that can
be accessed through, our website is not a part of this Report.
Director
Independence
We
are not currently listed on any national securities exchange or in an inter-dealer quotation system that has established a standard
for independence. However, in evaluating the independence of our members and the composition of the committees of our Board of
Directors, our Board utilizes the definition of “independence” as that term is defined by applicable listing standards
of the NYSE MKT. As of the date hereof, our Board consists of three members, two of whom are considered independent as that term
is defined by applicable listing standards of the NYSE MKT. Our independent directors include: Messrs. Chen and Okuno.
Board
and Committee Attendance
During
the fiscal year ended July 31, 2019, the Board of Directors met seven times and it took action by unanimous written consent six
times. During the fiscal year ended July 31, 2019 our Audit Committee met four times. Each of the directors attended 97% of the
meetings of the Board of Directors.
Director
Attendance at Annual Meeting
We
believe the annual meeting of stockholders provides a good opportunity for our directors to hear any feedback the stockholders
may share with the Company at the meeting. As a result, we encourage our directors to attend our annual meeting. We reimburse
our directors for the reasonable expenses incurred by them in attending the annual meeting.
Executive
Sessions
Executive
sessions of our independent directors are held at each regularly scheduled meeting of our Board and at other times as necessary
and are chaired by the Chairman of the Board. The Board’s policy is to hold executive sessions without the presence of management,
including our President and Chief Executive Officer, who is the only non-independent director on the Board. Our Board Committees
also generally meet in executive session at the end of each committee meeting.
Board
Committees
Compensation
Committee. The Compensation Committee of the Board of Directors currently consists of Messrs. Okuno (Chair) and Chen. The
functions of the Compensation Committee include the approval of the compensation offered to our executive officers and recommending
to the full Board of Directors the compensation to be offered to our directors, including our Chairman. The Board has determined
that Messrs. Okuno and Chen are each an “independent director” under the listing standards of the NYSE MKT. In addition,
the members of the Compensation Committee qualify as a “non-employee directors” for purposes of Rule 16b-3 under the
Exchange Act and as an “outside director” for purposes of Section 162(m) of the Internal Revenue Code of 1986, as
amended. The Compensation Committee is governed by a written charter approved by the Board of Directors, a copy of which is available
on our website at www.purebio.com.
Audit
Committee. The Audit Committee of the Board of Directors, currently consists of Messrs. Chen (Chair) and Okuno. The functions
of the Audit Committee include the retention of our independent registered public accounting firm, reviewing and approving the
planned scope, proposed fee arrangements and results of the Company’s annual audit, reviewing the adequacy of the Company’s
accounting and financial controls and reviewing the independence of the Company’s independent registered public accounting
firm. The Board has determined that Messrs. Chen and Okuno are “independent director” under the listing standards
of the NYSE MKT. The Board of Directors has also determined that Messrs. Chen and Okuno are each an “audit committee financial
expert” within the applicable definition of the SEC. The Audit Committee is governed by a written charter approved by the
Board of Directors, a copy of which is available on our website at www.purebio.com.
Nominating
Committee. The Board has not established a Nominating Committee, and as a result performs the functions typically assigned
to a Nominating Committee, including the identification, recruitment and nomination of candidates for the Board and its committees,
determining the structure, composition and functioning of the Board and its committees including the reporting channels through
which the Board receives information and the quality and timeliness of the information, developing and recommending to the Board
corporate governance guidelines applicable to the Company and annually reviewing and recommending changes, as necessary or appropriate,
overseeing the annual evaluation of the Board’s effectiveness and performance.
Board
and Committee Effectiveness
The
Board and each of its Committees performs an annual self-assessment to evaluate their effectiveness in fulfilling their obligations.
The Board and Committee evaluations cover a wide range of topics, including, among others, the fulfillment of the Board and Committee
responsibilities identified in the Corporate Governance Guidelines and charters for each Committee.
Board
Leadership Structure
Our
Bylaws provide our Board with flexibility to combine or separate the positions of Chairman of the Board and Chief Executive Officer
in accordance with its determination that utilizing one or the other structure would be in the best interests of our company.
These roles are currently combined as our Board is currently chaired by Mr. Lee, who is also our Chief Executive Officer. Our
Board believes that it is in the best interest of the company and its stockholders for Mr. Lee to serve in both roles at this
time given his knowledge of our company and industry. We believe that this structure provides appropriate leadership and oversight
of the company and facilitates effective functioning of both management and our Board. Our Board will continue to reassess the
structure to determine what is in the best interests of the Company and stockholders.
Board
Oversight of Risk
The
Board is actively involved in the oversight of risks that could affect the Company. The Board as a whole has responsibility for
risk oversight of the Company’s risk management policies and procedures, with reviews of certain areas being conducted by
the relevant Board committee. The Board satisfies this responsibility through reports by each Committee Chair regarding the Committee’s
considerations and actions, as well as through regular reports directly from management responsible for oversight of particular
risks within the Company. Specifically, the Board committees address the following risk areas:
|
●
|
The
Compensation Committee is responsible for overseeing the management of risks related to the Company’s executive compensation
plans and arrangements.
|
|
|
|
|
●
|
The
Audit Committee discusses with management the Company’s major financial risk exposures and the steps management has
taken to monitor and control such exposures.
|
The
Board as a whole considers risks related to regulatory and compliance matters as well as risks related to the Company’s
sales and marketing and research and development initiatives.
The
Board encourages management to promote a corporate culture that incorporates risk management into the Company’s day-to-day
business operations.
Stockholder
Recommendations for Director Nominees
In
nominating candidates for election as a director, the Board will consider a reasonable number of candidates recommended by a single
stockholder who has held over 20% of PURE Bioscience Common Stock for over one year and who satisfies the notice, information
and consent provisions set forth in our Bylaws and Corporate Governance Guidelines. Stockholders who wish to recommend a candidate
may do so by writing to the Board of Directors in care of the Corporate Secretary, PURE Bioscience, Inc., 9669 Hermosa Avenue,
Rancho Cucamonga, California 91730. The Board of Directors will use the same evaluation process for director nominees recommended
by stockholders as it uses for other director nominees. A printed copy of our Bylaws may be obtained by any stockholder upon request
to our Corporate Secretary.
Identification
and Evaluation of Director Nominees
In
evaluating nominees for membership on our Board, our Board applies the Board membership criteria set forth in our Corporate Governance
Guidelines. Under these criteria, the Board takes into account many factors, including an individual’s business experience
and skills (including skills in core areas such as operations, management, technology, accounting and finance, strategic planning
and international markets), as well as independence, judgment, knowledge of our business and industry, professional reputation,
leadership, integrity and ability to represent the best interests of the Company’s stockholders. In addition, the Board
also considers the ability to commit sufficient time and attention to the activities of the Board, as well as the absence of any
potential conflicts with the Company’s interests. The Board does not assign specific weights to particular criteria and
no particular criterion is necessarily applicable to all prospective nominees. The Board does not have a formal policy with respect
to diversity of nominees. Rather, our Board considers Board membership criteria as a whole and seeks to achieve diversity of occupational
and personal backgrounds on the Board.
Our
Board regularly assesses the appropriate size of our Board, and whether any vacancies on our Board are expected due to retirement
or otherwise. In the event that vacancies are anticipated, or otherwise arise, the Board will consider various potential candidates
who may come to the attention of the Board through current Board members, professional search firms, stockholders or other persons.
Each candidate brought to the attention of the Board, regardless of who recommended such candidate, is considered on the basis
of the criteria set forth in our corporate governance guidelines. As stated above, our Board will consider candidates proposed
for nomination by our significant stockholders. Stockholders may propose candidates by submitting the names and supporting information
to: Corporate Secretary, PURE Bioscience, Inc., 9669 Hermosa Avenue, Rancho Cucamonga, California 91730. Supporting information
should include (a) the name and address of the candidate and the proposing stockholder, (b) a comprehensive biography of the candidate
and an explanation of why the candidate is qualified to serve as a director taking into account the criteria identified in our
corporate governance guidelines, (c) proof of ownership, the class and number of shares, and the length of time that the shares
of our voting securities have been beneficially owned by each of the candidate and the proposing stockholder, and (d) a letter
signed by the candidate stating his or her willingness to serve, if elected.
Item
11. Executive Compensation
Summary
Compensation Table
The
following table sets forth a summary of cash and non-cash compensation awarded, earned or paid for services rendered to us during
the fiscal years ended July 31, 2019 and July 31, 2018 by our named executive officers, consisting of (i) each individual serving
as principal executive officer during the fiscal year ended July 31, 2019 and (ii) our other two most highly compensated officers
serving during the fiscal year ended July 31, 2019.
Name
and Principal Position
|
|
Fiscal
Year
|
|
|
Salary
($)(1)
|
|
|
Bonus
|
|
|
Option
Awards
($)(2)
|
|
|
Stock
Awards ($)(3)
|
|
|
All
Other Compensation
($)(4)
|
|
|
Total
Compensation
($)
|
|
Henry
R. Lambert
|
|
|
2019
|
|
|
$
|
175,000
|
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
99,000
|
(5)
|
|
$
|
—
|
|
|
$
|
274,000
|
|
Chief
Executive Officer
|
|
|
2018
|
|
|
$
|
301,000
|
|
|
|
—
|
|
|
$
|
68,000
|
(6)
|
|
$
|
|
|
|
$
|
59,000
|
|
|
$
|
428,000
|
|
Mark
S. Elliott
|
|
|
2019
|
|
|
$
|
180,000
|
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
185,000
|
|
Vice
President Finance
|
|
|
2018
|
|
|
$
|
185,000
|
|
|
|
—
|
|
|
$
|
51,000
|
(7)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
236,000
|
|
Tom
Myers (8)
|
|
|
2019
|
|
|
$
|
200,000
|
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
130,000
|
(9)
|
|
$
|
—
|
|
|
$
|
330,000
|
|
Chief
Operating Officer
|
|
|
2018
|
|
|
$
|
200,000
|
|
|
|
—
|
|
|
$
|
33,000
|
(10)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
233,000
|
|
(1)
|
Amounts
reflect salary earned during the respective fiscal years. On April 1, 2018, Mr. Lambert’s base salary was reduced from
$350,000 to $175,000 per year.
|
|
|
(2)
|
Amounts
for the years ended July 31, 2019 and 2018 reflect the grant date fair value for financial statement reporting purposes with
respect to stock options granted during the respective fiscal years, calculated in accordance with authoritative guidance.
|
(3)
|
Amounts
for the years ended July 31, 2019 and 2018 reflect the grant date fair value for financial statement reporting purposes with
respect to stock awards granted during the respective fiscal years, calculated in accordance with authoritative guidance.
|
|
|
(4)
|
Represents
amounts reimbursed to Mr. Lambert for housing expenses in San Diego until June of 2018, where the Company is headquartered.
Mr. Lambert maintains a permanent residence in Lake Forest, Illinois and he was renting a corporate apartment in San Diego.
The Company reimbursed Mr. Lambert on a monthly basis for the housing expense.
|
|
|
(5)
|
Represents
an award consisting of two hundred thousand (200,000) restricted stock units (“RSUs”)
|
|
|
(6)
|
Represents
an award consisting of an option to purchase two hundred thousand (200,000) shares of common stock.
|
|
|
(7)
|
Represents
an award consisting of an option to purchase one hundred fifty thousand (150,000) shares of common stock.
|
|
|
(8)
|
Mr.
Myers was appointed as our Chief Operating Officer on October 4, 2018 and had been serving as the Company’s Executive
Vice President, Technical Support and Services since September 2016.
|
|
|
(9)
|
Represents
an award consisting of two hundred sixty two thousand five hundred (262,500) RSUs
|
|
|
(10)
|
Represents
an award consisting of an option to purchase one hundred thousand (100,000) shares of common stock.
|
Narrative
to Summary Compensation Table
The
compensation program established for the Company’s executive officers consisted of the following elements:
Base
Salary: The base salaries of our named executive officers depend on their job responsibilities, the market rate of compensation
paid by companies in our industry for similar positions, our financial position and performance, and the strength of our business.
Base salaries provide a fixed means of compensation in order to attract and retain talent. Mr. Lambert’s base salary was
$175,000 per year during the fiscal year ended July 31, 2019. Mr. Elliott’s salary was $180,000 per year during the fiscal
year ended July 31, 2019. The base salary for Mr. Myers was $185,000 per year during the fiscal year ended July 31, 2019.
Performance-Based
Cash Awards: As part of the Company’s executive compensation program, our executive officers are eligible to receive
performance-based cash awards. The annual performance-based cash awards are based on the executive officer’s individual
performance and the Company’s actual performance compared to the corporate goals approved by the Board and the Compensation
Committee. Following the end of each fiscal year, the Board and the Compensation Committee is responsible for determining the
bonus amount payable to an executive officer based on that executive officer’s individual performance during the fiscal
year and its determination of the Company’s actual performance compared to the corporate goals established for that fiscal
year. Due to the Company’s limited financial resources and performance, our named executive officers did not receive any
performance-based cash bonuses for the years ended July 31, 2019 and 2018.
Long-Term
Equity Awards: Equity ownership by our executive officers and key employees encourages them to create long-term value
and aligns their interests with those of our stockholders. As a result, our executive compensation program provides for the issuance
of stock options and restricted stock units (“RSUs”) as determined by the Compensation Committee and our Board.
Outstanding
Equity Awards at Year-End
The
following table provides a summary of all equity awards held by our named executive officers that were outstanding as of July
31, 2019.
|
|
Option
Awards
|
|
|
Stock
Awards
|
|
Name
|
|
Number
of
Securities
Underlying
Unexercised
Options (#)
Exercisable
|
|
|
Number
of
Securities
Underlying
Unexercised
Options (#)
Unexercisable
|
|
|
Option
Exercise
Price
($)
|
|
|
Option
Expiration
Date
|
|
|
Number
of
shares
or
Units of
stock
that have not
vested(#)
|
|
|
Market
Value
of
shares or Units
of stock that
have not vested
($)(1)
|
|
Henry
R. Lambert
|
|
|
|
|
|
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
100,000
|
|
|
$
|
33,000
|
(2)
|
|
|
|
200,000
|
|
|
|
—
|
|
|
$
|
0.78
|
|
|
|
2/26/2023
|
(3)
|
|
|
|
|
|
|
|
|
|
|
|
200,000
|
|
|
|
—
|
|
|
$
|
0.88
|
|
|
|
3/22/2022
|
(4)
|
|
|
150,000
|
|
|
$
|
49,500
|
(5)
|
|
|
|
100,000
|
|
|
|
300,000
|
|
|
$
|
1.19
|
|
|
|
6/22/2027
|
(4)
|
|
|
—
|
|
|
$
|
—
|
|
|
|
|
200,000
|
|
|
|
—
|
|
|
$
|
1.05
|
|
|
|
5/27/2021
|
(6)
|
|
|
—
|
|
|
$
|
—
|
|
Mark
S. Elliott
|
|
|
150,000
|
|
|
|
—
|
|
|
$
|
0.78
|
|
|
|
2/26/2023
|
(7)
|
|
|
|
|
|
$
|
—
|
|
|
|
|
150,000
|
|
|
|
—
|
|
|
$
|
0.88
|
|
|
|
3/1/2022
|
(8)
|
|
|
—
|
|
|
$
|
—
|
|
|
|
|
150,000
|
|
|
|
—
|
|
|
$
|
1.15
|
|
|
|
5/11/2021
|
(9)
|
|
|
—
|
|
|
$
|
—
|
|
|
|
|
2,500
|
|
|
|
—
|
|
|
$
|
28.00
|
|
|
|
5/19/2020
|
|
|
|
—
|
|
|
$
|
—
|
|
|
|
|
6,875
|
|
|
|
—
|
|
|
$
|
6.72
|
|
|
|
7/14/2021
|
|
|
|
—
|
|
|
$
|
—
|
|
|
|
|
10,000
|
|
|
|
—
|
|
|
$
|
0.86
|
|
|
|
1/24/2023
|
|
|
|
—
|
|
|
$
|
—
|
|
Tom
Myers
|
|
|
|
|
|
|
|
|
|
$
|
—
|
|
|
|
|
|
|
|
131,250
|
|
|
$
|
43,300
|
(10)
|
|
|
|
100,000
|
|
|
|
—
|
|
|
$
|
0.78
|
|
|
|
2/26/2023
|
(11)
|
|
|
—
|
|
|
$
|
—
|
|
|
|
|
100,000
|
|
|
|
—
|
|
|
$
|
0.88
|
|
|
|
3/1/2022
|
(12)
|
|
|
—
|
|
|
$
|
—
|
|
|
|
|
100,000
|
|
|
|
—
|
|
|
$
|
1.15
|
|
|
|
5/11/2021
|
(13)
|
|
|
—
|
|
|
$
|
—
|
|
|
|
|
40,000
|
|
|
|
—
|
|
|
$
|
0.73
|
|
|
|
2/6/2023
|
|
|
|
—
|
|
|
$
|
—
|
|
(1)
|
The
market value was determined by multiplying the number of shares underlying the awards by the closing price for our common
stock on July 31, 2019, which was $0.33.
|
|
|
(2)
|
During
the year ended July 31, 2019, we granted Mr. Lambert an award consisting of two hundred thousand (200,000) RSUs. 50% of the
RSUs vest on December 15, 2019 with the remaining 50% vesting on December 15, 2020.
|
|
|
(3)
|
During
the year ended July 31, 2018, we granted Mr. Lambert an award consisting of an option to purchase two hundred thousand (200,000)
shares of common stock. The option has a five-year term and vests in four quarterly installments.
|
|
|
(4)
|
During
the year ended July 31, 2017, we granted Mr. Lambert an award consisting of an option to purchase two hundred thousand (200,000)
shares of common stock. The option has a five-year term and vests in four quarterly installments. In addition, we granted
Mr. Lambert an award consisting of an option to purchase four hundred thousand (400,000) shares of common stock. The option
has a ten-year term and vests 25% on December 31, 2018 with the remaining shares vesting in three equal annual installments
thereafter.
|
|
|
(5)
|
During
the year ended July 31, 2017, we granted Mr. Lambert an award consisting of two hundred thousand (200,000) RSUs. 25% of the
RSUs vest on December 31, 2018 with the remaining shares vesting in three equal annual installments thereafter.
|
|
|
(6)
|
During
the year ended July 31, 2016, we granted Mr. Lambert a five year award consisting of an option to purchase two hundred thousand
(200,000) shares of common stock. 33% vested on July 31, 2016; 33% vested on October 31, 2016; and 34% vested on January 31,
2017.
|
(7)
|
During
the year ended July 31, 2018, we granted Mr. Elliott an award consisting of an option to purchase one hundred fifty thousand
(150,000) shares of common stock. The option has a five-year term and vests in four quarterly installments.
|
|
|
(8)
|
During
the year ended July 31, 2017, we granted Mr. Elliott an award consisting of an option to purchase one hundred fifty thousand
(150,000) shares of common stock. The option has a five-year term and vests in four quarterly installments.
|
|
|
(9)
|
During
the year ended July 31, 2016, we granted Mr. Elliott an award consisting of an option to purchase one hundred fifty thousand
(150,000) shares of common stock. The option has a five-year term and vests in four quarterly installments.
|
|
|
(10)
|
During
the year ended July 31, 2019, we granted Mr. Myers an award consisting of two hundred sixty-two thousand five hundred (262,500)
RSUs. 50% of the RSUs vest on December 15, 2019 with the remaining 50% vesting on December 15, 2020.
|
|
|
(11)
|
During
the year ended July 31, 2018, we granted Mr. Myers an award consisting of an option to purchase one hundred thousand (100,000)
shares of common stock. The option has a five-year term and vests in four quarterly installments.
|
|
|
(12)
|
During
the year ended July 31, 2016, we granted Mr. Myers an award consisting of an option to purchase one hundred thousand (100,000)
shares of common stock. The option has a five-year term and vests in four quarterly installments.
|
During
the year ended July 31, 2019, Messrs. Lambert, Elliott and Myers had 250,000, 112,500 and 75,000 option awards vest, respectively.
The respective value on vesting was $121,000, $62,250 and $41,500 respectively.
Employment
Agreements; Potential Payments Upon Termination or a Change in Control for Current Executive Officers
Agreement
with our former Chief Executive Officer.
Effective
August 7, 2019, Henry R. Lambert retired as Chief Executive Officer and President of the Company and from our Board and entered
into a consulting role pursuant to a consulting agreement effective as of August 7, 2019 (the “Lambert Consulting Agreement”).
The following provides a description of Mr. Lambert’s employment agreement during the fiscal years ended July 31, 2019 and
2018. A description of the Consulting Agreement follows below.
On
September 10, 2013, we appointed Henry R. Lambert to serve as Chief Executive Officer and a member of the Board. The terms of
Mr. Lambert’s employment agreement provides that he was entitled to an annual base salary. The annual base salary of Mr.
Lambert was $350,000 until April 1, 2018 when his base salary was reduced to $175,000.
The
employment agreement provides that, during the term of the agreement, Mr. Lambert was eligible for equity compensation grants
to be awarded at the discretion of the Compensation Committee and the Board, and also provided for annual bonus targets equal
to, as applicable, 50% of Mr. Lambert’s current annual base salary, to be awarded at the sole discretion of the Compensation
Committee and the Board. Additionally, pursuant to the terms of Mr. Lambert’s employment agreement, we granted Mr. Lambert
500,000 RSUs, 200,000 of which subsequently expired by their terms. The award agreement for the 500,000 RSUs had provided Mr.
Lambert with the right to require us to pay his state and federal withholding and other employment taxes upon the vesting and
settlement of these RSUs in exchange for Mr. Lambert cancelling that number of shares of common stock having a value equal to
the tax obligations we pay on his behalf. In December 2016, we entered into an RSU Cancellation Agreement with Mr. Lambert and
our other officers and directors who received restricted stock unit awards (the “RSUs”) in October 2013 as compensation
for their continued services to us over a required vesting period. Mr. Lambert in his individual capacity, voluntarily agreed
to cancel his RSUs based on his determination that cancelling the RSUs would be in the best interests of the Company and our stockholders.
Mr. Lambert reached this conclusion in order to conserve our available cash resources and to reduce pressure on our stock price.
In
January 2017, we entered into an amendment (the “First Amendment”) to Mr. Lambert’s employment agreement. The
employment agreement, as amended, provided for certain compensation to be paid to Mr. Lambert if his employment was terminated
by the Company without cause or terminated by the executive for good reason or there occurs a Change in Control of the Company.
However, in September 2018, we entered into a second amendment (the “Second Amendment”) to Mr. Lambert’s employment
agreement, pursuant to which Mr. Lambert agreed to reduce the severance payments he was entitled to receive if he was terminated
by the Company without cause or he terminates his employment for good reason. Under the employment agreement as amended by the
first amendment, he was entitled to receive 24 months of base salary plus a $1,000,000 lump sum payment. Under the Second Amendment,
he was entitled to receive six months of base salary. In addition, under the Second Amendment, Mr. Lambert agreed to waive his
rights to: (i) receive 24 months of base salary plus a $1,000,000 lump sum payment in the event he is terminated in connection
with or following a change in control of the Company and (ii) receive “gross-up” payments from the Company in the
event any payment or distribution he receives from the Company is subject to an excise tax under Section 4999 of the Internal
Revenue Code.
Under
the Second Amendment, the term of Mr. Lambert’s employment with the Company was extended to June 30, 2020. During such term,
Mr. Lambert’s employment with the Company was to remain “at-will.” Either party could terminate Mr. Lambert’s
employment early, for any or no reason, and with or without cause, by providing the other party with 30 days’ advance written
notice. Additionally, the Second Amendment provided that Mr. Lambert would be entitled to accelerated vesting of his outstanding
equity awards, and a period of 12 months to exercise any outstanding stock options, if his employment was terminated at the expiration
of his employment term on June 30, 2020.
On
June 22, 2017, we granted Mr. Lambert (i) 200,000 RSUs for Common Stock and (ii) an option to purchase 400,000 shares of Common
Stock, which were granted outside the Company’s 2007 Amended and Restated Equity Incentive Plan pursuant to an RSU Agreement
and Option Agreement, respectively. The RSU Agreement and Option Agreement provide that 25% of the RSUs and Options vest on December
31, 2018, and the remainder vest in three equal annual installments thereafter and any unvested shares are subject to accelerated
vesting in connection with a termination without Cause or resignation for Good Reason, upon grantee’s death or Complete
Disability or upon a Change in Control (as the terms are defined in the RSU Agreement and Option Agreement as applicable). Additionally,
the RSUs settle on the earlier (i) ten years from the date of grant, (ii) 60 days after the date that the grantee’s service
ceases for any reason, (iii) the date of the grantee’s death or Complete Disability or (iv) a Change in Control. The consulting
agreement we entered into with Mr. Lambert provided that such unvested RSUs and options vested.
On
August 13, 2018, we granted Mr. Lambert an award consisting of two hundred thousand (200,000) RSUs. 50% of the RSUs were to vest
on December 15, 2019 with the remaining 50% vesting on December 15, 2020. The consulting agreement we entered into with Mr. Lambert
provided that such unvested RSUs vested.
The
foregoing description of the employment agreement, as amended, does not purport to be complete and is qualified in its entirety
by the terms and conditions of the employment agreement filed as Exhibit 10.33 to the Annual Report on Form 10-K for the year
ended July 31, 2013 filed with the SEC on October 24, 2013, Exhibit 99.1 to the Current Report on Form 8-K filed with the SEC
on January 20, 2017 and Exhibit 10.1 to the Current Report on Form 8-K filed with the SEC on September 7, 2018, which are incorporated
herein by reference. The foregoing description of the RSU Agreement and Option Agreement does not purport to be complete and is
qualified in its entirety by the terms and conditions of such RSU Agreement and Option Agreement filed as Exhibits 99.1 and 99.2,
respectively, to the Current Report on Form 8-K filed with the SEC on June 23, 2017, which are incorporated herein by reference.
Consulting
Agreement with our former Chief Executive Officer
Pursuant
to the terms of the Lambert Consulting Agreement, Mr. Lambert’s employment agreement as amended was terminated. The Lambert
Consulting Agreement provides that Mr. Lambert will provide consulting services to the Company for a four (4) month period following
August 7, 2019; provided, however, that if the Company achieves Cash Flow Breakeven (as defined in the Lambert Consulting Agreement)
during such four (4) month period, the term of the consultancy shall extend an additional two (2) months. Mr. Lambert will receive
$14,583 per month during the term of his consultancy. Additionally, in connection Mr. Lambert signing a release in favor of the
Company, the vesting of his outstanding stock options and other equity-based awards accelerated notwithstanding any vesting terms
of such stock options and other equity-based awards.
The
Lambert Consulting Agreement also requires Mr. Lambert to comply with restrictions and covenants in favor of the Company, including
confidentiality, non-compete and non-solicitation provisions.
The
foregoing summary of the Lambert Consulting Agreement, including the associated exhibits, does not purport to be complete, and
is qualified in its entirety by reference to the full text thereof, a copy of which is filed as Exhibit 10.1 to a Current Report
on a Form 8-K filed with the Securities and Exchange Commission on July 12, 2019, and incorporated herein by reference.
Code
Section 162(m) Provisions
Section
162(m) of the U.S. Internal Revenue Code, or the Code, generally disallows a tax deduction to public companies for compensation
in excess of $1 million paid to the Chief Executive Officer or any of the four most highly compensated officers. Prior to changes
in tax law taking effect in 2018, there was an exception to the $1.0 million limitation for performance-based compensation,
including stock options, meeting certain requirements. Before such amendments we had not adopted a policy that all compensation
must qualify as deductible under Section 162(m) of the Code. The exemption from the Section 162(m) deduction limit for performance-based
compensation has been repealed, effective for taxable years beginning after December 31, 2017, such that compensation paid
to our Chief Executive Officer and certain other executive officers in excess of $1.0 million will not be deductible unless
it qualifies for transition relief applicable to certain arrangements in place as of November 2, 2017.
Compensation
of Directors
Each
non-employee director of the Company receives an annual fee of $40,000 payable for such director’s service on the Board.
Members
of the Audit Committee and Compensation Committee do not receive any additional fee for committee participation.
Annual
fees are accrued to each non-employee director in four equal installments on a quarterly basis. Any non-employee directors serving
a portion of the year are entitled to receive such fees on a pro rata basis based on their length of service during the year.
Mr. Lambert did not receive any additional compensation for their board service.
Additionally,
new members of the Board are entitled to receive stock options in an amount to be determined by the Compensation Committee or
the Board.
Upon
his appointment to the Board during the fiscal year ended July 31, 2019, Mr. Okuno received an initial grant of 200,000 stock
options. The options vest fifty percent (50%) on the date of the next annual meeting and fifty percent (50%) on the date of the
following year’s annual meeting. Additionally, during the fiscal year ended July 31, 2019, none of our non-employee directors
received equity awards. Subsequent to July 31, 2019, Messrs. Chen and Okuno received an option to purchase 125,000 and 100,000
shares of common stock. The options vest in accordance with the annual meeting dates discussed above.
In
the past, our Board has approved each year, generally in the first or second calendar quarter of the year, an annual option or
stock grant for our non-employee directors. Any such grant is at the discretion of the Board, which considers the recommendation
of our Compensation Committee. Upon the Board’s approval of any such grant, each non-employee director generally may elect
whether to receive the grant as an option or stock award.
The
following table sets forth compensation earned in the fiscal year ended July 31, 2019 by each of our non-employee directors who
are not named executive officers.
|
|
Fees
Earned or
|
|
|
Option
|
|
|
All
Other
|
|
|
Total
|
|
|
|
Paid
in Cash
|
|
|
Awards
|
|
|
Compensation
|
|
|
Compensation
|
|
Name
|
|
($)
|
|
|
($)(1)
|
|
|
($)(2)
|
|
|
($)
|
|
Tom
Y. Lee
|
|
$
|
52,000
|
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
52,000
|
|
Janet
Risi Field (3)
|
|
$
|
32,500
|
|
|
$
|
—
|
|
|
|
19,753
|
|
|
$
|
52,253
|
|
Dr.
Hagen(3)
|
|
$
|
31,250
|
|
|
$
|
—
|
|
|
|
20,000
|
|
|
$
|
51,250
|
|
Ivan
Chen
|
|
$
|
52,000
|
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
52,000
|
|
Dale
Okuno
|
|
$
|
20,000
|
|
|
$
|
58,000
|
|
|
|
—
|
|
|
$
|
78,000
|
|
Gary
Cohee(3)
|
|
$
|
35,000
|
|
|
$
|
—
|
|
|
|
|
|
|
$
|
35,000
|
|
(1)
Amounts for the year ended July 31, 2019 reflect the grant date fair value for financial statement reporting purposes with respect
to stock options granted during the fiscal year, calculated in accordance with authoritative guidance.
(2)
Represents amount accrued to Ms. Risi and Dr. Hagen for their services on our scientific advisory board.
(3)
Ms. Risi and Dr. Hagen and Mr. Cohee not seek reelection to the Board of Directors at our annual meeting of shareholders held
in January 2019.
Item
12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The
following table provides information regarding the beneficial ownership of our common stock as of October 29, 2019, or the Evaluation
Date, by: (i) each of our current directors, (ii) each of our named executive officers as set forth in Item 11 of this Annual
Report, (iii) all such directors and executive officers as a group and (iv) our five percent or greater stockholders. The table
is based upon information supplied by our officers, directors and principal stockholders and a review of Schedules 13D and 13G,
if any, filed with the SEC. Unless otherwise indicated in the footnotes to the table and subject to community property laws where
applicable, we believe that each of the stockholders named in the table has sole voting and investment power with respect to the
shares indicated as beneficially owned.
Applicable
percentages are based on 79,994,402 shares outstanding as of the Evaluation Date, adjusted as required by rules promulgated by
the SEC. These rules generally attribute beneficial ownership of securities to persons who possess sole or shared voting power
or investment power with respect to those securities. In addition, the rules include shares of our common stock issuable pursuant
to the exercise of stock options or warrants or settlement of restricted stock units that are either immediately exercisable or
exercisable within 60 days of the Evaluation Date. These shares are deemed to be outstanding and beneficially owned by the person
holding those securities for the purpose of computing the percentage ownership of that person, but they are not treated as outstanding
for the purpose of computing the percentage ownership of any other person.
Name
(1)
|
|
Number
of
Shares
Beneficially
Owned
|
|
|
Percent
of
Common
Stock
|
|
Tom
Y. Lee
|
|
|
29,816,341
|
(2)
|
|
|
37.00
|
%
|
Mark
S. Elliott
|
|
|
541,725
|
(3)
|
|
|
*
|
%
|
Tom
Myers
|
|
|
558,850
|
(4)
|
|
|
*
|
%
|
Dale
Okuno
|
|
|
6,309,420
|
(5)
|
|
|
7.89
|
%
|
Ivan
Chen
|
|
|
295,689
|
(6)
|
|
|
*
|
%
|
All
of our named executive officers and directors as a group (5 persons)
|
|
|
37,522,025
|
(7)
|
|
|
46.62
|
%
|
*
|
Indicates
less than one percent of the outstanding shares of the Company’s common stock.
|
|
|
(1)
|
Unless,
noted below, the address for each person listed in the table is c/o PURE Bioscience, Inc., 9669 Hermosa Avenue Rancho Cucamonga,
California 91730
|
|
|
(2)
|
Consists
of 450,000 shares of common stock subject to options currently exercisable or exercisable within 60 days of the Evaluation
Date, and 29,366,341 shares of common stock held directly by Mr. Lee and his spouse.
|
(3)
|
Consists
of 469,375 shares of common stock subject to options currently exercisable or exercisable within 60 days of the Evaluation
Date, and 72,350 shares of common stock held directly by Mr. Elliott.
|
|
|
(4)
|
Consists
of 340,000 shares of common stock subject to options currently exercisable or exercisable within 60 days of the Evaluation
Date, and 218,850 shares of common stock held directly by Mr. Myers.
|
|
|
(5)
|
Consists
of 6,309,420 shares of common stock held directly by Mr. Okuno.
|
|
|
(6)
|
Consists
of 100,000 shares of common stock subject to options currently exercisable or exercisable within 60 days of the Evaluation
Date, and 195,689 shares of common stock held directly by Mr. Chen.
|
|
|
(7)
|
Consists
of 1,359,375 shares of common stock subject to options currently exercisable or exercisable within 60 days of the Evaluation
Date and 36,162,650 shares of common stock, held by all directors and executive officers as a group.
|
Section
16(a) Beneficial Ownership Reporting Compliance
Section
16(a) of the Securities Exchange Act of 1934, as amended (the “Act”), requires our executive officers and directors
and persons who beneficially own more than 10% of our Common Stock to file initial reports of beneficial ownership and reports
of changes in beneficial ownership with the SEC. Such persons are required by SEC regulations to furnish us with copies of all
Section 16(a) forms filed by such persons.
To
the Company’s knowledge, other than as described above, no person who, during the fiscal year ended July 31, 2019, was a
director or officer of the Company, or beneficial owner of more than ten percent of the Company’s Common Stock (which is
the only class of securities of the Company registered under Section 12 of the Act), failed to file on a timely basis reports
required by Section 16 of the Act during such fiscal year.
Equity
Compensation Plan Information
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.
2017
Equity Incentive Plan
In
January 2018 our stockholders approved our 2017 Equity Incentive Plan, the (“2017 Plan”), which has a share reserve
of 5,000,000 shares of common stock. The shares of common stock 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.
All
of our equity incentive plans are administered by the Compensation Committee. The exercise price for stock options is always at
or above the fair market value of our common stock on the date the award is granted. Fair market value is defined by the Plan
and is based on prevailing market prices of our common stock as reported by the OTCQB. The term of stock options granted and their
vesting schedules are determined by the Compensation Committee, subject to any limitations defined in the Plan. The Compensation
Committee also determines the vesting of other, non-option, stock awards.
On
June 23, 2017 we filed a Form S-8 to register shares of Common Stock underlying equity awards granted to our directors and officers
outside the 2007 Amended and Restated Equity Incentive Plan. The S-8 registered 3,150,000 shares with respect to RSUs and options,
which were also granted on the same date.
On
August 23, 2017 we filed a Form S-8 to register shares of Common Stock underlying equity awards granted to our directors, officers
and consultants outside the 2007 Amended and Restated Equity Incentive Plan. The S-8 registered 850,000 shares with respect to
RSUs and options, which were also granted on the same date.
The
following table sets forth, as of July 31, 2019, information with respect to our equity compensation plans, and with respect to
certain other options and warrants.
Plan
Category
|
|
Number
of
securities to
be issued
upon
exercise
of
outstanding
options,
warrants
and rights
(a)(1)
|
|
|
Weighted
average
exercise
price of
outstanding
options,
warrants
and rights
(b)
|
|
|
Number
of
securities
remaining
available
for
future
issuance
under
equity
compensation
plans
(excluding
securities
reflected
in
column
(a))
(c)
|
|
Equity
compensation plans approved by stockholders
|
|
|
5,163,125
|
|
|
$
|
0.98
|
|
|
|
3,224,000
|
|
Equity
compensation plans not approved by stockholders
|
|
|
2,200,000
|
|
|
|
1.18
|
|
|
|
—
|
|
Total
|
|
|
7,636,125
|
|
|
$
|
1.04
|
|
|
|
3,224,000
|
|
(1)
|
Includes
options only and does not include restricted stock units
|
Item
13. Certain Relationships and Related Transactions, and Director Independence
Except
as described below and other than Board or employment relationships and compensation
resulting from those employment relationships, no director, executive officer, 5% stockholder
or immediate family member of any of the foregoing, was a party to any transaction or
series of transactions since August 1, 2017 (the beginning of the year ended July 31,
2018), or is to be a party to any currently proposed transaction or series of proposed
transactions, in which (i) we were or are to be a participant, (ii) the amount involved
exceeds the lesser of $120,000 or one percent of the average of our total assets at fiscal
year-end for the fiscal years ended July 31, 2019 and 2018, which is $45,000, and (iii)
any director, executive officer, or immediate family member of any of the foregoing had
or will have a direct or indirect material interest.
For
information with respect to the compensation paid to our executive officers and directors, see heading “Executive Compensation”
of this annual report.
On
July 29, 2019, we entered into a Sublease Agreement (the “Sublease”) with SwabPlus L.P. (“SwabPlus”),
effective July 25, 2019, pursuant to which we will sublease certain office and industrial space for our corporate headquarters.
The premises are located in Rancho Cucamonga, California. Pursuant to the terms of the Sublease, the Company will pay SwabPlus
rent of approximately $2,333 per month, plus additional payments for real property taxes, maintenance and repair and related expenses.
We terminated the El Cajon lease and transitioned to the new premises in September 2019. We expect the Sublease to drastically
reduce our operating expenses as compared to our operating expenses under our prior lease at the El Cajon facility (See Note 4
to these consolidated financial statements).
Tom
Y. Lee, the Company’s Chief Executive Officer, Chairman of the Board and President, also serves as chairman of the board
of directors and chief executive officer of SwabPlus. Mr. Lee also serves as president of Hermosa Property, Inc., the landlord
of the premises subject to the Sublease. The Sublease was considered by the Company in accordance with the Company’s Related
Party Transaction and Procedures Policy, and approved by the disinterested members of the Board.
Equity
Transactions with our Directors and Officers
Since
August 1, 2017, the Company has entered into the following equity investment transactions with its directors and officers:
|
●
|
On
September 25, 2017, Mr. Lee and his spouse exercised warrants to purchase 694,703 shares of Common Stock for an aggregate
exercise price of $341,881 in connection with the Company’s warrant tender offer to holders of the Company’s warrants.
|
|
|
|
|
●
|
On
September 25, 2017, Bill Otis exercised warrants to purchase 9,066 shares of Common Stock for an aggregate exercise price
of $5,440 in connection with the Company’s warrant tender offer to holders of the Company’s warrants. Mr. Otis
retired from the Board in June 2018.
|
|
|
|
|
●
|
On
September 25, 2017, Dave Pfanzelter exercised warrants to purchase 16,000 shares of Common Stock for an aggregate exercise
price of $9,600 in connection with the Company’s warrant tender offer to holders of the Company’s warrants. Mr.
Pfanzelter retired from the Board in August 2018.
|
|
|
|
|
●
|
On
August 16, 2018, we completed a closing of a private placement financing to accredited investors. We raised approximately
$1.5 million in net proceeds in the private placement financing 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. Lee invested approximately $1.0 million through his affiliates, including
approximately $0.5 million of cash and the conversion 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.
|
|
|
|
|
●
|
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.
|
|
|
|
|
●
|
During May, June, July and October of 2019, we completed four closings (the “Closings”) of a private
placement financings to accredited investors. We raised net proceeds of $1,546,000 in the Closings and issued an aggregate of 5,331,031
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 the investors. Messrs. Tom Y. Lee, Dale Okuno and Ivan Chen, each
of whom is an accredited investor and a member of the Company’s Board of Directors, invested $290,000, $500,000 and $35,000,
respectively, in the private placement financings. Mr. Lee also serves as the Company’s President and Chief Executive Officer.
|
Compensation
of Our Current Directors and Executive Officers
For
information with respect to the compensation offered to our current directors and executive officers, please see the descriptions
under the heading “Executive Compensation” of this annual report.
Related
Party Transaction Policy and Procedures
Pursuant
to our Related Party Transaction and Procedures, our executive officers, directors, and principal stockholders, including their
immediate family members and affiliates, are prohibited from entering into a related party transaction with us without the prior
consent of our Audit Committee or our independent directors. Any request for us to enter into a transaction with an executive
officer, director, principal stockholder, or any of such persons’ immediate family members or affiliates, must first be
presented to our Audit Committee for review, consideration and approval. In approving or rejecting the proposed agreement, our
Audit Committee will consider the relevant facts and circumstances available and deemed relevant, including, but not limited,
to the risks, costs and benefits to us, the terms of the transaction, the availability of other sources for comparable services
or products, and, if applicable, the impact on a director’s independence. Our Audit Committee shall approve only those agreements
that, in light of known circumstances, are in, or are not inconsistent with, our best interests, as our Audit Committee determines
in the good faith exercise of its discretion.
Compensation
Committee Interlocks and Insider Participation
None
of the members of our Compensation Committee are or have been an officer or employee of us. During fiscal 2019, 2018 and 2017,
no member of our Compensation Committee had any relationship with us requiring disclosure under Item 404 of Regulation S-K, except
as set forth above, none of our executive officers served on the Compensation Committee (or its equivalent) or board of directors
of another entity any of whose executive officers served on our Compensation Committee or board of directors.
Board
Composition
We
are not currently listed on any national securities exchange or in an inter-dealer quotation system that has established a standard
for independence. However, in evaluating the independence of our members and the composition of the committees of our Board of
Directors, our Board utilizes the definition of “independence” as that term is defined by applicable listing standards
of the NYSE MKT. As of the date of this annual report, our Board consists of three members, two of whom are considered independent
as that term is defined by applicable listing standards of the NYSE MKT. Our independent directors include: Messrs. Chen and Okuno.
Our
directors are appointed annually, and hold office until their successors have been elected and qualified or until their earlier
death, resignation, disqualification, or removal.
Item
14. Principal Accounting Fees and Services
Independent
Registered Public Accounting Firm’s Fee Summary
The
following table provides information regarding the fees billed to us by Mayer Hoffman McCann P.C. for the years ended July 31,
2019 and 2018. Mayer Hoffman McCann P.C. leases substantially all of its personnel, who work under the control of Mayer Hoffman
McCann P.C. shareholders, from wholly-owned subsidiaries of CBIZ, Inc., including CBIZ MHM, LLC, in an alternative practice structure.
All fees described below were approved by the Board or the Audit Committee:
|
|
For
the years ended July 31,
|
|
|
|
2019
|
|
|
2018
|
|
Audit
Fees (1)
|
|
$
|
123,000
|
|
|
$
|
164,000
|
|
Tax
Fees (2)
|
|
$
|
13,000
|
|
|
$
|
13,000
|
|
Total
Fees
|
|
$
|
136,000
|
|
|
$
|
177,000
|
|
(1)
|
Audit
Fees include fees for services rendered for the audit and quarterly reviews of our financial statements, including our Annual
Report on Form 10-K and our periodic reports, and fees incurred related to the filings of registration statements.
|
|
|
(2)
|
Tax
Fees consist of amounts billed by an affiliate of our independent auditors for services in connection with the preparation
of our federal and state tax returns.
|
Pre-Approval
Policies and Procedures
Our
Audit Committee’s policy is to pre-approve all audit and permissible non-audit services provided by our independent auditors.
These services may include audit services, audit-related services, tax services and other services. Pre-approval is generally
provided for up to one year and any pre-approval is detailed as to the particular service or category of services. The independent
auditor and management are required to periodically report to the Audit Committee regarding the extent of services provided by
the independent auditor in accordance with this pre-approval. Any proposed services not included within the list of pre-approved
services or any proposed services that will cause the Company to exceed the pre-approved aggregate amount requires specific pre-approval
by the Audit Committee. All audit fees, audit-related fees, tax fees, and other fees listed in the table above were approved by
the Audit Committee pursuant to its pre-approval policies and procedures.
Notes
to Consolidated Financial Statements
1.
Organization and Business
All
references to “PURE,” “we”, “our,” and “us” refer to PURE Bioscience, Inc. and
our wholly owned subsidiary.
PURE
Bioscience, Inc. is focused on developing and commercializing our proprietary antimicrobial products that provide 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 that is manufactured as a liquid delivered in various concentrations. We currently distribute and contract the manufacture
and distribution of our SDC-based disinfecting and sanitizing products. We also contract manufacture and sell SDC-based formulations
to manufacturers for use as a raw material ingredient in the production of personal care products. We believe our technology platform
has potential application in a number of industries. We intend to focus our current resources on providing food safety solutions
to the food industry.
We
were incorporated in the state of California in August 1992 as Innovative Medical Services. In September 2003, we changed our
name to PURE Bioscience. In March 2011, we reincorporated in the state of Delaware. We operate in one business segment.
Liquidity
& Going Concern 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 July 31, 2019, we have incurred
a cumulative net loss of $123,478,000.
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 July 31, 2019, we had $398,000 in cash and cash equivalents, and $738,000 of current liabilities, including $553,000 in
accounts payable. On October 2, 2019, we entered into and completed a closing of a private placement financing to accredited investors.
We raised net proceeds of $830,000 in the closing of an aggregate of 2,862,068 shares of the Company’s common stock at a
purchase price of $0.29 per share. Tom Y. Lee and Dale Okuno, each of whom are accredited investors and members of the Company’s
Board of Directors invested $290,000 and $250,000, respectively, in the private placement financing. Mr. Lee also serves as the
Company’s President and Chief Executive Officer.
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.
These consolidated financial statements
have been prepared and presented on a basis assuming we will continue as a going concern. The factors above raise substantial
doubt about our ability to continue as a going concern. The
consolidated financial statements do not include any adjustment relating to recoverability or classification of recorded assets
and classification of recorded liabilities.
2.
Summary of Significant Accounting Policies
Basis
of Presentation
The
accompanying consolidated financial statements include the consolidated accounts of PURE Bioscience, Inc. and its wholly owned
subsidiary, ETIH2O Inc., a Nevada corporation. ETIH2O Inc. has no business and no material assets or liabilities and there have
been no significant transactions related to ETIH2O Inc. during the periods presented in the consolidated financial statements.
All inter-company balances and transactions have been eliminated.
Use
of Estimates
The
preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States
of America, or GAAP, requires management to make estimates and assumptions that affect the amounts reported in the consolidated
financial statements, and the disclosures made in the accompanying notes to the consolidated financial statements. Actual results
could differ materially from those estimates.
Cash
and Cash Equivalents
Cash
and cash equivalents consist of cash and highly liquid investments with original maturities from the purchase date of three months
or less.
Restricted
Cash
The
Company is required to maintain $75,000 in a restricted certificate of deposit account in order to fully collateralize four revolving
credit card accounts.
Fair
Value of Financial Instruments
Certain
of our financial instruments—including cash and cash equivalents, accounts receivable, inventories, prepaid expenses, accounts
payable, accrued liabilities, and deferred rent are carried at cost, which is considered to be representative of their respective
fair values because of the short-term nature of these instruments. Our derivative liabilities were carried at estimated
fair value (See Notes 5 and 6 to these consolidated financial statements).
Accounts
Receivable
Trade
accounts receivable are recorded net of allowances for doubtful accounts. Estimates of allowances for doubtful accounts are determined
based on historical payment patterns and individual customer circumstances. The allowance for doubtful accounts was zero at July
31, 2019 and 2018.
Inventories
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.
Property,
Plant and Equipment
Property,
plant and equipment is stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method over
the estimated useful lives of the assets. The estimated useful lives of our property, plant, and equipment range from three to
ten years. Capitalized costs associated with leasehold improvements are depreciated over the lesser of the useful life of the
asset or the remaining life of the lease. Depreciation is generally included in selling, general and administrative expense. Depreciation
related to manufacturing is systematically allocated to inventory produced, and expensed through cost of goods sold at the time
inventory is sold.
Patents
We
have filed a number of patent applications with the United States Patent and Trademark Office and in foreign countries. Certain
legal and related costs incurred in connection with pending patent applications have been capitalized. Costs related to successful
patent applications are amortized over the lesser of the remaining useful life of the related technology or the remaining patent
life, commencing on the date the patent is issued. Capitalized costs related to patent applications are expensed in the period
in which a determination is made not to pursue such applications.
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. There were no patent impairments during the years ended July 31, 2019 or 2018.
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 Consolidated Statements
of Operations.
Shipping
and Handling Costs
Shipping
and handling costs incurred by us for product shipments are included in cost of goods sold and were minimal for the years ended
July 31, 2019 and 2018.
Research
and Development Costs
Research
and development costs are expensed as incurred.
Share-Based
Compensation
We
grant equity-based awards under share-based compensation plans. 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.
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 years ended
July 31, 2019 and 2018, our comprehensive loss consisted only of net loss.
Income
Taxes
We
recognize deferred tax assets and liabilities for temporary differences between the tax basis of assets and liabilities and the
amounts at which they are carried in the financial statements based upon the enacted tax rates in effect for the year in which
the differences are expected to reverse. A valuation allowance is established to reduce deferred tax assets to the amount expected
to be realized.
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 antidilutive effect. For the years ended July 31, 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 9,736,722 and 12,012,189, respectively.
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. 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 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 had 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 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 fiscal year ended July 31, 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 years ended July 31, 2019 and
2018 because we maintain a valuation allowance on the entirety 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 fiscal year ended July
31, 2019. The adoption of this guidance had no material impact on our financial statements.
3.
Balance Sheet Details
Inventories
consist of the following:
|
|
July
31,
|
|
|
|
2019
|
|
|
2018
|
|
Raw materials
|
|
$
|
30,000
|
|
|
$
|
39,000
|
|
Finished goods
|
|
|
147,000
|
|
|
|
158,000
|
|
|
|
$
|
177,000
|
|
|
$
|
197,000
|
|
During
the year ended July 31, 2018, we wrote-off $58,000 of finished goods inventory damaged at our contract manufacturer’s facility.
In addition we wrote-off $26,000 of inventory destroyed in a third-party warehouse fire. 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 consolidated statements of operations.
Property,
plant, and equipment consist of the following:
|
|
July 31,
|
|
|
|
2019
|
|
|
2018
|
|
Computers and equipment
|
|
$
|
1,001,000
|
|
|
$
|
1,064,000
|
|
Furniture and fixtures
|
|
|
21,000
|
|
|
|
21,000
|
|
|
|
|
1,022,000
|
|
|
|
1,085,000
|
|
Less accumulated depreciation
|
|
|
(660,000
|
)
|
|
|
(624,000
|
)
|
|
|
$
|
362,000
|
|
|
$
|
461,000
|
|
Depreciation
expense remained unchanged at $106,000 for the years ended July 31, 2019 and 2018, respectively.
Patents
consist of the following:
|
|
July
31,
|
|
|
|
2019
|
|
|
2018
|
|
Patents
|
|
$
|
3,504,000
|
|
|
$
|
3,500,000
|
|
Less accumulated
amortization
|
|
|
(2,975,000
|
)
|
|
|
(2,842,000
|
)
|
|
|
$
|
529,000
|
|
|
$
|
658,000
|
|
Patent
amortization expense for the years ended July 31, 2019 and 2018 was $135,000 and $179,000, respectively.
At
July 31, 2019, future patent amortization expense is expected to be as follows:
2020
|
|
$
|
87,000
|
|
2021
|
|
|
76,000
|
|
2022
|
|
|
48,000
|
|
2023
|
|
|
42,000
|
|
2024
|
|
|
42,000
|
|
Thereafter
|
|
|
234,000
|
|
|
|
$
|
529,000
|
|
4.
Commitments and Contingencies
Legal
From time to time, we could become involved
in disputes and various litigation matters that arise in the normal course of business. Lawsuits against us or our officers or
directors by employees, former employees, stockholders, partners, customers, or others, or actions taken by regulatory authorities,
could be very costly and substantially disrupt our business. Such lawsuits and actions are not uncommon, and we may not be able
to resolve such disputes or actions on terms favorable to us, and there may not be sufficient capital resources available to defend
such actions effectively, or at all. As of July 31, 2019, there were no material lawsuits against the Company.
Operating
Leases
During
August 2016, we amended the lease of our primary facility in El Cajon, California under a noncancelable operating lease that now
expires in December 2019. This facility includes our corporate offices, research and development laboratory, and warehouse. Rent
expense, including common area maintenance, was $111,000 and $121,000 for the years ended July 31, 2019 and 2018, respectively.
On
July 29, 2019, we entered into a Sublease Agreement (the “Sublease”) with SwabPlus L.P. (“SwabPlus”),
effective July 25, 2019, pursuant to which we will sublease certain office and industrial space for our corporate headquarters.
The premises are located in Rancho Cucamonga, California. Pursuant to the terms of the Sublease, the Company will pay SwabPlus
rent of approximately $2,333 per month, plus additional payments for real property taxes, maintenance and repair and related expenses.
We terminated the El Cajon lease and transitioned to the new premises in September 2019. We expect the Sublease to drastically
reduce our operating expenses as compared to our operating expenses under our prior lease at the El Cajon facility.
Tom
Y. Lee, the Company’s Chief Executive Officer, Chairman of the Board and President, also serves as chairman of the board
of directors and chief executive officer of SwabPlus. Mr. Lee also serves as president of Hermosa Property, Inc., the landlord
of the premises subject to the Sublease. The Sublease was considered by the Company in accordance with the Company’s Related
Party Transaction and Procedures Policy, and approved by the disinterested members of the Board.
Future
minimum annual lease payments for our primary facility as of July 31, 2019 are as follows:
2019
|
|
$
|
37,000
|
|
2020
|
|
$
|
14,000
|
|
|
|
$
|
51,000
|
|
5.
Fair Value of Financial Instruments
Fair
value is defined as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability
in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined
based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions,
the authoritative guidance establishes a three-tier value hierarchy, which prioritizes the inputs used in measuring fair value
as follows:
|
●
|
Level
1 – Quoted prices in active markets for identical assets or liabilities.
|
|
|
|
|
●
|
Level
2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar
assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated
by observable market data for substantially the full term of the assets or liabilities.
|
|
|
|
|
●
|
Level
3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value
of the assets or liabilities.
|
In
connection with the October and November 2015 Private Placements, we issued warrants with derivative features. These instruments
were accounted for as derivative liabilities (See Note 6 to these consolidated financial statements).
We
used Level 3 inputs for the valuation methodology of the derivative liabilities. The estimated fair values were computed using
a Monte Carlo option pricing model based on various assumptions. Our derivative liabilities are adjusted to reflect estimated
fair value at each period end, with any decrease or increase in the estimated fair value being recorded in other income or expense
accordingly, as adjustments to the fair value of the derivative liabilities. Various factors are considered in the pricing models
we use to value the warrants, including the Company’s current stock price, the remaining life of the warrants, the volatility
of the Company’s stock price, and the risk free interest rate.
The following table provides a reconciliation of the beginning and ending balances of the derivative liabilities for the year
ended July 31, 2018:
Fair Value of Significant Unobservable
Inputs (Level 3)
|
|
Warrant
|
|
|
|
Liability
|
|
Balance at July 31,
2017
|
|
$
|
1,853,000
|
|
Issuances
|
|
|
—
|
|
Settlement of warrant liability
|
|
|
(1,394,000
|
)
|
Adjustments
to estimated fair value
|
|
|
(459,000
|
)
|
Balance
at July 31, 2018
|
|
$
|
—
|
|
6.
Derivative Liability
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 consolidated statements of operations during the fiscal year ended July 31, 2018. 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 consolidated statements of operations during the fiscal year ended July 31, 2018. In addition, the fair value on the exercise
date was returned to additional paid in capital.
During
the fiscal year ended July 31, 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 fiscal year ended July 31, 2018, was a decrease of $459,000, which was
recorded as a change in derivative liabilities in the consolidated statements of operations. As of July 31, 2019, there were no
warrants classified as derivatives outstanding.
7.
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 converted into
1,120,633 shares of common stock (See Note 8 to these consolidated financial statements).
8.
Stockholders’ Equity
Preferred
Stock
As
of July 31, 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 July 31, 2019 and July 31, 2018, there were no shares of preferred stock
issued and outstanding.
Common
Stock
As
of July 31, 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 conversion 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 conversion of indebtedness), after deducting fees and other offering
expenses, were approximately $1.5 million.
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 consolidated statement of operations for the inducement to exercise the
2014 Warrants.
During
May, June and July of 2019, we completed three closings (the “Closings”) of a private placement financings to accredited
investors. We raised net proceeds of $716,000 in the Closings and issued an aggregate of 2,468,963 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 the investors. Messrs. Dale Okuno and Ivan Chen, each of whom are accredited investors and
members of the Company’s Board of Directors invested $250,000 and $35,000, respectively, in the private placement financings.
The
net proceeds to us from the Closings, after deducting fees and other offering expenses, were approximately $716,000. 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.
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 consolidated statement of operations for the inducement to exercise the Original Warrants.
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 fiscal year ended July 31, 2019 and 2018, we recognized $25,000
and $21,000 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 fiscal year ended July 31, 2018, we recognized $101,000 of expense related
to these services.
Additional
Warrant Exercise
During
the fiscal year ended July 31, 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.
A
summary of our warrant activity and related data is as follows:
|
|
Shares
|
|
Outstanding at July 31, 2017
|
|
|
8,303,836
|
|
Issued
|
|
|
—
|
|
Exercised
|
|
|
(5,329,220
|
)
|
Expired/Cancelled
|
|
|
(113,520
|
)
|
Outstanding at July 31, 2018
|
|
|
2,861,096
|
|
Issued
|
|
|
—
|
|
Exercised
|
|
|
(2,399,999
|
)
|
Expired/Cancelled
|
|
|
—
|
|
Outstanding at July 31, 2019
|
|
|
461,097
|
|
The
following table summarizes information related to warrants outstanding at July 31, 2019:
Expiration
|
|
Exercise
|
|
|
|
|
Date
|
|
Price
|
|
|
Shares
|
|
08/29/19
|
|
$
|
0.75
|
|
|
|
133,332
|
|
12/01/21
|
|
$
|
1.25
|
|
|
|
58,824
|
|
12/01/21
|
|
$
|
1.28
|
|
|
|
117,647
|
|
01/23/22
|
|
$
|
1.25
|
|
|
|
117,647
|
|
01/23/22
|
|
$
|
1.28
|
|
|
|
33,647
|
|
|
|
|
|
|
|
|
461,097
|
|
9.
Share-Based Compensation
Restricted
Stock Units
During
the fiscal year ended July 31, 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.
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 July 31, 2019.
During
the fiscal year ended July 31, 2018, the Compensation Committee of the Board of Directors authorized the issuance of 450,000 RSUs
to newly appointed members of our Board of Directors. RSUs issued to directors vest in two 50% installments on or before our annual
meeting of stockholders, typically held in January. In addition, we issued 300,000 performance based RSUs to third-party consultants.
We currently do not expect the 300,000 RSUs to vest. Each RSU represents the right to receive one share of common stock, issuable
at the time the RSU is delivered and subsequently settles, as set forth in the Restricted Stock Unit Agreement.
A
summary of our restricted stock unit activity and related data is as follows:
|
|
Shares
|
|
Outstanding at July 31, 2017
|
|
|
2,035,000
|
|
Granted
|
|
|
750,000
|
|
Vested
|
|
|
(375,000
|
)
|
Forfeited
|
|
|
(885,000
|
)
|
Outstanding at July 31, 2018
|
|
|
1,525,000
|
|
Granted
|
|
|
725,000
|
|
Vested
|
|
|
(206,250
|
)
|
Forfeited
|
|
|
(131,250
|
)
|
Outstanding at July 31, 2019
|
|
|
1,912,500
|
|
Of
the 1,912,500 RSUs outstanding, we currently expect 456,250 to vest. As of July 31, 2019, there was $207,000 of unrecognized non-cash
compensation cost related to RSUs we expect to vest, which will be recognized over a weighted average period of 1.80 years. Of
the 1,912,500 RSUs outstanding as of July 31, 2019, 1,456,250 RSUs are vested and the underlying common stock has not been delivered
and remains outstanding, as set forth in the RSU agreements.
For
the fiscal year ended July 31, 2019 share-based compensation expense for RSUs was $1,062,000, 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 fiscal year ended July 31, 2018 share-based compensation expense for RSUs was $834,000.
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
July 31, 2019, there were approximately 1,153,000 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 July 31, 2019, there were approximately 2,071,000 shares available
for issuance under the 2017 Plan.
Stock
Option Activity
During
the fiscal year ended July 31, 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 fiscal year ended July 31, 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.
During
the fiscal year ended July 31, 2018, we issued 2,245,000 stock options at various exercise prices to employees, directors, and
consultants. The options vest between one and two years and carry a term between five and ten years.
During
the fiscal year ended July 31, 2018, the Compensation Committee of the Board of Directors extended the expiration terms of 740,000
employee options by three years. We accounted for the option modification under ASC Topic 718 and recorded a one-time expense
of $203,000, which was expensed under the share-based compensation line item on the consolidated statements of operations.
A
summary of our stock option activity for the fiscal years ended July 31, 2019 and 2018 is as follows:
|
|
Shares
|
|
|
Weighted-
Average
Exercise Price
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding at July 31, 2017
|
|
|
5,759,843
|
|
|
$
|
1.25
|
|
|
$
|
1,120,000
|
|
Granted
|
|
|
2,245,000
|
|
|
$
|
—
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
$
|
—
|
|
|
|
|
|
Cancelled
|
|
|
(378,750
|
)
|
|
$
|
1.96
|
|
|
|
|
|
Outstanding at July 31, 2018
|
|
|
7,626,093
|
|
|
$
|
1.09
|
|
|
$
|
—
|
|
Granted
|
|
|
300,000
|
|
|
$
|
0.52
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
$
|
—
|
|
|
|
|
|
Cancelled
|
|
|
(562,968
|
)
|
|
$
|
1.47
|
|
|
|
|
|
Outstanding at July 31, 2019
|
|
|
7,363,125
|
|
|
$
|
1.04
|
|
|
$
|
—
|
|
The
weighted average expected term of options outstanding at July 31, 2019 was 4.60 years.
At
July 31, 2019, options to purchase 6,354,792 shares of common stock were exercisable. These options had a weighted-average exercise
price of $1.04, an aggregate intrinsic value of zero, and a weighted average expected term of 4.32 years. The weighted average
grant date fair value for options granted during the years ended July 31, 2019 and 2018, was $0.52 and $0.44, respectively. The
total unrecognized compensation cost related to unvested stock option grants as of July 31, 2019 was approximately $312,000 and
the weighted average period over which these grants are expected to vest is 1.88 years.
For
the fiscal year ended July 31, 2019 and 2018, share-based compensation expense for stock options was $1,387,000 and $1,525,000
respectively.
We
use the Black-Scholes valuation model to calculate the fair value of stock options. Share-based compensation expense is recognized
over the vesting period using the straight-line method. The fair value of stock options was estimated at the grant date using
the following weighted average assumptions:
|
|
For
the years ended
July
31,
|
|
|
|
2019
|
|
|
2018
|
|
Volatility
|
|
|
75.67
|
%
|
|
|
71.18
|
%
|
Risk-free interest rate
|
|
|
2.63
|
%
|
|
|
2.32
|
%
|
Dividend yield
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
Expected life
|
|
|
4.80
years
|
|
|
|
3.69
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.
10.
Related Party Transactions
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 converted into 1,120,633
shares of common stock (See Note 8 to these consolidated financial statements).
On
June 9, 2019, we entered into a five-year manufacturing supply agreement with Intercon Chemical Company (ICC) with a three-year
renewal term option (the “Manufacturing Supply Agreement”). The agreement consists of manufacturing, packaging, and
distribution of PURE’s SDC-based products. The Manufacturing Supply Agreement provides:
|
●
|
ICC
licenses PURE’s patents and technology know-how for the non-exclusive manufacture of PURE’s SDC-based products.
|
|
●
|
ICC
will invest in plant improvements to allow for expanded SDC production.
|
|
●
|
ICC’s
R&D team will collaborate on SDC product line development.
|
The
Manufacturing Supply Agreement may be terminated by mutual written consent, or by either party upon the material breach of the
terms of the agreement by the other party.
During the years ended July 31, 2019 and 2018,
our net product sales to ICC was $5,000 and $8,000, respectively. As of July 31, 2019 and 2018, there was no accounts receivable
due to the Company for products purchased by ICC. During the years ended July 31, 2019 and 2018, we purchased $540,000 and $575,000,
of SDC based products produced by ICC, respectively. Additionally, as of July 31, 2019 and 2018, $65,000 and $85,000 was payable
to ICC for the production of SDC based products, respectively.
The president of ICC is a shareholder of the
Company.
On July 29, 2019, we entered into a Sublease
Agreement (the “Sublease”) with SwabPlus L.P. (“SwabPlus”), effective July 25, 2019, pursuant to which
we will sublease certain office and industrial space for our corporate headquarters. The premises are located in Rancho
Cucamonga, California. Pursuant to the terms of the Sublease, the Company will pay SwabPlus rent of approximately $2,333 per month,
plus additional payments for real property taxes, maintenance and repair and related expenses. We terminated the El Cajon lease
and transitioned to the new premises in September 2019. We expect the Sublease to drastically reduce our operating expenses as
compared to our operating expenses under our prior lease at the El Cajon facility (See Note 4 to these consolidated financial
statements).
Tom Y. Lee, the Company’s Chief Executive
Officer, Chairman of the Board and President, also serves as chairman of the board of directors and chief executive officer of
SwabPlus. Mr. Lee also serves as president of Hermosa Property, Inc., the landlord of the premises subject to the Sublease. The
Sublease was considered by the Company in accordance with the Company’s Related Party Transaction and Procedures Policy,
and approved by the disinterested members of the Board.
11.
Sales Concentration
Net
product sales were $1,909,000 and $1,774,000 for the years ended July 31, 2019 and 2018, respectively. For the year ended July
31, 2019, one individual customer accounted for 15%, and two individual customers accounted for 11% of our net product
sales. No other individual customer accounted for 10% or more of our net product sales. For the year ended July 31, 2018, three
individual customers accounted for 20%, 16% and 11%, of our net product sales, respectively. No other individual customer accounted
for 10% or more of our net product sales. For the years ended July 31, 2018 and 2017, all net product sales occurred in the United
States.
12.
Income Taxes
We
file federal and state consolidated tax returns with our subsidiaries. Our income tax provision for the years ended July 31, 2019
and 2018 was $1,650; the minimum state franchise taxes we pay regardless of income or loss.
At
July 31, 2019, we had federal and state tax net operating loss carry-forwards of approximately $108.3 million and $62.1 million,
respectively. At July 31, 2018, we had federal and state tax net operating loss carry-forwards of approximately $105.2 million
and $60.5 million, respectively. Utilization of the net operating loss carry-forwards may be subject to a substantial annual limitation
due to ownership change limitations that may have occurred or that could occur in the future, as required by Section 382 of the
Internal Revenue Code as well as similar state provisions. These ownership changes may limit the amount of net operating loss
carry-forwards that can be utilized annually to offset future taxable income and tax, respectively. In general, an ownership change,
as defined by Section 382 of the Internal Revenue Code results from a transaction or series of transactions over a three-year
period resulting in an ownership change of more than 50 percentage points of the outstanding stock of a company by certain stockholders
or public groups. Since our formation, we have raised capital through the issuance of capital stock on several occasions (both
before and after our initial public offering in 1996) which, combined with the purchasing stockholders’ subsequent disposition
of those shares, may have resulted in such an ownership change, or could result in an ownership change in the future upon subsequent
disposition. While we do not believe that we have experienced an ownership change, the pertinent tax rules related thereto are
complex and subject to varying interpretations, and thus complete assurance cannot be provided that the taxing authorities would
not take an alternative position.
Our
current federal tax loss carry-forwards begin expiring in the year ended July 31, 2020 and, unless previously utilized, all but
$3.1 million will completely expire in the year ending July 31, 2038. The $3.1 million can be carried forward indefinitely. Our
state tax loss carry-forwards began to expire in the year ending July 31, 2029, and will completely expire in the year ending
July 31, 2039.
Significant
components of our deferred tax assets are as follows:
|
|
July 31,
|
|
|
|
2019
|
|
|
2018
|
|
Net operating loss carry-forward
|
|
$
|
26,940,000
|
|
|
$
|
26,170,000
|
|
Stock options and warrants
|
|
|
2,030,000
|
|
|
|
2,590,000
|
|
Other temporary differences
|
|
|
(130,000
|
)
|
|
|
(130,000
|
)
|
Total deferred tax assets
|
|
|
28,840,000
|
|
|
|
28,630,000
|
|
Valuation allowance for deferred tax assets
|
|
|
(28,840,000
|
)
|
|
|
(28,630,000
|
)
|
Net deferred tax assets
|
|
$
|
—
|
|
|
$
|
—
|
|
A
reconciliation of income taxes computed using the statutory income tax rate, compared to the effective tax rate, is as follows:
|
|
2019
|
|
|
2018
|
|
Federal tax benefit at the expected statutory rate
|
|
|
21.0
|
%
|
|
|
26.4
|
%
|
State income tax, net of federal tax benefit
|
|
|
0.6
|
|
|
|
32.5
|
|
Expired net operating loss carryforwards
|
|
|
—
|
|
|
|
(20.0
|
)
|
Other
|
|
|
(18.3
|
)
|
|
|
(2.9
|
)
|
Rate change adjustment
|
|
|
—
|
|
|
|
(175.4
|
)
|
Change in state tax rates
|
|
|
—
|
|
|
|
—
|
|
Permanent items
|
|
|
—
|
|
|
|
—
|
|
Valuation allowance
|
|
|
(3.3
|
)
|
|
|
139.4
|
|
Income tax benefit - effective rate
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
Following
authoritative guidance, we recognize the tax benefit from a tax position if it is more likely than not that the tax position will
be sustained on examination by the taxing authorities, based on the technical merits of the position.
Our
practice is to recognize interest and/or penalties related to income tax matters in income tax expense; however we have had no
accrued interest or penalties at either July 31, 2019 or July 31, 2018. We are subject to income taxes in the United States and
in various states, and our historical tax years remain subject to future examination by the U.S. and state tax authorities. During
the years ended July 31, 2019 and 2018, we did not record any activity related to our unrecognized tax benefits.
The
Company and its subsidiaries are subject to federal income tax as well as income tax of multiple state jurisdictions. With few
exceptions, the Company is no longer subject to income tax examination by tax authorities in major jurisdictions for tax years
prior to 2012. However, to the extent allowed by law, the taxing authorities may have the right to examine prior periods where
net operating losses were generated and carried forward, and make adjustments up to the amount of the carryforwards. The Company
is not currently under examination by the IRS or state taxing authorities.
13.
Subsequent Events
Private
Placement Financing
On
October 2, 2019, we entered into and completed a closing (the “Closing”) of a private placement financing (the “Private
Placement Financing”) to accredited investors. We raised net proceeds of $830,000 in the Closing of an aggregate of 2,862,068
shares (collectively, the “Shares”) of the Company’s common stock (the “Common Stock”) at a purchase
price of $0.29 per share, the closing sales price of the Company’s common stock on the date prior to the Closing. The Shares
issued in the Private Placement Financing were issued pursuant to a Securities Purchase Agreement (the “Securities Purchase
Agreement”) entered into with the investors. Tom Y. Lee and Dale Okuno, each of whom are accredited investors and members
of the Company’s Board of Directors (the “Board”) invested $290,000 and $250,000, respectively, in the Private
Placement Financing. Mr. Lee also serves as the Company’s President and Chief Executive Officer.
The
net proceeds to the Company from the Closing, after deducting the forgoing fees and other offering expenses, are expected to be
approximately $829,000. The Company expects to use the net proceeds for general corporate purposes, including the Company’s
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.