Notes
to Condensed Consolidated Financial Statements
(Unaudited)
For
the three months ended October 31, 2022 and 2021
1.
Basis of Presentation
The
accompanying unaudited condensed consolidated financial statements include the consolidated accounts of PURE Bioscience, Inc. and its
wholly owned subsidiary, ETI H2O Inc., a Nevada corporation. ETI H2O, Inc. currently has no business operations and no material assets
or liabilities and there have been no significant transactions related to ETI H2O, Inc. during the periods presented in the condensed
consolidated financial statements. All inter-company balances and transactions have been eliminated. All references to “PURE,”
“we,” “our,” “us” and the “Company” refer to PURE Bioscience, Inc. and our wholly owned
subsidiary.
The
accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally
accepted in the United States of America, or GAAP, for interim financial information pursuant to the instructions to Form 10-Q and Article
10/Rule 8-03 of Regulation S-X. Accordingly, they do not include all of the information and disclosures required by GAAP for complete
financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary
for a fair presentation have been included. Operating results for the quarter ended October 31, 2022 are not necessarily indicative of
the results that may be expected for other quarters or the year ending July 31, 2023. The July 31, 2022 balance sheet was derived from
audited financial statements but does not include all disclosures required by GAAP and included in our Annual Report on Form 10-K. For
more complete information, these unaudited financial statements and the notes thereto should be read in conjunction with the audited
financial statements for the year ended July 31, 2022 included in our Annual Report on Form 10-K covering such period filed with the
Securities and Exchange Commission, or SEC, on October 28, 2022.
The
preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts
reported in the financial statements and the accompanying notes. Actual results could differ from those estimates.
2.
Liquidity and Going Concern
We
have a history of recurring losses, and as of October 31, 2022 we have incurred a cumulative net loss of $130,000,000. During the three
months ended October 31, 2022, we recorded a net loss of $993,000 on recorded net revenue of $471,000. In addition, during the three
months ended October 31, 2022 we used $939,000 in operating and investing activities resulting in a cash balance of $2,452,000 as of
October 31, 2022. Our history of recurring operating losses, and negative cash flows from operating activities give rise to substantial
doubt regarding our ability to continue as a going concern. The Company’s independent registered public accounting firm, in its
report on the Company’s consolidated financial statements for the year ended July 31, 2022, has also expressed substantial doubt
about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments to reflect
the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that
may result from our possible inability 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 continually generate positive cash flow from operations, we will need to continue to fund our operations with the proceeds of
offerings of our equity and debt securities. However, we cannot ensure 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.
3.
Significant Accounting Policies
Revenue
Recognition
Effective
August 1, 2018, we adopted the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”),
Topic 606, Revenue from Contracts with Customers (“Topic 606”). Under Topic 606, revenue is recognized at an amount that
reflects the consideration to which we expect to be entitled in exchange for transferring goods or services to a customer. This principle
is applied using the following 5-step process:
|
1. |
Identify
the contract with the customer |
|
2. |
Identify
the performance obligations in the contract |
|
3. |
Determine
the transaction price |
|
4. |
Allocate
the transaction price to the performance obligations in the contract |
|
5. |
Recognize
revenue when (or as) each performance obligation is satisfied |
Under
Topic 606, we recognize revenue when we satisfy a performance obligation by transferring control of the promised goods or services to
our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services.
Our
technology platform is based on patented stabilized ionic silver, and our initial products contain silver dihydrogen citrate, or SDC.
SDC is a broad-spectrum, non-toxic antimicrobial agent, which offers 24-hour residual protection and formulates well with other compounds.
We sell various configurations and dilutions of SDC direct to customers and through distributors. We currently offer PURE®
Hard Surface as a food contact surface sanitizer and disinfectant to restaurant chains, food processors and food transportation companies.
We also offer PURE Control® as a direct food contact processing aid.
Contract
terms for unit price, quantity, shipping and payment are governed by sales agreements and purchase orders which we consider to be a customer’s
contract in all cases. The unit price is considered the observable stand-alone selling price for the arrangements. Any promotional or
sales discounts are applied evenly to the units sold for purposes of calculating standalone selling price.
Product
sales generally consist of a single performance obligation that we satisfy at a point in time. We recognize product revenue when the
following events have occurred: (a) we have transferred physical possession of the products, (b) we have a present right to payment,
(c) the customer has legal title to the products, and (d) the customer bears significant risks and rewards of ownership of the products.
Our
direct customer and distributor 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.
A
summary of our revenue by product type for the three months ended October 31, 2022 and 2021 is as follows:
Summary of Revenue by Product
| |
2022 | | |
2021 | |
| |
October 31, | |
| |
2022 | | |
2021 | |
PURE Hard Surface | |
$ | 446,000 | | |
$ | 444,000 | |
SILVÉRION | |
| 21,000 | | |
| 53,000 | |
Total | |
$ | 467,000 | | |
$ | 497,000 | |
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.
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. Those estimates and assumptions include estimates for reserves of uncollectible accounts, inventory
obsolescence, depreciable lives of property and equipment, analysis of impairments of recorded long-term tangible and intangible assets,
realization of deferred tax assets, accruals for potential liabilities and assumptions made in valuing stock instruments issued for services.
Net
Loss Per Share
Basic
net loss per common share is computed as net loss divided by the weighted average number of common shares outstanding for the period.
Our diluted net loss per common share is the same as our basic net loss per common share because we incurred a net loss during each period
presented, and the potentially dilutive securities from the assumed exercise of all outstanding stock options, restricted stock units,
and warrants would have an anti-dilutive effect. As of October 31, 2022 and 2021, stock options, warrants and shares issuable under restricted
stock unit awards of 9,226,625 and 8,904,390, respectively, have been excluded from the computation of diluted shares outstanding.
Schedule of Anti-dilutive Securities Excluded from Computation of Earnings Per Share
| |
October 31, | |
| |
2022 | | |
2021 | |
Common stock option | |
| 8,014,125 | | |
| 7,214,125 | |
Restricted stock units | |
| 1,212,500 | | |
| 1,362,500 | |
Warrants | |
| — | | |
| 327,765 | |
Total | |
| 9,226,625 | | |
| 8,904,390 | |
Inventory
Inventories
are stated at the lower of cost or net realizable value, and net of a valuation allowance for potential excess or obsolete material.
Cost is determined using the average cost method. Depreciation related to manufacturing is systematically allocated to inventory produced,
and expensed through cost of goods sold at the time inventory is sold.
Inventories
consist of the following:
Schedule of Inventories
| |
October 31, 2022 | | |
July
31, 2022 | |
Raw materials | |
$ | 21,000 | | |
$ | 19,000 | |
Finished goods | |
| 218,000 | | |
| 160,000 | |
Inventories | |
$ | 239,000 | | |
$ | 179,000 | |
Share-Based
Compensation
We
periodically issue stock options and restricted stock awards to employees and non-employees in non-capital raising transactions for services
and for financing costs. We account for such grants issued and vesting to employees based on ASC 718, whereby the value of the award
is measured on the date of grant and recognized as compensation expense on the straight-line basis over the vesting period.
We
estimate the fair value of share-based payment awards at the date of grant using the Black-Scholes option valuation model. 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.
Concentrations
Gross
product sales. For the three months ended October 31, 2022, two individual customers accounted for 19% and 10% 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 three months ended October 31, 2021, three individual customers accounted for 24%, 13% 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.
Accounts
receivable. As of October 31, 2022, we had accounts receivable from two customers that comprised 23% and 16% of total accounts receivable,
respectively. As of October 31, 2021, we had accounts receivable from three customers that comprised 22%, 16% and 12% of total accounts
receivable, respectively.
Purchases.
For the three months ended October 31, 2022, one vendor accounted for 23% of our purchases. For the three months ended October 31,
2021, one vendor accounted for 17% of our purchases.
Accounts
payable. As of October 31, 2022, two vendors accounted for 29% and 11% of the total trade accounts payable. As of October 31, 2021,
two vendors accounted for 25% and 16% of the total trade accounts payable.
Segments
We
operate in one segment for the manufacture and distribution of our products. In accordance with the “Segment Reporting” Topic
of the ASC, our chief operating decision maker has been identified as the Chief Executive Officer and President, who reviews operating
results to make decisions about allocating resources and assessing performance for the entire Company. Existing guidance, which is based
on a management approach to segment reporting, establishes requirements to report selected segment information quarterly and to report
annually entity-wide disclosures about products and services, major customers, and the countries in which the entity holds material assets
and reports revenue. All material operating units qualify for aggregation under “Segment Reporting” due to their similar
customer base and similarities in: economic characteristics; nature of products and services; and procurement, manufacturing and distribution
processes. Since the Company operates in one segment, all financial information required by “Segment Reporting” can be found
in the accompanying financial statements
4.
Recent Accounting Pronouncements
In
June 2016, the FASB issued ASU No. 2016-13, Credit Losses - Measurement of Credit Losses on Financial Instruments or ASC 326. The standard
significantly changes how entities will measure credit losses for most financial assets, including accounts and notes receivable. The
standard will replace today’s “incurred loss” approach with an “expected loss” model, under which companies
will recognize allowances based on expected rather than incurred losses. Entities will apply the standard’s provisions as a cumulative-effect
adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. As small business
filer, the standard will be effective for us for interim and annual reporting periods beginning after December 15, 2022. The Company
is currently assessing the impact of adopting this standard on the Company’s financial statements and related disclosures.
In
May 2021, the FASB issued ASU 2021-04, Earnings Per Share (Topic 260), Debt — Modifications and Extinguishments (Subtopic 470-50),
Compensation — Stock Compensation (Topic 718), and Derivatives and Hedging — Contracts in Entity’s Own Equity (Subtopic
815-40): Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options or ASU
2021-04. ASU 2021-04 provides guidance as to how an issuer should account for a modification of the terms or conditions or an exchange
of a freestanding equity-classified written call option (i.e., a warrant) that remains classified after modification or exchange as an
exchange of the original instrument for a new instrument. An issuer should measure the effect of a modification or exchange as the difference
between the fair value of the modified or exchanged warrant and the fair value of that warrant immediately before modification or exchange
and then apply a recognition model that comprises four categories of transactions and the corresponding accounting treatment for each
category (equity issuance, debt origination, debt modification, and modifications unrelated to equity issuance and debt origination or
modification). ASU 2021-04 is effective for all entities for fiscal years beginning after December 15, 2021, including interim periods
within those fiscal years. The adoption of ASU 2021-04 did not have any impact on the Company’s consolidated financial statement
presentation or disclosures.
Recent
accounting pronouncements issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified Public Accountants,
and the Securities and Exchange Commission did not or are not believed by management to have a material impact on the Company’s
present or future consolidated financial statement presentation or disclosures.
5.
Share-Based Compensation
Restricted
Stock Units
We
issue restricted stock unit awards or RSUs, to key management and as compensation for services to consultants and others. The RSUs typically
vest over a one to three-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. We determine that fair value of those
awards at the date of grant, and amortize those awards as an expense over the vesting period of the award. The shares earned under the
grant are usually issued when the award settles at the end of the term. As of July 31, 2022, there were 1,212,500 RSU’s outstanding
of which 1,045,833 were issuable.
During
the three months ended October 31, 2022 and 2021, we recognized $21,000 of compensation cost relating to the vesting of RSU’s,
respectively. As of October 31, 2022, there was $41,000 of unrecognized non-cash compensation cost related to the remaining 166,667 RSUs
we expect to vest, which will be recognized over a weighted average period of 0.50 years.
During
the three months ended October 31, 2022, no RSUs were granted, issued, or forfeited. Of the 1,212,500 RSUs outstanding as of October
31, 2022, 1,045,833 RSUs are vested and issuable. These RSUs are issued upon settlement date which is defined as “for each Vested
Unit, the earliest of (i) the ten-year anniversary of the Grant Date; (ii) sixty days after the date the Grantee’s Service ceases
for any reason and such cessation constitutes a “separation from service” within the meaning of Section 409A of the Code;
(iii) the date of Grantee’s death or (iv) the date of a Change in Control that constitutes a “change in control event”
within the meaning of Section 409A of the Code”.
A
summary of our restricted stock unit activity and related data is as follows:
Schedule of Restricted Stock Activity
| |
Total RSU Shares | | |
Vested and Issuable | |
Outstanding at July 31, 2022 | |
| 1,212,500 | | |
| 1,045,833 | |
Granted | |
| — | | |
| — | |
Issued | |
| — | | |
| — | |
Forfeited | |
| — | | |
| — | |
Outstanding at October 31, 2022 | |
| 1,212,500 | | |
| 1,045,833 | |
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 October 31, 2022, there were approximately
552,000 shares available for issuance under the 2007 Plan.
2017
Equity Incentive Plan
In
January 2021, we amended and restated our 2017 Equity Incentive Plan, the (“2017 Plan”), to, among other changes, increase
the number of shares of common stock issuable under the 2017 Plan by 5,000,000 shares and extend the term of the 2007 Plan until January
2031. 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 October 31, 2022, there were approximately
3,856,000 shares available for issuance under the 2017 Plan.
During
the three months ended October 31, 2022, the Compensation Committee of the Board of Directors granted 1,935,000 stock options to our
employees, officers, directors and consultants with a fair value of $241,000 as determined by the Black Scholes option pricing model.
The vesting terms of the options vary between one and two years and carry a ten year term.
A
summary of our stock option activity is as follows:
Schedule of Stock Option Activity
| |
Shares | | |
Weighted- Average Exercise Price | | |
Aggregate Intrinsic Value | |
Outstanding at July 31, 2022 | |
| 6,079,125 | | |
$ | 0.62 | | |
$ | — | |
Granted | |
| 1,935,000 | | |
$ | 0.20 | | |
| — | |
Exercised | |
| — | | |
$ | — | | |
| — | |
Cancelled | |
| — | | |
$ | — | | |
| — | |
Outstanding at October 31, 2022 | |
| 8,014,125 | | |
$ | 0.52 | | |
$ | — | |
The
weighted-average remaining contractual term of options outstanding at October 31, 2022 was 7.12 years.
At
October 31, 2022, options to purchase 5,694,958 shares of common stock were exercisable. These options had a weighted-average exercise
price of $0.62 and a weighted average remaining contractual term of 6.07 years. The total unrecognized compensation cost related to unvested
stock option grants as of October 31, 2022 was approximately $263,000 and the weighted average period over which these grants are expected
to vest is 0.95 years.
For
the three months ended October 31, 2022, share-based compensation expense for stock options that vested during the period was $63,000.
For the three months ended October 31, 2021, share-based compensation expense for stock options that vested during the period was $169,000.
We
use the Black-Scholes valuation model to calculate the fair value of stock options. Stock-based compensation expense is recognized over
the vesting period using the straight-line method. The fair value of stock options was estimated at the grant date using the following
weighted average assumptions:
Schedule of Fair Value Assumptions
| |
For the three months ended October 31, | |
| |
2022 | | |
2021 | |
Volatility | |
| 91.90 | % | |
| 85.61 | % |
Risk-free interest rate | |
| 4.00 | % | |
| 0.84 | % |
Dividend yield | |
| — | % | |
| — | % |
Expected life | |
| 5.34 | | |
| 5.99 | |
Volatility
is the measure by which our stock price is expected to fluctuate during the expected term of an option. Volatility is derived from the
historical daily change in the market price of our common stock, as we believe that historical volatility is the best indicator of future
volatility.
The
risk-free interest rates used in the Black-Scholes calculations are based on the prevailing U.S. Treasury yield as determined by the
U.S. Federal Reserve.
We
have never paid dividends on our common stock and do not anticipate paying dividends on our common stock in the foreseeable future. Accordingly,
we have assumed no dividend yield for purposes of estimating the fair value of our share-based compensation.
The
expected life of options was estimated using the average between the contractual term and the vesting term of the options.
6.
Related Party Transactions
As
of October 31, 2022 and October 31, 2021, accounts payable include $115,250 and $136,000 in board fees due to officers and directors,
respectively.
7.
Commitments and Contingencies
COVID-19
The
COVID-19 pandemic led to severe disruptions in general economic activities, as businesses and federal, state, and local governments took
broad actions to mitigate this public health crisis. While we have experienced some delays related to final third-party validation of
certain of our products and product rollouts by customers using PURE Control, we did not experience a material disruption to our business.
In addition, we previously benefited from increased demand from our customers for our PURE Hard Surface product due to a focus on surface
disinfecting in response to attempting to prevent COVID-19 transmission. We subsequently experienced an abatement in such demand. Such
abatement has not stabilized and we cannot assure you that demand will stabilize in the future. Additionally, we experienced supply chain
issues with our various plastic packaging configurations and citric acid. Further, on a go-forward basis, we cannot guarantee the overall
economic conditions will not affect our business, as these conditions may significantly negatively impact all aspects of our business.
Our business is dependent on the continued health and productivity of our employees, including our sales staff and corporate management
team.
The
extent to which the COVID-19 pandemic or other health-related pandemics impacts our business, sales, results of operations and financial
condition will depend on future developments, which are highly uncertain and cannot be predicted. Even after the COVID-19 pandemic or
other health-related pandemics has subsided, we may experience significant impacts to our business as a result of its global economic
impact, including any economic downturn or recession that has occurred or may occur in the future.