In addition, the stock market in general, the NASDAQ Capital Market,OTCQB, and the market for shares of novel technology and biotechnology companies in particular, have experienced extreme price and volume fluctuations that have often beenin some cases may be unrelated or disproportionate to the operating performance of those companies. Further, the market prices of bioscience companiescompanies’ stock have been unusually volatile in the last year,recent periods, and such volatility may continue for the foreseeable future. These broad market and industry factors may materially harm the market price of our common stock, regardless of our operating performance. In addition, this volatility could adversely affect an investor’s ability to sell shares of our common stock, and/or the available price for such shares, at any given time.

Following periods of volatility in the market price of a company’s securities, stockholder derivative lawsuits and securities class action litigation are common. Such litigation, if instituted against us or our officers and directors, could result in substantial costs and a diversion of management’s attention and resources.

Although we are pursuing various sources of potential funding, we have historically supported our operations through the issuance of equity and expect to continue to do so in the future. Although we may not be successful in obtaining financing through equity sales on terms that are favorable to us, if at all, any such sales that do occur could result in substantial dilution to the interests of existing holders of our common stock. Additionally, the sale of a substantial number of shares of our common stock or other equity securities to any new investors, or the anticipation of such sales, could cause the trading price of our common stock to fall.

Certain provisions of our charter and bylaws may delay or frustrate the removal of incumbent directors and may prevent or delay a merger, tender offer, or proxy contest involving us that is not approved by our Board, even if such events may be beneficial to the interests of stockholders. For example, our Board, without stockholder approval, has the authority and power to authorize the issuance of up to 5,000,000 shares of preferred stock and such preferred stock could have voting or conversion rights whichthat could adversely affect the voting power of the holders of our common stock. Further, the one-for-eight reverse stock split of our outstanding common stock that we recently effected has increased the proportion of unissued and authorized common shares to issued and outstanding common shares, which could allow our Board to issue large numbers of additional shares of our common stock that could significantly reduce the voting power of our current stockholders. In addition, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which may discourage, delay or prevent certain business combinations with stockholders owning 15% or more of our outstanding voting stock. These and other provisions in our charter documents may make it more difficult for stockholders or potential acquirers to initiate actions that are opposed by theour then-current board of directors, including delaying or impeding a merger, tender offer, or proxy contest or other change of control transaction involving our company.the Company. Any delay or prevention of a change of control transaction could cause stockholders to lose a substantial premium over the then-current market price of their shares.

Not applicable.

We lease a facility in El Cajon, California covering a total of approximately 15,000 square feet. This is our primaryonly facility and it includes our corporate offices, research and development laboratory, manufacturing operations and warehouse. Our current lease on this facility expires in December 2014. We also lease approximately 6,500 square feet of additional warehouse space. This facility is located within one mile of our primary facility. Our current lease on this facility expires in November 2012. We also lease other office and warehouse space on a month to month basis.

From time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. The impact and outcome of litigation, if any, is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business. We are not currently aware of any such legal proceedings or claims to which we or our wholly owned subsidiary is a party or of which any of our property is subject that we believe will have, individually or in the aggregate, a material adverse effect on our business, financial condition or results of operations.

Not applicable.

Our common stock tradesis approved for quotation on the NASDAQ Capital MarketOTC Markets’ OTCQB marketplace under the symbol “PURE.” SetThe OTC QB is a regulated quotation service that displays real-time quotes, last-sale prices and volume information in over-the-counter equity securities. The OTC QB securities are traded by a community of market makers that enter quotes and trade reports. This market is limited in comparison to the national stock exchanges and any prices quoted may not be a reliable indication of the value of our common stock. On May 17, 2013 our common stock was delisted from The NASDAQ Capital Market and began trading on the OTCQB Marketplace under the ticker symbol “PURE”.

On October 22, 2013, the closing price of our common stock reported on the OTCQB was $1.65 per share. The following table sets forth, below arefor each of the quarterly periods indicated, the high and low sales prices forof our common stock, for each full quarterly period withinas reported on the two most recent fiscal years, asOTCQB. All per share information of our common stock has been adjusted forto reflect the one-for-eightapplication of the reverse stock splitthat we effected on August 14, 2012 and commencing with the opening of trading on August 15, 2012.

As of October 24, 2012,22, 2013, we had approximately 171160 holders of record of our common stock. This does not include beneficial owners holding common stock in street name.

As a Smaller Reporting Company, as defined by Rule 12b-2 of the Exchange Act and in Item 10(f)(1) of Regulation S-K, we are electing scaled disclosure reporting obligations and therefore are not required to provide the information requested by this Item.

We are focused on the discovery, developmentdeveloping and commercialization of biosciencecommercializing our proprietary antimicrobial products that provide solutions to globalthe health challenges.and environmental challenges of pathogen and hygienic control. Our technology platform is based on patented stabilized ionic silver, and our initial products contain silver dihydrogen citrate, or SDC. SDC is a broad-spectrum, non-toxic antimicrobial.antimicrobial agent that is manufactured as a liquid delivered in various concentrations. We currently manufacture and selldistribute SDC-based disinfecting and sanitizing products, which are registered by the Environmental Protection Agency, or EPA, to distributors and end users.EPA. We also manufacture and sell various SDC-based formulations to manufacturers for use as a raw material ingredient in the production of personal care and other products. We believe our technology platform has potential application in a number of industries, and we have ongoing research and development projects inindustries. We intend to focus our current resources on providing food processing, agriculture, water treatment, pharmaceuticals, and oil and gas.

Our goal is to become a sustainable company by usingcommercializing our proprietary technology platform to deliver leading antimicrobial products to multiplethrough our sales and marketing efforts focused on the food industry and through licensing collaborations in other industries. We manufacture and sell SDC-based products for end use, products preserved with SDC and SDC as a raw material for manufacturing use. Our current products are as follows:

Our PURE Complete SystemSolution is comprised of PURE® Hard Surface and our two newa concentrated cleaning productsproduct that werewas launched as a companion productsproduct to PUREPURE® Hard Surface, PURE Multi-Purpose Cleaner and PURE Floor Cleaner.Surface. The PURE Complete SystemSolution offers a comprehensive, cost-effective and user-friendly cleaning, disinfecting and sanitizing product line to end-users including our targeted foodservice, food manufacturing and food processing customers. We can also target this product to hospital and medical care facilities; janitorial service providers and the distributors that supply them.

PURE® Hard Surface is our SDC-based, patented and EPA-registered, ready-to-use hard surface disinfectant and food contact surface sanitizer. We manufacture both consumer and commercial versions of the product. PURE Hard Surface combines high efficacy and low toxicity with 30-second bacterial and viral kill times and 24-hour residual protection. The product completely kills resistant pathogens such as MRSA and Carbapenem-resistantKlebsiella pneumoniae (NDM-1), and effectively eliminates dangerous fungi and viruses including HIV, Hepatitis B, Hepatitis C, Norovirus, Influenza A, Avian Influenza and H1N1. It also eradicates hazardous food pathogens such asE. coli,Salmonella,Campylobacter and Listeria.Listeria. PURE Hard Surface delivers broad-spectrum efficacy yet remains classified as least-toxic by the EPA. The active ingredient, SDC, has been designated as Generally Recognized as Safe, or GRAS, for use on food processing equipment, machinery and utensils.

PURE Multi-Purpose Cleaner areConcentrate (End-User Dilutable)

PURE® Multi-Purpose Cleaner, is an environmentally responsible cleaning productsproduct that areis protected by SDC, a natural, non-toxic antimicrobial.SDC. SDC ensures the quality and safety of PURE Floor Cleaner and PURE Multi-Purpose Cleaner without human or environmental exposure to toxic chemical preservatives. PURE Floor Cleaner and PURE Multi-Purpose Cleaner areis non-toxic and non-flammable and containcontains no EDTA, phosphates, ammonia or bleach as well as no VOCs or NPEs. PURE Floor Cleaner and PURE Multi-Purpose Cleaner provideprovides professional strength cleaning in a concentrate formula that yields a 1:12896 – 1:256 use dilution that is safe for use on all resilient surfaces, including floors, glass and food contact surfaces.

Axen®30 is our patented and EPA-registered hard surface disinfectant and is a predecessor ready-to-use product to PUREPURE® Hard Surface. Axen30 is currently sold on a limited basis by distributors under thetheir respective private label brands SpectraSan24, PureGreen24, Critical Care, Mother Nature’s Choicelabels and Ag+ainst24. In prior years,which we sold this productintend to other distributors that resold Axen30 under a variety of other private label brands.

Axenohl® is our patented and EPA-registered SDC-based antimicrobial formulation for use as a raw material ingredient in the manufacturing of EPA-registered products. Axenohl is a colorless, odorless and stable solution that provides fast acting efficacy against bacteria, viruses and fungi when manufactured into consumer and commercial disinfecting and sanitizing products.

SILVÉRION® (Raw Material Ingredient)

SILVÉRION® is our patented SDC-based antimicrobial formulation for use as a raw material ingredient in the manufacturing of personal care products. It can be used as either an active ingredient or a preservative. SilvérionSILVÉRION is a colorless, odorless and stable solution that provides ionic silver in a water-soluble form. It provides fast acting efficacy at low concentrations against a broad-spectrum of bacteria, viruses, yeast and molds.

We were incorporated in the state of California in August 1992 as Innovative Medical Services. In September 2003, we changed our name to Pure Bioscience. In March 2011, we reincorporated in the state of Delaware under the name “Pure Bioscience, Inc.” We operate in one business segment.

New Board of Directors and Management Team

On August 13, 2013, the following managerial and corporate governance changes occurred to create a new Board of Directors, or Board, and management team:

receive a cash severance of $204,000 payable over a twelve month period; Mr. Krall received 850,000 unregistered shares of common stock, valued at $595,000; Ms. Singer received 300,000 unregistered shares of common stock, valued at $210,000; and Mr. Krall and Ms. Singer will continue to receive health insurance coverage over the terms of their respective severance periods. Medical and dental insurance for Mr. Krall and his dependents will cost the Company $19,933 over the eighteen month severance period. Medical and dental insurance for Ms. Singer and her dependents will cost the Company $17,819 over the twelve month severance period.

As previously disclosed on our Form 8-K filed on July 25, 2013, on July 22, 2013, Jon Carbone and Paul Maier resigned as directors of the Company and as members of the Audit and Compensation Committees.

On September 10, 2013, the Board appointed Henry R. Lambert to serve as Chief Executive Officer. His appointment was effective as of and on September 16, 2013. In connection with the hiring of Henry R. Lambert to serve as the Company’s Chief Executive Officer, Dave Pfanzelter resigned his position as our Interim Chief Executive Officer. Mr. Pfanzelter’s resignation coincided with Mr. Lambert’s start date, September 16, 2013. Mr. Pfanzelter will continue to render significant services to the Company and will continue to serve as the Company’s Chairman of the Board.

On September 10, 2013, the Board appointed Henry R. Lambert to serve as a member of the Board. His appointment is effective as of and on September 16, 2013.

On October 1, 2013, the Board appointed Dr. David Theno, Jr. to serve as a member of the Board. His appointment was immediately effective as of October 1, 2013.

On October 3, 2013, the Board appointed Craig C. Culver to serve as a member of the Board. His appointment was immediately effective as of October 3, 2013.

On October 8, 2013, the Board appointed William Otis to serve as a member of the Board. His appointment was immediately effective as of October 8, 2013.

Liquidity & Going Concern Uncertainty

Since our inception, we have financed our operations primarily through public and private offerings of securities, and revenue from product sales and license agreements. We have a history of recurring losses, and as of July 31, 2013 we have incurred a cumulative net loss of $70,171,000.

We do not have, and may never have, significant cash inflows from product sales or from other sources of revenue to fund our operations. As of July 31, 2013, we had $32,000 in cash and cash equivalents, and $2,153,000 of current liabilities, including $1,134,000 in accounts payable. We do not currently believe that our existing cash resources are sufficient to meet our anticipated needs over the next twelve months. The uncertainties surrounding our ability to continue to fund our operations raise substantial doubt about our ability to continue as a going concern.

Until we can generate significant cash from operations, we expect to continue to fund our operations with the proceeds of offerings of our equity and debt securities. However, we cannot assure you that additional financing will be available when needed or that, if available, financing will be obtained on terms favorable to us or to our stockholders. If we raise additional funds from the issuance of equity securities, substantial dilution to our existing stockholders would likely result. If we raise additional funds by incurring debt financing, the terms of the debt may involve significant cash payment obligations as well as

covenants and specific financial ratios that may restrict our ability to operate our business. Further, any contracts or license arrangements we enter into to raise funds may require us to relinquish our rights to our products or technology, and we cannot assure you that we will be able to enter into any such contracts or license arrangements on acceptable terms, or at all. Having insufficient funds may require us to delay or scale back our marketing, distribution and other commercialization activities or cease our operations altogether.

We do not have any unused credit facilities or other sources of capital available to us at this time. We intend to secure additional working capital through sales of additional debt or equity securities. On February 1, 2013, we filed a Certificate of Amendment to our Certificate of Incorporation with the Secretary of State of the State of Delaware to effect a reverse stock split of our issued and outstanding common stock, $0.01 par value per share, at a ratio of one-for-eight. The reverse stock split was approved by stockholders holding a majority of our outstanding voting power at our annual meeting of stockholders held on July 31, 2012. The reverse stock split became effective as of the close of trading on August 14, 2012 and shares of our common stock commenced trading on a post-reverse split basis as of the opening of trading on August 15, 2012, with each eight (8) issued and outstanding shares of our common stock automatically combined and converted into one (1) issued and outstanding share of our common stock. The reverse stock split affected all issued and outstanding shares of our common stock, as well as common stock underlying stock options, warrants, and convertible notes outstanding immediately prior to the effectiveness of the reverse stock split and the number of shares reserved for issuance under our equity incentive plan, but did not affect the number of authorized shares of our common stock. As a result of the reverse stock split, the number of outstanding shares of our common stock was reduced from approximately 57.8 million immediately prior to the effectiveness of the reverse stock split to approximately 7.2 million immediately thereafter.

If we are unable to obtain sufficient capital, it will have a material adverse effect on September 4, 2012our business and September 13, 2012, respectively. The shares were sold pursuantoperations. It could cause us to an underwriting agreement betweenfail to execute our business plan, fail to take advantage of future opportunities, or fail to respond to competitive pressures or customer requirements. It also may require us to significantly modify our business model and Aegis Capital Corp.

On June 29, 2012,26 and July 10, 2013, we entered intocompleted the initial and second closings of a common stock purchase agreement with fifteen investors,private placement pursuant to which we issued and sold to such investors an aggregate of 325,125183,333 shares of our common stock and warrants to purchase up to an aggregate of 81,28091,667 shares of our common stock. The shares were sold to the investors at a per share purchase price of $2.00 per share,$0.30, resulting in grossapproximately $55,000 in aggregate proceeds to us of approximately $650,000.us. The warrants issued to such investorsWarrants have a three-year term, are immediately exercisable, and have an exercise price of $0.50 per share.

On April 17 and April 24, 2013, we completed the initial and second closings of a private placement pursuant to which we sold an aggregate of 1,000,000 shares of our common stock and warrants to purchase an aggregate of 500,000 shares of our common stock. The shares were sold at a per share purchase price of $0.40, resulting in approximately $400,000 in aggregate proceeds to us. The warrants have a term of three years from the initial exercise date, become exercisable six months after the date of their issuance, and have an exercise price of $3.52$0.65 per common share, subject to adjustment as set forth in the warrants. The investors have certain piggyback registration rights with respect to the shares sold pursuant to the common stock purchase agreement, the warrants and the shares issuable upon exercise of the warrants, which rights are subject to certain conditions and limitations set forth in such agreement. None of the securities sold to such investors have been registered under the Securities Act or any state securities laws and have been issued in reliance on an exemption from the registration requirements of the Securities Act afforded by Section 4(2) thereof and Regulation D promulgated thereunder.

Commencing in September 2011, we have received a series of deficiency letters from the NASDAQ Stock Market, or NASDAQ, and have undergone a lengthy appeal process with a NASDAQ Hearings Panel, or the Panel, relating to the potential delisting of our common stock from the NASDAQ Capital Market for noncompliance with several listing rules and standards. After receiving several letters from the Panel granting our continued listing contingent upon our satisfaction of certain specified conditions, on September 21, 2012, we received a final decision letter notifying us that the NASDAQ Listing Qualifications Staff had concluded that we had satisfied the requiredthose conditions and regained compliance with all applicable listing requirements, and accordingly had determined to continue the listing of our securities on theThe NASDAQ Capital Market and to close the matter of our delisting on that date.

On October 1, 2012, we received a new deficiency letter from NASDAQ regarding our noncompliance with NASDAQ’s audit committee membership requirements as a result of the death of our former director and Audit Committee member Gregory Barnhill. Consistent with applicable NASDAQ listing rules, NASDAQ has granted us the following cure period to regain compliance with NASDAQ’s audit committee membership requirements: (i) until the earlier of our next annual meeting of stockholders or September 14, 2013, or (ii) if our next annual meeting of stockholders is held before March 13, 2013, until March 13, 2013. We intend to appoint an independent director who satisfies

On December 20, 2012, we received a new deficiency letter (the “Notification Letter”) from NASDAQ notifying us we no longer met NASDAQ’s requirements for membershipcontinued listing on the NASDAQ Capital Market under NASDAQ Listing Rule 5550(a)(2) (the “Bid Price Rule”) because the minimum bid price of our Audit Committee as promptly as practicablecommon stock has not equaled or exceeded $1.00 at least once over a period of 30 consecutive business days.

NASDAQ explained in the Notification Letter that we will be afforded 180 calendar days, or until June 18, 2013, to rectify this noncompliance.

On March 4, 2013, we received a Staff Delisting Determination from NASDAQ notifying us that NASDAQ had determined to delist our common stock from The NASDAQ Capital Market based upon our non-compliance with NASDAQ Listing Rule 5550(b)(1), which requires issuers to maintain stockholders’ equity of at least $2.5 million, unless we requested a hearing

before the Listing Qualifications Panel (the “Panel”) by March 11, 2013. We requested and were granted a hearing before the Panel, and on April 24, 2013, we received a determination from the NASDAQ Listing Qualifications Panel (the “Panel”) indicating that the Panel has granted our request for continued listing on The NASDAQ Capital Market pursuant to an extension through June 29, 2011,18, 2013 to evidence compliance with the minimum $2.5 million stockholders’ equity requirement and our ability to sustain compliance with the minimum threshold over the long term.

On May 15, 2013, we filed suit against Richmont Sciences, LLCreceived a letter indicating that the Panel determined to delist our common stock from The NASDAQ Stock Market LLC. Trading in San Diego County Superior Court, Case No. 37-2011-00068549-CU-CO-EC, asserting various causes of action to collectour securities on outstanding invoices. Richmont Sciences, LLC and Richmont Holdings, LLC then filed a cross-complaint for damages against us asserting contract, tort and statutory (trade secret) claims arising outNASDAQ was suspended effective with the open of business dealingson Friday, May 17, 2013. The suspension was the result of our determination that we would be unable to evidence compliance with us. We then filed a cross-complaintthe $2.5 million stockholders’ equity requirement for compensatory and punitive damages against Richmont Sciences, LLC and Richmont Holdings, LLC asserting contract and fraud claims.continued listing on The NASDAQ Capital Market, as set forth in NASDAQ Listing Rule 5550(b), by June 18, 2013, as required by the Panel’s decision in this matter. Our initial suit against Richmont Sciences, LLC and all related cross-claims are referred to herein ascommon stock began trading on the “Richmont Litigation”.

Reclassification of stockholders held on July 31, 2012, a solicitation of proxies in favor of an opposing slate of six nominees for election as directors on our Board at that annual meeting had been initiated by The Coalition to Save Pure, or the Coalition, which consisted of Jeffrey P. Bash, Theodore J. Coburn, C. James Jensen, Dr. Martin Kassir, Thomas J. Reynolds, John P. Rochon and Richmont Corporation.

On January 25, 2013, we entered into a settlement agreementLetter Agreement with the Coalition and with Richmont Sciences, LLC, Richmont Holdings, Inc., Richmont Corporation and IV-7 Direct, LLC, which we collectively refer to as “Richmont”. Pursuant toMorrison & Foerster LLP, or Morrison. Under the terms of the settlement agreement, all parties have dismissed all claims and cross-claimsLetter Agreement, we issued a Promissory Note, or the Note, in favor of Morrison in the Richmont Litigation with prejudice,principal amount of $1,125,000. In consideration for the Note, Morrison agreed to waive $1,519,000 of amounts due and Richmontpayable to Morrison for legal services rendered. The Note bears interest at the rate of 7.5% per annum, but the then outstanding balance will accrue interest at the rate of 10% per annum upon the occurrence of an event of default (as defined in the Note). Beginning March 31, 2013, and their respective affiliates, including John P. Rochon,on or before the last business day of each calendar month thereafter, we are required to pay all accrued but unpaid interest on the then unpaid amount of outstanding principal. Beginning on February 28, 2014, we are required to pay equal monthly principal installments of $47,000, plus interest. We may prepay the outstanding balance under the Note in full or in part at any time, which prepayment will result in a discount of the then outstanding balance as more fully described in the Note. The Note will mature on February 28, 2016, unless accelerated pursuant to an event of default (as defined in the Note) or upon the consummation of a change of control (as defined in the Note). In consideration for Morrison’s acceptance of the Note in lieu of payment for its legal services, we issued Morrison a warrant to purchase 375,000 shares of our common stock at an exercise price of $0.83 per share.

As a result of the Letter Agreement, we have takenreclassified the amount due and have causedpayable to Morrison from a current liability to long-term debt, except any payments due under the Coalition to take all reasonable and necessary efforts to withdraw and not resubmit the Coalition’s proxy solicitation in connection with our 2012 annual meeting of stockholders. In addition, the settlement agreement obligates us to make good faith efforts to,Letter Agreement within 12twelve months afterfrom the date of our 2012 annual meetingthe balance sheet which will continue to be classified as a current liability. As of stockholders, replace one member of our Board with an independent directorJuly 31, 2013, $368,000 was due under the Letter Agreement within twelve months and add an additional independent director to our Board.

This financial overview provides a general description of our revenue and expenses.

We manufacture and sell SDC-based products for end use, and as a raw material for manufacturing use. We also license our products and technology to development and commercialization partners. Revenue is recognized when realized or realizable and earned. Any amounts received prior to satisfying revenue recognition criteria are recorded as deferred revenue.

Cost of goods sold for product sales includes direct and indirect costs to manufacture products, including materials consumed, manufacturing overhead, shipping costs, salaries, benefits, reserved inventory, and related expenses of operations. Depreciation related to manufacturing is systematically allocated to inventory produced, and expensed through cost of goods sold at the time inventory is sold.

Selling, general and administrative expense consists primarily of salaries and other related costs for personnel in business development, sales, finance, accounting, information technology, and executive functions. Other selling, general and administrative costs include product marketing, advertising, and trade show costs, as well as public relations and investor relations, facility costs, and legal, accounting and other professional fees.

Our research and development activities are focused on leveraging our technology platform to develop additional proprietary products and applications. Research and development expense consists primarily of personnel and related costs, product registration expenses, and third-party testing. We expense research and developments costs as incurred.

We record interest income, interest expense, change in derivative liabilities, as well as other non-operating transactions, as other income (expense) in our consolidated statements of operations.

Net product sales were $812,000$820,000 and $454,000$812,000 for the years ended July 31, 20122013 and 2011,2012, respectively. The increase of $358,000$8,000 was primarily attributable to sales to onefluctuations within our existing customer as well as increased sales to several other customers.base. Our top twothree customers accounted for $547,000$565,000 of net product sales for the year ended July 31, 2012.

Cost of Goods Sold

Given our current focus on near term commercialization of the SDC-based products used to provide solutions for food safety industry, we believe there is no net realizable value for numerous current product configurations. Therefore, as of our fiscal year ended July 31, 2011, one customer accounted2013, we established an inventory reserve, or Reserve, for 46%$347,000. The majority of our net product sales. No other individual customer accounted for 10% or more of our net product sales. The geographic breakdown of net product sales wasthe reserve relates to components such as, follows:  87% U.S.plastic bottles, spray triggers, miscellaneous plastics, and 13% foreign.

Cost of goods sold was $264,000$565,000 and $131,000$264,000 for the years ended July 31, 20122013 and 2011,2012, respectively. The increase of $133,000$301,000 was primarily attributable to increased net product sales, as well as an inventory charge.the Reserve discussed above. Cost of goods sold excluding the Reserve was $218,000 and $264,000 for the years ended July 31, 2013 and 2012, respectively. The decrease of $46,000 was primarily attributable to a $64,000 inventory charge representsin the prior fiscal year for costs incurred by us to rework certain finished goods inventory, as well as a write-off of certain packaging inventory.

Gross margin, as a percentage of net product sales, or gross margin percentage, was 67%31% and 71%67% for the years ended July 31, 20122013 and 2011,2012, respectively. Gross margin percentage, excluding the Reserve and the prior year inventory charge, noted above, was 75%73% and 71%75% for the years ended July 31, 20122013 and 2011,2012, respectively. The decrease in gross margin percentage was primarily attributable to the sale of lower margin formulations and packaging configurations of our products during the year ended July 31, 20122013 as compared to prior year.

Selling, general and administrative expense was $7,439,000$5,718,000 and $6,520,000$7,439,000 for the years ended July 31, 20122013 and 2011,2012, respectively. The increasedecrease of $919,000$1,721,000 was primarily attributable to an increasea decrease in legal fees of approximately $800,000, which were incurred in significant part as a result of our ongoing litigation with Richmont Sciences, LLC as well as the proxy contest that Richmont Corporation had initiated, as well as decreases in travel, board of director fees, and increasesdepreciation and amortization expense. There were also reductions in personnelstock option expense related to employees, directors, and related costs.consultants supporting our Selling, General and Administrative functions. The increasescombined decreases were partially offset by reduced depreciation, amortization,the fair value of stock issued and stock option expense.

Change in derivative liability for the years ended July 31, 2013 and 2012 was $268,000 and 2011 was $11,000, and zero respectively. The increase is due to the issuance of warrants with anti-dilution provisions during the year ended July 31, 2012 and the conversion features associated with the secured convertible promissory notes that we issued in July 2012 in connection with the Bridge Loan.

Interest expense for the year ended July 31, 20122013 was $145,000$593,000 compared to zero$144,000 for the year ended July 31, 2011.2012. The increase in interest expense during the year ended July 31, 2012 is primarily attributable to non-cash amortization of deferred financing costs and debt discounts related to the secured convertible promissory notes that we issued in July 2012 in connection with the Bridge Loan.

Other expense net was $3,000 for the year ended July 31, 2013 and 2012 compared to other income, netwas $7,000 and $3,000, respectively. The increase is a result of $10,000 for the year ended July 31, 2011. The decrease$25,000 of $13,000 was primarilyexpense attributable to a settlementthe excess of the total cash outflows under the restructured Morrison debt, plus the expense related to the fair value of the warrant issued in conjunction with the debt, over the carrying amount of $13,000 that we received in the year ended July 31, 2011.

Since our inception, we have financed our operations primarily through public and private offerings of securities, debt financing, and revenue from product sales and license agreements, proceeds from the sale of a division and interest income from invested cash balances.agreements. We have a history of recurring losses, and as of July 31, 2013 we have incurred a cumulative net loss of $62,500,000.

On June 26 and July 10, 2013, we completed the initial and second closings of a private placement pursuant to which we sold an aggregate of 183,333 shares of our common stock and warrants to purchase an aggregate of 91,667 shares of our common stock. The shares were sold at a per share purchase price of $0.30, resulting in approximately $55,000 in aggregate proceeds to us. The warrants have a three-year term, are immediately exercisable, and have an exercise price of $0.50 per share.

On April 17 and April 24, 2013, we completed the initial and second closings of a private placement pursuant to which we sold an aggregate of 1,000,000 shares of our common stock and warrants to purchase an aggregate of 500,000 shares of our common stock. The shares were sold at a per share purchase price of $0.40, resulting in approximately $400,000 in aggregate proceeds to us. The warrants have a term of three years from the initial exercise date, become exercisable six months after the date of issuance, and have an exercise price of $0.65 per share.

On September 17, 2012, we closed an underwritten public offering of an aggregate of 4,341,615 shares of our common stock, including shares issued pursuant to the exercise of the underwriter’s overallotment option, at a price to the public of $1.10 per shareshare. The gross proceeds from the offering were approximately $4,776,000 and, after deducting $549,000 for net proceeds to us of approximately $4,313,000 (after deducting underwritingtransaction costs, including discounts, and commissions, and other offering expenses, although before payment of certain othersuch as legal and accounting expenses).

Pursuant to a securities purchase agreement entered into on June 26, 2012, on July 10, 2012 we received an aggregate of $1,200,000 in cash consideration from nine lenders in exchange for our issuance to such lenders of Notes in an aggregate principal amount of $1,333,000 and certain other consideration (including an aggregate of 54,878 shares of our common stock and warrants to acquire up to 128,046 shares of our common stock issued to such lenders) in the Bridge Loan transaction. Pursuant to the terms of the Notes and the other agreements entered in connection with the Bridge Loan, Agreements, all amounts owed thereunder became due and payable upon ourthe closing of our underwritten public offering on September 17, 2012, and accordingly all such amounts have been repaid in accordance with such terms.

On June 29, 2012, we entered into a common stock purchase agreement with fifteen investors, pursuant to which we issued and sold to such investors an aggregate of 325,125 shares of our common stock and warrants to purchase up to an aggregate of 81,280 shares of our common stock. The shares were sold to the investors at a price of $2.00 per share, resulting in gross proceeds to us of approximately $650,000.

On June 4, 2012, we issued an aggregate of 250,000 shares of our common stock to three separate investors pursuant to agreements entered with each such investor on May 16, 2012, May 17, 2012 and May 23, 2012. The shares were sold at a price of $2.00 per share, resulting in approximately $500,000 in aggregate gross proceeds to us.

On December 14, 2011 and December 15, 2011, we entered into two purchase agreements and a registration rights agreement with Lincoln Park for potential future sales of our common stock totaling up to $10,000,000 from time to time during the terms of the purchase agreements. The provisions of such agreements are described in more detail in Note 8 of our consolidated financial statements in Part II, Item 8 of this Annual Report. On May 18, 2012, we delivered notice to Lincoln Park of our termination of both purchase agreements and, consequently, since the date of the notice there have been, and there will be, no further sales of our common stock to Lincoln Park under those agreements. During the year ended July 31, 2012, we sold 718,463 shares of our common stock to Lincoln Park under one of the purchase agreements for net proceeds to us of $1,719,000. All such shares were registered under our then-effective shelf registration statement previously filed with the SEC, which expired on May 8, 2012.

In April 2011, we entered into a sales agreement with an investment banking firm. Under the terms of the sales agreement, we were permitted to offer and sell shares of our common stock having an aggregate offering price of up to $7,000,000. The sales were made, from time to time, through the investment bank in “at the market” offerings as defined by the SEC and were made pursuant to our then-effective shelf registration statement previously filed with the SEC, which expired on May 8, 2012. During the year ended July 31, 2012, we sold 167,136 shares of our common stock under the sales agreement for net proceeds to us of $949,000, and during the year ended July 31, 2011, we sold 329,571 shares of our common stock under the sales agreement for net proceeds to us of $3,065,000.$949,000. Effective as of December 14, 2011, we terminated the sales agreement and, as a result of such termination, there have been no sales of our common stock under the sales agreement since the date of its termination and there will be no future sales of our common stock under the sales agreement.

During the year ended July 31, 2013 and 2012, there were no exercises of stock options or warrants. During the year ended July 31, 2011, we received $278,000 from the issuance of common stock upon the exercise of stock options. We also received $259,000 from the issuance of common stock upon the exercise of warrants during that annual period.

As of July 31, 2012,2013, we had $32,000 in cash and cash equivalents compared to $877,000 in cash and cash equivalents and $373,000 in accounts receivable, compared to $1,794,000 in cash and cash equivalents, and $50,000 in accounts receivable as of July 31, 2011.2012. The net decrease in cash and cash equivalents was primarily attributable to the use of cash to fund our operations, partially offset by proceeds from theour issuance of common stock through securities offeringsin the public offering and the funds received in connection withprivate placement noted above, offset by our repayment of amounts owed under the Bridge Loan (which amounts have since been repaid). The increaseand cash used in accounts receivable was attributable to higher product sales for the year ended July 31, 2012 as compared to prior year.operations. Additionally, as of July 31, 2012,2013, we had $3,637,000$2,153,000 of current liabilities, and $1,946,000including $1,134,000 in accounts payable, compared to $935,000$3,637,000 of current liabilities, and $677,000including $1,946,000 in accounts payable as of July 31, 2011.2012. The net increasedecrease in current liabilities and accounts payable waswere primarily attributable to repayment of the Bridge Loan and the reclassification of the amounts due to Morrison as long-term debt discussed above under “Reclassification of Certain Debt.”

We do not have, and may never have, significant cash inflows from product sales or from other sources of revenue to fund our operations. We do not currently believe that our existing cash resources are sufficient to meet our anticipated needs over the next twelve months. The uncertainties surrounding our ability to continue to fund our operations raise substantial doubt about our ability to continue as a going concern.

Until we can generate significant cash from operations, we expect to continue to fund our operations with the proceeds of offerings of our equity and debt securities. However, we cannot assure you that additional financing will be available when needed or that, if available, financing will be obtained on terms favorable to us or to our stockholders. If we raise additional funds from the issuance of equity securities, substantial dilution to our existing stockholders would likely result. If we raise additional funds by incurring debt financing, the terms of the debt may involve significant cash payment obligations as well as covenants and specific financial ratios that may restrict our ability to increased legal fees,operate our business. Further, any contracts or license arrangements we enter into to raise funds may require us to relinquish our rights to our products or technology, and we cannot assure you that we will be able to enter into any such contracts or license arrangements on acceptable terms, or at all. Having insufficient funds may require us to delay or scale back our marketing, distribution and other commercialization activities or cease our operations altogether.

We do not have any unused credit facilities or other sources of capital available to us at this time. We intend to secure additional working capital through sales of additional debt or equity securities, including through private placements of our securities. On February 1, 2013, we filed a registration statement on Form S-1 with the SEC. Subject to the SEC’s declaration of effectiveness of such registration statement, and subject to capital market conditions, we intend to raise additional capital through the registration statement. Our intended financing initiatives are subject to risk, and we cannot provide any assurance about the availability or terms of these or any future financings.

If we are unable to obtain sufficient capital, it will have a material adverse effect on our business and operations. It could cause us to fail to execute our business plan, fail to take advantage of future opportunities, or fail to respond to competitive pressures or customer requirements. It also may require us to significantly modify our business model and operations to reduce spending to a sustainable level, which were incurred as a resultmay include delaying, scaling back or eliminating some or all of litigation with Richmont Sciences, LLC,our ongoing and the proxy contest that Richmont Corporation initiated.

The following table summarizes our contractual obligations as of July 31, 2012.

In addition, from time to time we have entered into employment agreements with our executives that, under certain cases, provide for the continuation of salary and certain other benefits if these executives are terminated under specified circumstances. These agreements generally expire upon termination for cause or when we have met our obligations under these agreements. As of July 31, 2012,2013, no events have occurred resulting in the obligation of any such payments.

Our future capital requirements depend on numerous forward-looking factors. These factors may include, but are not limited to, the following: the acceptance of, and demand for, our products; our success and the success of our partners in selling our products; our success and the success of our partners in obtaining regulatory approvals to sell our products; the costs of further developing our existing products and technologies; the extent to which we invest in new product and technology development; and the costs associated with the continued operation, and any future growth, of our business. The outcome of these and other forward-looking factors will substantially affect our liquidity and capital resources.

We expect that we will need to increase our liquidity and capital resources by one or more measures. These measures may include, but are not limited to, the following: reducing operating expenses; obtaining financing through the issuance of equity, debt, or convertible securities; entering into partnerships, licenses, or other arrangements with third parties; and reducing the exercise price of outstanding warrants. Any one of these measures could substantially reduce the value to us of our technology and its commercial potential.potential as it may be necessary to enter into arrangements with less favorable terms than otherwise possible. Additionally, a reduction in operating expenses will require a reduction in the sales, marketing, and other commercialization activities required to bring our products to market. If we issue equity, debt or convertible securities to raise additional funds, our existing stockholders may experience dilution, and the new equity, debt or convertible securities may have rights, preferences and privileges senior to those of our existing stockholders. There is no guarantee that we would be able to obtain capital on terms acceptable to us, or at all.

If we are unable to obtain sufficient capital, it would have a material adverse effect on our business and operations. It could cause us to fail to execute our business plan, fail to take advantage of future opportunities, or fail to respond to competitive pressures or customer requirements. It also may require us to delay, scale back or eliminate some or all of our research and development programs, to license to third parties the right to commercialize products or technologies that we would otherwise commercialize ourselves, or to reduce or cease operations altogether. If adequate funds are not available when needed, we may be required to significantly modify our business model and operations to reduce spending to a sustainable level.

We believe our current efforts to raise capital, our current efforts to market and sell our products, and our ability to significantly reduce expenses, will not provide sufficient cash resources to satisfy our needs over the next 12 months. However, we do not yet have, and we may never have, significant cash inflows from product sales or from other sources of revenue to offset our ongoing and planned investments in corporate infrastructure, research and development projects, regulatory submissions, business development initiatives, and sales and marketing activities, among other investments. Some or all of our ongoing or planned investments may not be successful and could result in further losses. In addition, irrespective of our cash resources, we may be contractually or legally obligated to make certain investments which cannot be postponed.

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

GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses, and related disclosures. We evaluate our estimates on an ongoing basis. We base our estimates on historical experience and on other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

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

For purposes of testing impairment, we group our long-lived assets at the lowest level for which there are identifiable cash flows independent of other asset groups. Currently, there is only one level of aggregation for our intangible assets. We assess the impairment of long-lived assets, consisting of property, plant, and equipment and ourfinite-lived intangible assets primarily consisting of the worldwide patent portfolio of our silver ion technologies, annually, or whenever events or circumstances indicate that the carrying value may not be recoverable. Examples of such events or circumstances include: