UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended July 31, 2004
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from __________ to __________
Commission file number: 0-21019
PURE Bioscience
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(Exact name of registrant as specified in its charter)
California 33-0530289
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1725 Gillespie Way, El Cajon, California 92020
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(Address of principal executive offices, including Zip Code)
(619) 596-8600
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(Registrant's Telephone Number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock
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(Title of Class)
Check whether the issuer (1) filed all reports required 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 [ ]
Check if there is no disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendments to this Form 10-KSB.
The issuer's revenues for its most recent fiscal year: $2,064,100
Aggregate market value of the voting stock held by non-affiliates of the
registrant: Approximately $6,442,100 as of October 28, 2004.
Indicate the number of shares outstanding of each of the issuer's classes of
common stock: 15,804,310 shares of common stock as of October 28, 2004.
Documents incorporated by reference: Certain Exhibits
PART I
ITEM 1. DESCRIPTION OF BUSINESS
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 antimicrobial 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. 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 are
entertaining 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 silver dihydrogen citrate
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 an aqueous disinfectant,
silver dihydrogen citrate. A patented new molecule, silver dihydrogen citrate
(SDC) is an electrolytically generated source of stabilized ionic silver that
can serve as the basis for a broad range of products in diverse markets. SDC
liquid is colorless, odorless, tasteless and non-caustic and formulates well
with other compounds. As a platform technology, our SDC-based antimicrobial is
distinguished from competitors in the marketplace because of its superior
efficacy combined with reduced toxicity.
The bioscience division also includes a patent-pending pesticide technology,
Triglycylboride(TM) which, like silver dihydrogen citrate, provides effective
results without human toxicity and is an alternative to traditional poisons.
Triglycylboride has been formulated into EPA registered RoachX(TM) and AntX(TM),
the key products in the Company's Innovex(TM) line of pest control products. In
addition, the Innovex line features our EPA-exempt non-toxic TrapX rodent lure,
and our EPA registered CleanKill(TM), the SDC-based hard surface disinfectant
for the pest control industry. The pest control products are being marketed to
both commercial pest control and consumer products companies.
History
PURE Bioscience was incorporated in the State of California on August 24, 1992,
to pursue the immediate business of manufacturing and marketing the Fillmaster
and subsequently a broadly based business of delivering advanced technology,
equipment and supplies to not only the pharmacy industry, but also other
healthcare markets and to retail consumers. Through acquisition as well as
research and development, we have expanded into the bioscience arena with our
silver dihydrogen citrate (SDC) antimicrobial products and our Innovex pesticide
products.
Since 1992, our water treatment division evolved significantly from the
introduction of the original Fillmaster pharmaceutical water purification and
dispensing system. In 1997 we launched the now-patented Fillmaster 1000e
computerized, electronic dispenser as an upgrade dispenser and in 1999 we
launched the Scanmaster, an add-on bar code reader enhancement to the Fillmaster
1000e. In 1998 we developed and launched an entry level residential water
filtration system, the Nutripure 2000, and in 2002 we entered the water dealer
market with our additional point-of-use and whole house water filtration and
treatment systems.
In 1999, we began investigating marketing opportunities for a new antimicrobial
molecule, silver dihydrogen citrate (SDC). The SDC patent application was owned
at the time by NVID International. Early in 2000, after concluding that we
wished to pursue development and marketing of the SDC technology, we engaged in
a marketing and licensing agreement with NVID International for specific market
segments in specific geographic areas.
In 2001 we acquired the marketing rights and patent to our boric acid pesticide
technologies. The first of these products developed, RoachX, launched in October
2001.
In June 2001, Environmental Protection Agency (EPA) registration was obtained
for the 2400-parts per million (ppm) technical grade SDC concentrate (trade name
Axenohl(R)) as well as for the initial Axen(R) hard surface disinfectant product
for commercial, industrial and consumer applications including restaurants,
homes and medical facilities
In March 2001, the first United States patent covering the basic SDC formulation
and the method of making was issued.
In late 2001, as part of a litigation settlement with NVID regarding the
marketing rights to SDC, we purchased the SDC patent for 700,000 shares of our
common stock plus certain expenses.
In mid-2002 we expanded our Innovex line of pesticides to include RoachX,
AntX75, TrapX and CleanKill, an SDC-based hard surface disinfectant for use in
the pest control industry.
In March 2003, we received Environmental Protection Agency (EPA) registration
for our new SDC-based Axen(R)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 SDC antimicrobial
technology. The additional EPA registration allows us to expand our hard surface
disinfectant claims to include a 30 second kill time on standard indicator
bacteria, a 24 hour residual kill on standard indicator bacteria, a 2 minute
kill time on some resistant strains of bacteria, 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 leading commercial
and consumer products currently on the market, while maintaining lower toxicity
ratings.
In July 2003 we received a second United States patent granted for the unique
disinfectant silver dihydrogen citrate. United States patent 6,583,176 was
issued on June 24, 2003 and covers the formulation of the aqueous disinfectant
in combination with ethyl alcohol. United States patent 6,583,176 is a division
of the first United States patent 6,197,814 issued on March 6, 2001 covering the
basic SDC formulation and the method of making.
In September 2003, we announced the first significant commercialization of its
SDC-based hard surface disinfectant, Axen30, which is sold by EnvirOx L.L.C. of
Danville, Illinois, as Critical Care(TM), a new commercial
disinfectant-fungicide-virucide.
Also in September 2003, the Company announced an agreement with Therapeutics,
Inc., a drug development company based in La Jolla, California, for the
development and commercialization of Food and Drug Administration (FDA)
regulated SDC-based products. Therapeutics, Inc. will fund and direct all
development activities and FDA regulatory filings and will initially focus on
development of SDC-based products for the treatment of bacterial, viral and
fungal mediated diseases and conditions.
In addition, in September 2003, shareholders approved a name change from
Innovative Medical Services to PURE Bioscience.
In November 2003, we signed a definitive agreement to sell our water treatment
division. 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. 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 are entertaining
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 SDC antimicrobial
technology.
In May 2004 we filed an additional United States patent covering multiple
potential uses for our SDC 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 the seventh SDC related
patent application filed in the United States covering inventive aspects of
manufacturing, composition and formulations of our SDC technology.
Also in May 2004, Therapeutics, Incorporated began development of the first two
groups of products subject to FDA regulation that use SDC antimicrobial
technology: women's health products and acne products.
In June 2004, we obtained EPA registration of expanded claims for our Axen30
hard surface disinfectant to include use on hard surfaces in childcare
facilities. The EPA previously registered 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 registration 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.
In August 2004, we filed a utility patent application to protect our proprietary
silver dihydrogen citrate disinfectant in combination with other antimicrobial
compounds, including quaternary ammonia, oxidizers or halogens such as chlorine,
bromine or iodine.
PRINCIPAL PRODUCTS AND MARKETS: BIOSCIENCE DIVISION
Silver Dihydrogen Citrate Our flagship technology is a patented, aqueous
antimicrobial called silver dihydrogen citrate (SDC). SDC is an electrolytically
generated source of stabilized ionic silver that can serve as the basis for a
broad range of products in diverse markets. Colorless, odorless, tasteless and
non-caustic, SDC formulates well with other compounds. We sell pre-formulated,
ready-to-use product, as well as varying strengths of silver dihydrogen citrate
concentrate as an additive or raw material for inclusion in other companies'
products.
We currently have Environmental Protection Agency (EPA) registration for our
2400-parts per million (ppm) technical grade SDC concentrate (trade name
Axenohl(R)) as well as for our Axen(R) and Axen(R)30 hard surface disinfectant
products for commercial, industrial and consumer applications including
restaurants, homes and medical facilities. The Axen30 EPA registration allows us
to expand the existing efficacy claims as a hard surface disinfectant to include
a 30 second kill time on standard indicator bacteria, a 24 hour residual kill on
standard indicator bacteria, a 2 minute kill time on some resistant strains of
bacteria, 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
Axen30 from many of the leading commercial and consumer products currently on
the market, while maintaining lower toxicity ratings. Based on the EPA toxicity
categorization of antimicrobial products that ranges from Category I (high
toxicity) down to Category IV, SDC, 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 tests conducted to obtain the recent EPA registration were performed by
nationally recognized independent laboratories Nelson Laboratories of Salt Lake
City, Utah and AppTec ATS, St. Paul, Minnesota, under AOAC protocol and GLP
regulations in accordance with EPA regulations. Specific Axen test results
include:
o 30-Second Kill Time At 30 ppm, Axen demonstrated a 30-second, 99.9999%
kill of standard indicator organisms including Staphylococcus aureus
ATCC 6538, Pseudomonas aeruginosa ATCC 15442 and Salmonella
choleraesuis ATCC 10708. Each is regarded as ever present in nearly
every person's life and is also a frequent human pathogen.
o Residual Kill Activity The residual activity of Axen was tested at 0,
1, 6, and 24 hours after application to a hard surface against
standard indicator organisms (Staphylococcus aureus ATCC 6538,
Pseudomonas aeruginosa ATCC 15442 and Salmonella choleraesuis ATCC
10708). Quantitative residual results at 24 hours after initial
application show a 99.99% reduction in all three bacteria tested.
o Bacteria Additional testing of Axen against Methicillin Resistant
Staphylococcus aureus ATCC 700698 (MRSA), Vancomycin Resistant
Enterococcus faecium ATCC 700221 (VRE) and Escherichia coli OH157 ATCC
43888 demonstrated a 99.9999% kill in 2 minutes. These specific
bacteria are especially problematic in hospitals because of their
resistance to antibiotics. Further, Axen showed a 99.9999% kill in 30
seconds against Listeria monocytogenes ATCC 19111. Food processing
operations are challenged to keep this bacterium under control.
o Fungus Axen demonstrated a 99.9999% kill in 10 minutes of the common
athlete's foot fungus, Trichophyton mentagrophytes ATCC 9533. This
data allows the Company to add a fungicidal claim to its hard surface
disinfectant label.
o Viruses Axen also demonstrated 99.9999% virucidal efficacy against HIV
Type 1 in 30 seconds, Herpes simplex virus type 1 in one minute, and
Influenza A virus ATCC VR-544, Rhinovirus type R 37 ATCC VR-1147,
Strain 151-1 and Poliovirus type 2 ATCC VR-1022, Strain Lansing in 10
minutes. After review and registration by the EPA, this data allows
the Company to add these virucidal claims to its hard surface
disinfectant label.
In September 2003, we announced the first significant commercialization of our
SDC-based 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.
In June 2004, we received EPA registration 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 registration 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.
We plan to pursue additional EPA and FDA regulatory approvals for other
applications. For example, 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 silver dihydrogen citrate-based products.
Therapeutics, Incorporated. will fund and direct all development activities and
FDA regulatory filings and will initially focus on development of silver
dihydrogen citrate-based products for the treatment of bacterial, viral and
fungal mediated diseases and conditions. In May 2004, Therapeutics, Incorporated
began development of the first two groups of products subject to FDA regulation
that use silver dihydrogen citrate antimicrobial technology: women's health
products and acne products. Therapeutics, Incorporated expects its development
work will result in t multiple Investigational New Drug (IND) filings with the
US FDA.
Triglycylboride(TM) 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), EPA-exempt non-toxic TrapX rodent lure
and EPA approved CleanKill(TM), the SDC-based hard surface disinfectant for the
pest control industry. We have taken a high level, executive-to-executive
marketing approach with leading national pest control companies. We also offer a
private label program to fortify sales to pest control professionals as well as
provide a cost-effective entry into the consumer retail marketplace.
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 silver dihydrogen citrate antimircrobial technology, the boric acid
based pesticides are very competitive with regard to efficacy when compared to
leading brands while maintaining lower toxicity ratings.
PRINCIPAL PRODUCTS AND MARKETS: WATER TREATMENT DIVISION (DISCONTINUED
OPERATION)
The Principal products in our Water Treatment Division include the Fillmaster(R)
dispensing apparatus, connected to the Pharmapure(R) reverse osmosis water
filtration system, which provides measured amounts of purified water for
reconstitution of liquid oral antibiotics and certain other pharmacy
applications. We also market filter replacements for the Fillmaster system.
Significant customers consist primarily of domestic retail chain pharmacies. In
addition, the Water Treatment Division includes our Nutriprue 2000 Countertop
Water Filtration System. Developed specifically for mass merchandising, the
Nutripure systems are sold through retail outlets in the United States.
Competition
The market for silver dihydrogen citrate is highly competitive because we must
work to displace traditional disinfecting technologies sold by well-known
international industry leaders.
The market is similar for our pesticide products. Although recent changes in EPA
regulations may ease our ability to enter the market, ongoing strong market
presence of existing pesticide companies may make it difficult to compete. On
June 8, 2000, the United States EPA reclassified the Dow Chemical product
Dursban (also sold as Lorsban). Over 800 products containing the organophosphate
pesticide chlorpyrifos are reclassified and now may only be sold in a
significantly diluted form. Sales of original, stronger formulations of such
products to retailers ended February 1, 2001, and retailers were required to
remove the products from shelves by December 31, 2001. The current formulations
were also banned for commercial and agriculture professionals as of December 31,
2000. Professional pest control companies must use a 100 to 1 diluted version of
the current product strength and obtain a waiver of responsibility from the home
or business owner. As of June 6, 2001, the product underwent a further 10 to 1
dilution, creating a 1000 to 1 diluted treatment.
We recognize that innovative marketing methods are required in such competitive
markets. We work to focus on the high quality and value price of our products in
their markets.
Patents and Intellectual Property
We own patents on the Medifier, the Fillmaster 1000e Electronic Dispenser and
several patents and patents pending related to the silver dihydrogen citrate
technology. In addition, we have a patent pending for RoachX and related
pesticide products.
The Medifier patent, which expires in March 2010, protects a device for use as a
magnifying implement which has a housing member designed to accommodate
prescription bottles of various popular sizes therein in a fixed position. A
longitudinally moveable magnifying lens slideably mounted in the housing member
is utilized to magnify the print contained on an instruction label located on
the side of the prescription bottle. Alternate embodiments allow different size
medicine bottles to be alternately mounted in concentric fashion, or with the
side of the medicine bottles facing the lens in a fixed position.
The Fillmaster 1000e patent expires in August 2017 and protects a method and
apparatus for dispensing fluids in response to a user request for a specified
amount of the fluid. A microprocessor opens and closes a fluid port for
predetermined amounts of time to control the amount of fluid dispensed. The
microprocessor monitors the elapsed time and the amount of fluid that has been
dispensed since the last time the filter was serviced. In one preferred
embodiment, the amount of fluid that is dispensed is measured by continuously
monitoring the volume of fluid flowing through the apparatus. A pressure
measurement device allows the microprocessor to monitor the fluid pressure. The
microprocessor prevents fluid from being dispensed if the pressure is not within
a predetermined range of tolerances. The fluid port is opened and closed by
activating and deactivating a solenoid. A keypad allows the user to input the
amount of fluid that is to be dispensed. A "Wait" period is imposed between the
time that the user initiates the first stage and the time the user may initiate
the second stage. The microprocessor does not open the fluid port if a "Failure"
condition exists. An LCD is provided to display the amount of fluid that the
user has requested. In an alternative embodiment, a bar code scanner or other
input device allows the user to automatically input the amount of fluid that is
to be dispensed.
On November 30, 2001, we acquired the patent for our silver dihydrogen citrate
and its method of making. The Company previously licensed the use of this
patent. The Company purchased the patent for 700,000 shares of its common stock
plus certain expenses.
The first United States patent for silver dihydrogen citrate was issued on March
6, 2001, and a supplemental patent has been filed to cover the substitution of
14 other organic acids for citric acid in the formulation. In June 2003, we
received a second United States patent granted for silver dihydrogen citrate
that covers the formulation of the aqueous disinfectant in combination with
ethyl alcohol. In addition, PURE has received patents in Australia and New
Zealand as well as in the EAPC (Eurasian Patent Community) and the OAPI
(Organisation Africaine de la Propriete Intellectuelle). Patent applications are
pending in Brazil, Canada, China, Japan, Mexico, the EPO (European Patent
Office) and the ARIPO (African Regional Industrial Property Organization). These
foreign patent applications were filed through the Patent Cooperation Treaty and
were published by the World Intellectual Property Organization (www.wipo.org) as
Number WO 99/18790 on April 22, 1999.
In May 2004 we filed an additional United States patent covering multiple
potential uses for our SDC 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 the seventh SDC related
patent application filed in the United States covering inventive aspects of
manufacturing, composition and formulations of our SDC technology. In addition,
in August 2004, we filed a utility patent application to protect our proprietary
silver dihydrogen citrate disinfectant in combination with other antimicrobial
compounds, including quaternary ammonia, oxidizers or halogens such as chlorine,
bromine or iodine.
A patent application for RoachX and related products was filed in February 1998
to protect a nonaqueous form of insecticide consisting of a desiccant,
preferably boric acid, with additional ingredients for binding, stability and
target insect attraction.
We own the trademarks or trademark applications for PURE Bioscience(TM),
Axenohl(R), Axen(R), Silverion(R), Kinderguard(TM), Innovex(TM), RoachX(R),
AntX(R), TrapX(R), Fillmaster(R), Nutripure(R) and Medifier(R).
Manufacturing
We manufacture and blend the silver dihydrogen citrate products in our
manufacturing facility at our corporate headquarters. Silver, the primary active
ingredient, is a readily available commodity, and the other active and inactive
ingredients of silver dihydrogen citrate are readily available from chemical
supply companies.
We manufacture RoachX, AntX and TrapX in our manufacturing facility at our
corporate offices and outsource some of the packaging functions. The active and
inactive ingredients of these products are readily available through multiple
manufacturers in the US and abroad.
Research and Development
Research and Development costs that have no alternative future uses are charged
to operations when incurred and are included in operating expenses. The total
amounts charged to Research and Development expense were $1,133,000 and $981,500
in the fiscal years ended July 31, 2004 and 2003, respectively.
Employees
As of October 28, 2004, PURE Bioscience employed nineteen people, all of whom
are full-time individuals.
ITEM 2. PROPERTIES
Our business operates in a 13,067 square foot facility located in a light
industrial/office park in El Cajon, California. This location houses all
administrative, executive, sales, assembly, shipping and manufacturing
functions. The space is leased from an unaffiliated third party under a
sixty-five month agreement commencing on July 1, 1996. We have also signed an
amendment to the lease and exercised an option to lease the building for an
additional five years.
ITEM 3. LEGAL PROCEEDINGS
On August 8, 2002, Billy Stapleton and Susie Stapleton filed a complaint for
patent infringement in the United States District Court Eastern District of
Tennessee at Knoxville, against PURE Bioscience' product RoachX. On August 12,
2002 Billy and Susie Stapleton filed an amended complaint. On May 2, 2003 PURE
Bioscience filed its answer to amended complaint, denying allegations generally
and specifically, and stating nine affirmative defenses to the amended
complaint. The trial is scheduled for April 21, 2004. PURE Bioscience believes
Stapleton's amended complaint is frivolous and without merit.
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 silver dihydrogen
citrate patent and related technology, pursuant to the Core Settlement Agreement
between PURE Bioscience and NVID International. In October 2004, PURE was
notified by the Arbitrator that PURE has prevailed against NVID in this action.
PURE awaits receipt of the formal arbitral award.
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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to shareholders in the fourth quarter of the fiscal
year.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
(1) Market Information: PURE Bioscience's common stock is traded on the
Bulletin Board under the symbol "PURE".
(2) High and Low Bid Prices: The following table sets forth high and low
bid prices for each fiscal quarter, for the last two fiscal years as
reported on myTrack by Track Data Corporation. Such quotations reflect
inter-dealer prices without retail mark-up, mark-down, or commissions
and may not represent actual transactions.
Fiscal 2004 Fiscal 2003
Quarter Ended High Low Quarter Ended High Low
------------------------- ---------- -- ---------- ----------------------- ---------- -- -----------
July 31, 2004 $1.00 $0.25 July 31, 2003 $0.98 $0.56
April 30, 2004 $1.00 $0.25 April 30, 2003 $1.10 $0.55
January 31, 2004 $1.07 $0.68 January 31, 2003 $1.23 $0.26
October 31, 2003 $1.07 $0.53 October 31, 2002 $0.82 $0.25
(3) Security Holders: As of October 28, 2004, we had approximately 180
holders of record of our common stock. This does not include
beneficial owners holding common stock in street name. The closing
price per share on October 28, 2004 was $0.44.
(4) Dividend Plans: We have paid no common stock cash dividends and have
no current plans to do so.
(5) Preferred Stock: There are no shares of preferred stock presently
outstanding.
(6) Recent Sales of Unregistered Securities: In June and July we conducted
two private placements in which we issued 166,667 shares of common
stock at $.45 per share for a total of $75,000. 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.
(7) Securities Authorized for Issuance under Equity Compensation Plans
------------------------ ------------------------- -------------------------- ----------------------------
Number of securities
remaining available for
future issuance under
Number of securities to Weighted-average equity compensation plans
be issued upon exercise exercise price of (excluding securities
of outstanding options, outstanding options, reflected in column (a))
warrants and rights warrants and rights (c)
Plan Category (a) (b)
------------------------ ------------------------- -------------------------- ----------------------------
Equity compensation
plans approved by
security holders 3,243,750 1.83 6,283,301
------------------------ ------------------------- -------------------------- ----------------------------
Equity compensation
plans not approved by
security holders 740,000 1.35 2,033,000
------------------------ ------------------------- -------------------------- ----------------------------
Total 3,983,750 1.74 8,316,301
------------------------ ------------------------- -------------------------- ----------------------------
The following equity compensation plans were not approved by security holders:
1. 2001 ETIH2O Stock Option Plan: Adopted by the Board in January 2001,
there are 1,000,000 shares authorized under this Plan. The options
have a five-year term with vesting ratably over a five-year period.
Executive Officers and Directors are not eligible participants under
this plan.
2. 2001 Consultants and Advisors Stock Option Plan: Adopted by the Board
in January 2001, there are 500,000 shares authorized under this Plan.
The options have a five-year term with vesting ratably over a
five-year period. Executive Officers and Directors are not eligible
participants under this plan.
3. 2004 Consultants and Advisors Stock Option Plan: Adopted by the Board
in April 2004, there are 2,000,000 shares authorized under this plan.
The options have a five-year term with vesting ratably over a
five-year period. Executive Officers and Directors are not eligible
participants under this plan.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Except for the historical information contained herein, the following discussion
contains forward-looking statements that are subject to risks and uncertainties.
Actual results may differ substantially from those referred to herein due to a
number of factors, including but not limited to risks described in the section
entitled Competition and elsewhere in this Form 10KSB. Our consolidated
financial data includes Export Company of America, Inc., Ampromed Comercia
Importacao e Exportacao Ltda., ETI-H2O Corporation, and Nutripure Water
Corporation. The following discussion and analysis should be read in conjunction
with the audited financial statements of PURE Bioscience.
RESULTS OF OPERATIONS FOR THE YEAR ENDED JULY 31, 2004 VERSUS YEAR ENDED
JULY 31, 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 silver
dihydrogen citrate antimicrobial products and our Innovex 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 year ended July 31, 2004, bioscience segment revenues of $263,500
increased 128% compared to $115,700 in the prior year. 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 silver dihydrogen citrate products will continue to
be significant. As we receive additional regulatory approvals for silver
dihydrogen citrate, however, we expect revenues to develop quickly. For example,
now that we have received EPA approval on Axen-30, our silver dihydrogen
citrate-based hard surface disinfectant, we expect to see increasing sales of
Axen-30 and related products in the coming year. We also believe that pesticide
technologies will have a material impact on revenues in the coming year.
Gross profit for the year ended July 31, 2004 was $132,600 versus $57,500 in
2003. Gross profit percentage of 50% in 2004 remained unchanged compared to the
prior period.
Net loss from continuing operations for the year ended July 31, 2004 was
$2,823,600 versus net loss of $3,663,900 for the same period in 2003. During the
year, General and Administrative expenses decreased $244,200, or 16%, from
$1,564,000 at in fiscal 2003 versus $1,319,800 in fiscal 2004. Administrative
expenses decreased mainly due to a decrease in consulting fees. Selling expense
decreased approximately $160,000, or 34%, from $466,200 in 2003 to $306,200 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
$1,133,000 for the year ended July 31, 2004 increased $151,500 or 15% compared
to the same period in 2003. 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, $738,200
is attributable to non-cash items: $462,800 of services and interest paid with
stock and warrants and $177,000 of amortization and $98,400 of depreciation. Of
the loss in the prior period, $1,123,500 was attributable to non-cash items:
$635,400 of non-cash start-up cost attributed to 651,000 warrants valued at
$0.976 per warrant, $225,400 of services paid with stock and warrants, $155,500
of amortization and $107,200 of depreciation.
DISCONTINUED OPERATION
Income from discontinued operations for the year ended July 31, 2004 consisted
of revenues of $1,800,600, cost of sales of $861,100 and other costs of $423,600
resulting in a net income from discontinued operations of $515,900. Income from
discontinued operations for the same period in 2003 consisted of revenues of
$2,473,800, cost of sales of $1,475,800 and other costs of $618,100 resulting in
a net income from discontinued operations of $379,900. At July 31, 2004 the
Company had a backlog of $458,000 of water treatment products.
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. This loan is in technical default and the Company also intends to cure the
default and pay-off the note from the proceeds of the sale of the Water Division
and Trust Deed.
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.
The Company has now granted an additional extension until November 30, 2004 for
the financing plan to be completed. 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. We cannot provide assurance that the transaction 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 above described asset sale is not completed, PURE Bioscience will
continue to operate the water treatment division while it entertains other
offers for its sale. 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 87% of our current source of revenue generation (based
upon results from the July 31, 2004 fiscal year end). We will become a
bioscience company focused on the marketing, selling and continued development
of our silver dihydrogen citrate 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 sell products
based upon our silver dihydrogen citrate antimicrobial technologies and boric
acid based pesticide technology. PURE's silver dihydrogen citrate is a platform
technology rather than a single use applied technology. As such, products
developed by PURE from the platform fall under the jurisdiction of multiple U.S.
and international regulatory agencies. PURE currently has Environmental
Protection Agency (EPA) registration for its 2400-parts per million (ppm)
technical grade SDC concentrate (trade name Axenohl(R)) as well as for its
Axen(R) and Axen(R)30 hard surface disinfectant products for commercial,
industrial and consumer applications including restaurants, homes and medical
facilities. 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.
PURE's technology also shows promise as a broad-spectrum antimicrobial for use
in human and veterinary healthcare products. PURE has chosen to pursue approvals
through the U.S. Food and Drug Administration (FDA) by partnering with
Therapeutics, Incorporated, which has assumed responsibility for funding and
managing the testing and regulatory process for potential FDA regulated silver
dihydrogen citrate-based products. PURE expects Therapeutics' experience with
drug development and FDA processing, especially with regard to dermal
pharmaceuticals, could lead to IND, NDA and/or 510-K filings for silver
dihydrogen citrated-based healthcare products with the FDA. 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. It may
be several years before we are able to introduce any FDA regulated antimicrobial
pharmaceutical products.
Uses for which no specific antimicrobial claims are made are typically
unregulated by any government agency.
Even after we have invested substantial funds in further development of our
silver dihydrogen citrate-based products and related technologies, and even if
the results of our efforts are favorable, there can be no guarantee that we will
be granted necessary regulatory approvals.
If we successfully bring additional EPA or FDA regulated products to market,
there is no assurance that we will be able to successfully manufacture or market
the products or that potential customers will buy them, if for example, a
competitive product has greater efficacy or is deemed more cost effective. In
addition, the market in which we will sell any such products is dominated by a
number of large, well-capitalized corporations, which may impact our ability to
successfully market our products or maintain any technological advantage we
might develop. We also would be subject to changes in regulations governing the
manufacture and marketing of our products, which could increase our costs,
reduce any competitive advantage we may have and/or adversely affect our
marketing effectiveness.
Although the Company has no plans to continue to fund operations with additional
private placements of stock 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.
At July 31, 2004, our current assets to liabilities ratio decreased from 0.27 to
0.21. Current assets increased $79,700 from $540,900 at July 31, 2003 to
$620,600 at July 31, 2004 mainly due to an increase in interest receivable.
Other Assets increased $1,903,400 from $2,484,600 and July 31, 2003 to
$4,388,000 at July 31, 2004. The increase is due mainly to the acquisition of
the $2,035,000 Trust Deed asset discussed above. Although the proceeds from the
Trust Deed are expected to be received within 90 days it is not reported in
Current Assets because it was not paid when originally due. Current liabilities
increased $1,035,300 from $1,967,900 to $3,003,200. 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 consisting mainly on an increase of accrued
interest payable and accrued wages.
Net fixed assets decreased approximately $81,900 due mainly to depreciation of
equipment. Other Assets decreased approximately $131,600 due to amortization.
Non-current assets of $2,353,000 consist almost entirely of Patents and
Licenses.
Cash flows used from continuing operations were $2,018,300 in year ended July
31, 2004 and $1,306,000 in 2003. For fiscal 2004, cash flows used in investing
activities included $45,000 for the purchase of patents and licenses and $16,600
for the purchase of machinery and equipment. In fiscal 2003 cash flows used in
investing activities included $4,400 for the purchase of patents and licenses
and $500 for the purchase of machinery and equipment.
Cash flows from financing activities were $1,282,100 in fiscal 2004 and $956,300
in fiscal 2003. During the period the Company borrowed $100,000 from a private
lender. Also during the year ended July 31, 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 the third quarter of the current fiscal year 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. During the fourth
quarter of the fiscal year, we conducted two private placements in which we
issued 582,389 shares of common stock at $0.45 per share which included warrants
to purchase 63,794 shares of common stock at $1.50 per share. The warrants were
valued at $7,905 ($0.12 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%. Also during the quarter, we issued 295,000 shares in exchange for
consulting services valued at $162,500. In addition, options on 50,000 shares
were exercised during the quarter.
In the prior year, cash flows from financing activities were $956,300. Financing
activities included the addition of $100,000 in loans from shareholders from a
line of credit renegotiated in September 2002 and $300,000 from a convertible
debenture issued in July of 2003. Cash flows from financing activities also
included an increase of common stock of $556,325. In the prior year, the Company
conducted a $250,000 private placement in which the Company issued 933,332
shares of common stock to six accredited investors at a price of $0.30 per share
(less costs), 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
and a $60,000 private placement in which the Company issued 120,000 shares of
common stock to three 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 silver dihydrogen citrate
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 silver dihydrogen citrate intellectual property as
well as reimbursement for ongoing intellectual property costs associated with
silver dihydrogen citrate. 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 silver
dihydrogen citrate 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.
COMMITMENTS
As a condition of the purchase agreement of the Axenohl patent, in a contract
called the Core Settlement Agreement, the Company had 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 10% or 5%, depending on
how near the date of the transfer is to July 31, 2004, while retaining all
related patents filed by the Company, including retention of all of its
previously granted license rights to sell, distribute and manufacture all silver
dihydrogen citrate based products. The Company had not recorded or accrued an
amount for the minimum royalty payments in the financial statements because the
Company had determined that it is unlikely to choose the option to pay the
minimum royalty.
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 silver dihydrogen
citrate patent and related technology, pursuant to the Core Settlement Agreement
between PURE Bioscience and NVID International. In October 2004, PURE was
notified by the Arbitrator that PURE has prevailed against NVID in this action.
PURE awaits receipt of the formal arbitral award. As a result of this
litigation, the Company believes the royalty obligation is terminated.
The Board of Directors
Pure Bioscience
We have audited the accompanying consolidated balance sheets of Pure Bioscience
as of July 31, 2004 and 2003, and the related statements of operations,
stockholders' equity and cash flows for the years ended July 30, 2004 and 2003.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentations. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Pure Bioscience.
and the results of its operations and its cash flows for the years ended July
31, 2004 and 2003, in conformity with generally accepted accounting principles
in the United States of America.
MILLER AND McCOLLOM
Certified Public Accountants
4350 Wadsworth Boulevard, Suite 300
Wheat Ridge, Colorado 80033
October 27, 2004
CONSOLIDATED BALANCE SHEETS
---------------------------------------------------------------------------------------
July 31
-------
2004 2003
------------ ------------
ASSETS
Current Assets
Cash $ 17,366 $ 251,087
Accounts receivable, net of allowance for doubtful
accounts of $ 59,000 at July 31, 2004
and $63,500 at July 31, 2003 238,487 163,895
Due from officers and employees -- 61
Inventories 172,933 119,237
Prepaid expenses -- 6,654
Interest receivable 191,849 --
------------ ------------
Total current assets 620,635 540,934
------------ ------------
Property, Plant and Equipment
Property, plant and equipment 167,173 249,024
------------ ------------
Total property, plant and equipment 167,173 249,024
------------ ------------
Other Assets
Trust deed receivable 2,035,000 --
Deposits 9,744 9,341
Patents and licenses 2,343,235 2,475,280
------------ ------------
Total other assets 4,387,979 2,484,621
------------ ------------
Assets of the water division held for resale 306,258 352,423
------------ ------------
Total assets $ 5,482,045 $ 3,627,002
============ ============
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities
Accounts payable $ 973,581 $ 1,079,128
Accrued liabilities 594,633 108,258
Notes payable 300,000 180,513
Loans from shareholders 1,135,000 600,000
------------ ------------
Total current liabilities 3,003,214 1,967,899
------------ ------------
Liabilities of the water division held for resale 44,464 42,430
------------ ------------
Stockholders' Equity
Preferred Stock -- --
Class A common stock, no par value: authorized
50,000,000 shares, issued and outstanding
15,457,310 at July 31, 2004 and
10,594,088 at July 31, 2003 17,834,139 14,758,203
Warrants: issued and outstanding 1,385,223
warrants 837,894 788,473
Accumulated deficit (16,237,666) (13,930,003)
------------ ------------
Total stockholders' equity 2,434,367 1,616,673
------------ ------------
Total liabilities and stockholders' equity $ 5,482,045 $ 3,627,002
============ ============
The accompanying notes are an integral part of these financial statements
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------------------------------------------------
For the Year Ended
July 31
-------
2004 2003
----------- -----------
Net revenues $ 263,499 $ 115,700
Cost of sales 130,904 58,220
----------- -----------
Gross profit 132,595 57,480
----------- -----------
Selling expenses 306,243 466,198
General and administrative expenses 1,319,774 1,563,951
Research and development 1,133,007 981,493
Start-up costs -- 635,376
----------- -----------
Total operating costs 2,759,024 3,647,018
----------- -----------
Loss from operations (2,626,429) (3,589,538)
----------- -----------
Other income and (expense):
Interest income 191,861 1,333
Interest expense (315,724) (98,765)
Other (73,271) 23,081
----------- -----------
Total other income (expense) (197,134) (74,351)
----------- -----------
Loss from continuing operations (2,823,563) (3,663,889)
Discontinued operations:
Income from discontinued operations 515,900 379,900
----------- -----------
Net loss $(2,307,663) $(3,283,989)
=========== ===========
Net loss per common share, basic and diluted
Continuing operations $ (0.21) $ (0.40)
Discontinued operations 0.04 0.04
----------- -----------
Net loss $ (0.17) $ (0.36)
=========== ===========
The accompanying notes are an integral part of these financial statements
CONSOLIDATED STATEMENTS OF CASH FLOWS
---------------------------------------------------------------------------------------------------------
For the Years Ended
July 31
-------
2004 2003
----------- -----------
Cash flows from operating activities
Net loss $(2,307,663) $(3,283,989)
Adjustments to reconcile net income to net cash provided by operating
activities:
Amortization 177,045 155,461
Depreciation 98,402 107,201
Services and interest paid for with stock and warrants 462,770 885,509
Income from discontinued operations (515,900) (379,900)
Changes in assets and liabilities:
(Increase) decrease in accounts receivable (74,592) 2,706
(Increase) decrease in due from officers and employees 61 209,376
(Increase) decrease in prepaid expense 6,654 171,087
(Increase) decrease in interest receivable (191,849) --
(Increase) decrease in inventory (53,697) 307,131
(Increase) decrease in deposits (403) (387)
Increase (decrease) in accounts payable (105,547) 488,097
Increase (decrease) in accrued liabilities 486,372 31,713
----------- -----------
Net cash provided (used) by operating
activities (2,018,347) (1,305,995)
----------- -----------
Cash flows from investing activities
Purchase of patents and licenses (45,000) (4,365)
Purchase of property, plant and equipment (16,551) (531)
----------- -----------
Net cash (used) in investing activities (61,551) (4,896)
----------- -----------
Cash flows from financing activities
Proceeds from debt obligations 100,000 400,000
Proceeds from sale of common stock 1,182,075 556,325
----------- -----------
Net cash provided by financing activities 1,282,075 956,325
----------- -----------
Cash flows from discontinued operations 564,102 454,396
----------- -----------
Net increase (decrease) in cash and cash equivalents (233,721) 99,830
----------- -----------
Cash and cash equivalents at beginning of period 251,087 151,257
----------- -----------
Cash and cash equivalents at end of period $ 17,366 $ 251,087
=========== ===========
Supplemental disclosures of cash flow information
Cash paid for interest $ 166,236 $ 98,765
Cash paid for taxes $ -- $ 3,500
Noncash investing and financing activities:
Value of warrants issued in exchange for startup costs $ -- $ 635,376
Trust Deed received in exchange for stock $ 2,035,000 $ --
The accompanying notes are an integral part of these financial statements
Notes to Consolidated Financial Statements
See Independent Accountants' Report
Note 1. Organization and Summary of Significant Accounting Policies
-----------------------------------------------------------
This summary of significant accounting policies of PURE Bioscience (formerly
Innovative Medical Services) is presented to assist in understanding the
Company's financial statements. The financial statements and notes are
representations of the Company's management who is responsible for their
integrity and objectivity. These accounting policies conform to Generally
Accepted Accounting Principles in the United States of America and have been
consistently applied in the preparation of the financial statements. The
financial statements are stated in United States of America dollars.
Organization and Business Activity
----------------------------------
PURE Bioscience was incorporated as Innovative Medical Services in San Diego,
California on August 24, 1992 as a provider of pharmaceutical water purification
products. Based on revenues, the Company's primary business is the production,
sale and licensing of silver ion bioscience technologies and boric acid based
pesticides. In September 2003, the Company effected a name change as approved by
shareholders to PURE Bioscience.
In October of 1998, the Company formed a subsidiary, EXCOA Nevada to purchase
the assets of Export Company of America, Inc. (EXCOA), a privately held Fort
Lauderdale, Florida-based distributor of disposable medical, dental and
veterinary supplies. The major asset of this company was its 45% interest in
Ampromed Comercio Importacao E Exportacao Ltda (AMPROMED), a Rio de
Janeiro-based import company that sells medical, dental and veterinary supplies
and water filtration products to practitioners, retail outlets and government
agencies. The Company acquired the remaining 55% interest in AMPROMED from a
private individual and transferred it to EXCOA Nevada.
In November 2000, PURE Bioscience acquired 100% of the stock of ETIH2O, Inc, a
privately held technology corporation that developed silver dihydrogen citrate
and is responsible for processing, and production of Axenohl and Axen. ETI-H2O
is also responsible for all supervision of all research, studies, data and
quality control of the Axenohl/Axen product line.
Basis of Presentation and Principles of Consolidation
-----------------------------------------------------
The accompanying financial statements include the consolidated accounts of PURE
Bioscience and its subsidiaries. All inter-company balances and transactions
have been eliminated.
Revenue Recognition
-------------------
Generally, the Company recognizes income based upon concluded arrangements with
customers and when all events have occurred by delivery or performance. Certain
income is recognized upon shipment where the sale is made f.o.b. shipping point
including sales to dealers and pharmacies. Customer acceptance provisions and
installation procedures accompanying delivery are minor in nature, and the
Company has not experienced any material expense in satisfying warranties and
returns.
Most of the Company's chain customers have entered into multi-year contracts for
the Customer Service Plan 2000. The Plan provides an extended warranty on PURE
Bioscience's Fillmaster pharmacy products; significant discounts on maintenance
item costs; free software upgrades for the Fillmaster 1000e and Scanmaster;
automatic replacement filter shipments; and simplified, annual invoicing. When
the customer buys a dispenser on the Customer Service Plan 2000 it agrees to pay
a fixed annual fee that covers replacement filters and parts. The filters should
be replaced once a year. In order to match income with related costs, and for
simplicity in accounting and billing, the Company bills the customer the annual
fee and recognizes revenue in the same month that it ships replacement filters
to the store. This is done one year after the store is added to the Plan and
each year thereafter. Future warranty costs associated with the CSP 2000 Plan
are discussed in Note 18.
Accounts Receivable
-------------------
The Company sells on terms of cash or net 30 days. Invoices not paid within
stated terms are considered delinquent. The Company analyzes its accounts
receivable periodically and recognizes an allowance for doubtful accounts based
on estimated collectibility. Individual accounts deemed uncollectible are
charged to the allowance. At July 31, 2004, $59,000 was considered past due,
determined at 90 days after invoice date.
Stock-Based Compensation
------------------------
The Company follows FASB Statement No. 123, `Accounting for Stock-Based
Compensation' (`FAS 123'). The provisions of FAS 123 allow companies to either
expense the estimated fair value of stock options or to continue to follow the
intrinsic value method set forth in APB Opinion 25, `Accounting for Stock Issued
to Employees' (`APB 25') but disclose the pro forma effects on net income (loss)
had the fair value of the options been expensed. The Company has elected to
continue to apply the methods of APB 25 in accounting for its stock option
plans. For awards that generate compensation expense as defined under APB 25,
the Company calculates the amount of expenses and recognizes the expense over
the vesting period of the award.
Research and Development
------------------------
Research and Development costs that have no alternative future uses are charged
to operations when incurred and are included in operating expenses. The total
amount charged to Research and Development expense was $1,133,000 and $981,500
in the fiscal years ended July 31, 2004 and 2003, respectively.
Depreciation Method
-------------------
The cost of property, plant and equipment is depreciated on a straight-line
basis over the estimated useful lives of the related assets. The useful lives of
property, plant, and equipment for purposes of computing depreciation are:
Computers and equipment 7.0 years
Furniture and fixtures 10.0 years
Website 3.0 years
Vehicle 5.0 years to 7.0 years
Leasehold improvements are being depreciated over the life of the lease, which
is equal to 120 months.
Amortization of Intangible Assets
---------------------------------
The cost of patents acquired is amortized on a straight-line basis over the
remaining lives of the patents. Licenses are amortized on a straight-line basis
over periods ranging from 15 to 20 years. The weighted average amortization
period for all patents and licenses is 17.61 years. The estimated amortization
expense over each of the next five years is $152,045. Amortization expense for
the years ended July 31, 2004 and July 31, 2003 was $177,045 and $155,500,
respectively.
Long-Lived Assets
-----------------
In accordance with Financial Accounting Standards Board ("FASB") Statement of
Financial Accounting Standards ("SFAS") No. 121, Accounting for Impairment of
Long-Lived Assets, and for Long-Lived Assets to be Disposed, the Company
periodically analyzes its intangible assets and long-lived assets for potential
impairment, assessing the appropriateness of lives and recoverability of
unamortized balances through measurement of undiscounted operation cash flows on
a basis consistent with accounting principles generally accepted in the United
States of America.
Inventory
---------
Inventories are stated at the lower of cost or net realizable value using the
average cost method. Inventories at July 31 consisted of:
2004 2003
------------- -------------
Finished Goods $ 131,300 $ 133,900
Work in Progress 17,700 0
Raw Materials 175,300 181,900
------------- -------------
$ 324,300 $ 315,800
------------- -------------
Use of Estimates
----------------
The preparation of the financial statements in conformity with Generally
Accepted Accounting Principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Fair Value of Financial Instruments
-----------------------------------
The carrying amounts for receivables and payables approximate fair value because
of the short maturity, generally less than three months, for these instruments.
The carrying value of the Company's loans payable, notes from shareholder and
trust deed receivable cannot be estimated because of the unique nature of these
instruments.
Advertising and Promotional Costs
---------------------------------
Cost of advertising and promotion are expensed as incurred. Such costs were
$306,200 and $466,200 for the years ended July 31, 2004 and July 31, 2003,
respectively.
Net Income (Loss) Per Common Share
----------------------------------
The Company adopted FASB Statement No. 128, Earnings Per Share ("SFAS 128"),
which is effective for periods ending after December 15, 1997. Entities that
have only common stock outstanding are required to present basic earnings per
share amounts. All other entities are required to present basic and diluted per
share amounts. Diluted per share amounts assume the conversion, exercise or
issuance of all potential common stock instruments unless the effect is to
reduce a loss or increase the income per common share from continuing
operations.
Following is a reconciliation of the weighted average number of shares actually
outstanding with the number of shares used in the computations of loss per
common share:
For the Years Ended
July 31, 2004 July 31, 2003
------------- -------------
Shares outstanding 15,547,310 10,594,088
Weighted average number of shares actually outstanding 13,836,574 7,607,146
Stock Options 3,983,750 4,144,375
Warrants 1,385,223 1,037,429
------------ ------------
Total weighted average shares 19,205,547 14,335,691
------------ ------------
Loss from continuing operations $ (2,823,563) $ (3,663,889)
Gain from discontinued operations 515,900 379,900
------------ ------------
Net loss $ (2,307,663) $ (3,283,989)
------------ ------------
Net loss per common share, basic and diluted
Continued operations $ (0.21) $ (0.40)
Discontinued operations
0.04 0.04
------------ ------------
Net loss $ (0.17) $ (0.36)
------------ ------------
Income Taxes
------------
The Company records deferred taxes in accordance with the Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes." The
Statement requires recognition of deferred tax assets and liabilities for
temporary differences between the tax basis of assets and liabilities and the
amounts at which they are carried in the financial statements, based upon the
enacted tax rates in effect for the year in which the differences are expected
to reverse. A valuation allowance is established when necessary to reduce
deferred tax assets to the amount expected to be realized.
Other
-----
The Company's fiscal year end is July 31.
The Company paid no cash dividends during the periods presented.
Shipping and handling costs payable by the Company are charged to cost of sales.
Certain comparative figures have been reclassified to conform to the current
year presentation.
All of the Company's assets are located in the United States.
The Company has no elements of comprehensive income other than net income.
For purposes of the balance sheets and statements of cash flows, the Company
considers all highly liquid investments with a maturity of three months or less
when purchased to be cash equivalents. At July 31, 2004 and at July 31, 2003,
the Company had no deposits in excess of FDIC insured limits.
Note 2. Property, Plant and Equipment
-----------------------------
The following is a summary of property, plant, and equipment - at cost, less
accumulated depreciation:
July 31, 2004 July 31, 2003
------------------ ------------------
Computers and equipment $ 1,054,602 $ 1,081,046
Furniture and fixtures 108,129 108,129
Vehicle 50,985 50,985
Leasehold improvements 309,830 309,830
------------------ ------------------
1,523,546 1,549,990
Less: accumulated depreciation and amortization 1,248,235 1,117,246
------------------ ------------------
Total $ 275,311 $ 432,744
------------------ ------------------
Depreciation expense charged to general and administrative expense for the years
ended July 31, 2004 and July 31, 2003 was $161,600 and $181,700, respectively.
Note 3. Notes Payable
-------------
The details relating to note payable are as follows:
July 31, 2004 July 31, 2003
--------------- ---------------
Convertible Debenture, interest payable quarterly
at 10% per annum due and payable on July 24, 2004. $ 300,000 $ 300,000
Discount - (119,487)
Current maturities of notes payable included in
current liabilities 300,000 180,513
--------------- ---------------
Total long term debt $ - $ -
--------------- ---------------
The note was contained in a Unit Purchase Agreement in which the holder of the
note receives 300,000 five-year warrants to purchase common stock of the Company
at an exercise price of $0.75. The recorded value of the note payable and the
warrants were apportioned based on their respective fair values. This resulted
in the note being recorded at its discounted value of $180,513. The discount of
$119,487 was amortized over the one-year life of the note. The note contained
provisions for convertibility to common stock of the Company if held to
maturity. This note was in technical default at July 31, 2004, but it has been
agreed with the lender to be paid off in cash with the proceeds from the sale of
the water division and trust deed discussed in note 17 and has been guaranteed
by a third party.
Note 4. Loans from Shareholder
----------------------
The details relating to loans from shareholders are as follows:
July 31, 2004 July 31, 2003
---------------- ----------------
Line of Credit (from shareholder)
$600,000 line of credit, interest at 18%
Due and payable November 13, 2003
Secured by total assets of the Company, excluding
the Axenohl patent $ 600,000 $ 600,000
Current maturities of loans payable included in
current liabilities 600,000 600,000
---------------- ----------------
Total long term debt $ - $ -
---------------- ----------------
The terms of the line of credit required the Company to maintain current
accounts receivable of a minimum of $350,000. At the end of year, the Company
was in technical violation with this provision. The Company has neither
requested nor received a waiver of this provision. The note is in technical
default and the Company is currently in litigation with the lender. 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.
Note 5. 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 unlimited warranty on all PURE Bioscience pharmacy
products; significant discounts on maintenance item costs; free software
upgrades for the Fillmaster 1000e and Scanmaster; automatic replacement filter
shipments; and simplified, annual invoicing. When the customer buys a dispenser
on the Customer Service Plan 2000 it agrees 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 warranty liability.
Beginning Expense Warranty Ending
Liability Incurred Payments Liability
--------------- -------------- -------------- ---------------
Year ended July 31, 2004 $ 42,430 $ 44,663 $ 42,629 $ 44,464
--------------- -------------- -------------- ---------------
Year ended July 31, 2003 $ 41,445 $ 33,692 $ 32,707 $ 42,430
--------------- -------------- -------------- --- -----------
Note 6. Commitments
-----------
On May 14, 1996, the Company entered into an operating lease agreement for its
home office which expires (under extension) in October 2006. The rental expense
recorded in general and administrative expenses for the years ended July 31,
2004 and July 31, 2003 was $181,370 and $160,545, respectively. Future minimum
rental payments required for each of the 5 succeeding years assuming exercise of
the option are as follows:
Year Ended July 31 Amount
----------------------- --------------------
2005 $ 188,625
2006 $ 196,170
2007 $ 204,017
2008 $ 212,178
2009 $ 220,665
The Company has an employment contract with its Chief Executive
Officer/President which includes a provision for him to be paid an amount equal
to 3% of the Company's net income before taxes, if any.
Note 7. Equity and Common Stock
-----------------------
The following schedule summarizes the change in equity:
Common Common
Stock Stock Warrants Warrants Accumulated
Shares $ Issued $ Deficit Total
----------- --------------- ------------ ------------- ----------------- ---------------
Balance, July 31, 2002 8,400,899 $ 13,976,448 15,000 $ 8,610 $ (10,646,014) $ 3,339,044
----------- --------------- ------------ ------------- ----------------- ---------------
Sale of Stock 72,500 81,325 - - - 81,325
Private Placement 1,788,439 475,000 371,429 144,487 - 619,487
Shares Issued for Services 332,250 225,430 - - - 225,430
Warrants Issued for - - 651,000 635,376 - 635,376
Services
Net Loss - - - - (3,283,989) (3,283,989)
----------- --------------- ------------ ------------- ----------------- ---------------
Balance, July 31, 2003 10,594,088 $ 14,758,203 1,037,429 $ 788,473 $ (13,930,003) $ 1,616,673
----------- --------------- ------------ ------------- ----------------- ---------------
Shares Issued for Trust 2,000,000 1,600,000 - - - 1,600,000
Deed
Private Placement 2,438,222 1,132,653 347,794 49,421 - 1,182,074
Shares Issued for Services 515,000 343,283 - - - 343,283
Net Loss - - - - (2,354,551) (2,354,551)
----------- --------------- ------------ ------------- ----------------- ---------------
Balance, July 31, 2004 15,547,310 $ 17,834,139 1,385,223 $ 837,894 $ (16,284,554) $ 2,387,479
----------- --------------- ------------ ------------- ----------------- ---------------
The Company also has 5,000,000 shares of preferred stock authorized; no
preferred stock has been issued.
The following schedule summarizes the outstanding warrants:
Weighted
Average
Date $ Exercise Exercise Expiration
Issued For Issued Amount Amount Price Price Date
------------------- ----------- --------------- ---------- ----------- -------------- ------------
Services 6/14/02 15,000 $ 8,610 $ 1.00 $ 1.00 6/14/07
Private Placement 1/31/03 71,429 25,000 $ 0.30 $ 0.30 1/31/08
Start-Up Costs 1/15/03 651,000 635,376 $ 0.001 $ 0.001 1/15/08
Private Placement 7/24/03 300,000 119,487 $ 0.75 $ 0.75 7/24/08
Private Placement 10/21/03 84,000 21,220 $ 0.80 $ 0.80 10/21/04
Private Placement 1/29/04 200,000 20,296 $ 1.00 $ 1.00 1/29/05
Private Placement 5/28/04 41,572 5,145 $ 1.50 $ 1.50 5/28/05
Private Placement 6/22/04 11,111 1,110 $ 1.50 $ 1.50 6/22/05
Private Placement 7/12/04 11,111 1,650 $ 1.00 $ 1.00 7/12/05
-------------- ------------
Total 1,385,223 $ 837,894
-------------- -----------
Note 8. Related Party Transactions
--------------------------
See Note 5.
Note 9. Stock Option Plans
------------------
The Company has the following stock option plans (the Plans) pursuant to which
options to acquire common stock have been granted.
1996 Directors And Officers Stock Option Plan: On April 17, 1996, the Company's
Board of Directors approved a Directors and Officers Stock Option Plan. The Plan
is administered by the entire Board of Directors. The Plan became effective on
April 17, 1996 by the Board of Directors, was not subject to Shareholder
approval and shall terminate on April 17, 2006. Subject to anti-dilution
provisions, the Plan may issue Options to acquire up to 1,000,000 shares to
Directors and Officers. The Plan may be terminated, modified or amended by the
Board of Directors.
1998 Directors And Officers Stock Option Plan: On December 19, 1998, the
Company's Shareholders approved the Amended PURE Bioscience 1998 Officers and
Directors Stock Option Plan.
2001 Directors And Officers Stock Option Plan: On January 8, 2001, the Company's
Shareholders approved the PURE Bioscience 2001 Officers and Directors Stock
Option Plan.
2001 ETIH2O Stock Option Plan: Adopted by the Board in January 2001, there are
1,000,000 shares authorized under this Plan. Executive Officers and Directors
are not eligible participants under this plan.
2001 Consultants and Advisors Stock Option Plan: Adopted by the Board in January
2001, there are 500,000 shares authorized under this Plan. Executive Officers
and Directors are not eligible participants under this plan.
2002 Non-Qualified Stock Option Plan: On March 11, 2002, the Company's
Shareholders approved the PURE Bioscience 2002 Non-Qualified Stock Option Plan.
Eligible Plan Participants include the Directors and Officers of the Company,
consultants, advisors and other individuals deemed by the Compensation Committee
to provide valuable services to the Company but who are not otherwise eligible
to participate in the Employee Incentive Stock Option Plan.
2002 Employee Incentive Stock Option Plan: On March 11, 2002, the Company's
Shareholders approved the PURE Bioscience 2002 Employee Incentive Stock Option
Plan. Eligible Plan Participants include employees and non-employee Directors
for the Company.
2004 Consultants and Advisors Stock Option Plan: Adopted by the Board in April
2004, there are 2,000,000 shares authorized under this plan. Executive Officers
and Directors are not eligible participants under this plan.
Non-employee directors are eligible to receive stock option grants under the
Company's 1996, 1998 and 2001 Directors and Officers Stock Option Plans and the
2002 Non-Qualified and Employee/Incentive Stock Option Plans. Employee Directors
are eligible to receive stock option grants under the Company's 1996, 1999 and
2001 Directors and Officers Stock Option Plans and the 2002 Non-Qualified Stock
Option Plan. The Plans are administered by an Administrative Committee. The
exercise price for Options shall be set by the Administrative Committee but
shall not be for less than the fair market value of the shares on the date the
Option is granted. Fair market value shall mean the average of the closing price
for ten consecutive trading days ending on the day prior to the date the option
is granted. The period in which Options can be exercised shall be set by the
Administrative Committee not to exceed five years from the date of Grant.
Options granted to new executive officers or directors shall vest one year from
date of appointment or election. Shares issuable under options granted to
continuing officers or directors are immediately exercisable and vest upon
exercise. The Board may at any time terminate the Plans. The approval of the
majority of shareholders is required to increase the total number of shares
subject to the Plans, change the manner of determining the option price or to
withdraw the administration of the Plans from the Administrative Committee.
The Company estimates a fair value method of accounting for stock-based
compensation in accordance with Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" (SFAS 123). In accordance with
SFAS 123, the Company has chosen to continue to account for employee stock-based
compensation utilizing the intrinsic value method. Accordingly, compensation
cost for stock options is measured as the excess, if any, of the fair market
price of the Company's stock at the date of grant over the amount an employee
must pay to acquire the stock. Also, in accordance with SFAS 123, the Company
has provided footnote disclosure with respect to stock-based employee
compensation. The cost of stock-based employee compensation is measured at the
grant date based on the value of the award and is recognized over the service
period. The value of the stock based award is determined using a pricing model
whereby compensation cost is the excess of the fair value of the stock as
determined by the model at grant date or other measurement date over the amount
an employee must pay to acquire the stock.
The Company accounts for non-employee stock based compensation by recording the
fair value of the stock options granted over the anticipated service period.
The effect of applying FAS 123 on the years ended July 31, 2004 and 2003 pro
forma net loss as stated below is not necessarily representative of the effects
on reported net loss for future years due to, among other things, the vesting
period of the stock options and the fair value of additional stock options in
future years. Had compensation cost for the Company's stock option plans been
determined based upon the fair value at the grant date for awards under the
plans consistent with the methodology prescribed under FAS 123, the Company's
net loss in the years ended July 31, 2004 and 2003 would have been approximately
$3,552,985 and $4,014,900 or $(0.26) per share and $(0.44) per share,
respectively, on a diluted basis. Compensation cost for non-employees of
$125,000 was charged to income in the year ended July 31, 2004 and $191,600 in
the year ended July 31, 2003. The weighted average fair value for all options
granted during the years ended July 31, 2004 and 2003 are estimated at $1.24 per
share and $1.16 per share, respectively, on the date of grant using the
Black-Scholes option-pricing model. The weighted average fair value non-employee
options granted during the years ended July 31, 2004 and 2003 are estimated at
$0.75 per share and $0.79 per share, respectively using the Black-Scholes
option-pricing model. The following assumptions were used for grants in 2004 and
2003; no dividend yield, volatility of 137.78% and 101.48%, respectively; a
risk-free interest rate of 1.75% and 2.25%, respectively and an expected life of
2.35 and 2.24 years from date awarded.
A summary of stock option activity is as follows:
Number of Weighted-Average
Shares Exercise Price ($)
-------------- -------------------
Balance at July 31, 2002 4,211,675 1.74
Granted 637,500 0.50
Exercised (156,875) 0.55
Forfeited - -
--------------
Balance at July 31, 2003 4,692,300 1.61
--------------
Granted 500,000 0.46
Exercised (400,300) 0.48
Forfeited (808,550) 1.85
--------------
Balance at July 31, 2004 3,983,750 1.67
--------------
Outstanding Exercisable
---------------------------------- --------------------------
Weighted
Range of Exercise Prices Number Weighted Average Average Weighted
Shares Remaining Life Exercise Number Average
Outstanding (in years) Price Exercisable Price ($)
-------------------------- ------------- ------------------- ----------- ------------- ---------
$0.35 to $0.57 562,500 3.20 $0.52 562,500 $0.52
$1.00 to $1.50 615,000 3.20 $1.12 615,000 $1.12
$1.90 to $2.00 2,025,000 2.08 $1.99 2,025,000 $1.99
$2.10 450,000 2.27 $2.10 450,000 $2.10
$2.93 to $3.20 331,250 1.03 $2.63 331,250 $2.63
------------- -------------
3,983,750 2.35 $1.74 3,983,750 $1.74
------------- -------------
Note 10. Pension Plan
------------
The Company participates in a Small SEP program under which the employer makes
contributions to a SEP, which includes a salary reduction arrangement (SARSEP).
Employees who participate in the SARSEP may elect to have the employer: (a) make
contributions to the SEP on their behalf, or (b) pay them cash. A salary
reduction arrangement may be used only in years in which the SEP meets
requirements that the IRS may impose to ensure distribution of excess
contributions. Annual contributions of an employer under a SEP are excluded from
the participant's gross income. No employer contributions were made during the
fiscal years ending July 31, 2004 and July 31, 2003.
Note 11. Income Taxes
------------
The current provisions for income taxes of $2,700 for fiscal year ended July 31,
2004 and $3,200 for July 31, 2003 is the minimum franchise tax paid to the State
of California regardless of income or loss. The Company files federal and
California consolidated tax returns with its subsidiaries.
At July 31, 2004, the Company had federal and California tax net operating loss
carryforwards of approximately $13,939,500 and $5,995,900 respectively. At July
31, 2003, the Company had federal, and California tax net operating loss
carryforwards of approximately $12,030,000 and $4,945,700 respectively. The
difference between the financial reporting and the federal tax loss
carryforwards is primarily due to accrued expenses and valuation allowances
reported in the financials but not deductible for tax purposes. The difference
between federal and California tax loss carryforwards is primarily due to the
limitation on California loss carryforwards. The federal tax loss carryforwards
will begin expiring in the fiscal year ended July 31, 2011, unless previously
utilized and will completely expire in fiscal year ended July 31, 2023. The
California tax loss carryforwards will begin to expire in fiscal year ended July
31, 2011, unless previously utilized and will completely expire in fiscal year
ended July 31, 2023.
The Company has total deferred tax assets of approximately $5,661,200 and
$4,726,000 for the fiscal years ended July 31, 2004 and 2003, respectively.
Realization of these deferred tax assets, which relate to operating loss
carryforwards and timing differences, is dependant on future earnings. The
timing and amount of future earnings are uncertain and therefore, the valuation
allowance had been established. The increase in the valuation allowance on the
deferred tax asset during the fiscal year ended July 31, 2004 was $935,200.
Significant components of the Company's deferred tax assets are as follows:
July 31, 2004 July 31, 2003
--------------------- ----------------------
Net operating loss carryforward $ 5,269,500 $ 4,551,000
Depreciation and amortization (Operating) 134,700 100,300
Depreciation and amortization (Discontinued
Operations) 28,000 24,300
Calculation allowances (314,400) (292,800)
Stock options and warrants 583,600 385,400
Other (40,200) (42,200)
--------------------- ----------------------
Total deferred tax assets 5,661,200 4,726,000
Valuation allowance for deferred tax assets (5,661,200) (4,726,000)
--------------------- ----------------------
Net deferred tax assets $ - $ -
--------------------- ----------------------
A reconciliation of income taxes computed using the statutory income tax
compared to the effective tax rate is as follows:
2004 2003
--------------------- ----------------------
Federal tax benefit at the expected statutory rate 34 % 34 %
State income tax, net of federal tax benefit 9 9
Valuation allowance (43) (43)
--------------------- ----------------------
Income tax benefit - effective rate 0 % 0 %
--------------------- ----------------------
Note 12. 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 activity was 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 included Commercial Water and
Residential Retail products and the Nutripure Water Dealer program. Bioscience
includes the silver dihydrogen citrate antimicrobial and the Innovex line of
pest control products. Because the Company plans to sell the Water Treatment
segment, it is now reported as Discontinued Operations in the financial
statements.
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. Reconciling amounts consist of unallocated general and
administrative expenses.
Water Reconciling
2003 Treatment Biosciences Amounts Consolidated
(Discontinued)
------------------------------------------ -------------- ----------- ----------- ------------
Revenues
Commercial Water Treatment
Fillmaster Products $ 1,160,700 $ -- $ -- $ 1,160,700
Replacement Filters (Includes CSP 2000) 640,600 -- -- 640,600
Residential Water Treatment 155,200 -- -- 155,200
Water Dealer Program 517,300 -- -- 517,300
Silver Dihydrogen Citrate -- 54,500 -- 54,700
Pesticide -- 61,200 -- 61,200
----------- ----------- ----------- -----------
Total Revenues $ 2,473,800 $ 115,700 $ -- $ 2,589,500
----------- ----------- ----------- -----------
Operating Income/(Loss) $ 379,900 $ (173,100) $(3,491,200) $(3,284,400)
----------- ----------- ----------- -----------
Segment Assets $ 423,300 $ 2,436,100
----------- -----------
2004
--------------------------------------------
Revenues
Commercial Water Treatment
Fillmaster Products $ 1,035,300 $ -- $ -- $ 1,035,300
Replacement Filters (Includes CSP 2000) 679,400 -- -- 679,400
Residential Water Treatment 49,900 -- -- 49,900
Water Dealer Program 36,000 -- -- 36,000
Silver Dihydrogen Citrate -- 83,800 -- 83,800
Pesticide -- 179,700 -- 179,700
----------- ----------- ----------- -----------
Total Revenues $ 1,800,600 $ 263,500 $ -- $ 2,064,100
----------- ----------- ----------- -----------
Operating Income/(Loss) $ 515,900 $ (248,600) $(2,600,700) $(2,333,400)
----------- ----------- ----------- -----------
Segment Assets $ 108,136 $ 2,510,408
----------- -----------
Significant customers primarily consisted of domestic retail chain pharmacies.
Sales concentrations to major chain stores were approximately $1,449,000 and
export sales were $76,800 for the year ended July 31, 2004. Sales concentrations
to major chain stores were approximately $923,000 and export sales were $76,000
for the year ended July 31, 2003. One of the major retail chain pharmacies
accounted for 26% of consolidated sales.
Note 13. Patent Acquisition
------------------
On November 30, 2001, the Company acquired the patent for silver dihydrogen
citrate, a silver ion based technology which is the basis for the Company's
silver ion products. The Company previously licensed the use of this patent.
The Company purchased the patent for 700,000 shares of its common stock plus
certain expenses. The Company valued the patent at $1,540,600 based on the
market price of the stock exchanged.
As a condition of the purchase agreement of the Axenohl patent, the Company
originally agreed to make certain royalty payments to NVID. 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 silver dihydrogen citrate patent and
related technology, pursuant to the Core Settlement Agreement between PURE
Bioscience and NVID International. In October 2004, PURE was notified by the
Arbitrator that PURE has prevailed against NVID in this action. PURE awaits
receipt of the formal arbitral award. As a result of this litigation, we believe
the royalty obligation is terminated.
Note 14. 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. In case this
transaction does not close as anticipated, the Company has solicited 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 on the balance
sheet. In addition, the results of operations from the water division have been
reported as discontinued operations, and were historically shown as the
Company's water treatment segment for financial reporting.
Components of the results of discontinued operations are:
Year Ended Year Ended
July 31, 2004 July 31, 2003
------------- -------------
Net revenues $1,800,600 $2,473,800
Cost of Sales 861,100 1,475,800
Other Expenses 423,600 618,100
---------- ----------
Total $ 515,900 $ 379,900
---------- ----------
Assets and liabilities of the water division held for sale include:
July 31, 2004 July 31, 2003
------------- -------------
Inventories and other current assets $ 198,100 $ 168,700
Property, plant and equipment 108,100 183,700
------------ -----------
Total 306,200 352,400
Accrued liabilities 44,500 42,400
------------ -----------
Net assets and liabilities of the water division held for sale: $ 261,700 $ 310,000
------------ -----------
Note 15. 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 171 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 November 30,
2004. There were no other changes to the security or to the terms of the note.
Note 16. Subsequent Events
-----------------
In August we issued 200,000 shares of common stock in exchange for consulting
and legal services. In September we issued 7,000 shares for payment of
directors' expenses. In September the Company issued 200,000 shares in exchange
for the assignment of two patents rights.
Note 17. Recent Accounting Pronouncements
--------------------------------
In April 2003, the FASB issued SFAS No. 149 "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities", which amends and clarifies the
accounting guidance on certain derivative instruments and hedging activities.
SFAS 149 is generally effective for contracts entered into or modified after
June 30, 2003 and hedging relationships designated after June 30, 2003. The
adoption of this statement did not impact the Company's financial position,
results of operations, or cash flows.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." SFAS 150
establishes standards for how an issuer of equity (including the equity shares
of any entity whose financial statements are included in the consolidated
financial statements) classifies and measures on its balance sheet certain
financial instruments with characteristics of both liabilities and equity. SFAS
150 is effective for financial instruments entered into or modified after May
31, 2003 and for existing financial instruments after July 1, 2003. The adoption
of this statement did not impact the Company's financial position, results of
operations, or cash flows.
In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable Interest
Entities," and a revised interpretation of FIN 46 ("FIN 46-R") in December 2003.
FIN 46 requires certain variable interest entities ("VIEs") to be consolidated
by the primary beneficiary of the entity if the equity investors in the entity
do not have the characteristics of a controlling financial interest or do not
have sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. The provisions of
FIN 46 are effective immediately for all arrangements entered into after January
31, 2003. Since January 31, 2003, the Company has not invested in any entities
it believes are variable interest entities for which the Company is the primary
beneficiary. For all arrangements entered into after January 31, 2003, the
Company was required to continue to apply FIN 46 through April 30, 2004. The
Company was required to adopt the provisions of FIN 46-R for those arrangements
on May 1, 2004. For arrangements entered into prior to February 1, 2003, the
Company was required to adopt the provisions of FIN 46-R on May 1, 2004. The
adoption of this statement did not impact the Company's financial position,
results of operations, or cash flows.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE: None.
ITEM 8A. CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures that are designed to
ensure that information required to be disclosed in the Company's Exchange Act
reports is recorded, processed, summarized and reported within the time periods
specified in the SEC's rules and forms, and that such information is accumulated
and communicated to the Company's management, including its Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure based closely on the definition of "disclosure
controls and procedures" in Rule 13a-14(c). In designing and evaluating the
disclosure controls and procedures, management recognized that any controls and
procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives, and management
necessarily was required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures.
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.
ITEM 8B. OTHER INFORMATION: None.
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers and directors of PURE Bioscience and their ages are as
follows:
Name Age Position Held Position Since
-------------------- ----- ----------------------------------- --------------------
Michael L. Krall 52 President, CEO, Chairman, Director 1992
Gary Brownell, CPA 55 Treasurer CFO, Director 1996
Gene Auerbach 59 Chief Operating Officer 2002
Donna Singer 34 Executive Vice President, Director 1998
Dennis Atchley, Esq. 51 Secretary 1996
Greg Barnhill 50 Director 2001
Dennis Brovarone 48 Director 1996
Patrick Galuska 45 Director 1996
Eugene Peiser, PD 72 Director 1996
The Directors serve until their successors are elected by the shareholders.
Vacancies on the Board of Directors may be filled by appointment of the majority
of the continuing directors. The executive officers serve at the discretion of
the Board of Directors except as subject to the employment agreement with Mr.
Krall.
Business Experience
-------------------
DENNIS B. ATCHLEY, ESQ. Mr. Atchley is the Secretary of PURE Bioscience and
currently practices as a sole practitioner in Carlsbad, California handling
corporate and business related litigation matters. A 1973 graduate of Loyola
Marymount University in Los Angeles and a 1976 graduate of California Western
School of Law in San Diego, California, Mr. Atchley is a member of the
California Bar, the San Diego County Bar Association, and the Association of
Business Trial Lawyers.
GENE AUERBACH Mr. Auerbach is the Chief Operating Officer of PURE Bioscience.
Prior to joining the Company in June 2002, Mr. Auerbach served as Senior Vice
President, Global Supply Chain for Estee Lauder Companies (NYSE: EL) in New York
City. Previously, he served as Senior Vice President for Development and
International Development at AutoZone (NYSE: AZO) in Memphis, Tennessee. Prior
to joining AutoZone, Mr. Auerbach gained significant international experience as
Regional Director, Asia for Dairy Farm International (Jardines), where he played
a key role in the executive management of 1400 retail stores in eight countries,
including supermarkets, drug stores, convenience stores and restaurants. Before
joining Dairy Farm International, Mr. Auerbach held the position of Senior Vice
President at Costco (NasdaqNM: COST) and, prior thereto, Executive Vice
President for Price Club. Before joining Price Club/Costco, Mr. Auerbach served
22 years in the US Navy where he was, and still is, the youngest officer ever
selected for Captain (06) in the history of the Navy Supply Corps. Mr. Auerbach
holds a BA degree in Business Administration from University of Washington and
an MBA degree from Wharton School of Finance and Commerce.
GREGORY H. BARNHILL Mr. Barnhill is a Partner and member of the Board of Brown
Advisory Securities, LLC. Previously, Mr. Barnhill served as Managing Director
of North American Equity Sales at Deutsche Banc Alex.Brown Inc., Baltimore, MD.
He joined the firm in 1975, following his graduation from Brown University with
an AB degree in economics.
DENNIS BROVARONE Mr. Brovarone has been practicing corporate and securities law
since 1986 and as a sole practitioner since 1990. He was elected to the
Company's Board of Directors in April 1996. From January 3002 to the present,
Mr. Brovarone serves on the Board of Directors of Shannon International
Resources, Inc., a publicly held Nevada corporation. From December 1997 to April
2001, Mr. Brovarone served as the President and Chairman of the Board of
Directors of Ethika Corporation, a publicly held, Mississippi corporation
investment holding company with its office in Littleton, Colorado.
GARY W. BROWNELL Mr. Brownell has been the CFO and a Director of PURE Bioscience
since 1996.
PATRICK GALUSKA Mr. Galuska is a consulting petroleum engineer in Denver,
Colorado. His practice focuses mainly on the acquisition and exploitation of
underdeveloped oil and gas assets in the Rocky Mountain area. He is a Registered
Professional Engineer and is a member of the Society of Petroleum Engineers. Mr.
Galuska earned his BS degree in petroleum engineering from the University of
Wyoming and received his MBA degree in Finance from the University of Denver.
MICHAEL L. KRALL Mr. Krall is the President, CEO and Chairman of the Board of
Directors of PURE Bioscience, a position he has held since 1993.
EUGENE S. PEISER, DOCTOR OF PHARMACY Dr. Peiser has been an independent
consultant to FDA regulated industries since 1974 and a Member of the Board of
PURE Bioscience since 1994. He graduated from the University of Tennessee
College of Pharmacy with a Bachelor of Science in Pharmacy in 1951 and has
received his Doctorate of Pharmacy. Dr. Peiser's consultancy advises on a wide
variety of subjects, including compliance with the Prescription Drug Marketing
Act and other government compliance matters, employee training and drug
repackaging. Dr. Peiser furnishes expert witness services and has provided
approved Pharmaceutical Continuing Education to several thousand attendees at
his seminars. Dr. Peiser is a Founding Director of the Association of Drug
Repackagers; is appointed as a Registered Arbitrator by the American Registry of
Arbitrators; and is President of the Southwest Chapter of the Association of
Military Surgeons.
DONNA SINGER Ms. Singer is the Executive Vice President of PURE Bioscience and
has been a director since 1997. From 1996-1998, Ms. Singer served as Vice
President of Operations for the Company.
Family Relationships
There is no family relationship between any Director, executive or person
nominated or chosen by PURE Bioscience to become a Director or executive
officer.
Audit Committee
The Board of Directors does not have an audit committee. The functions of the
audit committee are currently performed by the entire board of directors. PURE
Bioscience is under no legal obligation to establish an audit committee and has
elected not to do so at this time so as to avoid the time and expense of
identifying independent directors willing to serve on the audit committee. PURE
Bioscience may establish an audit committee in the future if the board
determines it to be advisable or we are otherwise required to do so by
applicable law, rule or regulation.
As the board of directors does not have an audit committee, it therefore has no
"audit committee financial expert" within the meaning of Item 401(e) of
Regulation S-B. In general, an "audit committee financial expert" is an
individual member of the audit committee who understands Generally Accepted
Accounting Principles and financial statements; is able to assess the general
application of such principles in connection with accounting for estimates,
accruals and reserves; has experience preparing, auditing, analyzing or
evaluating financial statements comparable to the breadth and complexity to our
financial statements; understands internal controls over financial reporting,
and understands audit committee functions.
Board of Directors Independence
Three of our directors, Gregory Barnhill, Patrick Galuska and Dr. Eugene Peiser
are "independent" within the meaning of definitions established by the
Securities and Exchange Commission or any self-regulatory organization. PURE is
not currently subject to any law, rule or regulation requiring that all or any
portion of its board of directors include "independent" directors.
Compliance with Section 16(a) of Securities Exchange Act of 1934
To our knowledge, during the fiscal year ended July 31, 2004, our Directors and
Officers complied with all applicable Section 16(a) filing requirements except
that Patrick Galuska, a director, failed to report transactions. This statement
is based solely on a review of the copies of such reports that reflect all
reportable transactions furnished to us by our Directors and Officers and their
written representations that such reports accurately reflect all reportable
transactions.
Code of Ethics
Under the Sarbanes-Oxley Act of 2002 and the Securities and Exchange
Commission's related rules, PURE Bioscience is required to disclose whether it
has adopted a code of ethics that applies to PURE's principal executive officer,
principal financial officer, principal accounting officer or controller or
persons performing similar functions. We have adopted a code of ethics that
applies to our chief executive officer, chief financial officer and other
officers, legal counsel and to any person performing similar functions. We have
made the code of ethics available and intend to provide disclosure of any
amendments or waivers of the code within five business days after an amendment
or waiver on our website, www.pure-bioscience.com.
ITEM 10. EXECUTIVE COMPENSATION
Summary Compensation Table
The following table shows for the fiscal year ending July 31, 2004, the
compensation awarded or paid by the Company to its Chief Executive Officer and
any of the executive officers of the Company whose total salary and bonus
exceeded $100,000 during such year (The "Named Executive Officers"):
--------------------------------------------------------------------------------------------------------
SUMMARY COMPENSATION TABLE |
--------------------------------------------------------------------------------------------------------
| Long Term Compensation |
--------------------------------------------------------------------------------------------------------
| Annual Compensation | Awards | Payouts |
---------------------------------------------------------------------------------------------------------
| | Salary | Other Annual | Securities | |
Name and Principle Position | Year| (S) | Compensation | Underlying |All Other Compensation |
| | | ($) | Options (#) | ($) |
---------------------------------------------------------------------------------------------------------
Michael L. Krall President/CEO| 2004| 168,000 | 0 | N/A | 0 |
---------------------------------------------------------------------------------------------------------
Michael L. Krall President/CEO| 2003| 168,000 | 0 | 50,000 Common| 0 |
---------------------------------------------------------------------------------------------------------
Michael L. Krall President/CEO| 2002| 144,000 | 0 |150,000 Common| 0 |
---------------------------------------------------------------------------------------------------------
No other executive officer earned more than $100,000 during the current fiscal
year. No option grants were made to Named Executive Officers during the current
fiscal year.
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year End
Option/Values
The following table sets forth the number and value of the unexercised options
held by each of the Named Executive Officers at July 31, 2004.
------------------------------------------------------------------------------------------------------------------------
Aggregate Option Exercises in Last Fiscal Year and FY-End Option Values
------------------------------------------------------------------------------------------------------------------------
Shares Value Number of Securities Underlying Value of Unexercised In-the Money
Acquired on Realized at Unexercised Options at FY-End (#) Options at FY-End ($)
Name Exercise (#) FY-End ($) Exercisable/Unexercisable Exercisable/Unexercisable
------------------------------------------------------------------------------------------------------------------------
Michael L. Krall 0 0 731,250 Common Shares/Exercisable 0/Exercisable (1)
President/CEO
------------------------------------------------------------------------------------------------------------------------
(1) Option value based on the difference between the exercise price of
unexercised options and the average closing price of $0.46 for the 30
trading days ending July 31, 2004.
Employment Agreements and Executive Compensation
In April 1996, the Board of Directors approved a five-year employment agreement
for Michael Krall, its President. Mr. Krall receives a salary of $168,000 per
year plus an amount equal to 3% of PURE Bioscience's net income before taxes, if
any, plus other benefits. The Board of Directors has extended Mr. Krall's
employment agreement for an additional year.
Compensation of Directors
Directors are entitled to receive $300 plus reimbursement for all out-of-pocket
expenses incurred for attendance at Board of Directors meetings. Directors, upon
joining the Board, each receive an option on 100,000 shares at fair market
value. Upon each subsequent anniversary thereof, each such Director will receive
an option to purchase 50,000 shares of common stock at fair market value. The
Plans also give the Administrative Committee discretion to award additional
options.
Other Arrangements: None
Termination of Employment and Change of Control Arrangement
There is no compensatory plan or arrangement with respect to any individual
named above which results or will result from the resignation, retirement or any
other termination of employment with the Company, or from a change in the
control of the Company.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The following table sets forth the number of shares of the Company's Common
Stock beneficially owned as of October 28, 2004 by individual directors and
executive officers and by all directors and executive officers of the Company as
a group. Based upon a review of the Company's shareholders list as of October
28, 2004, there is one other registered holder of five percent or more of the
Company's Common Stock. As of October 28, 2004 there were 15,804,310 shares
outstanding.
Name and Address of Common Stock Percentage of Shares
Beneficial Owner Title Ownership Outstanding (%)
---------------------------- ------------------------- --------------------- ------------------------
Dennis Atchley Secretary 243,860 (1) 1.52
1725 Gillespie Way
El Cajon, CA 92020
Gene Auerbach Chief Operating Officer 175,000 (2) 1.10
1725 Gillespie Way
El Cajon, CA 92020
Gregory Barnhill Director 425,000 (3) 2.62
1725 Gillespie Way
El Cajon, CA 92020
Dennis Brovarone Director 506,483 (4) 3.11
1725 Gillespie Way
El Cajon, CA 92020
Gary Brownell Treasurer, CFO/Director 450,321 (5) 2.77
1725 Gillespie Way
El Cajon, CA 92020
Patrick Galuska Director 384,140 (6) 2.37
1725 Gillespie Way
El Cajon, CA 92020
Michael L. Krall President, CEO/Chairman 1,353,560 (7) 7.89
1725 Gillespie Way
El Cajon, CA 92020
Eugene Peiser Director 476,136 (8) 2.92
1725 Gillespie Way
El Cajon, CA 92020
Donna Singer Executive VP, Director 403,356 (9) 2.49
1725 Gillespie Way
El Cajon, CA 92020
Directors and Officers as a Group
(9 individuals) 4,454,406 (10) 21.85
Next9, LLC Shareholder 2,000,000 (11) 11.23
850 State Street
San Diego, CA 92101
(1) Includes presently exercisable options to acquire up to 200,000 shares.
(2) Includes presently exercisable options to acquire up to 150,000 shares.
(3) Includes presently exercisable options to acquire up to 250,000 shares.
(4) Includes presently exercisable options to acquire up to 435,000 shares.
(5) Includes presently exercisable options to acquire up to 400,000 shares.
(6) Includes presently exercisable options to acquire up to 350,000 shares.
(7) Includes presently exercisable options to acquire up to 731,250 shares.
(8) Includes presently exercisable options to acquire up to 400,000 shares.
(9) Includes presently exercisable options to acquire up to 375,000 shares.
(10) Includes presently exercisable options held by all of the above officers
and directors to acquire up to 3,291,250 shares. (11) Lee Brukman is a
control person of Next9 LLC
The following table sets forth information about our common stock that may
be issued upon exercise of options under our equity compensation plans.
------------------------ ------------------------- -------------------------- ----------------------------
Number of securities
remaining available for
Number of securities to future issuance under
be issued upon exercise Weighted-average equity compensation plans
of outstanding options, exercise price of (excluding securities
warrants and rights outstanding options, reflected in column (a))
Plan Category (a) warrants and rights (c)
(b)
------------------------ ------------------------- -------------------------- ----------------------------
Equity compensation
plans approved by
security holders 3,243,750 1.83 6,283,301
------------------------ ------------------------- -------------------------- ----------------------------
Equity compensation
plans not approved by
security holders 740,000 1.35 2,033,000
------------------------ ------------------------- -------------------------- ----------------------------
Total 3,983,750 1.74 8,316,301
------------------------ ------------------------- -------------------------- ----------------------------
The following equity compensation plans were not approved by security holders:
1. 2001 ETIH2O Stock Option Plan: Adopted by the Board in January 2001,
there are 1,000,000 shares authorized under this Plan. The options
have a five-year term with vesting ratably over a five-year period.
Executive Officers and Directors are not eligible participants under
this plan.
2. 2001 Consultants and Advisors Stock Option Plan: Adopted by the Board
in January 2001, there are 500,000 shares authorized under this Plan.
The options have a five-year term with vesting ratably over a
five-year period. Executive Officers and Directors are not eligible
participants under this plan.
3. 2004 Consultants and Advisors Stock Option Plan: Adopted by the Board
in April 2004, there are 2,000,000 shares authorized under this plan.
The options have a five-year term with vesting ratably over a
five-year period. Executive Officers and Directors are not eligible
participants under this plan.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
ITEM 13. EXHIBITS
A. The following Exhibits are filed as part of this registration statement
pursuant to Item 601 of Regulation S-B:
3.1 (1) -- Articles of Incorporation, Articles of Amendment and Bylaws
3.1.1(13) -- Articles of Amendment dated March 11, 2002
4.1 (1) -- Form of Class A Warrant
4.2 (1) -- Form of Class Z Warrant
4.3 (1) -- Form of Common Stock Certificate
4.4 (1) -- Warrant Agreement
4.5 (2) -- March 2000 Warrant
4.6 (3) -- January 2001 Warrant
4.7 (4) -- Convertible Debenture
4.8 (5) -- Convertible Debenture Purchase Agreement
4.9 (6) -- Convertible Debenture Warrant
10.1 (1) -- Employment Contract/Michael L. Krall
10.2 (7) -- Manufacturing, Licensing and Distribution Agreement dated
March 26, 2001
10.3 (8) -- Axenohl License Agreement
10.4 (9) -- Weaver - Roach X Assignment
10.5 (9) -- Dodo Agreement [CONFIDENTIAL TREATMENT REQUESTED FOR CERTAIN
OMITTED INFORMATION FILED SEPARATELY]
10.6 (8) -- Promissory Note of Michael Krall
10.7 (8) -- Promissory Note of Gary Brownell
10.8 (9) -- Nutripure Dealer Agreement
10.9 (9) -- Sales Finance Agreement
10.10 (10) -- ETIH2O, Inc., Acquisition Agreement
10.11 (11) -- NVID Litigation Settlement Agreement
10.12 (12) -- Addendum #1 to NVID Settlement Agreement
10.13 (14) -- Therapeutics, Inc. Agreement [CONFIDENTIAL TRREATMENT
REQUESTED FOR CERTAIN OMITTED INFORMATION FILED SEPARATELY]
10.14 -- Promissory Note dated November 2003 $4,750,000
10.15 -- Promissory Note dated January 26, 2004 $100,000
13 (13) -- Subsidiaries of the Registrant
14.1 -- Code of Ethics
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: No Reports on Form 8-K were filed during the fourth
quarter of the fiscal year.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Miller & McCollom, Certified Public Accountants, are the Company's independent
auditors to examine the financial statements of the Company for the fiscal year
ending July 31, 2004. Miller & McCollom has performed the following services and
has been paid the following fees for these fiscal years.
Audit Fees
Miller & McCollom was paid aggregate fees of $70,457 for the fiscal year ended
July 31, 2003 and $66,027 for the fiscal year ended July 31, 2004 for
professional services rendered for the audit of the Company's annual financial
statements and for the reviews of the financial statements included in Company's
quarterly reports on Form 10QSB during these fiscal years.
Audit-Related Fees
Miller & McCollom was not paid any additional fees for the fiscal year ended
July 31, 2003 and July 31, 2004 for assurance and related services reasonably
related to the performance of the audit or review of the Company's financial
statements.
Tax Fees
Deloitte & Touche USA LLP was paid aggregate fees of $10,900 for the fiscal year
ended July 31, 2003 and $11,300 for the fiscal year ended July 31, 2004 for
professional services rendered for tax compliance, tax advice and tax planning.
Other Fees
Neither Miller & McCollom nor Deloitte & Touche USA LLP was paid other fees for
professional services during the fiscal years ended July 31, 2003 and July 31,
2004.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 DATE
/s/ MICHAEL L. KRALL October 28, 2004
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Michael L. Krall, Chairman/President/CEO
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
is signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
NAME TITLE DATE
/s/ GREGORY BARNHILL Director October 28, 2004
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Gregory Barnhill
/s/ DENNIS BROVARONE Director October 28, 2004
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Dennis Brovarone
/s/ GARY BROWNELL Chief Financial Officer and Director October 28, 2004
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Gary Brownell
/s/ PATRICK GALUSKA Director October 28, 2004
---------------------- ----------------
Patrick Galuska
/s/ MICHAEL L. KRALL President/CEO and Director October 28, 2004
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Michael L. Krall
/s/ EUGENE PEISER Director October 28, 2004
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Eugene Peiser
/s/ DONNA SINGER Executive Vice President and Director October 28, 2004
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Donna Singer