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| PURE > SEC Filings for PURE > Form 10-K on 13-Oct-2009 | All Recent SEC Filings |
13-Oct-2009
Annual Report
This report contains forward-looking statements. These statements relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as "may," "will," "should," "expect," "plan," "anticipate," "believe," "estimate," "predict," "potential" or "continue," the negative of such terms or other comparable terminology. These statements are only predictions. Actual events or results may differ materially.
Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Moreover, neither we, nor any other person, assume responsibility for the accuracy and completeness of the forward-looking statements. We are under no obligation to update any of the forward-looking statements after the filing of this Annual Report on Form 10-K to conform such statements to actual results or to changes in our expectations.
The following discussion of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes and other financial information appearing elsewhere in this Annual Report. Readers are also urged to carefully review and consider the various disclosures made by us which attempt to advise interested parties of the factors which affect our business, including without limitation the disclosures made in Item 1A of Part I of this Annual Report under the Caption "Risk Factors".
Risk factors that could cause actual results to differ from those contained in the forward-looking statements include but are not limited to: our limited operating history; our history of losses; our future capital needs; the rapidly changing technologies and market demands; the failure of our products to achieve broad acceptance; our failure to successfully compete; our dependence on a single product; our failure to comply with government regulation; the loss of a key member of our management team; our failure to protect our intellectual property; our exposure to intellectual property and product liability claims; changes in government policies and other risks identified in this Annual Report on Form 10-K.
The financial statements presented herein, and discussed below, have been prepared in accordance with U.S. Generally Accepted Accounting Principles.
Overview
PURE Bioscience (sometimes referred to herein as the "Company," "we" "us" or
"our") was incorporated in the state of California on August 24, 1992. We began
as a provider of pharmaceutical water purification products for the pharmacy
market. In 2000, we commenced investments in the development of novel bioscience
technologies, and subsequent to the May 2005 sale of our Water Treatment
Division we have been exclusively focused on the development and
commercialization of our current and future bioscience products.
We are expanding into markets with broad potential by developing new, proprietary bioscience products based upon our patented silver ion antimicrobial technologies. We are developing technology-based bioscience products, including our silver dihydrogen citrate-based antimicrobials, which we believe can provide novel, non-toxic solutions to numerous global health challenges and represent innovative advances in diverse markets. We believe that our technologies are in a position to contribute significantly to today's global trend toward industrial and consumer use of environmentally friendly products, while providing competitive advantages in efficacy and safety.
Bioscience Technologies
Our flagship bioscience technology is a patented, aqueous antimicrobial called
silver dihydrogen citrate ("SDC"). A new molecular entity, SDC is an
electrolytically generated source of stabilized ionic silver that can serve as
the basis for a broad range of products in diverse markets. SDC liquid is
colorless, odorless, tasteless, non-caustic and formulates well with other
compounds. As a platform technology, our SDC-based antimicrobial is
distinguished from competitors in the marketplace because of its superior
efficacy combined with reduced toxicity. We are producing and plan to expand the
production of pre-formulated, ready-to-use products for private label
distribution, as well as varying strengths of SDC concentrate as an additive or
raw material for inclusion in other companies' products, including as an active
pharmaceutical ingredient. In addition to SDC, we have obtained patent
protection for ionic silver-based molecular entities utilizing 14 organic acids
other than citric acid.
We also own certain rights to a patent-pending pesticide technology, Triglycylboride which, like SDC, provides effective results without human toxicity and is an alternative to traditional poisons. Triglycylboride has been formulated into the products RoachX and AntX, however these products are not currently being actively marketed or developed.
Sources of Revenue
Our principal sources of revenue are comprised of sales of SDC concentrate as
well as both bulk and individually bottled SDC-based hard surface disinfectant.
SDC concentrate is sold to distributors that either resell the concentrate as an
active ingredient or preservative in other companies' products, or blend the
product into hard surface disinfectant products for sale to retail, commercial
and institutional customers. SDC-based hard surface disinfectant is sold in bulk
and as individually bottled products to distributors that in turn sell the
product to retail, commercial and institutional customers. In addition to sales
of SDC concentrate and finished goods, we anticipate generating additional
revenues from licensing and royalty arrangements in future periods.
Our revenues have historically fluctuated from period to period. For example, in Fiscal 2009 we reported revenues from product sales of $478,000, compared with revenue from product sales for Fiscal 2008 of $1,487,000. Among other factors, during Fiscal 2008 we recorded product revenue of $997,000 for sales to two international distributors for whom we did not recognize any revenue in Fiscal 2009.
In future periods, we expect our revenues to continue to fluctuate. In some cases, such as under our agreement with BASF, we will not be aware of the launch of products containing SDC until they are available to end-users. In February 2009 the first name brand personal care products containing SDC as the active ingredient were launched in Europe by a customer of BASF. Notwithstanding that we sold the SDC used as an active ingredient in the product, we were not able to anticipate this launch due to the contractual rights of BASF and its customer.
Cost of Revenues and Operating Expenses
Costs of Revenue. Costs of product revenue include materials consumed,
manufacturing overheads, shipping costs, salaries, benefits and related expenses
of operations. In addition, included in our inventory of finished goods as of
July 31, 2009 are approximately 12,000 gallons of SDC concentrate that we
purchased from an unrelated third party in a lien sale (see Note 5 to the
consolidated financial statements for further information regarding this
transaction). This transaction had no impact on our consolidated statements of
operations for Fiscal 2009, however it is expected to temporarily reduce our
cost of goods sold per gallon of SDC concentrate sold in future periods.
Gross profit on product sales represents net revenue less the costs of revenue. Gross profit percentage is highly dependent on pricing, contractual agreements, overhead allocations and other factors. We do not believe that historical gross profit margins on product sales are a reliable indicator of future gross profit margins.
During the three month period ended January 31, 2009 we recorded $250,000 of licensing revenue on the expiration of an agreement whereby we allowed a third party a limited time period to exclusively evaluate our SDC technology. Cost of goods sold related to this revenue was zero, as we did not incur any costs directly related to our commitments under the agreement.
Selling and Marketing. Selling and marketing expenses consist primarily of salaries and benefits, and amounts paid to third party providers for marketing, sales, public relations and advertising, along with promotional and trade show costs and travel expenses. Sales and marketing expenses also include share-based compensation allocable to employees and third party advisors performing services related to sales and marketing.
General and Administrative. General and administrative expenses include employee salaries and benefits, and amounts paid to third party providers for finance and accounting, legal activities, human resources, insurance, information technology, and other administrative activities. General and administrative expenses also include share-based compensation allocable to employees and third party advisors performing general and administrative services.
Research and Development. Research and development costs include in-house research costs, expenditures for third party testing, patent amortization, outside legal costs for maintaining issued patents, and product registration expenditures. We do not currently expect our research and development expense to grow significantly in future periods, however if opportunities arise, particularly in the development and testing of new formulations, we will evaluate the need for additional research expenditures based on potential market sizes and our estimation of the likelihood of our technology achieving successful results. Research and development expenses also include share-based compensation allocable to employees and third party advisors performing services related to research and development.
Critical Accounting Policies
Accounting for Long-Lived Assets / Intangible Assets We assess the impairment of long-lived assets, consisting of property, plant, equipment and finite-lived intangible assets, whenever events or circumstances indicate that the carrying value may not be recoverable. Examples of such events or circumstances include:
· An asset's ability 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.
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, requires 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.
Accounting for Stock-Based Compensation
We adopted the fair value provisions of SFAS 123(R) on August 1,
2006. Stock-based compensation expense for all stock-based compensation awards
granted after August 1, 2006 is based on the grant date fair value estimated in
accordance with the provisions of SFAS 123(R). Specifically, we estimate the
weighted-average fair value of options granted using the Black-Scholes Option
Pricing Model based on evaluation assumptions regarding expected volatility,
dividend yield, risk-free interest rates, the expected term of the option and
the expected forfeiture rate. Each of these assumptions, while reasonable,
requires a certain degree of judgment and the fair value estimates could vary if
the actual results are materially different than those initially applied. Prior
to the adoption of SFAS 123(R), we were not required to record compensation cost
in the consolidated financial statements for stock options issued to employees
or directors.
Recent Accounting Pronouncements
In September 2006, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 157, Fair Value Measurements, which provides a single definition of
fair value, a framework for measuring fair value, and expanded disclosures
concerning fair value. Previously, different definitions of fair value were
contained in various accounting pronouncements creating inconsistencies in
measurement and disclosures. SFAS No. 157 applies under those previously issued
pronouncements that prescribe fair value as the relevant measure of value,
except Statement No. 123R and related interpretations and pronouncements that
require or permit measurement similar to fair value but are not intended to
measure fair value. In February 2008, the Financial Accounting Standards Board
("FASB") issued FASB Staff Position ("FSP") No. FAS 157-2, "Effective Date of
FASB Statement No. 157," which provides a one year deferral of the effective
date of FAS 157 for non-financial assets and non-financial liabilities to years
beginning after November 15, 2008 (our fiscal year ending July 31, 2010). As a
result, we are only partially adopting SFAS No. 157 as it relates to our
financial assets and liabilities until we are required to apply this
pronouncement to our non-financial assets and liabilities beginning with the
fiscal year ending July 31, 2010.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities-Including an Amendment of FASB Statement No. 115. This standard permits an entity to choose to measure many financial instruments and certain other items at fair value. Most of the provisions in SFAS No. 159 are elective, however the amendment to SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities, applies to all entities with available-for-sale and trading securities. The fair value option established by SFAS No. 159 permits all entities to choose to measure eligible items at fair value at specified election dates. Under SFAS No. 159, we would report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. The fair value option: (a) may be applied instrument by instrument, with a few exceptions, such as investments otherwise accounted for by the equity method; (b) is irrevocable (unless a new election date occurs); and (c) is applied only to entire instruments and not to portions of instruments. This statement became effective for us on August 1, 2008, however we did not elect the fair value option for any of our financial assets or financial liabilities.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business
Combinations ("SFAS 141R"). SFAS 141R replaces SFAS No. 141, Business
Combinations and requires an acquirer in a business combination to recognize the
assets acquired, the liabilities assumed, including those arising from
contractual contingencies, any contingent consideration, and any non-controlling
interest in the acquiree at the acquisition date, measured at their fair values
as of that date, with limited exceptions specified in SFAS 141R. SFAS 141R also
amends SFAS No. 109, Accounting for Income Taxes, and SFAS 142, Goodwill and
Other Intangible Assets. SFAS 141R applies prospectively to business
combinations, if any, for which the acquisition date is on or after the
beginning of the first annual reporting period beginning on or after December
15, 2008 (our fiscal year ending July 31, 2010). In April 2009, the FASB issued
SFAS 141(R)-1, Accounting for Assets Acquired and Liabilities Assumed in a
Business Combination That Arise from Contingencies, which amends the accounting
prescribed in SFAS 141(R) for assets and liabilities arising from contingencies
in business combinations. SFAS 141(R)-1 requires pre-acquisition contingencies
to be recognized at fair value if fair value can be reasonably determined during
the measurement period. If fair value cannot be reasonably determined, SFAS
141(R)-1 requires measurement based on the recognition and measurement criteria
of SFAS 5, Accounting for Contingencies. The adoption of the provisions of SFAS
141R or SFAS 141(R)-1 did not have a material effect on our financial condition,
results of operations or cash flows for Fiscal 2009.
In December 2007, the FASB issued Statement of Financial Accounting Standards No. 160, Non-controlling Interests in Consolidated Financial Statements ("SFAS 160"). SFAS 160 amends Accounting Research Bulletin 51, Consolidated Financial Statements, to establish accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. It also clarifies that a non-controlling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. SFAS 160 also changes the way the consolidated income statement is presented by requiring consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the non-controlling interest. It also requires disclosure, on the face of the consolidated statement of income, of the amounts of consolidated net income attributable to the parent and to the non-controlling interest. SFAS 160 requires that a parent recognize a gain or loss in net income when a subsidiary is deconsolidated and requires expanded disclosures in the consolidated financial statements that clearly identify and distinguish between the interests of the parent owners and the interests of the non-controlling owners of a subsidiary. SFAS 160 is effective for fiscal periods, and interim periods within those fiscal years, beginning on or after December 15, 2008 (our fiscal year ending July 31, 2010). We do not currently expect the adoption of the provisions of SFAS No. 160 to have a material effect on our financial condition, results of operations or cash flows.
In June 2008, the FASB ratified Emerging Issue Task Force ("EITF") 07-5, Determining Whether an Instrument (or an Embedded Feature) is Indexed to an Entity's Own Stock ("EITF 07-5"). EITF 07-5 provides a framework for determining whether an instrument is indexed to an entity's own stock, including evaluating the instrument's contingent exercise and settlement provisions. EITF 07-5 is effective for fiscal years beginning after December 15, 2008 (our fiscal year ending July 31, 2010). We do not currently expect the implementation of EITF 07-5 to have a material impact on our consolidated financial statements.
In October 2008, the FASB issued FSP No. FAS 157-3, Determining the Fair Value of a Financial Asset When the Market for that Asset is Not Active ("FSP FAS 157-3"), which clarifies the application of SFAS 157 in an inactive market. Additional guidance is provided regarding how a reporting entity's own assumptions should be considered when relevant observable inputs do not exist, how available observable inputs in a market that is not active should be considered when measuring fair value, and how the use of market quotes should be considered when assessing the relevance of inputs available to measure fair value. FSP FAS 157-3 became effective immediately upon issuance. Its adoption did not impact our consolidated financial statements.
In April 2009, the FASB issued FASB Staff Position No. 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly ("FSP 157-4"). Based on the guidance, if an entity determines that the level of activity for an asset or liability has significantly decreased and that a transaction is not orderly, further analysis of transactions or quoted prices is needed, and a significant adjustment to the transaction or quoted prices may be necessary to estimate fair value in accordance with FASB Statement of Financial Accounting Standards No. 157, Fair Value Measurements ("SFAS 157"). FSP 157-4 is to be applied prospectively and became effective for us as Fiscal 2009. The adoption of FSP 157-4 did not have an impact on the Company's consolidated results or financial condition.
In April 2009, the FASB issued FSP FAS 107-2 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments ("FSP FAS 107-2 and FSP APB 28-1"). FSP FAS 107-2 amends SFAS No. 107, Disclosures about Fair Value of Financial Instruments, to require disclosures about fair value and the related carrying amount of financial instruments in interim and annual periods. FSP APB 28-1 amends APB Opinion No. 28, Interim Financial Reporting, to require those disclosures in all interim financial statements. FSP FAS 107-2 and FSP APB 28-1 also require disclosure about the method and significant assumptions used to estimate the fair value of financial instruments. FAS FSP 107-2 and FSP APB 28-1 became effective for us as of Fiscal 2009. Their adoption did not impact our consolidated financial statements.
In April 2009, the FASB issued FASB Staff Positions FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments ("FSP 115-2 and 124-2"), which amend the other-than-temporary guidance in U.S. GAAP for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. FSP 115-2 and 124-2 became effective for us as of Fiscal 2009. Their adoption did not impact our consolidated financial statements.
In May 2009, the FASB issued SFAS No. 165, Subsequent Events ("SFAS 165"). SFAS 165 provides rules on recognition and disclosure for events and transactions occurring after the balance sheet date but before the financial statements are issued or available to be issued. In addition, SFAS 165 requires a reporting entity to disclose the date through which subsequent events have been evaluated, as well as whether that date is the date the financial statements are issued or the date the financial statements are available to be issued. SFAS 165 is effective for interim and annual periods ending after June 15, 2009. We have adopted SFAS 165 and have included the required additional disclosures in Note 16 to the consolidated financial statements.
In June 2009, the FASB issued FAS No. 167, Amendments to FASB Interpretation No. 46(R" ("FAS 167"). FAS 167 amends FIN 46(R), Consolidation of Variable Interest Entities (revised December 2003)-an interpretation of ARB No. 51, to require an issuer to perform an analysis to determine whether the issuer's variable interest or interests give it a controlling financial interest in a variable interest entity, if any. This analysis identifies the primary beneficiary of a variable interest entity as one with the power to direct the activities of a variable interest entity that most significantly impact the entity's economic performance and the obligation to absorb losses of the entity that could potentially be significant to the variable interest. FAS 167 will be effective as of the beginning of the annual reporting period commencing after November 15, 2009 (our fiscal quarter ending October 31, 2010). We will assess the potential impact, if any, of the adoption of FAS 167 on our consolidated financial statements.
In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles ("SFAS 168"). SFAS 168 will become the source of authoritative GAAP recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the Securities and Exchange Commission ("SEC") under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. On the effective date of this statement, the codification will supersede all then existing non-SEC accounting and reporting standards. All other non-grandfathered, non-SEC accounting literature not included in the codification will become non-authoritative. This statement is effective for financial statements issued for interim and annual periods ending after September 15, 2009 (our fiscal quarter ended October 31, 2009). We do not currently expect the adoption of SFAS 168 to have a material impact on our financial condition, results of operations or cash flows.
Results of Operations for the Year Ended July 31, 2009 ("Fiscal 2009") Versus The Year Ended July 31, 2008 ("Fiscal 2008")
Revenue and Gross Margin
For Fiscal 2009, product revenues of $478,300 declined by $1,009,200, or 68%, compared with Fiscal 2008. The decrease is primarily due to the recording of revenue of $997,300 in Fiscal 2008 for sales to two international distributors for whom we did not recognize any revenue in Fiscal 2009. Product revenues for each of the periods presented were derived from sales of finished products to our partners and distributors, and product sold to our partners for product development and testing.
During Fiscal 2009, 84% of product sales were made to five strategic partners that are also developing markets for our products. 98% of revenue from product sales for the year was derived from sales made to U.S. domestic customers. During Fiscal 2008, 90% of product sales were made to five strategic partners, and 33% of revenue from product sales for the year was derived from sales made to U.S. domestic customers. In some cases we have, or may have in future periods, distributors or strategic partners to whom we have granted rights to sell our technology in multiple countries. Generally, we do not require such distributors to report to us the quantities of products that they . . .
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