U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 For the period ended October 31, 2003
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [No Fee Required]
For the transition period from to
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Commission File number 0-21019
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PURE Bioscience
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(Name of small business issuer in its charter)
California 33-0530289
------------------------------ -------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
1725 Gillespie Way, El Cajon, California 92020
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(Address of principal executive offices)
619 596 8600
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Issuer's telephone number
Check whether the issuer (1) filed all reports to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
State the number of shares outstanding of each of the issuer's classes
of common equity as of the latest practicable date: 13,484,088 as of December
12, 2003.
INNOVATIVE MEDICAL SERVICES
INDEX
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets as of July 31, 2003 and October 31, 2003
Statements of Operations for the three months ended
October 31, 2003 and 2002
Statements of Cash Flows for the three months ended
October 31, 2003 and 2002
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Item 3. Controls and Procedures
PART 2. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults Upon Senior Securities: None
Item 4. Submission of Matters to a Vote of Security Holders: None
Item 5. Other information
Item 6. Exhibits and Reports on Form 8-K
Signatures and Certifications
PART 1 ITEM 1 Financial Statements
-----------------------------------
CONSOLIDATED BALANCE SHEETS
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(Unaudited)
October 31 July 31
2003 2003
---- ----
ASSETS
Current Assets
Cash and cash equivalents $ 145,827 $ 251,087
Accounts receivable, net of allowance for doubtful
accounts of $ 63,500 at October 31, 2003
and $63,500 at July 31, 2003 256,484 163,895
Due from officers and employees -- 61
Trust deed receivable 2,035,000 --
Inventories 112,537 119,237
Prepaid expenses 3,000 6,655
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Total current assets 2,552,848 540,935
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Property, Plant and Equipment
Property, plant and equipment 221,554 249,024
------------ ------------
Total property, plant and equipment 221,554 249,024
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Noncurrent Assets
Deposits 9,744 9,341
Patents and licenses 2,479,769 2,475,280
------------ ------------
Total noncurrent assets 2,489,513 2,484,621
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Assets of the water division held for resale 337,850 352,423
------------ ------------
Total assets $ 5,601,765 $ 3,627,002
============ ============
LIABILITIES AND STOCKHOLDERS EQUITY
Current Liabilities
Accounts payable $ 980,762 $ 1,079,128
Accrued liabilities 180,334 114,523
Notes payable 645,385 180,513
Loans from shareholders 600,000 600,000
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Total current liabilities 2,406,481 1,974,164
------------ ------------
Liabilities of the water division held for resale 45,083 36,165
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Stockholders' Equity
Class A common stock, no par value: authorized
50,000,000 shares, issued and outstanding
13,604,088 at October 31, 2003 and
10,594,088 at July 31, 2003 16,948,203 14,758,203
Warrants: issued and outstanding 1,037,429
warrants 788,473 788,473
Accumulated deficit (14,586,475) (13,930,003)
------------ ------------
Total stockholders' equity 3,150,201 1,616,673
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Total liabilities and stockholders' equity $ 5,601,765 $ 3,627,002
============ ============
The accompanying notes are an integral part of these financial statements
3
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
---------------------------------------------------------------------------------------------
For the Three Months Ended
October 31
2003 2002
---- ----
Net revenues $ 39,293 $ 36,683
Cost of sales 28,333 26,267
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Gross profit 10,960 10,416
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Selling expenses 46,697 150,200
General and administrative expenses 328,432 316,946
Research and development 376,941 173,068
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Total operating costs 752,070 640,214
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Loss from operations (741,110) (629,798)
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Other income and (expense):
Interest income 32,329 1,329
Interest Expense (73,102) (17,470)
Other (1,095) --
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Total other income (expense) (41,868) (16,141)
--------- ---------
Loss from continuing operations (782,978) (645,939)
Discontinued operations:
Income from discontinued operations 126,506 167,115
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Net loss $(656,472) $(478,824)
========= =========
Net loss per common share, basic and diluted
Continuing operations $ (0.06) $ (0.07)
Discontinued operations 0.01 0.02
--------- ---------
Net loss $ (0.05) $ (0.05)
========= =========
(Unaudited)
Three Months Year
Ended Ended
October 31 July 31
CONSOLIDATED STATEMENTS OF ACCUMULATED DEFICITS 2003 2003
-------------------------------------------------------------------------- ------------------
Balance, beginning of period $ (13,930,003) $ (10,646,014)
Net income (loss) (656,472) (3,283,989)
--------- -----------
Balance, end of period $ (14,586,475) $ (13,930,003)
============== ==============
The accompanying notes are an integral part of these financial statements
4
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
---------------------------------------------------------------------------------------------
For the Three Months Ended
October 31
2003 2002
---- ----
Cash flows from operating activities
Net loss $ (656,472) $(478,825)
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization 40,511 38,037
Depreciation 27,473 30,187
Services and interest paid for with stock and warrants 74,872 --
Income from discontinued operations (126,506) (167,115)
Changes in assets and liabilities:
(Increase) decrease in accounts receivable (92,588) (56,264)
(Increase) decrease in due from officers and employees 61 22,980
(Increase) decrease in prepaid expense 3,655 64,996
(Increase) decrease in inventory 6,699 57,903
(Increase) decrease in deposits (403) (387)
Increase (decrease) in accounts payable (98,366) 102,017
Increase (decrease) in accrued liabilities 65,808 7,851
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Net cash provided (used) by operating
activities (755,256) (378,620)
----------- ---------
Cash flows from investing activities
Purchase of patents and licenses (45,000) (4,740)
Purchase of property, plant and equipment -- (8,928)
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Net cash (used) in investing activities (45,000) (13,668)
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Cash flows from financing activities
Proceeds from debt obligations -- 100,000
Proceeds from sale of common stock 545,000 76,950
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Net cash provided by financing activities 545,000 176,950
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Cash flows from discontinued operations 149,996 185,616
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Net increase (decrease) in cash and cash equivalents (105,260) (29,722)
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Cash and cash equivalents at beginning of period 251,087 151,257
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Cash and cash equivalents at end of period $ 145,827 $ 121,535
=========== =========
Supplemental disclosures of cash flow information
Cash paid for interest $ 43,230 $ 17,470
Noncash investing and financing activities:
Value of shares issued in exchange for services $ 45,000 $ 139,650
Value of options issued in exchange for services $ -- $ 59,805
Trust Deed received in exchange for stock $ 2,035,000
The accompanying notes are an integral part of these financial statements
5
NOTES TO FINANCIAL STATEMENTS
Note 1. Financial Statements
The financial statements included herein have been prepared by PURE Bioscience
(the Company) without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote disclosures
normally included in the financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted as
allowed by such rules and regulations, and PURE Bioscience believes that the
disclosures are adequate to make the information presented not misleading. It is
suggested that these financial statements be read in conjunction with the July
31, 2003 audited financial statements and the accompanying notes thereto. While
management believes the procedures followed in preparing these financial
statements are reasonable, the accuracy of the amounts are in some respects
dependent upon the facts that will exist and procedures that will be
accomplished by PURE Bioscience later in the year. The results of operations for
the interim periods are not necessarily indicative of the results of operations
for the full year.
The management of the Company believes that the accompanying unaudited financial
statements contain all adjustments (including normal recurring adjustments)
necessary to present fairly the operations and cash flows for the periods
presented.
Note 2. Business Segment and Sales Concentrations
In accordance with the provisions of SFAS No. 131, certain information is
disclosed based on the way management organizes financial information for making
operating decisions and assessing performance. In determining operating
segments, the Company reviewed the current management structure reporting to the
chief operating decision-maker ('CODM') and analyzed the reporting the CODM
receives to allocate resources and measure performance.
The Company's business activities are divided, managed and conducted in two
basic business segments, the Water Treatment segment and the Bioscience segment.
These two segments were determined by management based upon the inherent
differences in the end use of the products, the inherent differences in the
value added processes made by the Company, the differences in the regulatory
requirements and the inherent differences in the strategies required to
successfully market finished products. The Water Treatment segment includes
Commercial Water and Residential Retail products and the Nutripure Water Dealer
program. The Water Treatment division has been discontinued (Note 6). Bioscience
includes Axenohl (Silver Ion Technology) and the Innovex line of pest control
products.
Segment information is presented in accordance with SFAS 131, Disclosures about
Segments of an Enterprise and Related Information. This standard is based on a
management approach, which requires segmentation based upon the Company's
internal organization and disclosure of revenue and operating income based upon
internal accounting methods. The Company's financial reporting systems present
various data for management to run the business, including internal profit and
loss statements prepared on a basis not consistent with U.S. generally accepted
accounting principles.
Water
FOR THE THREE MONTHS ENDED Treatment Reconciling
OCTOBER 31, 2002 (Discontinued) Bioscience Amounts Consolidated
------------------------------------------ ---------------- ---------------- ---------------- -----------------
Revenues
Commercial Water Treatment
Fillmaster Products $ 304,500 $ - $ - 304,500
Replacement Filters (Includes CSP 2000) 153,200 - - 153,200
Residential Water Treatment 128,200 - (2,800) 125,400
Water Dealer Program 107,500 - - 107,500
Silver Ionization - - - -
Pesticide - 36,700 - 36,700
---------------- ---------------- ---------------- -----------------
Total Revenues $ 693,400 $ 36,700 $ (2,800) 727,300
---------------- ---------------- ---------------- -----------------
Operating Income/(Loss) $ 167,100 $ (268,100) $ (377,800) (478,800)
---------------- ---------------- ---------------- -----------------
Segment Assets $ 1,303,200 $ 1,873,300
---------------- ----------------
Water
FOR THE THREE MONTHS ENDED Treatment Reconciling
OCTOBER 31, 2003 (Discontinued) Bioscience Amounts Consolidated
------------------------------------------ ---------------- ---------------- ---------------- -----------------
Revenues
Commercial Water Treatment
Fillmaster Products $ 236,000 $ - $ - 236,000
Replacement Filters (Includes CSP 2000) 184,200 - - 184,200
Residential Water Treatment 26,000 - - 26,000
Water Dealer Program 21,000 - (3,000) 18,000
Silver Ionization - 8,600 8,600
Pesticide - 30,700 30,700
---------------- ---------------- ---------------- -----------------
Total Revenues $ 467,200 $ 39,300 $ (3,000) 503,500
---------------- ---------------- ---------------- -----------------
Operating Income/(Loss) $ 126,500 $ (167,200) $ (615,800) (656,500)
---------------- ---------------- ---------------- -----------------
Segment Assets $ 340,700 $ 2,639,200
---------------- ----------------
Significant customers primarily consisted of domestic retail chain pharmacies.
Sales concentrations to major chain stores were approximately $322,300 and
export sales were $13,700 for the quarter ended October 31, 2003. Sales
concentrations to major chain stores were approximately $375,100 and export
sales were $2,400 for the three months ended October 31, 2002. No customer
accounted for more than 10% of consolidated sales.
6
Note 3. Common Stock
In August of 2003 the Company completed a financing arrangement which included
the acquisition of a $2,000,000 Trust Deed receivable and $35,000 related
accrued interest and issuing a $435,000 note payable resulting in a net increase
of $1,600,000 in equity during the period. This note receivable is in exchange
for the issuance of 2,000,000 shares (at fair value of $0.80 per share) of the
Company's common stock to a party unrelated to the Company, and that is fully
secured by specific assets other than the equity instruments granted.
On August 25, 2003, 60,000 shares were issued in exchange for attorney fees
related to the acquisition of the Axenohl patent. The shares were issued at fair
value of $0.75 per share. Also during the quarter ended October 31, 2003 the
Company conducted three private placements in which it issued 950,000 shares of
common stock at prices that range from $0.50 to $0.75 per share for a total of
$545,000 with a weighted average price of $0.57 per share.
Note 4. Recent Accounting Pronouncements
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others". Interpretation 45 is effective for financial statements
of interim or annual periods fiscal years ending after December 15, 2002 and
requires the following disclosures of the Company's product warranties:
The Company provides a standard warranty of two years for replacement parts on
all Fillmaster systems sold. Most of the Company's chain customers have entered
into multi-year contracts for the Customer Service Plan 2000. The CSP 2000
provides an extended warranty on all PURE Bioscience pharmacy products;
significant discounts on maintenance item costs; annual software upgrades for
the Fillmaster 1000e and Scanmaster; automatic replacement filter shipments; and
simplified, annual invoicing. When the customer buys a dispenser on the Customer
Service Plan 2000 they agree to pay a fixed annual fee that covers replacement
filters and parts. The Company monitors the costs of providing replacement parts
other than filters. This cost has remained steady and is computed as a
percentage of related revenues. The following is a summary of changes in the
Company's product warrantee liability.
Beginning Expense Warranty Ending
Liability Incurred Payments Liability
---------------- ---------------- --------------- --------------
Three months ended October 31, 2002 $ 41,445 $ 2,612 $ 1,306 $ 42,750
---------------- ---------------- --------------- --- ----------
Three months ended October 31, 2003 $ 42,430 $ 2,903 $ 3,067 $ 42,265
---------------- ---------------- --------------- --- ----------
Note 5. Reclassifications
Certain reclassifications have been made to previously reported statements to
conform to the Company's current financial statement format.
Note 6. Sale of Water Treatment Division and Discontinued Operations
On October 29, 2003, PURE Bioscience and subsidiaries ("PURE") announced that it
had entered into an agreement (the "Agreement For The Purchase and Sale of
Assets") to sell substantially all of the assets and certain related liabilities
of the water treatment division, including substantially all of the related
machinery, equipment, inventory, work in process, licenses, customer lists and
certain intellectual property and certain agreements and contracts to Data
Recovery Continuum, Inc. (DRCI). The Company will realize a gain on the sale of
approximately $2,000,000 after federal and California income taxes.
If the proposed transaction is consummated, DRCI will pay $2.75 million in cash
at the closing. DRCI will also pay an additional $250,000 six months later and
another $1,000,000 one year after closing after the Nutripure 2000 Countertop
water purifier reaches certain agreed upon volume and sales projections in
connection with a rollout program with a large general merchandise retailer. In
the event the sales of Nutripure products do not achieve the projected levels
the additional payment amounts will be reduced on a pro rata basis. Also at
closing DRCI has agreed to deposit an additional $2.0 million into escrow to
purchase the Company's Trust Deed receivable at face value, PURE Bioscience will
incur no gain or loss on this portion of the agreement. The Trust Deed was
acquired in August of 2003 in exchange for 2,000,000 unregistered shares of PURE
common stock.
In accordance with SFAS 144, the assets and liabilities of the water division
are classified as held for sale and are presented separately in the balance
sheet. In addition, the results of operations from the water division have been
reported as discontinued operations, and were historically shown as the
Company's water treatment segment for financial reporting.
Components of the results of discontinued operations are:
Three Months Ended Three Months Ended
October 31, 2003 October 31, 2002
-------------------- -------------------
Net revenues $ 467,000 $ 693,400
Cost of Sales 209,500 418,300
Other Expenses 131,000 108,000
-------------------- -------------------
Total $ 126,500 $ 167,100
-------------------- -------------------
Assets and liabilities of the water division held for sale include:
October 31, 2003 July 31, 2003
----------------- -------------------
Inventories and other current assets $ 171,100 $ 168,700
Property, plant and equipment 166,700 183,700
----------------- -------------------
Total 337,800 352,400
Accrued liabilities 45,100 36,200
----------------- -------------------
Net assets and liabilities of the water division held for sale: $ 292,700 $ 316,200
----------------- -------------------
The interim financial statements include all adjustments, which in the opinion
of management, are necessary in order to make the financial statements not
misleading.
7
ITEM 2
------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion and analysis should be read in conjunction with the
audited and unaudited financial statements of PURE Bioscience.
OVERVIEW
PURE Bioscience (formerly Innovative Medical Services) began as a provider of
pharmaceutical water purification products. Although our current revenues are
still primarily from the pharmacy industry, we have expanded from our niche
pharmacy market into other, broader markets with new, proprietary bioscience
products based upon our silver ion bioscience technologies and boric acid based
pesticide technologies. Because of this business development evolution, in
September 2003, shareholders approved a name change from Innovative Medical
Services to PURE Bioscience. In November 2003, we announced that we signed a
definitive agreement to sell our water treatment business to Data Recovery
Continuum, Inc., a Delaware corporation based in California, for $2.75 million
in cash plus up to $1.25 million in deferred payments over the next year. We are
also selling to Data Recovery Continuum, Inc. (DRCI) our $2.0 million Note and
Deed of Trust asset for face value. Total combined cash proceeds from the
transaction will be $4.75 million to $6.0 million to PURE Bioscience. Upon
completion of the transaction, we emerge as a focused bioscience company that is
debt-free, and we believe that we will be capitalized sufficiently to
commercialize our powerful, least toxic and environmentally friendly
technologies including our Axenohl(R) antimicrobial technology. Completion of
the transaction is subject to approval by PURE Bioscience shareholders. On
November 25, 2003, we filed a proxy statement with the Securities and Exchange
Commission detailing the proposed sale. A definitive proxy statement will be
sent to shareholders of PURE Bioscience seeking their approval of the
transaction.
Water Treatment Division (Discontinued Operation) The Fillmaster(R)
pharmaceutical water purification, dispensing and measuring products include the
Pharmapure(R) water purification system, the FMD 550 dispenser, the patented
Fillmaster 1000e computerized dispenser and the patented Scanmaster(TM) bar code
reader. We also market proprietary National Sanitation Foundation certified
replacement filters for the Fillmaster Systems. Our Nutripure(R) line of water
treatment and filtration systems includes a line of Nutripure whole-house water
softening systems, a line of Nutripure reverse osmosis point-of-use systems, the
Nutripure 2000 countertop water filtration system and the Nutripure Sport
filtered sport bottle. Results from this division are shown separately as
"Discontinued Operation."
Bioscience Division Our bioscience division features a patented, aqueous
disinfectant called Axenohl(R) (silver dihydrogen citrate). Based on the EPA
toxicity categorization of antimicrobial products that ranges from Category I
(high toxicity) down to Category IV, Axen, with its combination of the biocidal
properties of ionic silver and citric acid, is an EPA Category IV antimicrobial
for which precautionary labeling statements are normally not required. This
compares with Category II warning statements for most leading brands of
antimicrobial products.
The initial EPA registration for use of Axenohl and Axen (12-parts per million
formula) as hard surface disinfectants was issued in 2001. In March 2003, we
received Environmental Protection Agency (EPA) registration for our new
Axen-30(R) formulated Category IV hard surface disinfectant product for
commercial, industrial and consumer applications. Axen-30 is a 30-part per
million (ppm) use-dilution formula of our patented antimicrobial technology,
Axenohl.
The recent EPA approval allows us to expand the existing Axen efficacy claims as
a hard surface disinfectant to include a 30 second kill time and a 24 hour
residual kill on standard indicator bacteria, a 2 minute kill time on some
resistant strains of bacteria including MRSE and VRE, 10 minute kill time on
fungi, 30 second kill time on HIV Type I, and 10 minute kill time on other
viruses. These claims distinguish the efficacy of Axen-30 from many of the
leading commercial and consumer products currently on the market, while
maintaining lower toxicity ratings.
In September 2003, we announced the first significant commercialization of our
hard surface disinfectant, Axen-30, which is sold by EnvirOx L.L.C. of Danville,
Illinois, as Critical Care(TM), a new commercial
disinfectant-fungicide-virucide.
We plan to pursue additional EPA and FDA regulatory approvals for other
applications. Additional possible uses for this product include wound care,
topical infection care, personal disinfecting retail products, food processing,
and food safety applications which may require FDA approvals, as well as
municipal water treatment and point-of-use/point-of-entry water treatment
products, which may require additional EPA approvals.
Also in September 2003, we announced an agreement with Therapeutics, Inc., a
drug development company based in La Jolla, California, for the development and
commercialization of Food and Drug Administration (FDA) regulated Axenohl-based
products. Therapeutics, Inc. will fund and direct all development activities and
FDA regulatory filings and will initially focus on development of Axenohl-based
products for the treatment of bacterial, viral and fungal mediated diseases and
conditions.
Our bioscience division also includes a line of pesticide technologies. Branded
as Innovex(TM), the product line launched in October 2001 with our EPA-approved,
patent-pending RoachX(TM). Subsequently, we have developed and launched
additional products in the Innovex product line, including the EPA-approved
AntX75(TM), two formulas of EPA-exempt non-toxic TrapX rodent lure, Pro's
Choice(TM) caulk for pest control operators, and EPA approved CleanKill(TM), the
Axen-based hard surface disinfectant for the pest control industry.
United States Department of Agriculture testing confirms that RoachX is over 96%
effective in three to four days with one application for indoor and outdoor
eradication of cockroaches, and can be used near children and food preparation
areas. Boric acid is a well-known and effective deterrent of cockroaches and
will kill them on contact, but cockroaches do not naturally eat the repellent.
Although many pesticide products contain boric acid as the listed active
ingredient, we believe RoachX to be new because of the endothermic reaction
caused by the combination of boric acid and polyglycol that produces three
unique results: 1) The formula protects the boric acid from water and humidity,
2) When combined with an attractant, the cockroaches perceive the formulation as
food and will actually eat the polyglycol-encapsulated boric acid, and 3) The
formula acts as a time-released pesticide, allowing the cockroach to return to
the nest before it dies and then becomes a "bait station" for other roaches in
the colony. We believe the product line, containing particular formulas and
attractants for specific pests, is effective against cockroaches, ants, palmetto
bugs, silverfish, waterbugs, ticks, fleas, lice and garden pests. Like the
Axenohl antimicrobial technology, the boric acid based pesticides are very
competitive with regard to efficacy when compared to leading brands while
maintaining lower toxicity ratings.
8
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED OCTOBER 31, 2003 VERSUS THREE
MONTH ENDED OCTOBER 31, 2002
During the quarter we decided to sell our water treatment division. Following
the closing of the divestment transaction, we will be focused on our bioscience
segment. Our current bioscience technologies include our Axenohl (silver
dihydrogen citrate) antimicrobial product and our Innovex (Triglycylboride)
pesticide products. We will realize a gain on the water treatment division sale
of approximately $2,000,000 after federal and California income taxes.
During the quarter ended October 31, 2003, bioscience segment revenues of
$39,300 remained virtually unchanged compared to $33,900 in the prior period.
The antimicrobial market is highly competitive, and we anticipate that market
acceptance of a brand new technology may be a long term achievement. In addition
to competition challenges, we believe that the investment necessary to pursue
research testing and regulatory approval for Axenohl products will continue to
be significant. As we receive additional regulatory approvals for Axenohl,
however, we expect revenues to develop quickly. For example, now that we have
received EPA approval on Axen-30, our Axenohl-based hard surface disinfectant,
and we expect to see a shift toward increasing Axenohl division product sales in
the coming year, and we believe that sales of Axen-30 will have a significant
impact on revenues in future. We continue to believe that pesticide technologies
will have a material impact on revenues in the coming year, and we continue to
believe that the silver ion technologies will ultimately become the largest
revenue generator for PURE Bioscience.
Gross profit for the quarter ended October 31, 2003 was $11,000 versus $10,400
in 2002. Gross profit percentage of 28% in 2003 remained unchanged from the
prior period.
Net loss from continuing operations for the quarter ended October 31, 2003 was
$783,000 versus net loss of $646,000 for the same period in 2002. During the
quarter, General and Administrative expenses increased $11,500, or 4%, from
$317,000 at in fiscal 2002 versus $328,400 in fiscal 2003. Administrative
expenses include an increase in amortization costs associated with purchased
patents and licenses. Selling expense decreased approximately $103,500, or 69%,
from $150,200 in 2002 to $46,700 in 2003 because of a decreased use of salaried
sales personnel and an increase in the use of commissioned salespeople. Research
and Development increased approximately 125%, or $203,800, over the same period
in 2002 from $173,100 to $376,900. This increase was the result of continued
time and resources devoted to the development and testing of our emerging
pesticide and silver ion technology product lines. Of the loss in the current
period, $159,900 is attributable to non-cash items: $74,900 of services and
interest paid with stock and warrants, $40,500 of amortization and $27,500 of
depreciation.
DISCONTINUED OPERATION
Income from discontinued operations for the quarter ended October 31, 2003
consisted of revenues of $467,200, cost of sales of $209,700 and other costs of
$131,000 resulting in a net income of $126,500. Income from discontinued
operations for the same period in 2002 consisted of revenues of $693,400, cost
of sales of $418,300 and other costs of $108,000 resulting in a net income of
$167,100. At October 31, 2003 the Company had a backlog of $349,300 of water
treatment products because cash flow limited the Company's ability to purchase
raw materials. Had the Company been able to fulfill these orders in the current
quarter, water treatment revenues would have exceeded those of the same quarter
in 2002.
LIQUIDITY AND CAPITAL RESOURCES
From inception through the present, we have financed our operations primarily
through our initial public offering in August of 1996 and by subsequent private
placement stock sales. In addition, the Company had obtained short term
financing through a $500,000 line of credit. In September 2002 the Company
renegotiated its line of credit and extended it until November 2003. The
extension includes an increase from $500,000 to $600,000 at an interest rate of
1 1/2 % per month secured against the entire assets of the Company excluding the
Axenohl patent. In July 2003, the Company issued a $300,000 convertible
debenture at an interest rate of 10% per annum due July 2004.
The Company is currently attempting to strengthen its liquidity position by
working with an investment banker because the Company requires an outside source
of capital to fund planned projects relating to new product development and
related product launches, research and development projects and regulatory
approvals. The Company's operations alone may not generate cash flows, within
the next twelve months, sufficient to fund planned expansion.
In August of 2003, the Company completed a financing arrangement which included
the acquisition of a $2,035,000 Trust Deed asset (and $435,000 offsetting loan
payable for a net increase in equity of $1,600,000) in exchange for the issuance
of 2,000,000 shares of the Company's common stock to a party unrelated to the
grantor. In October 2003, the Company signed a term sheet to sell the Trust Deed
asset for cash at face value. The purchasing party is also acquiring the water
treatment division for $2,750,000 in cash plus up to $1,250,000 in deferred
payments over the next year. Completion of the divestment of the water treatment
division is subject to approval by PURE Bioscience shareholders. The Company
intends to use a portion of the proceeds of this transaction to satisfy
outstanding debt. The remaining proceeds should be sufficient to sustain
operations and fund product development and commercialization until our
bioscience technologies result in positive cash flow.
If the asset sale is not approved, PURE Bioscience will continue to operate the
water treatment division unless and until it is able to negotiate another
transaction that the Board of Directors believes is acceptable to the
stockholders and to PURE Bioscience. The Board of Directors believes that this
transaction relieves the need for additional funding to properly continue the
marketing, selling and further development of our bioscience technologies while
still making the necessary investments in the water treatment division to
maintain our historical growth rates. To the extent that we do not obtain needed
capital through the sale of the water treatment division, we will have to obtain
it through the issuance of additional debt or equity or through other means, any
one of which may reduce the value to us, perhaps substantially, of any
commercialization of bioscience products. There is no guarantee that we would be
able to obtain such funding on terms acceptable to us or at all.
Stockholder approval is only one of the closing conditions. If the remaining
closing conditions are not satisfied or waived, the sale might not be
consummated, even if the stockholders approve the sale.
9
By completing the asset sale, we lose our historical revenue stream and become
less diversified. By selling our water treatment division assets, we will be
selling approximately 95% of our current source of revenue generation (based
upon results from the July 31, 2003 fiscal year end). We will become a
bioscience company focused on the marketing, selling and continued development
of our Axenohl antimicrobial technology and our Triglycylboride pesticide
technology. We may invest in other complementary technologies in the future, but
we have no current specific plans to do so at this time. This transaction would
increase our business risk because we will be less diversified than before the
sale of the water treatment division assets and because our remaining business
is in the relatively high-risk, but potentially high reward, field of applied
biotechnology.
After the sale, we will become a biotechnology company in a highly regulated
field with high investment costs and high risks. We currently have two pesticide
products, RoachX and AntX and one antimicrobial product, Axen-30 hard surface
disinfectant, being sold or ready for sale. We intend to fund and manage
additional EPA regulated product development internally and in conjunction with
current regulatory consultants, and we do not expect to be able to introduce
additional EPA regulated antimicrobial products for several months. It may be
several years before we are able to introduce any FDA regulated antimicrobial
pharmaceutical products. To that end, we have partnered with Therapeutics, Inc.,
a California based drug development company, which has assumed responsibility
for funding and managing the testing and regulatory process for potential FDA
regulated Axenohl-based pharmaceutical products. The FDA and comparable agencies
in many foreign countries impose substantial limitations on the introduction of
new products through costly and time-consuming laboratory and clinical testing
and other procedures. The process of obtaining FDA and other required regulatory
approvals is lengthy, expensive and uncertain.
Even after we have invested substantial funds in further development of our
Axenohl-based products and related technology, and even if the results of our
efforts are favorable, there can be no guarantee that we will be granted
necessary regulatory approvals.
If we successfully bring additional EPA or FDA regulated products to market,
there is no assurance that we will be able to successfully manufacture or market
the products or that potential customers will buy them, if for example, a
competitive product has greater efficacy or is deemed more cost effective. In
addition, the market in which we will sell any such products is dominated by a
number of large, well-capitalized corporations, which may impact our ability to
successfully market our products or maintain any technological advantage we
might develop. We also would be subject to changes in regulations governing the
manufacture and marketing of our products, which could increase our costs,
reduce any competitive advantage we may have and/or adversely affect our
marketing effectiveness.
Although the Company has no plans to continue to fund operations with additional
private placements of stock, we may evaluate opportunities to sell additional
equity or debt securities, or obtain credit facilities from lenders to
strengthen our financial position. The sale of additional equity or convertible
debt securities could result in additional dilution to our stockholders.
Our liquidity is unaffected by the financing program offered to participating
dealers in the Nutripure water dealer program. We receive funds from our lender
and disperse the funds to the dealer, less a commission charged by us, upon
completion of the contract. The lender disperses funds to us. We record a
liability when the funds are received and relief of liability when funds are
dispersed, and we do not retain liability on the credit extended.
At October 31, 2003, our current assets to liabilities ratio increased from 0.27
to 1.06. Current assets increased $2,011,900 from $540,900 at July 31, 2003 to
$2,552,800 at October 31, 2003 due mainly to the acquisition of the $2,035,000
Trust Deed discussed above. Current liabilities increased $432,300 from
$1,974,200 to $2,406,500. This increase was due mainly to the addition to notes
payable of the $435,000 note also mentioned above
Net fixed assets decreased approximately $27,500 due mainly to depreciation of
equipment. Noncurrent assets decreased approximately $4,900 due to amortization.
Non-current assets of $2,489,500 consist almost entirely of Patents and
Licenses.
Cash flows used from continuing operations were $2,663,800 in quarter ended
October 31, 2003 and $211,500 in 2002. For fiscal 2003, cash flows used in
investing activities included $45,000 for the purchase of patents and licenses.
In fiscal 2002 cash flows used in investing activities included $8,900 for the
purchase of machinery and equipment and $4,700 for the purchase of patents and
licenses.
Cash flows from financing activities were $545,000 in fiscal 2003 and $176,950
in fiscal 2002. During the quarter ended October 31, 2003 the Company conducted
three private placements to three accredited investors in which it issued
950,000 shares of common stock at prices that range from $0.50 to $0.75 per
share for a total of $545,000. In the prior period, cash flows from financing
activities included the addition of $100,000 in loans payable from a line of
credit renegotiated in September 2002 which was reclassified to long-term debt.
Cash flows from financing activities in the prior period also included an
increase of common stock of $76,950 from the exercise of stock options.
COMMITMENTS
As a condition of the purchase agreement of the Axenohl patent, the Company
agreed to make certain royalty payments to NVID of 5% of the gross product sales
with a minimum royalty payment total of $1,000,000 for the period from November
15, 2001 to July 31, 2004 and subsequently $1,000,000 per year for the remaining
life of the patent. The contract states that at July 31, 2004 the Company shall
have the right, in its sole and absolute discretion, to do one of the following:
a) pay the initial minimum royalty payment of $1,000,000 in cash or common stock
of the Company to NVID, less royalty amounts already paid, on or before July 31,
2004, b) transfer the patent back to NVID, at which time the Company would be
released of any future minimum payments and granted a license to manufacture and
distribute products covered by the patent while retaining all Axen and Axenohl
related patents filed by the Company, including retention of all of its
previously granted license rights to sell, distribute and manufacture all
Axenohl based products, or c) cancel any royalty obligation under the contract
by selling, transferring or assigning its ownership of the primary patent to a
third party and paying NVID a percentage of the gross proceeds of 5% while
retaining all Axen and Axenohl related patents filed by the Company, including
retention of all of its previously granted license rights to sell, distribute
and manufacture all Axenohl based products. The Company has not recorded or
accrued an amount for the minimum royalty payments in the financial statements
because the Company has determined that it is unlikely to choose the option to
pay the minimum royalty.
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ITEM 3
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CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures that are designed to
ensure that information required to be disclosed in the Company's 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 the Company's management, including its Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure based closely on the definition of "disclosure
controls and procedures" in Rule 13a-14(c). In designing and evaluating the
disclosure controls and procedures, management recognized that any controls and
procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives, and management
necessarily was required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures.
Within 90 days prior to the date of this report, the Company carried out an
evaluation, under the supervision and with the participation of the Company's
management, including the Company's Chief Executive Officer and the Company's
Chief Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures. Based on the foregoing, the
Company's Chief Executive Officer and Chief Financial Officer concluded that the
Company's disclosure controls and procedures were effective.
There have been no significant changes in the Company's internal controls or in
other factors that could significantly affect the internal controls subsequent
to the date the Company completed its evaluation.
PART II OTHER INFORMATION, ITEM 1
----------------------------------
LEGAL PROCEEDINGS
There have been no developments in the case involving PURE Bioscience and
Zedburn Corporation et. al. in Circuit Court of Pinellas County, Florida as
previously disclosed and incorporated by reference herein from Annual Report on
Form 10KSB for fiscal year ended July 31, 2003.
There have been no developments in the case involving PURE Bioscience and Billy
Stapleton and Susie Stapleton as previously disclosed and incorporated by
reference herein from Annual Report on Form 10KSB for fiscal year ended July 31,
2003.
ITEM 2
------
CHANGES IN SECURITIES
On August 25, 2003, 60,000 shares of common stock were issued in exchange for
attorneys fees incurred in connection with the acquisition of the Axenohl
patent. Also in August 2003, the Company completed a financing arrangement with
Next9 LLC which included the acquisition of a $2,000,000 Trust Deed receivable
and $35,000 related accrued interest and issuing a $435,000 note payable
resulting in a net increase of $1,600,000 in equity during the period. This note
receivable was in exchange for the issuance of 2,000,000 shares of the Company's
common stock to a party unrelated to the Company, and that is fully secured by
specific assets other than the equity instruments granted. During the quarter we
conducted three private placements to three accredited investors in which it
issued 950,000 shares of common stock at prices that range from $0.50 to $0.75
per share for a total of $545,000 with a weighted average price of $0.57 per
share.
With respect to the sales made, we relied on Section 4(2) of the Securities Act
of 1933, as amended. No advertising or general solicitation was employed in
offering the securities. The securities were offered solely to accredited or
sophisticated investors who were provided all of the current public information
available on PURE Bioscience.
11
ITEM 3.
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DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4.
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SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5.
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OTHER INFORMATION
Not applicable.
ITEM 6.
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EXHIBITS AND REPORTS ON FORM 8-K
Exhibits
A. The following Exhibits are filed as part of this report pursuant to Item
601 of Regulation S-B:
3.1 (1) -- Articles of Incorporation, Articles of Amendment and Bylaws
3.1.1(13) -- Articles of Amendment dated March 11, 2002
4.1 (1) -- Form of Class A Warrant
4.2 (1) -- Form of Class Z Warrant
4.3 (1) -- Form of Common Stock Certificate
4.4 (1) -- Warrant Agreement
4.5 (2) -- March 2000 Warrant
4.6 (3) -- January 2001 Warrant
4.7 (4) -- Convertible Debenture
4.8 (5) -- Convertible Debenture Purchase Agreement
4.9 (6) -- Convertible Debenture Warrant
10.1 (1) -- Employment Contract/Michael L. Krall
10.2 (7) -- Manufacturing, Licensing and Distribution Agreement dated March 26,
2001
10.3 (8) -- Axenohl License Agreement
10.4 (9) -- Weaver - Roach X Assignment
10.5 (9) -- Dodo Agreement [CONFIDENTIAL TREATMENT REQUESTED FOR CERTAIN OMITTED
INFORMATION FILED SEPARATELY]
10.6 (8) -- Promissory Note of Michael Krall
10.7 (8) -- Promissory Note of Gary Brownell
10.8 (9) -- Nutripure Dealer Agreement
10.9 (9) -- Sales Finance Agreement
10.10 (10) -- ETIH2O, Inc., Acquisition Agreement
10.11 (11) -- NVID Litigation Settlement Agreement
10.12 (12) -- Addendum #1 to NVID Settlement Agreement
13 (13) -- Subsidiaries of the Registrant
(1) Incorporated by reference from Form SB-2 registration statement SEC File #
333-00434 effective August 8, 1996
(2) Incorporated by reference from S-3 registration statement, SEC File
#333-36248 effective on May 17, 2000
(3) Incorporated by reference from S-3 registration statement, SEC File
#333-55758 effective on February 26, 2001
(4) Incorporated by reference from S-3 registration statement, SEC File
#333-61664 filed on May 25, 2001
(5) Incorporated by reference from pre-effective amendment no. 1 to S-3
registration statement, SEC File #333-61664 filed on July 10, 2001
(6) Incorporated by reference from pre-effective amendment no. 2 to S-3
registration statement, SEC File #333-61664 filed on August 13, 2001
(7) Incorporated by reference from Current Report on Form 8-K filed on May 24,
2001 as amended on October 19, 2001
(8) Incorporated by reference from the Amended Annual Report on Form 10KSB for
the fiscal year ended July 31, 2000 filed on October 19, 2001
(9) Incorporated by reference from Amended Form 10QSB for the nine month period
ended April 30, 2001 filed on October 19, 2001
(10) Incorporated by reference from the Amended Annual Report on Form 10KSB for
the fiscal year ended July 31, 2001 filed on November 13, 2001
(11) Incorporated by reference from Current Report on Form 8-K filed on December
6, 2001
(12) Incorporated by reference from Amended Current Report on Form 8-K filed on
December 7, 2001
(13) Incorporated by reference from the Annual Report on Form 10KSB for the
fiscal year ended July 31, 2002 filed on October 29, 2003
B. Reports on Form 8-K:
We filed a Form 8-K Current Report, Item 9, on August 20, 2003 and on
August 23, 2003 which was amended on August 26, 2003..
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SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PURE BIOSCIENCE
By: /s/ Michael L. Krall
---------------------------------
Michael L. Krall, President/CEO
December 12, 2003
By: /s/ Gary Brownell
--------------------------------------
Gary Brownell, Chief Financial Officer
December 12, 2003
13