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 April 30, 2004
---------------
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 [No Fee Required]
For the transition period from _______ to _______
Commission File number 0-21019
PURE Bioscience
---------------
(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
------------
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: 14,739,921 as of June 11, 2004.
Index
Part 1. Financial Information
Item 1. Financial Statements
Balance Sheets as of July 31, 2003 and April 30, 2004
Statements of Operations for the three and
nine months ended April, 2004 and 2003
Statements of Cash Flows for the nine months
ended April, 2004 and 2003
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Item 3. Controls and Procedures
Part II 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
2
CONSOLIDATED BALANCE SHEETS
------------------------------------------------------------------------------------
(Unaudited)
April 30 July 31
2004 2003
------------ -------------
ASSETS
Current Assets
Cash and cash equivalents $ 12,970 $ 251,087
Accounts receivable, net of allowance for doubtful
accounts of $ 58,000 at April 30, 2004
and $63,500 at July 31, 2003 153,784 163,895
Due from officers and employees -- 61
Trust deed receivable 2,035,000 --
Inventories 130,963 119,237
Prepaid expenses -- 6,655
Interest receivable 141,438 --
------------ ------------
Total current assets 2,474,155 540,935
------------ ------------
Property, Plant and Equipment
Property, plant and equipment 187,125 249,023
------------ ------------
Total property, plant and equipment 187,125 249,023
------------ ------------
Noncurrent Assets
Deposits 9,744 9,341
Patents and licenses 2,381,246 2,475,280
------------ ------------
Total noncurrent assets 2,390,990 2,484,621
------------ ------------
Assets of the water division held for resale 294,667 352,423
------------ ------------
Total assets $ 5,346,937 $ 3,627,002
============ ============
LIABILITIES AND STOCKHOLDERS EQUITY
Current Liabilities
Accounts payable $ 869,808 $ 1,079,128
Accrued liabilities 444,135 114,523
Notes payable 270,128 180,513
Loans from shareholders 1,135,000 600,000
------------ ------------
Total current liabilities 2,719,071 1,974,164
------------ ------------
Liabilities of the water division held for resale 42,398 36,165
------------ ------------
Stockholders' Equity
Class A common stock, no par value: authorized
50,000,000 shares, issued and outstanding
14,461,921 at April 30, 2004 and
10,594,088 at July 31, 2003 17,406,687 14,758,203
Warrants: issued and outstanding 1,321,429
warrants 829,989 788,473
Accumulated deficit (15,651,208) (13,930,003)
------------ ------------
Total stockholders' equity 2,585,468 1,616,673
------------ ------------
Total liabilities and stockholders' equity $ 5,346,937 $ 3,627,002
============ ============
See accompanying notes to the consolidated financial statements.
F-1
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
------------------------------------------------------------------------------------------------------------------------
For the Nine Months Ended For the Three Months Ended
April 30 April 30
-------- --------
2004 2003 2004 2003
---- ---- ---- ----
Net revenues $ 143,862 $ 80,307 $ 49,805 $ 11,679
Cost of sales 74,939 49,752 23,229 7,609
------------ ----------- ---------- ----------
Gross profit 68,923 30,555 26,576 4,070
------------ ----------- ---------- ----------
Selling expenses 145,318 444,295 79,593 155,727
General and administrative expenses 883,030 1,155,545 282,116 438,076
Research and development 1,105,406 690,491 266,131 266,241
Start-up costs - 635,376 - -
------------ ----------- ---------- ----------
Total operating costs 2,133,754 2,925,707 627,840 860,044
------------ ----------- ---------- ----------
Loss from operations (2,064,831) (2,895,152) (601,264) (855,974)
------------ ----------- ---------- ----------
Other income and (expense):
Interest income 141,449 1,332 109,120 1
Interest expense (207,244) (71,765) (87,770) (27,000)
Other (2,480) - (637) -
------------ ----------- ---------- ----------
Total other income (expense) (68,275) (70,433) 20,713 (26,999)
------------ ----------- ---------- ----------
Loss from continuing operations (2,133,106) (2,965,585) (580,551) (882,973)
Discontinued operations:
Income from discontinued operations 411,901 519,717 147,238 176,491
------------ ----------- ---------- ----------
Net loss $ (1,721,205) $ (2,445,868) $ (433,313) $ (706,482)
============= ============= =========== ===========
Net loss per common share, basic and diluted
Continuing operations $ (0.16) $ (0.32) $ (0.04) $ (0.10)
Discontinued operations 0.03 0.05 0.01 0.02
------------ ----------- ---------- ----------
Net loss $ (0.13) $ (0.27) $ (0.03) $ (0.08)
============= ============= =========== ===========
(Unaudited) (Unaudited)
Nine Months Year Three Months Year
Ended Ended Ended Ended
April July 31 April July 31
CONSOLIDATED STATEMENTS OF ACCUMULATED DEFICITS 2004 2003 2004 2003
---------------------------------------------------------------------------------------------------------------------
Balance, beginning of period $(13,930,003) $(10,646,014) $ (13,930,003) $ (10,646,014)
Net income (loss) (1,721,205) (3,283,989) (433,313) (3,283,989)
------------ ------------ ------------- -------------
Balance, end of period $(15,651,208) $(13,930,003) $ (14,363,316) $ (13,930,003)
============= ============= ============== ==============
See accompanying notes to the consolidated financial statements.
F-2
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
-------------------------------------------------------------------------------------------------------
For the Nine Months Ended
April 30
2004 2003
---- ----
Cash flows from operating activities
Net loss $(1,721,205) $(2,445,868)
Adjustments to reconcile net income to net cash provided by operating
activities:
Amortization 139,034 115,611
Depreciation 75,136 87,209
Services and interest paid for with stock and warrants 259,616 760,965
Income from discontinued operations (411,901) (519,717)
Changes in assets and liabilities:
(Increase) decrease in accounts receivable 10,111 (96,950)
(Increase) decrease in due from officers and employees 61 193,312
(Increase) decrease in prepaid expense 6,655 177,456
(Increase) decrease in interest receivable (141,438) --
(Increase) decrease in inventory (11,727) 220,756
(Increase) decrease in deposits (403) (387)
Increase (decrease) in accounts payable (209,320) 272,042
Increase (decrease) in accrued liabilities 329,609 42,490
----------- -----------
Net cash provided (used) by operating
activities (1,675,772) (1,193,081)
----------- -----------
Cash flows from investing activities
Purchase of patents and licenses (45,000) (99,365)
Purchase of property, plant and equipment (13,237) (10,794)
----------- -----------
Net cash (used) in investing activities (58,237) (110,159)
----------- -----------
Cash flows from financing activities
Proceeds from debt obligations 100,000 100,000
Proceeds from sale of common stock 920,000 529,900
----------- -----------
Net cash provided by financing activities 1,020,000 629,900
----------- -----------
Cash flows from discontinued operations 475,892 575,220
----------- -----------
Net increase (decrease) in cash and cash equivalents (238,117) (98,120)
----------- -----------
Cash and cash equivalents at beginning of period 251,087 151,257
----------- -----------
Cash and cash equivalents at end of period $ 12,970 $ 53,137
=========== ===========
Supplemental disclosures of cash flow information
Cash paid for interest $ 117,628 $ 71,765
Noncash investing and financing activities:
Value of shares issued in exchange for services $ 170,000 $ 165,660
Value of options issued in exchange for services $ -- $ 59,805
Value of warrants issued in exchange for startup costs $ -- $ 635,376
Trust Deed received in exchange for stock $ 2,035,000 $ --
See accompanying notes to the consolidated financial statements.
F-3
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
APRIL 30, 2003 (Discontinued) Bioscience Amounts Consolidated
------------------------------------------ -------------- ------------- ----------- ------------
Revenues
Commercial Water Treatment
Fillmaster Products $ 328,900 $ -- $ -- $ 328,900
Replacement Filters (Includes CSP 2000) 181,500 -- -- 181,500
Residential Water Treatment 20,700 -- -- 20,700
Water Dealer Program 101,800 -- -- 101,800
Silver Ionization -- 1,200 -- 1,200
Pesticide -- 10,500 -- 10,500
----------- ----------- ----------- -----------
Total Revenues $ 632,900 $ 11,700 $ -- $ 644,600
----------- ----------- ----------- -----------
Operating Income/(Loss) $ 176,500 $ (368,900) $ (487,100) $ (679,500)
----------- ----------- ----------- -----------
Segment Assets $ 427,700 $ 2,676,900
----------- -----------
Water
FOR THE THREE MONTHS ENDED Treatment Reconciling
APRIL 30, 2004 (Discontinued) Bioscience Amounts Consolidated
------------------------------------------ ------------ ----------- ----------- ------------
Revenues
Commercial Water Treatment
Fillmaster Products $ 187,900 $ -- $ -- $ 187,900
Replacement Filters (Includes CSP 2000) 210,200 -- -- 210,200
Residential Water Treatment 5,400 -- -- 5,400
Water Dealer Program -- -- -- --
Silver Ionization -- 24,600 (3,400) 21,200
Pesticide -- 25,200 -- 25,200
----------- ----------- ----------- -----------
Total Revenues $ 403,500 $ 49,800 $ (3,400) $ 449,900
----------- ----------- ----------- -----------
Operating Income/(Loss) $ 147,200 $ (74,600) $ (505,900) $ (433,300)
----------- ----------- ----------- -----------
Segment Assets $ 294,700 $ 2,709,100
----------- -----------
F-4
Water
FOR THE NINE MONTHS ENDED Treatment Reconciling
APRIL 30, 2003 (Discontinued) Bioscience Amounts Consolidated
------------------------------------------ ----------- ----------- ----------- ------------
Revenues
Commercial Water Treatment
Fillmaster Products $ 906,300 $ -- $ -- $ 906,300
Replacement Filters (Includes CSP 2000) 493,000 -- -- 493,000
Residential Water Treatment 138,900 -- -- 138,900
Water Dealer Program 389,800 -- -- 389,800
Silver Ionization -- 32,100 (2,800) 29,300
Pesticide -- 48,200 -- 48,200
----------- ----------- ----------- -----------
Total Revenues $ 1,928,000 $ 80,300 $ (2,800) $ 2,005,500
----------- ----------- ----------- -----------
Operating Income/(Loss) $ 519,700 $(1,003,500) $(1,891,600) $(2,375,400)
----------- ----------- ----------- -----------
Segment Assets $ 427,700 $ 2,982,900
----------- -----------
Water
FOR THE NINE MONTHS ENDED Treatment Reconciling
APRIL 30, 2004 (Discontinued) Bioscience Amounts Consolidated
------------------------------------------ ----------- ----------- ----------- ------------
Revenues
Commercial Water Treatment
Fillmaster Products $ 708,200 $ -- $ -- $ 708,200
Replacement Filters (Includes CSP 2000) 540,300 -- -- 540,300
Residential Water Treatment 53,600 -- -- 53,600
Water Dealer Program 36,400 -- -- 36,400
Silver Ionization -- 63,300 (3,000) 60,300
Pesticide -- 80,200 -- 80,200
----------- ----------- ----------- -----------
Total Revenues $ 1,338,500 $ 143,500 $ (3,000) $ 1,479,000
----------- ----------- ----------- -----------
Operating Income/(Loss) $ 411,900 $ (356,700) $(1,776,400) $(1,721,200)
----------- ----------- ----------- -----------
Segment Assets $ 294,700 $ 2,709,100
----------- -----------
Significant customers primarily consisted of domestic retail chain pharmacies.
Sales concentrations to major chain stores were approximately $272,300 and
export sales were $42,800 for the quarter ended April 30, 2004. Sales
concentrations to major chain stores were approximately $982,300 and export
sales were $80,300 for the nine months ended April 30, 2004. No customer
accounted for more than 10% of consolidated sales.
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 two private placements in which it issued 250,000 shares of
common stock at a price of $0.50 per share for a total of $125,000. On October
21, 2003 the Company issued a security which included 700,000 shares of common
stock at a price of $0.60 per share and a one-year warrant to purchase 84,000
shares of common stock at $0.80 per share. The warrants were valued at $21,220
($0.25 per share based on the Black Scholes Option Pricing Model assuming no
dividend yield, volatility of 137.78% and a risk-free interest rate of 5.25%).
On December 18, 2004, 170,000 shares valued at $100,000 ($.59 per share) were
issued in exchange for financial and business consulting services. On January
29, 2004 the Company conducted a private placement in which it sold two units of
Company securities. Each unit consisted of 200,000 shares of common stock at a
price of $.50 per share and a one-year warrant to purchase 50,000 shares of
common stock at $1.00 valued at $20,296 ($0.20 per share based on the Black
Scholes Option Pricing Model assuming no dividend yield, volatility of 137.78%
and a risk-free interest rate of 5.25%)
On April 30, 2004, 50,000 shares were issued in exchange for attorney fees
related to the Axenohl patent. The shares were issued at fair value of $0.50 per
share. Also during the quarter ended April 30, 2004 the Company conducted two
private placements in which it issued 395,833 shares of common stock at a
weighted average price of $0.44 per share for a total of $175,000.
Note 4. Warranty Liability
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 system 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.
F-5
Beginning Expense Warranty Ending
Liability Incurred Payments Liability
---------------- ---------------- --------------- --------------
Nine Months Ended April 30, 2003 $ 41,445 $ 33,578 $ 26,363 $ 48,660
---------------- ---------------- --------------- --------------
Nine Months Ended April 30, 2004 $ 42,430 $ 21,086 $ 21,118 $ 42,398
---------------- ---------------- --------------- --------------
Note 5. Loans from Shareholders
In August of 2003 the Company obtained a loan from a shareholder of $435,000 in
connection with a financing arrangement which included the acquisition of a
$2,000,000 Trust Deed receivable. The note bears an interest rate of 10% and is
due and payable on June 12, 2004. On January 26, 2004, the same shareholder
loaned the Company an additional $100,000 with the same terms. The Company also
has a $600,000 loan payable to a different shareholder which was due on November
17, 2003 and is past due. Interest on the note accrues at a rate of 18% per
annum and $ 49,800 was in arrears at April 30, 2004.
Note 6. Reclassifications
Certain reclassifications have been made to previously reported statements to
conform to the Company's current financial statement format.
Note 7. 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.
As of the date of this filing, the transaction has not closed. DRCI has affirmed
a willingness and intention to complete the transaction, and we have granted the
buyer an extension of time to perform. Although we anticipate a successful
transaction, we cannot provide assurance that it will close. If this transaction
does not close as anticipated, the Company intends to solicit other offers for
the water treatment division.
If the proposed transaction is consummated, DRCI will pay $2.75 million in cash
at the closing. DRCI will also pay up to an additional $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.
Three Months Three Months
Ended Ended
April 30, 2004 April 30, 2003
-------------- --------------
Net revenues $403,200 $632,900
Cost of Sales 134,500 415,700
Other Expenses 121,500 40,700
-------- --------
Total $147,200 $176,500
-------- --------
Nine Months Nine Months
Ended Ended
April 30, 2004 April 30, 2003
-------------- --------------
Net revenues $1,338,200 $1,928,000
Cost of Sales 536,600 1,141,900
Other Expenses 389,700 266,400
---------- ----------
Total $ 411,900 $ 519,700
---------- ----------
Assets and liabilities of the water division held for sale include:
April 30, 2004 July 31, 2003
-------------- -------------
Inventories and other current assets $170,800 $168,700
Property, plant and equipment 123,900 183,700
-------- --------
Total 294,700 352,400
Accrued liabilities 42,400 36,200
-------- --------
Net assets and liabilities of the water division held for sale: $252,300 $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.
F-6
Note 8. Trust Deed Receivable
In August 2003, the Company completed a financing arrangement which included the
acquisition of a $2,000,000 Note and Trust Deed bearing a rate of interest of
10% with principal and all interest due and payable on or before June 12, 2004.
Prior to the due date, the debtors requested a 64 day extension to complete an
in-process financing plan for the payment of the principal and interest. The
Company reviewed the plan and granted the requested extension until August 15,
2004. There were no other changes to the security or to the terms of the note.
Note 9. Subsequent Events
Subsequent to quarter end, in May 2004, the Company conducted a private
placement in which it issued 415,722 shares of common stock at $0.45 per share
for a total of $187,075. Also in May 2004, the Company issued 250,000 shares in
exchange for business development consulting services valued at $125,000. In May
2004, an employee exercised options on 20,000 shares of common stock.
F-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. (DRCI), 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. The transaction with DRCI also includes the sale of 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.
Shareholders approved the transaction at a special meeting of shareholders on
April 14, 2004. As of the date of this filing, the transaction has not closed.
DRCI has affirmed a willingness and intention to close the transaction;
therefore, we have granted the buyer an extension of time to perform. Although
we anticipate a successful transaction, we cannot provide assurance that it will
close. In the meantime, we continue to operate the water treatment division and
retain the profits from that division, and we continue to record the business as
a discontinued operation because we intend to solicit other offers for the water
treatment division regardless of the outcome of the pending transaction.
After we sell the water treatment division, we will emerge as a focused
bioscience company that is essentially 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.
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). The initial EPA
registrations for use of Axenohl, the 2400-parts per million technical grade
concentrate used to manufacture our use dilutions, and Axen(R), a 12-parts per
million use dilution hard surface disinfectant were issued in 2001. In March
2003, we received Environmental Protection Agency (EPA) registration for our new
Axen-30 formulated Category IV hard surface disinfectant product for commercial,
industrial and consumer applications. Axen30 is a 30-part per million (ppm)
use-dilution formula of our patented antimicrobial technology, Axenohl. Based on
the EPA toxicity categorization of antimicrobial products that ranges from
Category I (high toxicity) down to Category IV, Axen30, 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 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 MRSA 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,
Incorporated, 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.
In May 2004, we announced that Therapeutics, Incorporated began development of
the first group of FDA regulated products using PURE's Axenohl silver dihydrogen
citrate (SDC) antimicrobial technology. Following months of evaluation of
formulations and potential indications, Therapeutics, Incorporated's product
development team identified several potential Axenohl based women's health
products and initiated work on a lead product for which they intend to pursue
FDA approval.
We have filed an additional United States patent covering multiple potential
uses for our Axenohl technology including the treatment of specific types of
bacteria, fungus and viruses, as well as medical treatment and the preservation
of consumable and non-consumable products. The additional Disinfectant and
Method of Use patent application was filed in May 2004 and is the seventh
Axenohl related patent application filed in the United States covering inventive
aspects of manufacturing, composition and formulations of our Axenohl
technology.
We have already obtained two U.S. patents related to the Axenohl technology:
U.S. Patent 6,197,814 for the original Axenohl disinfectant and method of
making, and Patent 6,583,176 covering the Axenohl aqueous disinfectant in
combination with ethyl alcohol. In addition, we have received national patents
in Australia and New Zealand as well as regional patents in the Eurasian and
OAPI regions of the world. National patent applications are pending in Brazil,
Canada, China, Japan and Mexico as well as the European and the ARIPO regions of
the world. The Axenohl International Patent Application was published by the
World Intellectual Property Organization (www.wipo.org) on April 22, 1999 under
publication Number WO 99/18790.
3
In June 2004, we received EPA approval to expand claims made for our Axen30 hard
surface disinfectant to include use on hard surfaces in childcare facilities.
The EPA previously approved Axen30 for disinfection of hard surfaces including
those in restaurants, homes and medical facilities. Expanded use claims for our
Axen30 disinfectant now feature children's toys, toy boxes, play tables and
activity centers, jungle gyms, playpens, child car seats, strollers and diaper
changing tables. The EPA's approval of such sensitive use sites emphasizes the
"least-toxic" characteristics of Axen30 while expanding its versatility in the
professional and consumer disinfection markets. We believe that the new claims
open key market opportunities for us as our distributors position to penetrate
the childcare segment which includes daycare centers, preschools, schools,
gymnasiums and children's activity centers.
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.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED APRIL 30, 2004 VERSUS THREE
MONTH ENDED APRIL 30, 2003
During the first 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. Revenues and expenses of the Water Division are now netted and
shown on the income statement as Income from Discontinued Operations.
During the quarter ended April 30, 2004, bioscience segment revenues of $49,800
increased 326% compared to $11,700 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
the 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 April 30, 2004 was $26,600 versus $4,100 in
2003. Gross profit percentage of 53% in 2004 increased compared to 35% in the
prior period because a larger percent of the revenues in the recent quarter were
from the sale of Axenohl products which are associated with higher margins.
Net loss from continuing operations for the quarter ended April 30, 2004 was
$580,600 versus net loss of $883,000 for the same period in 2003. During the
quarter, General and Administrative expenses decreased $156,000, or 36%, from
$438,100 at in fiscal 2003 versus $282,100 in fiscal 2004. Administrative
expenses decreased mainly due to a decrease in consulting fees. Selling expense
decreased approximately $76,100, or 49%, from $155,700 in 2003 to $79,600 in
2004 because of a decreased use of salaried sales personnel and an increase in
the use of commissioned salespeople. Research and Development costs of $266,100
for the quarter ended April 30, 2004 remained unchanged compared to the same
period in 2003.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED APRIL 30, 2004 VERSUS NINE MONTH
ENDED APRIL 30, 2003
During the nine months ended April 30, 2004, bioscience segment revenues of
$143,900 increased 79% compared to $80,300 in the prior period. Gross profit for
the period ended April 30, 2004 was $68,900 versus $30,600 in 2003. Gross profit
percentage of 48% in 2004 increased compared to 38% in the prior period because
a larger percent of the revenues in the recent quarter were from the sale of
Axenohl products which are associated with higher margins.
Net loss from continuing operations for the nine months ended April 30, 2004,
was $2,133,100 versus net loss of $2,965,600 for the same period in 2003. The
loss in the prior period included an expense for start-up costs of $635,376.
During the recent nine months, General and Administrative expenses decreased
$272,500, or 24%, from $1,155,500 in fiscal 2003 versus $883,000 in fiscal 2004.
Administrative expenses decreased mainly due to a decrease in consulting fees.
Selling expense decreased approximately $299,000, or 67%, from $444,300 in 2003
to $145,300 in 2004 because of a decreased use of salaried sales personnel and
an increase in the use of commissioned salespeople. Research and Development
increased approximately 60%, or $414,900, over the same period in 2003 from
$690,500 to $1,105,400. 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, $473,700
is attributable to non-cash items: $259,600 of services and interest paid with
stock and warrants, $139,000 of amortization and $75,100 of depreciation.
4
DISCONTINUED OPERATION
Income from discontinued operations for the nine months ended April 30, 2004
consisted of revenues of $1,338,500, cost of sales of $536,600 and other costs
of $389,700 resulting in a net income of $411,900. Income from discontinued
operations for the same period in 2003 consisted of revenues of $1,928,000, cost
of sales of $1,141,900 and other costs of $266,400 resulting in a net income of
$519,700. At April 30, 2004 the Company had a backlog of $221,500 of water
treatment products because cash flow limited the Company's ability to purchase
raw materials and because the Company experienced a significant interruption in
service from its primary component supplier when the supplier relocated its
manufacturing from the west coast to the Midwest.
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 included 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 late December 2003, Charles Siddle, Colt Communications Money
Purchase Pension Plan and LeeAnn Newcomb, SPS Business Services, Inc. 401 (K)
Profit Sharing Plan filed an action in District Court of Arizona against PURE
Bioscience for the Company's failure to perform under the terms of their loan
agreements. The Company intends to cure the default and pay-off the loans from
the proceeds of the sale of the Water Division. 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. The principal and interest on this Note was due on or before June 12,
2004. Prior to the due date, the debtors requested a 64 day extension of the
note and presented their in-progress financing plan for payment of the principal
and interest. The Company reviewed the plan and granted the requested extension.
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. Shareholders approved the transaction at a special
meeting of shareholders on April 14, 2004. As of the date of this filing, the
transaction has not closed. DRCI has affirmed a willingness and intention to
close the transaction; therefore, we have granted the buyer an extension.
Although we anticipate a successful transaction, we cannot provide assurance
that it will close. 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 completed, PURE Bioscience will continue to operate the
water treatment division, although the Company would work to locate a new buyer
for the water treatment division to advance its business strategy of focusing on
the bioscience division. 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.
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.
5
Although the Company has no plans to continue to fund operations with additional
private placements of stock following the sale of the water treatment division,
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 April 30, 2004, our current assets to liabilities ratio increased from 0.27
to 0.91. Current assets increased $2,419,200 from $540,900 at July 31, 2003 to
$2,474,200 at April 30, 2004 due mainly to the acquisition of the $2,035,000
Trust Deed asset discussed above plus accrued interest receivable. Current
liabilities increased $744,900 from $1,974,200 to $2,719,100. This increase was
due mainly to the addition to notes payable of the $535,000 note also mentioned
above and an increase in accrued liabilities.
Net fixed assets decreased approximately $61,900 due mainly to depreciation of
equipment. Noncurrent assets decreased approximately $93,600 due to
amortization. Non-current assets of $2,391,000 consist almost entirely of
Patents and Licenses.
Cash flows used from continuing operations were $1,675,800 in nine months ended
April 30, 2004 and $1,193,100 in 2003. For fiscal 2004, cash flows used in
investing activities included $45,000 for the purchase of patents and licenses
and $13,200 for the purchase of machinery and equipment. In fiscal 2003 cash
flows used in investing activities included $99,400 for the purchase of patents
and licenses and $10,800 for the purchase of machinery and equipment.
Cash flows from financing activities were $1,020,000 in fiscal 2004 and $629,900
in fiscal 2003. During the period the Company borrowed $100,000 from a private
lender. Also during the nine-month period ended April 30, 2004 the Company
conducted two private placements in which it issued 250,000 shares of common
stock at a price of $0.50 per share for a total of $125,000. On October 21, 2003
the Company issued a security which included 700,000 shares of common stock at a
price of $0.60 per share and a one-year warrant to purchase 84,000 shares of
common stock at $0.80 per share. The warrants were valued at $21,220 ($0.25 per
share based on the Black Scholes Option Pricing Model assuming no dividend
yield, volatility of 137.78% and a risk-free interest rate of 5.25%. On January
29, 2004 the Company conducted a private placement in which it sold two units of
Company securities. Each unit consisted of 200,000 shares of common stock at a
price of $.50 per share and a one-year warrant to purchase 50,000 shares of
common stock at $1.00 valued at $20,296 ($0.20 per share based on the Black
Scholes Option Pricing Model assuming no dividend yield, volatility of 137.78%
and a risk-free interest rate of 5.25%) In addition, during the most recent
quarter the Company conducted two private placements in which it issued 395,833
shares of common stock at a weighted average price of $0.44 per share for a
total of $175,000. The total equity raise for the period was $920,000.
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. Cash flows from financing activities also included an increase of common
stock of $529,900. During the prior nine-month period the Company conducted a
$250,000 private placement in which the Company issued 833,332 shares of common
stock to six accredited investors at a price of $0.30 per share and a $200,000
private placement in which the Company issued 400,000 shares of common stock to
six accredited investors at a price of $0.50 per share . The Company also
received $81,325 from the exercise of options.
VALUATION OF INTANGIBLE ASSETS
SFAS 142 requires that goodwill and other intangible assets be tested for
impairment on an annual basis and between annual tests in certain circumstances.
Recoverability of assets to be held for use is based on expectations of future
discounted cash flows from the related operations, and when circumstances
dictate, the Company adjusts the asset to the extent the carrying value exceeds
the fair value of the asset. Our impairment review process is based on the
discounted future cash flow approach that uses our estimates of revenue driven
by assumed market segment share and estimated costs. Also included in our
analysis is an estimate of revenues expected from our agreement with
Therapeutics, Inc. We have entered into an agreement with Therapeutics Inc. for
the development and commercialization of FDA regulated Axenohl based products
where Therapeutics is responsible for funding and directing all development
activities and regulatory filings. In the agreement Therapeutics Inc. has agreed
to reimburse the Company for $2.2M of pre-contract acquisition and development
costs of the Axenohl intellectual property as well as reimbursement for ongoing
intellectual property costs associated with Axenohl. Following reimbursement of
costs, depending on the type of product, the Company will receive 40% to 90% of
all sales proceeds, licensing fees, royalty payments and all other forms of cash
and non-cash consideration. The Company will also realize revenues from the sale
of Axenohl raw material as an active ingredient.
Judgments made by the Company related to the expected useful lives of long-lived
assets and the Company's ability to realize discounted cash flows in excess of
the carrying amounts of such assets are affected by factors such as the ongoing
maintenance and improvements of the assets and changes in economic and market
conditions. As the Company assesses the ongoing expected cash flows and carrying
amounts of our long-lived assets, these factors could cause the Company to
realize a material impairment charge, which would result in decreased results of
operations, and potentially decrease the carrying value of these assets.
6
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.
7
ITEM 3. 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 13(a)-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.
As of the end of the period, 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
ITEM 1. LEGAL PROCEEDINGS
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 was settled in November 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.
In October 2003, PURE Bioscience filed an arbitration action against NVID
International and Falken Industries to demand a cease and desist from continued
and ongoing public dissemination of false, misleading and disparaging statements
and complete cooperation in enforcing and defending the Axenohl patent and
related technology, pursuant to the Core Settlement Agreement between PURE
Bioscience and NVID International.
In late December 2003, Charles Siddle, Colt Communications Money Purchase
Pension Plan and LeeAnn Newcomb, SPS Business Services, Inc. 401 (K) Profit
Sharing Plan filed an action in District Court of Arizona against PURE
Bioscience for PURE's failure to perform under the terms of its loan agreements.
PURE Bioscience intends to cure the default and pay-off the loans from the
proceeds of the sale of the Water Division.
ITEM 2. CHANGES IN SECURITIES
On April 30, 2004, 50,000 shares were issued in exchange for attorney fees
related to the Axenohl patent. The shares were issued at fair value of $0.50 per
share. Also during the quarter ended April 30, 2004 the Company conducted two
private placements in which it issued 395,833 shares of common stock at a
weighted average price of $0.44 per share for a total of $175,000.
Subsequent to quarter end, in May 2004 the Company conducted a private placement
in which it issued 415,722 shares of common stock at $0.45 per share for a total
of $187,075. Also in May 2003, the Company issued 250,000 shares in exchange for
business development consulting services. In May 2004, an employee exercised an
option on 20,000 shares.
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.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On or about March 15, 2004, we mailed proxy statement to shareholders to seek
approval of the sale of our water treatment division at a special meeting of
shareholders held on April 14, 2004. Shareholders approved the transaction.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
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
8
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
10.13 (14) -- Therapeutics, Inc. Agreement [CONFIDENTIAL TRREATMENT REQUESTED
FOR CERTAIN OMITTED INFORMATION FILED SEPARATELY]
10.14 (15) -- Promissory Note dated November 2003 $4,750,000
10.15 (15) -- Promissory Note dated January 26, 2004 $100,000
13 (13) -- Subsidiaries of the Registrant
31.1 -- Section 302 Certification
31.2 -- Section 302 Certification
32.1 -- Section 906 Certification
32.2 -- Section 906 Certification
(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
(14) Incorporated by reference from the Amended Annual Report on Form 10KSB for
the fiscal year ended July 31, 2003 filed on January 30, 2004
(15) Incorporated by reference from the Amended Quarterly Report for the three
month period ended October 31, 2003 filed on February 27, 2004
B. Reports on Form 8-K: None.
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
June 11, 2004
By: /s/ Gary Brownell
--------------------------------------
Gary Brownell, Chief Financial Officer
June 11, 2004
9