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PURE > SEC Filings for PURE > Form 10-Q on 14-Jun-2013All Recent SEC Filings

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Form 10-Q for PURE BIOSCIENCE, INC.


14-Jun-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

All references in this Item 2 and elsewhere in this Quarterly Report to "PURE," "we," "our," "us" and the "Company" refer to Pure Bioscience, Inc. and our wholly owned subsidiary, ETIH2O Corporation, a Nevada corporation. ETIH2O Corporation currently has no business operations and no material assets or liabilities and there have been no significant transactions related to ETIH2O Corporation during the periods presented in the consolidated financial statements contained elsewhere in this Quarterly Report.

The discussion in this section contains forward-looking statements. These statements relate to future events, our future capital requirements or our future financial performance. We have attempted to identify forward-looking statements by terminology such as "anticipate," "believe," "can," "continue," "could," "estimate," "expect," "intend," "may," "plan," "potential," "predict," "should," "would" or "will" or the negative of these terms or other comparable terminology, but their absence does not mean that a statement is not forward-looking. These statements are only predictions and involve known and unknown risks, uncertainties and other factors, which could cause our actual results to differ from those projected in any forward-looking statements we make. Several risks and uncertainties we face are discussed in more detail under "Risk Factors" in Part II, Item 1A of this Quarterly Report or in the discussion and analysis below. You should, however, understand that it is not possible to predict or identify all risks and uncertainties and you should not consider the risks and uncertainties identified by us to be a complete set of all potential risks or uncertainties that could materially affect us. You should not place undue reliance on the forward-looking statements we make herein because some or all of them may turn out to be incorrect. 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 financial statements included elsewhere in this Quarterly Report on Form 10-Q.

Unless otherwise noted, all information in this Item 2 regarding share amounts of our common stock and prices per share of our common stock has been adjusted to reflect the application of the one-for-eight reverse stock split of our common stock that we effected on August 14, 2012, as further described below.

Overview

Company Overview
We are focused on the discovery, development and commercialization of bioscience products designed to provide solutions to global health challenges. Our technology platform is based on stabilized ionic silver, and our initial products contain silver dihydrogen citrate, or SDC. SDC is a broad-spectrum, non-toxic antimicrobial. We manufacture and sell SDC-based disinfecting and sanitizing products, which are registered by the Environmental Protection Agency, or EPA, to distributors and end users. We also manufacture and sell various SDC-based formulations to manufacturers for use as a raw material in the production of personal care and other products. We believe our technology platform has potential application in a number of industries, and we have ongoing research and development projects in food processing, agriculture, water treatment, pharmaceuticals, and oil and gas.

Our goal is to become a sustainable company by using our proprietary technology platform to deliver leading antimicrobial products to multiple industries. We manufacture and sell SDC-based products for end use, products preserved with SDC and SDC as a raw material for manufacturing use. Our current products are as follows:

       Product Name               Product Use        EPA Registration
PURE Complete System:
PURE® Hard Surface             Disinfectant and     SDC3A
                               sanitizer
PURE Multi-Purpose Cleaner     Cleaner              Not applicable
Concentrate
PURE Floor Cleaner             Cleaner              Not applicable
Concentrate
Axen® 30                       Disinfectant         Axen30
Axenohl®                       Raw material         Axenohl
Silvérion®                     Raw material         Not applicable

PURE Complete System
Our PURE Complete System is comprised of PURE® Hard Surface and our two new cleaning products that were launched as companion products to PURE Hard Surface, PURE Multi-Purpose Cleaner and PURE Floor Cleaner. The PURE Complete System offers a comprehensive, cost-effective and user-friendly product line to end-users, janitorial service providers and the distributors that supply them.


PURE® Hard Surface
PURE® Hard Surface is our patented and EPA-registered hard surface disinfectant and food contact surface sanitizer. We manufacture both consumer and commercial versions of the product. PURE Hard Surface combines high efficacy and low toxicity with 30-second bacterial and viral kill times and 24-hour residual protection. The product completely kills resistant pathogens such as MRSA and Carbapenem-resistant Klebsiella pneumoniae (NDM-1), and effectively eliminates dangerous fungi and viruses including HIV, Hepatitis B, Hepatitis C, Norovirus, Influenza A, Avian Influenza and H1N1. It also eradicates hazardous food pathogens such as E. coli, Salmonella, Campylobacter and Listeria. PURE Hard Surface delivers broad-spectrum efficacy yet remains classified as least-toxic by the EPA. The active ingredient, SDC, has been designated as Generally Recognized as Safe, or GRAS, for use on food processing equipment, machinery and utensils.

PURE Multi-Purpose and Floor Cleaner Concentrates Our recently launched cleaning products, PURE Floor Cleaner and PURE Multi-Purpose Cleaner, are environmentally responsible cleaning products that are protected by SDC, a natural, non-toxic antimicrobial. SDC ensures the quality and safety of PURE Floor Cleaner and PURE Multi-Purpose Cleaner without human or environmental exposure to toxic chemical preservatives. PURE Floor Cleaner and PURE Multi-Purpose Cleaner are non-toxic and non-flammable and contain no EDTA, phosphates, ammonia or bleach as well as no VOCs or NPEs. PURE Floor Cleaner and PURE Multi-Purpose Cleaner provide professional strength cleaning in a concentrate formula that yields a 1:128 use dilution that is safe for use on all resilient surfaces.

Axen® 30
Axen®30 is our patented and EPA-registered hard surface disinfectant and is a predecessor product to PURE Hard Surface. Axen30 is sold by distributors under the private label brands SpectraSan24, PureGreen24, Critical Care, Mother Nature's Choice and Ag+ainst24. In prior years, we sold this product to other distributors that resold Axen30 under a variety of other private label brands.

Axenohl®
Axenohl® is our patented and EPA-registered antimicrobial formulation for use as a raw material in the manufacturing of EPA-registered products. Axenohl is a colorless, odorless and stable solution that provides fast acting efficacy against bacteria, viruses and fungi when manufactured into consumer and commercial disinfecting and sanitizing products.

Silvérion®
Silvérion® is our patented antimicrobial formulation for use as a raw material 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.

We are a Delaware corporation and operate in one business segment.

Recent Developments

Liquidity Update
Since our inception, we have financed our operations primarily through public and private offerings of securities, revenue from product sales and license agreements and proceeds from the sale of a division. We have a history of recurring losses, and as of April 30, 2013 we have incurred a cumulative net loss of $68,012,000.

We do not have, and may never have, significant cash inflows from product sales or from other sources of revenue to fund our operations. As of April 30, 2013, we had $410,000 in cash and cash equivalents, and $1,539,000 of current liabilities, including $848,000 in accounts payable. On April 17 and April 24, 2013, we completed closings of a private placement pursuant to which we sold 1,000,000 shares of our common stock and warrants (the "Warrants") to purchase an aggregate of 500,000 shares of the Company's common stock. The shares were sold at a per share purchase price of $0.40, resulting in approximately $400,000 in aggregate proceeds to the Company. The Warrants have a term of three years from the initial exercise date, become exercisable six months after the date of issuance, and have an exercise price of $0.65 per share. We do not currently believe that our existing cash resources are sufficient to meet our anticipated needs through June 2013. The uncertainties surrounding our ability to continue to fund our operations raise substantial doubt about our ability to continue as a going concern. Refer to "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources" and Note 2 to the Notes to Condensed Consolidated Financial Statements for a further discussion of our liquidity and need to raise capital.


NASDAQ Delisting
Commencing in September 2011, we have received a series of deficiency letters from the NASDAQ Stock Market, or NASDAQ, and have undergone a lengthy appeal process with a NASDAQ Hearings Panel, or the Panel, relating to the potential delisting of our common stock from the NASDAQ Capital Market for noncompliance with several listing rules and standards. After receiving several letters from the Panel granting our continued listing contingent upon our satisfaction of certain specified conditions, on September 21, 2012, we received a final decision letter notifying us that the NASDAQ Listing Qualifications Staff had concluded that we had satisfied those conditions and regained compliance with all applicable listing requirements, and accordingly had determined to continue the listing of our securities on The NASDAQ Capital Market and to close the matter of our delisting on that date.

On October 1, 2012, we received a new deficiency letter from NASDAQ regarding our noncompliance with NASDAQ's audit committee membership requirements as a result of the death of our former director and Audit Committee member Gregory Barnhill. Consistent with applicable NASDAQ listing rules, NASDAQ granted us the following cure period to regain compliance with NASDAQ's audit committee membership requirements: (i) until the earlier of our next annual meeting of stockholders or September 14, 2013, or (ii) if our next annual meeting of stockholders is held before March 13, 2013, until March 13, 2013..

On December 20, 2012, we received a new deficiency letter (the "Notification Letter") from NASDAQ notifying us we no longer met NASDAQ's requirements for continued listing on the NASDAQ Capital Market under NASDAQ Listing Rule 5550(a)(2) (the "Bid Price Rule") because the minimum bid price of our common stock has not equaled or exceeded $1.00 at least once over a period of 30 consecutive business days.

NASDAQ explained in the Notification Letter that we will be afforded 180 calendar days, or until June 18, 2013, to regain compliance with the Bid Price Rule. To regain compliance, the closing bid price of our common stock must meet or exceed $1.00 per share for at least 10 consecutive business days during that 180-day period.

On March 4, 2013, we received a Staff Delisting Determination from NASDAQ notifying us that NASDAQ had determined to delist our common stock from The NASDAQ Capital Market based upon our non-compliance with NASDAQ Listing Rule 5550(b)(1), which requires issuers to maintain stockholders' equity of at least $2.5 million, unless we requested a hearing before the Listing Qualifications Panel (the "Panel") by March 11, 2013. We requested and were granted a hearing before the Panel, and on April 24, 2013, we received a determination from the NASDAQ Listing Qualifications Panel (the "Panel") indicating that the Panel has granted our request for continued listing on The NASDAQ Capital Market pursuant to an extension through June 18, 2013 to evidence compliance with the minimum $2.5 million stockholders' equity requirement and our ability to sustain compliance with the minimum threshold over the long term.

On May 15, 2013, we received a letter indicating that the Panel determined to delist our common stock from The NASDAQ Stock Market LLC. Trading in our securities on NASDAQ was suspended effective with the open of business on Friday, May 17, 2013. The suspension was the result of our determination that we would be unable to evidence compliance with the $2.5 million stockholders' equity requirement for continued listing on The NASDAQ Capital Market, as set forth in NASDAQ Listing Rule 5550(b), by June 18, 2013, as required by the Panel's decision in this matter. Our common stock began trading on the OTC Markets' OTCQB marketplace under the ticker symbol "PURE" commencing May 17, 2013.

Reclassification of Certain Debt
On January 25, 2013, we entered into a Letter Agreement with Morrison & Foerster LLP, or Morrison. Under the terms of the Letter Agreement, we issued a Promissory Note, or the Note, in favor of Morrison in the principal amount of $1,125,000. In consideration for the Note, Morrison agreed to waive $1,519,000 of amounts due and payable to Morrison for legal services rendered. The Note bears interest at the rate of 7.5% per annum, but the then outstanding balance will accrue interest at the rate of 10% per annum upon the occurrence of an event of default (as defined in the Note). Beginning March 31, 2013, and on or before the last business day of each calendar month thereafter, we are required to pay all accrued but unpaid interest on the then unpaid amount of outstanding principal. Beginning on February 28, 2014, we are required to pay equal monthly principal installments of $47,000, plus interest. We may prepay the outstanding balance under the Note in full or in part at any time, which prepayment will result in a discount of the then outstanding balance as more fully described in the Note. The Note will mature on February 28, 2016, unless accelerated pursuant to an event of default (as defined in the Note) or upon the consummation of a change of control (as defined in the Note). In consideration for Morrison's acceptance of the Note in lieu of payment for its legal services, we issued Morrison a warrant to purchase 375,000 shares of our common stock at an exercise price of $0.83 per share.

As a result of the Letter Agreement, we have reclassified the amount due and payable to Morrison from a current liability to long-term debt, except that any payments due under the Letter Agreement within twelve months from the date of the balance sheet will continue to be classified as a current liability. As of April 30, 2013, $231,000 was due under the Letter Agreement within twelve months and classified as a current liability.


Corporate Governance Change
Effective May 17, 2013, we appointed Dave Pfanzelter as chairman of the board. Pfanzelter has been a member of the board since February 2013 and had previously served on the PURE Bioscience Advisory Panel. The position of chairman had been held by PURE's president and CEO, Michael L. Krall, since 1993.

Financial Overview
This financial overview provides a general description of our revenue and expenses.

Revenue
We manufacture and sell SDC-based products for end use, and as a raw material for manufacturing use. We also license our products and technology to development and commercialization partners. Revenue is recognized when realized or realizable and earned. Any amounts received prior to satisfying revenue recognition criteria are recorded as deferred revenue.

Cost of Goods Sold
Cost of goods sold for product sales includes direct and indirect costs to manufacture products, including materials consumed, manufacturing overhead, shipping costs, salaries, benefits and related expenses of operations. Depreciation related to manufacturing is systematically allocated to inventory produced, and expensed through cost of goods sold at the time inventory is sold.

Selling, General and Administrative
Selling, general and administrative expense consists primarily of salaries and other related costs for personnel in business development, sales, finance, accounting, information technology, and executive functions. Other selling, general and administrative costs include product marketing, advertising, and trade show costs, as well as public relations and investor relations, facility costs, and legal, accounting and other professional fees.

Research and Development
Our research and development activities are focused on leveraging our technology platform to develop additional proprietary products and applications. Research and development expense consists primarily of personnel and related costs, product registration expenses, and third-party testing. We expense research and development costs as incurred.

Other Income (Expense)
We record interest income, interest expense, change in derivative liabilities, as well as other non-operating transactions, as other income (expense) in our consolidated statements of operations.

Results of Operations

Fluctuations in Operating Results
Our results of operations have fluctuated significantly from period to period in the past and are likely to continue to do so in the future. We anticipate that our results of operations will be affected for the foreseeable future by several factors that may contribute to these periodic fluctuations, including 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 and contract labor as needed to meet fluctuations in demand not supportable by our existing workforce, 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 stock options granted, 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.

Comparison of the Three Months Ended April 30, 2013 and 2012

Net Product Sales
Net product sales were $258,000 and $207,000 for the three months ended April 30, 2013 and 2012, respectively. The increase of $51,000 was primarily attributable to increased sales to two existing customers.

For the three months ended April 30, 2013, two individual customers each accounted for 10% or more of our net product sales. One customer accounted for 64% and the other for 10%. No other individual customer accounted for 10% or more of our net product sales. The geographic breakdown of net product sales was as follows: 100% U.S. and 0% foreign.


For the three months ended April 30, 2012, one individual customer accounted for 10% or more of our net product sales. No other individual customer accounted for 10% or more of our net product sales. The geographic breakdown of net product sales was as follows: 100% U.S. and 0% foreign.

Cost of Goods Sold
Cost of goods sold was $67,000 and $37,000 for the three months ended April 30, 2013 and 2012, respectively. The increase of $30,000 was attributable to increased net product sales.

Gross margin as a percentage of net product sales, or gross margin percentage, was 74% and 82% for the three months ended April 30, 2013 and 2012, respectively. This decrease in gross margin percentage was primarily attributable to the sale of higher margin formulations and packaging configurations of our products during the quarter ended April 30, 2012 as compared to the current quarter.

Selling, General and Administrative Expense Selling, general and administrative expense was $1,464,000 and $1,557,000 for the three months ended April 30, 2013 and 2012, respectively. The decrease of $93,000 was primarily attributable to a decrease in legal fees, travel, non-cash stock option expense, and depreciation and amortization expense. The decreases were partially offset by the fair value of stock issued and expenses incurred for investor relations services.

Research and Development Expense
Research and development expense was $304,000 and $439,000 for the three months ended April 30, 2013 and 2012, respectively. The decrease of $135,000 was primarily attributable to decreases in personnel costs and related expenses, and third-party research and testing activities.

Change in Derivative Liability
Change in derivative liability for the three months ended April 30, 2013 and 2012 was $30,000 and zero, respectively. The increase is due to the issuance of warrants with anti-dilution provisions during the year ended July 31, 2012.

Other (Expense) Income
Other income for the three months ended April 30, 2013 was $15,000 compared to expense of $3,000, in the prior year. The increase is primarily attributable to a $13,000 gain from the sale of silver inventory discussed above under "Notes to Condensed Consolidated Financial Statements - Note 5".

Comparison of the Nine Months Ended April 30, 2013 and 2012

Net Product Sales
Net product sales were $631,000 and $685,000 for the nine months ended April 30, 2013 and 2012, respectively. The decrease of $54,000 was primarily attributable to a reduction in sales to one customer.

For the nine months ended April 30, 2013, two individual customers each accounted for 10% or more of our net product sales. One customer accounted for 56%, and another for 11%. No other individual customer accounted for 10% or more of our net product sales. The geographic breakdown of net product sales was as follows: 92% U.S. and 8% foreign.

For the nine months ended April 30, 2012, one individual customer accounted for 10% or more of our net product sales. No other individual customer accounted for 10% or more of our net product sales. The geographic breakdown of net product sales was as follows: 98% U.S. and 2% foreign.

Cost of Goods Sold
Cost of goods sold was $155,000 and $206,000 for the nine months ended April 30, 2013 and 2012, respectively. The decrease of $51,000 was primarily attributable to decreased net product sales.

Gross margin as a percentage of net product sales, or gross margin percentage, was 75% and 70% for the nine months ended April 30, 2013 and 2012, respectively. The increase in gross margin percentage was attributable to an inventory charge in the nine months ended April 30, 2012. Gross margin percentage, excluding the inventory charge, was 75% and 77% for the nine months ended April 30, 2013 and 2012, respectively. This decrease in gross margin percentage was primarily attributable to the sale of higher margin formulations and packaging configurations of our products during the nine months ended April 30, 2012 as compared to the current period.


Selling, General and Administrative Expense Selling, general and administrative expense was $4,550,000 and $5,439,000 for the nine months ended April 30, 2013 and 2012, respectively. The decrease of $889,000 was primarily attributable to a decrease in legal fees of approximately $600,000, which were incurred in significant part as a result of our ongoing litigation with Richmont Sciences, LLC as well as the proxy contest that Richmont Corporation had initiated, as well as decreases in travel, and non-cash stock option, depreciation and amortization expense. The decreases were partially offset by the fair value of stock issued and expenses incurred for investor relations services.

Research and Development Expense
Research and development expense was $1,105,000 and $1,421,000 for the nine months ended April 30, 2013 and 2012, respectively. The decrease of $316,000 was primarily attributable to decreases in personnel and related costs, third-party research and testing activities, laboratory supplies and patent costs.

Change in Derivative Liability
Change in derivative liability for the nine months ended April 30, 2013 and 2012 was $270,000 and zero, respectively. The increase is due to the issuance of warrants with anti-dilution provisions during the year ended July 31, 2012, offset by a decrease related to the cancellation of the conversion feature associated with the secured convertible promissory notes that we issued in July 2012 in connection with the Bridge Loan.

Interest Expense
Interest expense for the nine months ended April 30, 2013 and 2012 was $591,000 and zero, respectively. The increase is primarily attributable to non-cash amortization of deferred financing costs and debt discounts related to the secured convertible promissory notes that we issued in July 2012 in connection with the Bridge Loan.

Other Expense
Other expense for the nine months ended April 30, 2013 and 2012 was $12,000 and $3,000, respectively. The increase is a result of $25,000 of expense attributable to the excess of the total cash outflows under the restructured Morrison debt, plus the expense related to the fair value of the warrant issued in conjunction with the debt, over the carrying amount of the Morrison payables prior to the restructuring. The increase was partially offset by a $13,000 gain from the sale of silver inventory discussed above.

Liquidity and Capital Resources
Since our inception, we have financed our operations primarily through public and private offerings of securities, revenue from product sales and license agreements and proceeds from the sale of a division. We have a history of recurring losses, and as of April 30, 2013 we have incurred a cumulative net loss of $68,012,000.

On April 17 and April 24, 2013, we completed closings of a private placement pursuant to which we sold an aggregate of 1,000,000 shares of our common stock and warrants (the "Warrants") to purchase an aggregate of 500,000 shares of the Company's common stock. The shares were sold at a per share purchase price of $0.40, resulting in approximately $400,000 in aggregate proceeds to the Company. We have used, and intend to continue to use, the remaining proceeds from the offering for working capital and general corporate purposes. The Warrants have a term of three years from the inital exercise date, become exercisable six months after the date of issuance, and have an exercise price of $0.65 per share.

On September 17, 2012, we closed an underwritten public offering of an aggregate of 4,341,615 shares of our common stock, including shares issued pursuant to the exercise of the underwriter's overallotment option, at a price to the public of $1.10 per share. The gross proceeds from the offering were approximately $4,776,000 and, after deducting $549,000 therefrom for transaction costs, including discounts, commissions, and other offering expenses, such as legal and . . .

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