PURE BIOSCIENCE, INC

PURE
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PURE BIOSCIENCE : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

06/15/2021 | 04:14pm

All references in this Item 2 and elsewhere in this Quarterly Report to "PURE,"
"we", "our," "us" and the "Company" refer to PURE Bioscience, Inc., a Delaware
corporation, and our wholly owned subsidiary, ETI H2O, Inc., a Nevada
corporation. ETI H2O, Inc. currently has no business operations and no material
assets or liabilities and there have been no significant transactions related to
ETI H2O, Inc. during the periods presented in the condensed consolidated
financial statements contained elsewhere in this Quarterly Report.



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






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 PURE Hard Surface and PURE Control, we market and sell our
SDC-based products indirectly through third-party distributors supporting
various industries.






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Business Strategy




Our goal is to become a sustainable company by commercializing the SDC-based
products we have developed with our proprietary technology platform. We are
focused on delivering leading antimicrobial products that address food safety
risks across the food industry supply chain. Key aspects of our business
strategy include:






? Expanding sales and distribution for our products into the food industry with
a focus on a dual track of food safety market opportunities:




? Hard Surface Disinfectant - commercializing our current EPA registered PURE
Hard Surface disinfectant and sanitizer for use in foodservice operations,
food manufacturing and food transportation.

? Direct Food Contact - commercializing FDA approved PURE Control as a direct
food contact processing aid for fresh produce; commercializing FDA approved
PURE Control as a food processing and intervention aid for food processors
treating raw poultry in pre and post on-line reprocessing.




? Continuing to grow and establish new strategic alliances to maximize the
commercial potential of our technology platform;

? Continuing to partner with third parties who are seeking, or intend to seek,
approvals to market SDC-based products in markets outside the U.S.

? Developing additional proprietary products and applications; and

? Protecting and enhancing our intellectual property.





In addition to our current products addressing food safety, we intend to
leverage our technology platform through licensing and distribution
collaborations in order to develop new products and enter into new markets that
could potentially generate multiple sources of revenue.






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.






15







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 PURE Hard 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.






16






Results of Operations




Fluctuations in Operating Results



Our results of operations have fluctuated significantly from period to period in
the past and are likely to continue to do so in the future. We anticipate that
our results of operations will be affected for the foreseeable future by several
factors that may contribute to these periodic fluctuations, including
fluctuations in the buying patterns of our current or potential customers for
which we have no visibility, the mix of product sales including a change in the
percentage of higher or lower margin formulations and packaging configurations
of our products, the cost of product sales including component costs, 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.



Comparison of the Three Months Ended April 30, 2021 and 2020






Net Product Sales




Net product sales were $556,000 and $2,221,000 for the three months ended April
30, 2021
and 2020, respectively. The decrease of $1,665,000 was attributable to
decreased sales across our distribution and end-user network servicing the food
processing, transportation and janitorial industry. Our top three customers
accounted for $268,000 of net product sales for the three months ended April 30,
2021
. [Add color for COVID last year]



For the three months ended April 30, 2021, three individual customers accounted
for 25%, 12% and 11% of our net product sales, respectively. No other individual
customer accounted for 10% or more of our net product sales. All of our net
product sales were U.S. based sales.



For the three months ended April 30, 2020, two individual customers accounted
for 22% and 11% of our net product sales, respectively. No other individual
customer accounted for 10% or more of our net product sales. The geographic
breakdown of net product sales was as follows: 95% U.S., 5% international.



During the three months ended April 30, 2021, we recognized $5,000 in royalties
from a nonexclusive third-party distributor.






Cost of Goods Sold




Cost of goods sold was $246,000 and $972,000 for the three months ended April
30, 2021
and 2020, respectively. The decrease of $726,000 was primarily
attributable to decreased product sales.



Gross margin as a percentage of net product sales, or gross margin percentage,
was 56% for the three months ended April 30, 2021 and 2020, respectively.



Selling, General and Administrative Expense



Selling, general and administrative expense was $1,036,000 and $690,000 for the
three months ended April 30, 2021 and 2020, respectively. The increase of
$346,000 was primarily attributable to increased personnel and facility costs,
as well as, share-based compensation.



Share-based compensation expense, included in selling, general and
administrative expense, was $213,000 and $46,000 for the three months ended
April 30, 2021 and 2020, respectively. The increase of $167,000 is primarily due
to the current year vesting of stock options and restricted stock units granted
in the prior year.



Research and Development Expense



Research and development expense, primarily consisting of third-party fees and
personnel costs, was $89,000 and $85,000 for the three months ended April 30,
2021
and 2020, respectively.



Comparison of the Nine Months Ended April 30, 2021 and 2020






Net Product Sales




Net product sales were $2,841,000 and $2,968,000 for the nine months ended April
30, 2021
and 2020, respectively. The decrease of $127,000 was attributable to
decreased sales across our distribution and end-user network servicing the food
processing, transportation and janitorial industry. Our top three customers
accounted for $1,019,000 of net product sales for the nine months ended April
30, 2021
.



For the nine months ended April 30, 2021, two individual customers accounted for
18% and 10% of our net product sales, respectively. No other individual customer
accounted for 10% or more of our net product sales. All of our net product sales
were U.S. based sales.



For the nine months ended April 30, 2020, two individual customers accounted for
17% and 12% of our net product sales, respectively. No other individual customer
accounted for 10% or more of our net product sales. The geographic breakdown of
net product sales was as follows: 96% U.S., 4% international.



During the nine months ended April 30, 2021, we recognized $227,000 in royalties
from a nonexclusive third-party distributor.






Cost of Goods Sold




Cost of goods sold was $1,250,000 and $1,270,000 for the nine months ended April
30, 2021
and 2020, respectively. The decrease of $20,000 was primarily
attributable to decreased product sales.



Gross margin as a percentage of net product sales, or gross margin percentage,
was 56% and 57% for the nine months ended April 30, 2021 and 2020, respectively.
The decrease in gross margin percentage was primarily attributable to the sale
of lower margin formulations and packaging configurations of our products during
the nine months ended April 30, 2021, as compared with the prior period.



Selling, General and Administrative Expense



Selling, general and administrative expense was $3,136,000 and $2,790,000 for
the nine months ended April 30, 2021 and 2020. The increase of $346,000 was
primarily attributable to increased personnel and facility costs, as well as,
share-based compensation.



Share-based compensation expense, included in selling, general and
administrative expense, was $683,000 and $593,000 for the nine months ended
April 30, 2021 and 2020, respectively. The increase of $90,000 is primarily due
to the current year vesting of stock options and restricted stock units granted
in the prior year.



Research and Development Expense



Research and development expense was $265,000 and $227,000 for the nine months
ended April 30, 2021 and 2020, respectively. The increase of $38,000 was
primarily attributable to increased spending on third-party research.






17







Liquidity and Capital Resources



As of April 30, 2021, we had $2,894,000 in cash and cash equivalents compared
with $3,914,000 in cash and cash equivalents as of July 31, 2020. The net
decrease in cash and cash equivalents was primarily attributable to cash used to
fund operations and investments in property, plant and equipment. Additionally,
as of April 30, 2021, we had $938,000 of current liabilities, including $557,000
in accounts payable, compared with $1,512,000 of current liabilities, including
$1,344,000 in accounts payable as of July 31, 2020. The net decrease in current
liabilities was primarily due to trade payables due to our contract manufacture.



We have a history of recurring losses, and as of April 30, 2021 we have incurred
a cumulative net loss of $125,060,000. During the nine months ended April 30,
2021
, we recorded a net loss of $1,586,000 on recorded net revenue of
$3,068,000. In addition, we used $1,259,000 in operating and investing
activities resulting in a cash balance of $2,819,000. 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.



Critical Accounting Policies and Estimates



The discussion and analysis of our financial condition and results of operations
are based on our condensed consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
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.



In addition, the condensed consolidated financial statements included in this
Quarterly Report have been prepared and presented on a basis assuming we will
continue as a going concern. Until we can generate significant cash from
operations, we expect 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. Further, any
contracts or license arrangements we enter into to raise funds may require us to
relinquish our rights to our products or technology, and we cannot assure you
that we will be able to enter into any such contracts or license arrangements on
acceptable terms, or at all. Having insufficient funds may require us to delay
or scale back our marketing, distribution and other commercialization activities
or cease our operations altogether.






18







We believe the following accounting policies and estimates are critical to aid
you in understanding and evaluating our reported financial results.






Revenue Recognition




We recognize revenue in accordance with Financial Accounting Standards Board
("FASB") Accounting Standards Codification ("ASC"), Topic 606, Revenue from
Contracts with Customers ("Topic 606"). Under Topic 606, revenue is recognized
at an amount that reflects the consideration to which we expect to be entitled
in exchange for transferring goods or services to a customer. This principle is
applied using the following 5-step process:






1. Identify the contract with the customer
2. Identify the performance obligations in the contract
3. Determine the transaction price
4. Allocate the transaction price to the performance obligations in the contract
5. Recognize revenue when (or as) each performance obligation is satisfied





Under Topic 606, we recognize revenue when we satisfy a performance obligation
by transferring control of the promised goods or services to our customers, in
an amount that reflects the consideration we expect to be entitled to in
exchange for those goods or services.



Our technology platform is based on patented stabilized ionic silver, and our
initial products contain silver dihydrogen citrate, or SDC. SDC is a
broad-spectrum, non-toxic antimicrobial agent, which offers 24-hour residual
protection and formulates well with other compounds. We sell various
configurations and dilutions of SDC direct to customers and through
distributors. We currently offer PURE®Hard Surface as a food contact surface
sanitizer and disinfectant to restaurant chains, food processors and food
transportation companies. We also offer PURE Control® as a direct food contact
processing aid.



Contract terms for unit price, quantity, shipping and payment are governed by
sales agreements and purchase orders which we consider to be a customer's
contract in all cases. The unit price is considered the observable stand-alone
selling price for the arrangements. Any promotional or sales discounts are
applied evenly to the units sold for purposes of calculating standalone selling
price.



Product sales generally consist of a single performance obligation that we
satisfy at a point in time. We recognize product revenue when the following
events have occurred: (a) we have transferred physical possession of the
products, (b) we have a present right to payment, (c) the customer has legal
title to the products, and (d) the customer bears significant risks and rewards
of ownership of the products.



Our direct customer and distributor sales are invoiced based on received
purchase orders. Our payment terms on invoiced direct customer and distributor
sales range between 30 and 90 days after we satisfy our performance obligation.
The majority of our customers are on 30 day payment terms. We currently offer no
right of return on invoiced sales and maintain no allowance for sales returns.



Shipping and handling are treated as activities to fulfill promises to customers
and any amounts billed to a customer, if applicable, represent revenues earned
for the goods provided. Costs related to such shipping and handling billings are
classified as cost of sales.



We do not have significant categories of revenue that may impact how the nature,
amount, timing and uncertainty of revenue and cash flows are affected by
economic factors.



We do not allow for returns, except for damaged products when the damage
occurred pre-fulfillment. Damaged product returns have historically been
insignificant. Because of this, the stand-alone nature of our products, and our
assessment of performance obligations and transaction pricing for our sales
contracts, we do not currently maintain a contract asset or liability balance
for obligations. We assess our contracts and the reasonableness of our
conclusions on a quarterly basis.



The Company's licensing contracts typically provide for royalties based on the
licensee's sales of various configurations of PURE Hard Surface. The Company
records its royalty revenue in the month in which the licensee sold our products
to end users. Payments are generally received in the subsequent month.






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.






19






Share-Based Compensation




We grant equity-based awards under share-based compensation plans or stand-alone
contracts. 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. During the three and
nine months ended April 30, 2021 and 2020, no impairment of long-lived assets
was indicated or recorded.



Recent Accounting Pronouncements



See Note 4 to the condensed consolidated financial statements included in Item 1
of this Quarterly Report on Form 10-Q.



Off Balance Sheet Arrangements



We do not have any off balance sheet arrangements.

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