PURE BIOSCIENCE, INC. All references to "PURE," "we," "our," "us" and the "Company" in this Item 7
refer to
The discussion in this section contains forward-looking statements. These statements relate to future events, our future operations or our future financial performance. We have attempted to identify forward-looking statements by terminology such as "anticipate," "believe," "can," "continue," "could," "estimate," "expect," "intend," "may," "plan," "potential," "predict," "should," "would" or "will" or the negative of these terms or other comparable terminology, but their absence does not mean that a statement is not forward-looking. These statements are only predictions and involve known and unknown risks, uncertainties and other factors, which could cause our actual results to differ from those projected in any forward-looking statements we make. Several risks and uncertainties we face are discussed in more detail under "Risk Factors" in Part I, Item 1A of this Annual Report or in the discussion and analysis below. You should, however, understand that it is not possible to predict or identify all risks and uncertainties and you should not consider the risks and uncertainties identified by us to be a complete set of all potential risks or uncertainties that could materially affect us. You should not place undue reliance on the forward-looking statements we make herein because some or all of them may turn out to be wrong. We undertake no obligation to update any of the forward-looking statements contained herein to reflect future events and developments, except as required by law. The following discussion should be read in conjunction with the consolidated financial statements and the notes to those statements included elsewhere in this Annual Report on Form 10-K. 34 Overview
We are focused on developing and commercializing proprietary antimicrobial products that provide safe and cost-effective solutions to the health and environmental challenges of pathogen and hygienic control. Our technology platform is based on patented stabilized ionic silver, and our initial products contain silver dihydrogen citrate, or SDC. SDC is a broad-spectrum, non-toxic antimicrobial agent, which offers 24-hour residual protection and formulates well with other compounds. As a platform technology, we believe SDC is distinguished from existing products in the marketplace because of its superior efficacy, reduced toxicity, non-causticity and the inability of bacteria to
form a resistance to it. We believe there is a significant market opportunity for our safe, non-toxic, non-caustic and effective SDC-based solutions. We currently offer PURE®Hard Surface as a food contact surface sanitizer and disinfectant to restaurant chains, food processors and food transportation companies. We also offer PURE Control® as a direct food contact processing aid. In addition to our direct sales efforts with PUREHard Surface and PURE Control, we market and sell our SDC-based products indirectly through third-party distributors supporting various industries. Financial Overview
This financial overview provides a general description of our revenue and expenses.
Net Product Sales We contract manufacture and sell SDC-based products for end use, and as a raw material for manufacturing use. We recognize revenue when we satisfy a performance obligation by transferring control of the promised goods or services to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. Any amounts received prior to satisfying revenue recognition criteria are recorded as deferred revenue. See "Critical Accounting Policies and Estimates - Revenue Recognition". Cost of Goods Sold
Cost of goods sold for product sales includes direct and indirect costs to manufacture products, including materials consumed, manufacturing overhead, shipping costs, salaries, benefits, reserved inventory, and related expenses of operations. Depreciation related to manufacturing is systematically allocated to inventory produced, and expensed through cost of goods sold at the time inventory is sold. 35
Selling, General and Administrative
Selling, general and administrative expense consists primarily of salaries and other related costs for personnel in business development, sales, finance, accounting, information technology, and executive functions. Other selling, general and administrative costs include product marketing, advertising, and trade show costs, as well as public relations and investor relations, facility costs, and legal, accounting and other professional fees. Research and Development Our research and development activities are focused on leveraging our technology platform to develop additional proprietary products and applications. Research and development expense consists primarily of personnel and related costs, product registration expenses, and third-party testing. We expense research and development costs as incurred. Other Income (Expense)
We record interest income, interest expense, the change in derivative liabilities, as well as other non-operating transactions, as other income (expense) in our consolidated statements of operations.
COVID-19 The COVID-19 pandemic has led to severe disruptions in general economic activities, as businesses and federal, state, and local governments take increasingly broad actions to mitigate this public health crisis. While we have experienced some delays related to final third-party validation of certain of our products and product rollouts by customers using PURE Control, we have not experienced a material disruption to our business. In addition, we have benefited from increased demand from our customers for our PUREHard Surface product due to a focus on surface disinfecting in response to attempting to prevent COVID-19 transmission. We cannot assure you that such increased demand will continue. Further, on a go-forward basis, we cannot guarantee the overall economic conditions will not affect our business, as these conditions may significantly negatively impact all aspects of our business. Our business is dependent on the continued health and productivity of our employees, including our sales staff and corporate management team. Additionally, our liquidity could be negatively impacted if these conditions continue for a significant period of time and we may be required to pursue additional sources of financing to obtain working capital, maintain appropriate inventory levels, and meet our financial obligations. Currently, capital and credit markets have been disrupted by the crisis and our ability to obtain any required financing is not guaranteed and largely dependent upon evolving market conditions and other factors. Depending on the continued impact of the crisis, further actions may be required to improve our cash position and capital structure. The extent to which the COVID-19 pandemic ultimately impacts our business, sales, results of operations and financial condition will depend on future developments, which are highly uncertain and cannot be predicted, including, but not limited to, the duration and spread of the outbreak, its severity, the actions to contain the virus or treat its impact, and how quickly and to what extent normal economic and operating conditions resume and, more specifically, the effect it has on our customers and suppliers. Even after the COVID-19 pandemic has subsided, we may experience significant impacts to our business as a result of its global economic impact, including any economic downturn or recession that has occurred or may occur in the future.
Results of Operations - Comparison of the Years Ended
Fluctuations in Operating Results
Our results of operations have fluctuated significantly from period to period in the past and are likely to continue to do so in the future. We anticipate that our results of operations will be affected for the foreseeable future by several factors that may contribute to these periodic fluctuations, including fluctuations in the buying patterns of our current or potential customers for which we have no visibility, the mix of product sales including a change in the percentage of higher or lower margin formulations and packaging configurations of our products, the cost of product sales including component costs, our inability for any reason to be able to meet demand, the achievement and timing of research and development and regulatory milestones, unforeseen changes in expenses, including non-cash expenses such as the fair value of equity awards granted and the fair value change of derivative liabilities, the calculation of which includes several variable assumptions, and unforeseen manufacturing or supply issues, among other issues. Due to these fluctuations, we believe that the period-to-period comparisons of our operating results are not a reliable indication of our future performance. As of the date of this filing, we are not aware of any trends in these factors or events or conditions that we believe are reasonably likely to impact our results of operations in the future. Net Product Sales Net product sales were$6,917,000 and$1,909,000 for the years endedJuly 31, 2020 and 2019, respectively. The increase of$5,008,000 was attributable to increased sales across our distribution and end-user network servicing the food processing, transportation and janitorial industry. Our top three customers accounted for$2,757,000 of net product sales for the year endedJuly 31, 2020 . For the year endedJuly 31, 2020 , three individual customers accounted for 16%, 13% and 11% of our net product sales. No other individual customer accounted for 10% or more of our net product sales. The geographic breakdown of net product sales was as follows: 98%U.S. and 2% foreign. For the year endedJuly 31, 2019 , one individual customer accounted for 15%, and two individual customers accounted for 11% of our net product sales. No other individual customer accounted for 10% or more of our net product sales. All of our net product sales occurred inthe United States . 36 Cost of Goods Sold
Cost of goods sold was$2,896,000 and$728,000 for the years endedJuly 31, 2020 and 2019, respectively. The increase of$2,168,000 was primarily attributable to increased product sales.
Gross margin, as a percentage of net product sales, was 58% and 62% for the years endedJuly 31, 2020 and 2019, respectively. The decrease in gross margin percentage was primarily attributable to the sale of higher margin formulations and packaging configurations of our products during the fiscal year endedJuly 31, 2019 as compared with the current year.
Selling, General and Administrative Expense
Selling, general and administrative expense was$3,695,000 and$6,416,000 for the years endedJuly 31, 2020 and 2019, respectively. The decrease of$2,721,000 was primarily attributable to decreased personnel costs, as well as, decreased business development, marketing, board fees and share-based compensation. Share-based compensation expense included in selling, general and administrative expense, was$787,000 and$2,449,000 for the fiscal year endedJuly 31, 2020 and 2019, respectively. The decrease of$1,662,000 is primarily due to the prior year vesting of stock options and restricted stock units granted to employees, directors and consultants supporting our selling, general and administrative functions.
Research and Development Expense
Research and development expense was$322,000 and$354,000 for the years endedJuly 31, 2020 and 2019, respectively. The decrease of$32,000 was primarily attributable to reduced personnel costs and reductions in third-party testing and research supporting our FDA approval efforts.
Inducement to Exercise Warrants
Inducement expense was zero and$960,000 for the fiscal year endedJuly 31, 2020 and 2019, respectively. During the fiscal year endedJuly 31, 2019 , we amended outstanding warrants held by investors participating in our 2014 private placement financings. In accordance with the terms of the amendment the strike price for the warrants was reduced. As a result, we recorded an inducement expense of$960,000 during the fiscal year endedJuly 31, 2019 . 37 Modified EBITDA In addition to our GAAP results, we present Modified EBITDA as a supplemental measure of our performance. However, Modified EBITDA is not a recognized measurement under GAAP and should not be considered as an alternative to net income, income from operations or any other performance measure derived in accordance with GAAP, or as an alternative to cash flow from operating activities as a measure of liquidity. We define Modified EBITDA as net income (loss), plus interest expense, depreciation and amortization, stock-based compensation, and warrant inducement expense. Management considers our core operating performance to be that which our managers can affect in any particular period through their management of the resources that affect our underlying revenue and profit generating operations during that period. Non-GAAP adjustments to our results prepared in accordance with GAAP are itemized below. You are encouraged to evaluate these adjustments and the reasons we consider them appropriate for supplemental analysis. In evaluating Modified EBITDA, you should be aware that in the future we may incur expenses that are the same as or similar to some of the adjustments in this presentation. Our presentation of Modified EBITDA should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items.
Set forth below is a reconciliation of net loss to Modified EBITDA for the
fiscal year ended
July 31,
2020 2019
Net income (loss) $ 4,000 $ (6,554,000 )
Add (deduct)
Other (income) expense - 5,000
Depreciation and amortization 191,000 241,000
Inducement to exercise warrants 960,000
Stock-based compensation 787,000 2,449,000
Modified EBITDA $ 982,000 $ (2,899,000 )
We present Modified EBITDA because we believe it assists investors and analysts
in comparing our performance across reporting periods on a consistent basis by
excluding items that we do not believe are indicative of our core operating
performance. In addition, we use Modified EBITDA in developing our internal
budgets, forecasts and strategic plan; in analyzing the effectiveness of our
business strategies in evaluating potential acquisitions; making compensation
decisions; and in communications with our board of directors concerning our
financial performance. Modified EBITDA has limitations as an analytical tool,
which includes, among others, the following:
? Modified EBITDA does not reflect our cash expenditures, or future
requirements, for capital expenditures or contractual commitments;
? Modified EBITDA does not reflect changes in, or cash requirements for, our
working capital needs;
? Modified EBITDA does not reflect future interest expense, or the cash
requirements necessary to service interest or principal payments, on our
debts; and
? Although depreciation and amortization are non-cash charges, the assets being
depreciated and amortized will often have to be replaced in the future, and
Modified EBITDA does not reflect any cash requirements for such replacements.
Liquidity and Capital Resources
As ofJuly 31, 2020 , we had$3,914,000 in cash and cash equivalents compared with$473,000 in cash and cash equivalents as ofJuly 31, 2019 . The net increase in cash and cash equivalents was primarily attributable to increased cash collections from customer sales. Additionally, as ofJuly 31, 2020 , we had$1,512,000 of current liabilities, including$1,344,000 in accounts payable, compared with$738,000 of current liabilities, including$553,000 in accounts payable as ofJuly 31, 2019 . The net increase in current liabilities was primarily due to trade payables due to our contract manufacture. We have a history of recurring losses, and as ofJuly 31, 2020 we have incurred a cumulative net loss of$123,474,000 . During the fiscal year endedJuly 31, 2019 , we had a net loss of$6,554,000 and net product sales of$1,909,000 . In addition, our cash on hand was$398,000 and we used$2,990,000 in cash to fund operations. During the fiscal year endedJuly 31, 2020 , our financial performance significantly improved, and we recorded net income of$4,000 , recorded net product sales of$6,917,000 and generated$669,000 of cash flows from operations. In addition, during the year endedJuly 31, 2020 , we raised$2,830,000 through the sale of our common stock, resulting in a cash balance of$3,839,000 and stockholders' equity of$4,811,000 atJuly 31, 2020 . Based on current projections, we believe our available cash on-hand, our current efforts to market and sell our products, and our ability to significantly reduce expenses, will provide sufficient cash resources to satisfy our operational needs, for at least one year from the date these financial statements are issued. Our future capital requirements depend on numerous forward-looking factors. These factors may include, but are not limited to, the following: the acceptance of, and demand for, our products; our success and the success of our partners in selling our products; our success and the success of our partners in obtaining regulatory approvals to sell our products; the costs of further developing our existing products and technologies; the extent to which we invest in new product and technology development; and the costs associated with the continued operation, and any future growth, of our business. The outcome of these and other forward-looking factors will substantially affect our liquidity and capital resources. Until we can continually generate positive cash flow from operations, we will need to continue to fund our operations with the proceeds of offerings of our equity and debt securities. However, we cannot assure you that additional financing will be available when needed or that, if available, financing will be obtained on terms favorable to us or to our stockholders. If we raise additional funds from the issuance of equity securities, substantial dilution to our existing stockholders would likely result. If we raise additional funds by incurring debt financing, the terms of the debt may involve significant cash payment obligations as well as covenants and specific financial ratios that may restrict our ability to operate our business. 38 The following table summarizes our contractual obligations as ofJuly 31, 2020 . Payments due by period Less than More than Total 1 year 1-3 years 3-5 years 5 years
Operating lease obligations$ 12,000 $ 12,000 $ - - -$ 12,000 $ 12,000 $ - - -
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations are based on our audited consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted inthe United States , or GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses, and related disclosures. We evaluate our estimates on an ongoing basis. We base our estimates on historical experience and on other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. 39
We believe the following accounting policies and estimates are critical to aid you in understanding and evaluating our reported financial results.
Revenue Recognition EffectiveAugust 1, 2018 , we adopted theFinancial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC"), Topic 606, Revenue from Contracts with Customers ("Topic 606"). Under Topic 606, revenue is recognized at an amount that reflects the consideration to which we expect to be entitled in exchange for transferring goods or services to a customer. This principle is applied using the following 5-step process: 1. Identify the contract with the customer 2. Identify the performance obligations in the contract 3. Determine the transaction price
4. Allocate the transaction price to the performance obligations in the contract
5. Recognize revenue when (or as) each performance obligation is satisfied
Under Topic 606, we recognize revenue when we satisfy a performance obligation by transferring control of the promised goods or services to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. Our technology platform is based on patented stabilized ionic silver, and our initial products contain silver dihydrogen citrate, or SDC. SDC is a broad-spectrum, non-toxic antimicrobial agent, which offers 24-hour residual protection and formulates well with other compounds. We sell various configurations and dilutions of SDC direct to customers and through distributors. We currently offer PURE®Hard Surface as a food contact surface sanitizer and disinfectant to restaurant chains, food processors and food transportation companies. We also offer PURE Control® as a direct food contact processing aid.
Contract terms for unit price, quantity, shipping and payment are governed by sales agreements and purchase orders which we consider to be a customer's contract in all cases. The unit price is considered the observable stand-alone selling price for the arrangements. Any promotional or sales discounts are applied evenly to the units sold for purposes of calculating standalone selling price.
Product sales generally consist of a single performance obligation that we satisfy at a point in time. We recognize product revenue when the following events have occurred: (a) we have transferred physical possession of the products, (b) we have a present right to payment, (c) the customer has legal title to the products, and (d) the customer bears significant risks and rewards of ownership of the products. Our direct customer and distributer sales are invoiced based on received purchase orders. Our payment terms on invoiced direct customer and distributor sales range between 30 and 90 days after we satisfy our performance obligation. The majority of our customers are on 30 day payment terms. We currently offer no right of return on invoiced sales and maintain no allowance for sales returns. Shipping and handling are treated as activities to fulfill promises to customers and any amounts billed to a customer, if applicable, represent revenues earned for the goods provided. Costs related to such shipping and handling billings are classified as cost of sales.
We do not have significant categories of revenue that may impact how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors.
40 Variable Consideration We record revenue from customers in an amount that reflects the transaction price we expect to be entitled to after transferring control of those goods or services. From time to time, we offer sales promotions on our products such as discounts. Variable consideration is estimated at contract inception only to the extent that it is probable that a significant reversal of revenue will not
occur. Share-Based Compensation We grant equity-based awards under share-based compensation plans. We estimate the fair value of share-based payment awards using the Black-Scholes option valuation model. This fair value is then amortized over the requisite service periods of the awards. The Black-Scholes option valuation model requires the input of subjective assumptions, including price volatility of the underlying stock, risk-free interest rate, dividend yield, and expected life of the option. Share-based compensation expense is based on awards ultimately expected to vest, and therefore is reduced by expected forfeitures. Changes in assumptions used under the Black-Scholes option valuation model could materially affect our
net loss and net loss per share.
Impairment of Long-Lived Assets
In accordance with GAAP, if indicators of impairment exist, we assess the recoverability of the affected long-lived assets by determining whether the carrying value of such assets can be recovered through undiscounted future operating cash flows. If impairment is indicated, we measure the amount of such impairment by comparing the carrying value of the asset to the fair value of the asset and we record the impairment as a reduction in the carrying value of the related asset and a charge to operating results. Estimating the undiscounted future cash flows associated with long-lived assets requires judgment, and assumptions could differ materially from actual results. There were no patent impairments during the fiscal years endedJuly 31, 2020 or 2019. For purposes of testing impairment, we group our long-lived assets at the lowest level for which there are identifiable cash flows independent of other asset groups. Currently, there is only one level of aggregation for our intangible assets. We assess the impairment of long-lived assets, consisting of property, plant, equipment and finite-lived intangible assets primarily consisting of the worldwide patent portfolio of our silver ion technologies, annually, or whenever events or circumstances indicate that the carrying value may not be recoverable. Examples of such events or circumstances include:
? an asset group's inability to continue to generate income from operations and
positive cash flow in future periods;
? loss of legal ownership or title to an asset;
? significant changes in our strategic business objectives and utilization of
the asset(s); and
? the impact of significant negative industry or economic trends.
41
Additionally, on a quarterly basis we review the significant assumptions underlying our impairment assessment to determine that our previous conclusions remain valid. As part of our review, we consider changes in revenue growth rates, operating margins, working capital needs and other expenditures. With the exception of the impairment discussed above we have not identified any asset groups where undiscounted cash flows were not substantially in excess of carrying value. Recoverability of assets to be held and used in operations is measured by a comparison of the carrying amount of an asset to the future net cash flows expected to be generated by the assets. The factors used to evaluate the future net cash flows, while reasonable, require a high degree of judgment and the results could vary if the actual results are materially different than the forecasts. In addition, we base useful lives and amortization or depreciation expense on our subjective estimate of the period that the assets will generate revenue or otherwise be used by us. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value
less selling costs.
We also periodically review the lives assigned to our intangible assets to ensure that our initial estimates do not exceed any revised estimated periods from which we expect to realize cash flows from the technologies. If a change were to occur in any of the above-mentioned factors or estimates, the likelihood of a material change in our reported results would increase.
Recent Accounting Pronouncements
Information regarding recent accounting pronouncements is contained in Note 2 to the Consolidated Financial Statements, included elsewhere in this report.
Off Balance Sheet Arrangements
We do not have any off balance sheet arrangements.
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