UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED JANUARY 31, 2018APRIL 30, 2020

Commission File Number 001-14468

PURE Bioscience, Inc.

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code: (619) 596-8600

Securities registered pursuant to Section 12(b) of the Act: None.

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 [  ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [  ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [  ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [  ] No [X]

As of March 14, 2018,June 11, 2020, there were 68,057,65886,890,953 shares of the registrant’s common stock, $0.01 par value per share, outstanding.

PURE Bioscience, Inc.

Form 10-Q

for the Quarterly Period Ended January 31, 2018April 30, 2020

Table of Contents

Part I - Financial Information

Item 1. Condensed Financial Statements

PURE Bioscience, Inc.

Condensed Consolidated Balance Sheets

See accompanying notes.

PURE Bioscience, Inc.

Condensed Consolidated Statements of Operations

(Unaudited)

See accompanying notes.

PURE Bioscience, Inc.

Condensed Consolidated Statement of Stockholders’ Equity

(Unaudited)

See accompanying notes.

PURE Bioscience, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

See accompanying notes.

PURE Bioscience, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

1. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements include the consolidated accounts of PURE Bioscience, Inc. and its wholly owned subsidiary, ETI H2O Inc., a Nevada corporation. ETI H2O, Inc. currently has no business operations and no material assets or liabilities and there have been no significant transactions related to ETI H2O, Inc. during the periods presented in the condensed consolidated financial statements. All inter-company balances and transactions have been eliminated. All references to “PURE,” “we,” “our,” “us” and the “Company” refer to PURE Bioscience, Inc. and our wholly owned subsidiary.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP, for interim financial information pursuant to the instructions to Form 10-Q and Article 10/Rule 8-03 of Regulation S-X. Accordingly, they do not include all of the information and disclosures required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three and sixnine months ended January 31, 2018April 30, 2020 are not necessarily indicative of the results that may be expected for other quartersperiods or the year ending July 31, 2018.2020. The July 31, 20172019 balance sheet was derived from audited financial statements but does not include all disclosures required by GAAP and included in our Annual Report on Form 10-K. For more complete information, these unaudited financial statements and the notes thereto should be read in conjunction with the audited financial statements for the year ended July 31, 20172019 included in our Annual Report on Form 10-K covering such period filed with the Securities and Exchange Commission, or SEC, on October 26, 2017.30, 2019.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. Actual results could differ from those estimates.

2. Liquidity & Going Concern Uncertainty

These unaudited

The accompanying condensed consolidated financial statements have been prepared and presented on a going concern basis, assumingwhich contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. As reflected in the accompanying condensed consolidated financial statements, during the nine months ended April 30, 2020, we will continue asincurred a going concern. Thenet loss of $1,318,000 and used cash in operations of $1,162,000. These factors below raise substantial doubt about our ability to continue as a going concern.concern within one year after the date of the financial statements being issued. Our ability to continue as a going concern is dependent upon our ability to generate positive operating cash flow and implement the Company’s business plan. The condensed consolidated financial statements do not include any adjustments that might be necessary fromif we are unable to continue as a going concern. In addition, our independent registered public accounting firm, in its report on the outcome of this uncertainty.Company’s July 31, 2019 financial statements, has raised substantial doubt about the Company’s ability to continue as a going concern.

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. WeWhile we have a history of recurring losses, and asduring the three months ended April 30, 2020, we generated a significant increase in sales resulting in net income of January 31, 2018,approximately $473,000. However, we have incurred a cumulative net loss of $113,848,000.cannot be certain that this sales momentum will continue.

WeWhile we generated net income for the three months ended April 30, 2020 and, as of the date hereof, expect to commence generating positive operating cash flow by July 31, 2020, 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 January 31, 2018, we had $2,129,000 in cash and cash equivalents, and $449,000 of accounts payable. As of January 31, 2018, we have no long-term debt. We do not currently believe that our existing cash resources are sufficient to meet our anticipated needs over the next twelve months from the date hereof and based on our current plans and available resources, we believe we can maintain our current operations through the end of July 2018. As a result, to continue to fund our ongoing operations, beyond July 2018, we would need to secure significant additional capital. If we were unable to secure additional capital on a timely basis or at all, we will be required to curtail our current business plans and substantially reduce our expenses and development costs such as reducing our headcount and limiting our sales and marketing efforts and may ultimately be required to cease operations altogether. Moreover, our expenses may exceed our current plans and expectations, which would require us to secure additional capital or wind-down our operations sooner than anticipated. 

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

Until we can continually generate significantpositive cash flow from operations, we expectwill need to continue to fund our operations with the proceeds of offerings of our equity and debt securities. However, we cannot assure you that additional financing will be available when needed or that, if available, financing will be obtained on terms favorable to us or to our stockholders. If we raise additional funds from the issuance of equity securities, substantial dilution to our existing stockholders would likely result. If we raise additional funds by incurring debt financing, the terms of the debt may involve significant cash payment obligations as well as covenants and specific financial ratios that may restrict our ability to operate our business. Further, any contracts or license arrangements

As of April 30, 2020, we enter intohad $2,097,000 in cash and cash equivalents, and $1,491,000 of current liabilities, including $1,286,000 in accounts payable.

While, as discussed above, certain factors raise substantial doubt about our ability to raise funds may require uscontinue as a going concern, we currently believe our available cash, our current efforts to relinquish our rights tomarket and sell our products, or technology, and our ability to significantly reduce expenses, will provide sufficient cash resources to satisfy our needs over the next 12 months.

Until we can continually generate positive cash flow from operations, we will need to continue to fund our operations with the proceeds of offerings of our equity and debt securities. However, we cannot assure you that weadditional financing will be ableavailable when needed or that, if available, financing will be obtained on terms favorable to enter into any such contractsus or license arrangementsto 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.

3. Significant Accounting Policies

Revenue Recognition

Effective August 1, 2018, we adopted the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”), Topic 606, Revenue from Contracts with Customers (“Topic 606”). Under Topic 606, revenue is recognized at an amount that reflects the consideration to which we expect to be entitled in exchange for transferring goods or services to a customer. This principle is applied using the following 5-step process:

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

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

Contract terms for unit price, quantity, shipping and payment are governed by sales agreements and purchase orders which we consider to be a customer’s contract in all cases. The unit price is considered the observable stand-alone selling price for the arrangements. Any promotional or at all. Having insufficient funds may require ussales discounts are applied evenly to delay or scale back our marketing, distribution and other commercialization activities or cease our operations altogether.the units sold for purposes of calculating standalone selling price.

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

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

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

We do not have any unused credit facilities or other sourcessignificant categories of capital available to us at this time. We intend to secure additional working capital through salesrevenue that may impact how the nature, amount, timing and uncertainty of additional debt or equity securities. Our intended financing initiativesrevenue and cash flows are subject to risk, and we cannot provide any assurance about the availability or terms of these or any future financings.affected by economic factors.

IfVariable Consideration

We record revenue from customers in an amount that reflects the transaction price we are unableexpect to obtain sufficient capital, it will have a material adverse effectbe entitled to after transferring control of those goods or services. From time to time, we offer sales promotions on our business and operations. It could cause usproducts such as discounts. Variable consideration is estimated at contract inception only to fail to execute our business plan, fail to take advantagethe extent that it is probable that a significant reversal 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 may include delaying, scaling back or eliminating some or allrevenue will not occur.

Use of 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. If adequate funds are not available when needed, we may be required to reduce or cease operations altogether.Estimates

The condensedpreparation of consolidated financial statements do notin conformity with accounting principles generally accepted in the United States of America, or GAAP, requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements, and the disclosures made in the accompanying notes to the consolidated financial statements. Actual results could differ materially from those estimates. Those estimates and assumptions include any adjustment relating to recoverability or classificationestimates for reserves of uncollectible accounts, inventory obsolescence, depreciable lives of property and equipment, analysis of impairments of recorded long-term tangible and intangible assets, realization of deferred tax assets, accruals for potential liabilities and classification of recorded liabilities.assumptions made in valuing stock instruments issued for services.

3. Net LossIncome (Loss) Per Share

Basic net lossearnings (loss) per common share is computed asby dividing net loss dividedincome (loss) attributable to common stockholders by the weighted averageweighted-average number of common shares outstanding forduring the period. Our dilutedDiluted earnings per share is computed by dividing net loss perincome attributable to common stockholders by the sum of the weighted-average number of common shares outstanding during the period and the weighted-average number of dilutive common share isequivalents outstanding during the same as our basic net loss perperiod, using the treasury stock method. Dilutive common share becauseequivalents are comprised of in-the-money stock options and restricted stock units, based on the average stock price for each period using the treasury stock method. For the three months ended April 30, 2020, the incremental dilutive common share equivalents were 1,723,574. Since we incurred a net loss during each period presented,for the nine months ended April 30, 2020 and the potentially dilutive securities from the assumed exercise of all outstanding stock options, restricted stock units, and warrants would have an anti-dilutive effect. As of January 31, 2018 and 2017,2019, the number of shares issuable upon the exercise of stock options, the vesting of restricted stock units, and the exercise of warrants, none of which are included in the computation of basic net loss per common share, was 11,280,93910,410,890 and 11,980,795,10,496,565, respectively.

4. Comprehensive Loss

Comprehensive loss is defined as the change in equity during a period from transactions and other events and circumstances from non-owner sources, including unrealized gains and losses on marketable securities and foreign currency translation adjustments. For the three and six months ended January 31, 2018 and 2017, our comprehensive loss consisted only of net loss.

5. Inventory

Inventories are stated at the lower of cost or net realizable value, and net of a valuation allowance for potential excess or obsolete material.material when necessary. Cost is determined using the average cost method. Depreciation related to manufacturing is systematically allocated to inventory produced, and expensed through cost of goods sold at the time inventory is sold.

Inventories consist of the following:

During November of 2017, we wrote-off $26,000 of inventory destroyed in a third-party warehouse fire. Subsequent to January 31, 2018, we received $45,000 from an insurance claim for the replacement cost of the inventory destroyed in the fire.

Share-Based Compensation

We grant equity-based awards under share-based compensation plans. We estimate the fair value of share-based payment awards using the Black-Scholes option valuation model. This fair value is then amortized over the requisite service periods of the awards. The Black-Scholes option valuation model requires the input of subjective assumptions, including price volatility of the underlying stock, risk-free interest rate, dividend yield, and expected life of the option. Share-based compensation expense is based on awards ultimately expected to vest, and therefore is reduced by expected forfeitures. Changes in assumptions used under the Black-Scholes option valuation model could materially affect our net loss and net loss per share.

6. Fair Value Measurements

The Company determines the fair value of its assets and liabilities based on the exchange price in U.S. dollars that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value maximize the use of observable inputs and minimize the use of unobservable inputs. The Company uses a fair value hierarchy with three levels of inputs, of which the first two are considered observable and the last unobservable, to measure fair value:

The carrying amounts of financial instruments such as cash, accounts receivable, inventories, accounts payable and accrued liabilities, approximate the related fair values due to the short-term maturities of these instruments.

Impairment of Long-Lived Assets

In accordance with GAAP, if indicators of impairment exist, we assess the recoverability of the affected long-lived assets by determining whether the carrying value of such assets can be recovered through undiscounted future operating cash flows. If impairment is indicated, we measure the amount of such impairment by comparing the carrying value of the asset to the fair value of the asset and we record the impairment as a reduction in the carrying value of the related asset and a charge to operating results. Estimating the undiscounted future cash flows associated with long-lived assets requires judgment, and assumptions could differ materially from actual results. During the threeAs of April 30, 2020 and six months ended JanuaryJuly 31, 2018 and 2017,2019, no impairment of long-lived assets was indicated or recorded.

7. Fair Value of Financial Instruments

Fair value is defined as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, the authoritative guidance establishes a three-tier value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

In connection with the October and November 2015 Private Placements, we issued warrants with derivative features. These instruments were accounted for as derivative liabilities (See Note 8 to these condensed consolidated financial statements).

We used Level 3 inputs for the valuation methodology of the derivative liabilities. The estimated fair values were computed using a Monte Carlo option pricing model based on various assumptions. Our derivative liabilities are adjusted to reflect estimated fair value at each period end, with any decrease or increase in the estimated fair value being recorded in other income or expense accordingly, as adjustments to the fair value of the derivative liabilities. Various factors are considered in the pricing models we use to value the warrants, including the Company’s current stock price, the remaining life of the warrants, the volatility of the Company’s stock price, and the risk free interest rate.

The following table provides a reconciliation of the beginning and ending balances of the derivative liabilities for the six months ended January 31, 2018:

Fair Value of Significant Unobservable Inputs (Level 3)

8. Derivative Liabilities

On October 23, 2015, we completed a first closing of a private placement financing (the “2015 Private Placement Financing”), where we issued, among other securities, a warrant to purchase up to an aggregate of 6,666,666 shares of common stock with a term of five years and a warrant to purchase up to an aggregate of 8,666,666 shares of common stock with a term of six months.

On November 23, 2015, we completed a second and final closing of the 2015 Private Placement Financing, where we issued, among other securities, a warrant to purchase up to an aggregate of 2,222,217 shares of common stock with a term of five years and a warrant to purchase up to an aggregate of 2,820,670 shares of common stock with a term of six months.

We accounted for the combined 20,376,219 warrants issued in connection with the 2015 Private Placement Financing in accordance with the accounting guidance for derivatives. The applicable accounting guidance sets forth a two-step model to be applied in determining whether a financial instrument is indexed to an entity’s own stock, which would qualify such financial instruments for a scope exception. This scope exception specifies that a contract that would otherwise meet the definition of a derivative financial instrument would not be considered as such if the contract is both (i) indexed to the entity’s own stock and (ii) classified in the stockholders’ equity section of the entity’s balance sheet. We determined the warrants were ineligible for equity classification due to anti-dilution provisions set forth therein.

During the fiscal year ended July 31, 2016, (i) all 2,820,670 of the six-month warrants issued in the second and final closing were exercised, (ii) the six-month warrants issued in the first closing expired and (iii) the five-year warrants issued in the first closing were cancelled.

On September 25, 2017, we completed the first closing of a tender offer (the “Tender Offer”) to amend and exercise outstanding warrants to purchase shares of our common stock held by the investors participating in the 2015 Private Placement Financing and our 2014 and 2017 private placement financings the investors participating in our 2014, 2015 and 2017 private placement financings. As a result, 1,599,135 warrants issued in connection with the 2015 Private Placement Financing were exercised for cash. In addition, there was a net exercise on 118,057 warrants which resulted in the issuance of 63,811 shares of our common stock. The net exercised warrants were issued in connection with the 2015 Private Placement Financing. The change in fair value of the warrant liabilities on September 25, 2017 was recorded as a change in derivative liabilities in the condensed consolidated statements of operations. The fair value on the exercise date was returned to additional paid in capital and is reflected in the settlement of warrant liability section on the table in Note 7. The following assumptions were used as inputs to the fair value model at September 25, 2017: stock price of $1.00 per share and a warrant exercise price of $0.45 per share as of the valuation date; our historical stock price volatility of 70.00%; risk free interest rate on U.S. treasury notes of 1.6%; warrant expiration of 3.2 years (See Note 9 to these condensed consolidated financial statements).

On October 10, 2017, we completed a second and final closing of the Tender Offer. As a result, 268,909 warrants issued in connection with the 2015 Private Placement Financing were exercised. The change in fair value of the warrant liabilities on October 10, 2017 was recorded as a change in derivative liabilities in the condensed consolidated statements of operations. The fair value on the exercise date was returned to additional paid in capital and is reflected in the settlement of warrant liability section on the table in Note 7. The following assumptions were used as inputs to the fair value model at October 10, 2017: stock price of $1.03 per share and a warrant exercise price of $0.45 per share as of the valuation date; our historical stock price volatility of 70.00%; risk free interest rate on U.S. treasury notes of 1.6%; warrant expiration of 3.1 years (See Note 9 to these condensed consolidated financial statements).

During the six months ended January 31, 2018, all remaining warrants containing derivative features issued in connection with the 2015 Private Placement Financing were exercised.

As of January 31, 2018, the total value of the derivative liabilities was zero. The change in fair value of the warrant liabilities for the six months ended January 31, 2018 and 2017, was a decrease of $459,000 and $300,000, respectively, which was recorded as a change in derivative liabilities in the condensed consolidated statements of operations. The change in fair value of the warrant liabilities for the three months ended January 31, 2018 and 2017, was zero and a decrease $459,000, respectively, which was recorded as a change in derivative liabilities in the condensed consolidated statements of operations.indicated.

9. Stockholders’ EquityConcentrations

Preferred StockGross sales

As. For the three months ended April 30, 2020, two individual customers accounted for 22% and 11% of January 31, 2018,our net product sales, respectively. For the Company’s Boardnine months ended April 30, 2020, two individual customers accounted for 17% and 12% of Directors is authorized to issue 5,000,000 sharesour net product sales, respectively. For the three months ended April 30, 2019, two individual customers accounted for 13% and 12% of preferred stock with a par valueour net product sales. For the nine months ended April 30, 2019, two individual customers accounted for 12% and 11% of $0.01 per share, in one or more series. As of January 31, 2018 and July 31, 2017, there were no shares of preferred stock issued and outstanding.our net product sales, respectively.

Common StockAccounts receivable.As of April 30, 2020, we had accounts receivable from three customers that comprised of 17%, 11% and 10% of total accounts receivable, respectively. As of April 30, 2019, we had accounts receivable from two customers that comprised of 17%, and 11% of total accounts receivable, respectively.

Purchases. For the three months ended April 30, 2020, one vendor accounted for 63% of our purchases. For the nine months ended April 30, 2020, one vendor accounted for 45% of our purchases. For the three months ended April 30, 2019, one vendor accounted for 13% of our purchases. For the nine months ended April 30, 2019, one vendor accounted for 17% of our purchases.

Accounts payable.As of January 31, 2018, 100,000,000 sharesApril 30, 2020, one vendor accounted for 63% of common stock with a par valuethe total trade accounts payable. As of $0.01 per share are authorizedApril 30, 2019, two vendors accounted for issuance.15% of the total trade accounts payable.

Schedule TO and Warrant ExercisesReclassification

On October 10, 2017, we closedFor the Tender Offer. Specifically, we filed a Schedule TO withthree and nine months ended April 30, 2020, share-based compensation expense of $46,000 and $593,000 has been included in selling, general and administrative expense to conform to current period presentation, respectively. This reclassification did not have an impact on our results of operations or financial condition for the SEC on August 25, 2017 offering to (i) reduce the exercise price of the warrants to purchase 4,104,980 shares of Common Stock issued to investors participating in our private placement financing completed on August 29, 2014, as amended (the “2014 Warrants”) from $0.75 per share to $0.60 per share of Common Stock in cash, (ii) reduce the exercise price of outstanding warrants to purchase 1,986,101 shares of Common Stock issued to investors participating in our private placement financing completed on November 23, 2015 (the “2015 Warrants”) from $0.45 per share to $0.40 per share of Common Stock in cash, (iii) reduce the exercise price of the outstanding warrants to purchase 1,572,941 shares of Common Stock issued to investors participating in our private placement financing completed on January 23, 2017 (the “2017 Warrants”, together with the 2014 Warrantsthree and 2015 Warrants, the “Original Warrants”) from $1.25 per share to $0.85 per share of Common Stock in cash, (iv) shorten the exercise period of the Original Warrants so that they expired concurrently with the expiration of the Offer to Amendnine months ended April 30, 2020 and Exercise at 5:00 p.m. (Pacific Time) on September 25, 2017 (“Expiration Date”) unless extended until the Subsequent Expiration Date (as defined below), (v) delete the cashless exercise provisions in the Original Warrants and (vi) delete the price-based anti-dilution provisions contained in the 2015 Warrants.

2019.

Additionally,4. Recent Accounting Pronouncements

In June 2016, the FASB issued ASU No. 2016-13, Credit Losses - Measurement of Credit Losses on Financial Instruments (“ASC 326”). The standard significantly changes how entities will measure credit losses for most financial assets, including accounts and notes receivables. The standard will replace today’s “incurred loss” approach with an “expected loss” model , under which companies will recognize allowances based on expected rather than incurred losses. Entities will apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. As small business filer, the standard will be effective for us for interim and annual reporting periods beginning after December 15, 2022. The Company is currently assessing the impact of adopting this standard on the Company’s financial statements and related disclosures.

Recent accounting pronouncements issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified Public Accountants, and the Securities and Exchange Commission did not or are not believed by management to have a material impact on the Company’s present or future consolidated financial statement presentation or disclosures.

5. Stockholders’ Equity

Private Placement Financing – Fiscal Year 2020

On October 2, 2019, we requested the holdersentered into and completed a closing (the “Closing”) of a majorityprivate placement financing to accredited investors. We raised net proceeds of $830,000 in the Closing of an aggregate of 2,862,068 shares of our common stock at a purchase price of $0.29 per share, the closing sales price of our common stock on the date prior to the Closing. The Shares issued in the private placement financing were issued pursuant to a securities purchase agreement entered into with the investors. Tom Y. Lee and Dale Okuno, each of whom are accredited investors and members of the Company’s Board of Directors invested $290,000 and $250,000, respectively, in the private placement financing. Mr. Lee also serves as the Company’s President and Chief Executive Officer.

The net proceeds to us from the Closing, after deducting the forgoing fees and other offering expenses, were $830,000. We expect to use the net proceeds for general corporate purposes, including our research and development efforts, and for general administrative expenses and working capital.

On March 9, 2020, we entered into a Securities Purchase Agreement (the “Purchase Agreement”) with various accredited investors with respect to a private placement financing (the “Private Placement”) and simultaneously completed the closing (the “Closing”) of the Private Placement. We raised net proceeds of approximately $2,000,000 in the Private Placement for an aggregate of 6,896,551 shares of our common stock (the “Shares”) at a purchase price of $0.29 per share. The per share purchase price was approved by our Board of Directors on February 24, 2020 and represents a 20% discount to the closing price of the Company’s common stock on that date. Tom Y. Lee, Dale Okuno and Ivan Chen, each of whom are accredited investors and members of the Company’s Board of Directors, invested $650,500, $450,000 and $52,000, respectively, in the Private Placement. Mr. Lee also serves as the Company’s President and Chief Executive Officer.

The net proceeds to us from the Private Placement, after deducting estimated fees and other offering expenses, were approximately $2,000,000. We expect to use the net proceeds for general corporate purposes, including our research and development efforts, and for general administrative expenses and working capital.

The issuance and sale of the Shares was not registered under the Securities Act of 1933, as amended (the “Securities Act”), and these Shares may not be offered or sold in the United States absent registration under or exemption from the Securities Act and any applicable state securities laws. The Shares were issued and sold in reliance upon an exemption from registration afforded by Section 4(a)(2) of the Securities Act and Rule 506 of Regulation D promulgated under the Securities Act. The Investors represented to the Company that each was an “accredited investor” within the meaning of Rule 501 of Regulation D under the Securities Act, and that each was receiving the Shares for investment for its own account and without a view to distribute them.

Private Placement Financing – Fiscal Year 2019

On August 16, 2018, we completed a Closing of a private placement financing to accredited investors. We raised approximately $1.5 million in the Closing and issued an aggregate of 3,333,964 shares of our common stock at a purchase price of $0.45 per share, including the conversion of approximately $0.5 million held in the form of a promissory note as of July 31, 2018. The shares issued in the private placement financing were issued pursuant to a securities purchase agreement entered into with the investors. Mr. Tom Y. Lee, a member of the Company’s Board of Directors invested approximately $1.0 million through his affiliates, including approximately $0.5 million of cash and the cancellation of existing indebtedness in the amount of approximately $0.5 million that was held in the form of a promissory note payable as of July 31, 2018.

The net proceeds to us from the Closing (including the cancellation of indebtedness), after deducting fees and other offering expenses, were approximately $1.5 million.

The issuance and sale of the shares issuablewas not registered under the Securities Act of 1933, as amended (the “Securities Act”), and these shares may not be offered or sold in the United States absent registration under or exemption from the Securities Act and any applicable state securities laws. The shares were issued and sold in reliance upon an exemption from registration afforded by Section 4(a)(2) of the Securities Act and Rule 506 of Regulation D promulgated under the Securities Act. The Investors represented to the Company that each was an “accredited investor” within the meaning of Rule 501 of Regulation D under the Securities Act, and that each was receiving the shares for investment for its own account and without a view to distribute them.

Warrant Financing – Fiscal Year 2019

On February 19, 2019, we entered into warrants amendments (each a “Warrant Amendment”, and together, the “Warrant Amendments”) with three holders of warrants to purchase the Company’s common stock issued in August 2014 (the “2014 Warrants”). The Warrant Amendments provided (i) for a reduction in the exercise price from $0.75 to $0.35 and (ii) that 2014 Warrants would expire unless otherwise exercised on the date of the Warrant Amendments. In connection with the execution of the Warrant Amendments, on February 19, 2019, the holders exercised the 2014 Warrants (the “2014 Requisite Majority”), 2015 Warrants (the “2015 Requisite Majority”) and 2017 Warrants (the “2017 Requisite Majority”) to approvepurchase 2,399,999 shares of common stock for an amendmentaggregate exercise price of all$840,000.

Tom Lee, the Company’s Chairman of the outstandingBoard, and beneficial holder of a 2014 Warrants, 2015 Warrants and 2017 Warrants, respectively,Warrant to amend such Original Warrants in the same manner as set forth above (the “Aggregate Warrant Amendment”), except the Expiration Date would be extended until October 10, 2017 (the “Subsequent Expiration Date”) if such Aggregate Warrant Amendment was approved with respect to such class of Original Warrants. The 2015 Requisite Majority approved an amendment of all of the outstanding 2015 Warrants and holders of 2015 Warrants had until the Subsequent Expiration Date to exercise their 2015 Warrants (the “Subsequent Offer Period”).

The Offer to Amend and Exercise with respect to the 2014 Warrants and 2017 Warrants expired on the Expiration Date of September 25, 2017. As of September 25, 2017, 1,491,649purchase 2,133,333 shares of Common Stock, were issued uponentered into a Warrant Amendment and exercised his 2014 Warrant for an aggregate exercise price of $746,666. Additionally, Dale Okuno, a member of the Company’s Board of Directors, and beneficial holder of a 2014 Warrants, 1,599,135Warrant to purchase 213,333 shares of Common Stock, were issued upon exercise of 2015 Warrantsentered into a Warrant Amendment and 1,396,470 shares of Common Stock were issued upon exercise of 2017 Warrants,exercised his 2014 Warrant for aggregate gross proceeds to us of approximately $2,720,000. During the Subsequent Offer Period, 2015 Warrants to purchase 268,909 shares of Common Stock were exercised for aggregate gross proceeds to us of approximately $107,000. 2014 Warrants to purchase 2,533,331 shares of Common Stock and 2017 Warrants to purchase 176,471 shares of Common Stock at exercise prices of $0.75 per share and $1.25 per share, respectively, continue to remain outstanding and no 2015 Warrants remain outstanding.

Original Warrants (including 2015 Warrants exercised during the Subsequent Offer Period) to purchase an aggregate exercise price of 4,756,163 shares of Common Stock were tendered and exercised in the Offer to Amend and Exercise for aggregate net proceeds to us of approximately $2,632,000. Garden State Securities Inc. assisted the Company as warrant solicitation agents with respect to the 2017 Warrants.$74,666.

Due to the reduction in exercise price for the Original2014 Warrants issued in connection with the Schedule TO,Warrant Amendment, we determined it was appropriate to record $876,000$960,000 of expense in the 2019 condensed consolidated statement of operations for the inducement to exercise the Original2014 Warrants.

Additional Warrant Exercise

Other Activity

OnDuring the three months ended October 1,31, 2017, we entered into a two-year service agreement for business development services. In accordance with the agreement we issued 50,000 shares of common stock, with a value of $51,000. The value was capitalized to prepaid expense and is being amortized over the term of the agreement. During the three and sixnine months ended January 31, 2018,April 30, 2020, we recognized zero and $4,000 of expense related to these services, respectively. During the three and nine months ended April 30, 2019, we recognized $6,000 and $8,000$19,000 of expense related to these services, respectively.

On April 13, 2016, we entered into a two-year service agreement for general financial advisory services. In accordance with the agreement we issued 250,000 shares of common stock, with a value of $290,000. The value was capitalized to prepaid expense and is being amortized over the term of the agreement. During the three and six months ended January 31, 2018, we recognized $36,000 and $73,000 of expense related to these services, respectively. In addition, during the three and six months ended January 31, 2017, we recognized $36,000 and $72,000 of expense related to these services, respectively.

10.6. Share-Based Compensation

Restricted Stock Units

During the six months ended January 31, 2018, the Compensation Committee of the Board of Directors authorized the issuance of 300,000 Restricted Stock UnitsThe Company issues restricted stock unit awards (“RSUs”) to newly appointed members of our board of directors.key management and as compensation for services to consultants and others. The RSUs typically vest over a two-year period and carry a ten-year term. Each RSU represents the right to receive one share of common stock, issuable at the time the RSU is delivered and subsequently settles, as set forth in the Restricted Stock Unit Agreement.The breakdown isCompany determines that fair value of those awards at the date of grant, and amortizes those awards as follows:an expense over the vesting period of the award. The shares earned under the grant are usually issued when the award settles at the end of the term.

As of July 31, 2019, the Company had granted 1,912,500 RSU’s of which 1,456,250 had vested. As of July 31, 2019, 456,250 RSU’s with a fair value of $211,200, remained unvested. None of the shares vested under the RSUs had been issued as of July 31, 2019.

During the nine month period ended April 30, 2020, the Company recognized $49,000 of compensation cost relating to the shares vesting during the period. In addition, the Company accelerated the vesting of 400,000 shares of stock issued to Henry R. Lambert with a remaining value of $162,000 upon his retirement during the period. In total, the Company recognized $211,000 from the vesting of these restricted stock units. For the nine months ended April 30, 2019 share-based compensation expense for RSUs was $1,007,000, of which $489,000 was due the accelerated vesting of RSU’s held by Dave Pfanzelter, the former Chairman of our Board. Mr. Pfanzelter retired from our Board in August 2018.

During the nine months ended April 30, 2020 there were no Restricted Stock Units granted, and 400,000 shares were settled and delivered to Mr. Lambert upon his retirement. At April 30, 2020, all outstanding RSUs were fully vested with no unrecognized non-cash compensation expense remaining.

As of April 30, 2020, 1,512,500 RSUs are issuable. These RSUs are issued upon settlement date which is defined as “for each Vested Unit, the earliest of (i) the ten-year anniversary of the Grant Date; (ii) sixty days after the date the Grantee’s Service ceases for any reason and such cessation constitutes a “separation from service” within the meaning of Section 409A of the Code; (iii) the date of Grantee’s death or (iv) the date of a Change in Control that constitutes a “change in control event” within the meaning of Section 409A of the Code”.

DuringA summary of our restricted stock unit activity and related data is as follows:

All of the six months ended January 31, 2018, we issued 300,0001,512,500 RSUs to purchaseoutstanding as of April 30, 2020 are fully vested and the underlying common stock to third-party consultants for business development services. The RSUs vest based on performance conditions if sales milestones are achieved. We currently do not expect the 300,000 RSUs to vest.

Of the 2,260,000 unvested RSUs outstanding, we currently expect 1,075,000 to vest. As of January 31, 2018, there was $1,160,000 of unrecognized non-cash compensation cost related to RSUs we expect to vest, which will be recognized over a weighted average period of 2.86 years. During the three and six months ended January 31, 2018, 375,000 and 425,000 RSUs vested, based on service conditions, respectively. Of the 425,000 RSUs that vested during the six months ended January 31, 2018, 375,000 shares havehas not been delivered and remainremains outstanding, as set forth in the RSU agreements.

For the three months ended January 31, 2018 and 2017, share-based compensation expense for RSUs was $284,000 and $24,000, respectively. For the six months ended January 31, 2018 and 2017, share-based compensation expense for outstanding RSUs was $545,000 and $75,000, respectively.

RSU Termination

On December 13, 2016, we entered into an RSU Cancellation Agreement with our officers and directors who received RSUs in October 2013 as compensation for their continued services to us over a required vesting period. Under this Agreement, our officers and directors agreed to cancel RSUs representing the right to receive an aggregate of 3.9 million vested shares of our common stock. Pursuant to the terms of the cancelled RSUs, we would have been required to settle and deliver these vested shares to the individual officers and directors prior to January 1, 2017, which would have triggered a taxable event. Our officers and directors, in their individual capacities, voluntarily agreed to cancel their respective RSUs based on their determination that cancelling the RSUs would be in the best interests of the Company and our stockholders. The individual officers and directors reached this conclusion for the following reasons:

Each of our officers and directors who are parties to the RSU Cancellation Agreement agreed to cancel their RSUs and the shares of common stock underlying the RSUs in their individual capacities as stockholders and equity award holders, and without any agreement or promise from us or our officers or directors to issue them equity, equity-based awards or cash compensation in the future in exchange for entering into the Agreement.

During the six months ended January 31, 2017, $87,000 of pre-vest expense was reversed as a result of the RSU cancelation.

Stock Option Plans

2007 Equity Incentive Plan

In February 2016, we amended and restated our 2007 Equity Incentive Plan, the (“2007 Plan”), to, among other changes, increase the number of shares of common stock issuable under the 2007 Plan by 4,000,000 shares and extend the term of the 2007 Plan until February 4, 2026. The 2007 Plan provides for the grant of incentive and non-qualified stock options, as well as other share-based payment awards, to our employees, directors, consultants and advisors. These awards have up to a 10-year contractual life and are subject to various vesting periods, as determined by the Compensation Committee of the Board of Directors. As of January 31, 2018,April 30, 2020, there were approximately 561,0001,185,000 shares available for issuance under the 2007 Plan.

2017 Equity Incentive Plan

Approved byOur shareholders approved our shareholders in January 2018, the 2017 Equity Incentive Plan the (“2017(the “2017 Plan”), in January 2018, which has a share reserve of 5,000,000 shares of common stock whichthat were registered under a Form S-8 filed with the SEC in February 2018. The 2017 Plan provides for the grant of incentive and non-qualified stock options, as well as other share-based payment awards, to our employees, directors, consultants and advisors. These awards have up to a 10-year contractual life and are subject to various vesting periods, as determined by the Compensation Committee of the Board of Directors. As of January 31, 2018,April 30, 2020, there were 5,000,000approximately 831,000 shares available for issuance under the 2017 Plan.

During the sixnine months ended January 31, 2018,April 30, 2020, the Compensation Committee of the Board of Directors authorized the issuance of 400,0001,240,000 stock options to newly appointed membersour employees, officers and directors with a fair value of our board$265,000 as determined by the Black Scholes option pricing model. The vesting terms of directors.Each option represents the right to receiveoptions vary between one share of common stock, issuable at the time the option is exercised, as set forth in the option agreement. The breakdown is as follows:

During the six months ended January 31, 2017, we issued 100,000 options to purchase common stock to a member of our Scientific Advisory Board. The options vested quarterly over one yearand two years and carry a five-yearten year term.

None of the options granted to our directors were granted pursuant to any compensatory, bonus, or similar plan maintained or otherwise sponsored by the Company.

A summary of our stock option activity is as follows:

The weighted-average remaining contractual term of options outstanding at January 31, 2018April 30, 2020 was 5.454.7 years.

For the nine months ended April 30, 2020 share-based compensation expense for stock options was $382,000. For the six months ended April 30, 2019 share-based compensation expense for stock options was $1,330,000, of which $739,000 was due the accelerated vesting of stock options held by Dave Pfanzelter, the former Chairman of our Board. Mr. Pfanzelter retired from our Board in August 2018.

At January 31, 2018,April 30, 2020, options to purchase 4,072,3437,355,417 shares of common stock were exercisable. These options had a weighted-average exercise price of $1.28, an aggregate intrinsic value of $58,000,$0.99 and a weighted average remaining contractual term of 3.824.01 years. The weighted average grant date fair value for options granted during the sixnine months ended January 31, 2018April 30, 2020 was $0.81.$0.21. The total unrecognized compensation cost related to unvested stock option grants as of January 31, 2018April 30, 2020 was approximately $1,406,000$205,000 and the weighted average period over which these grants are expected to vest is 3.131.47 years.

For the three months ended January 31, 2018 and 2017, share-based compensation expense for stock options was $456,000 and $234,000 respectively. For the six months ended January 31, 2018 and 2017, share-based compensation expense for stock options was $851,000 and $460,000 respectively.

We use the Black-Scholes valuation model to calculate the fair value of stock options. Stock-based compensation expense is recognized over the vesting period using the straight-line method. The fair value of stock options was estimated at the grant date using the following weighted average assumptions:

Volatility is the measure by which our stock price is expected to fluctuate during the expected term of an option. Volatility is derived from the historical daily change in the market price of our common stock, as we believe that historical volatility is the best indicator of future volatility.

The risk-free interest rates used in the Black-Scholes calculations are based on the prevailing U.S. Treasury yield as determined by the U.S. Federal Reserve.

We have never paid dividends on our common stock and do not anticipate paying dividends on our common stock in the foreseeable future. Accordingly, we have assumed no dividend yield for purposes of estimating the fair value of our share-based compensation.

The weighted average expected life of options was estimated using the average ofbetween the contractual term and the weighted average vesting term of the options. Certain options granted to consultants are subject to variable accounting treatment and are required to be revalued until vested.

Stock-based compensation expense7. Related Party Transactions

As of April 30, 2020 and July 31, 2019, accounts payable include $60,000 in board fees due to officers and directors, respectively. Additionally, as of April 30, 2020, $124,000 was due to the company from the sale of product to Harmony Bioscience, Inc. PURE Chairman and CEO Tom Y. Lee is based on awards ultimately expectedan affiliate of Harmony Bioscience.

8. Commitments and Contingencies

The global outbreak of COVID-19 has led to vest,severe disruptions in general economic activities, as businesses and therefore is reduced by expected forfeitures.federal, state, and local governments take increasingly broad actions to mitigate this public health crisis. We have not hadexperienced a material disruption to our business. However, on a go-forward basis, we cannot guarantee the overall economic conditions will not effect our business, as these conditions may significantly negatively impact all aspects of our business. Our business is dependent on the continued health and productivity of our employees, including our sales staff and corporate management team. Individually and collectively, the consequences of the COVID-19 outbreak could have a material adverse effect on our business, sales, results of operations and financial condition.

Additionally, our liquidity could be negatively impacted if these conditions continue for a significant forfeituresperiod of stock options grantedtime and we may be required to employeespursue additional sources of financing to obtain working capital, maintain appropriate inventory levels, and directorsmeet our financial obligations. Currently, capital and credit markets have been disrupted by the crisis and our ability to obtain any required financing is not guaranteed and largely dependent upon evolving market conditions and other factors. Depending on the continued impact of the crisis, further actions may be required to improve our cash position and capital structure.

The extent to which the COVID-19 outbreak ultimately impacts our business, sales, results of operations and financial condition will depend on future developments, which are highly uncertain and cannot be predicted, including, but not limited to, the duration and spread of the outbreak, its severity, the actions to contain the virus or treat its impact, and how quickly and to what extent normal economic and operating conditions resume and, more specifically, the effect it has on our customers and suppliers. Even after the COVID-19 outbreak has subsided, we may experience significant impacts to our business as a significant numberresult of its global economic impact, including any economic downturn or recession that has occurred or may occur in the future.

9. Subsequent Events

On May 15, 2020, we entered into an initial one-year manufacturing supply and license agreement with Packers Sanitation Services, Inc. (“PSSI”) with a four-year renewal term option (the “Supply and License Agreement”). The Supply and License Agreement consists of packaging, promotion, advertising, and distribution of PURE’s SDC-based products.

Pursuant to the Supply and License Agreement, we granted an exclusive license to our patents and technology know-how for packaging, promotion, advertising, and distribution of our historical stock option grants were fully vested at issuance or were issued with short vesting provisions. Therefore, weSDC-based products to PSSI and PSSI will have estimated the forfeiture rateright to appoint sub-licensees to promote, advertise, distribute, and sell licensed products. Additionally, the Supply and License Agreement provides that PSSI will be our exclusive distributor for hard surface disinfection, sanitization and cleaning of protein food processing. PSSI has also agreed to be the non-exclusive distributor of our outstanding stock options as zero.SDC-based products for hard surface disinfection, sanitization and cleaning of non-residential buildings, food and beverage manufacturing and processing facilities, food service facilities, non-food processing facilities, and education facilities. The exclusive license is contingent on PSSI purchasing certain quantities of our SDC-based products at a fixed price. The Supply and License Agreement contains certain customary representations of the parties and customary indemnification provisions and liability limitations and may be terminated by either party upon the material breach of the terms of the agreement by the other party, or if the other party becomes insolvent.

11. Recent Accounting Pronouncements

In July 2017, the Financial Accounting Standards Board (“FASB”) issued a two-part Accounting Standards Update (“ASU”) No. 2017-11, I. Accounting for Certain Financial Instruments With Down Round Features and II. Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests With a Scope Exception (“ASU 2017-11”). ASU 2017-11 amends guidance in FASB ASC 260, Earnings Per Share, FASB ASC 480, Distinguishing Liabilities from Equity, and FASB ASC 815, Derivatives and Hedging. The amendments in Part I of ASU 2017-11 change the classification analysis of certain equity-linked financial instruments (or embedded features) with down round features. The amendments in Part II of ASU 2017-11 re-characterize the indefinite deferral of certain provisions of Topic 480 that now are presented as pending content in the Codification, to a scope exception. Those amendments do not have an accounting effect. ASU 2017-11 is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. We are evaluating the effect that this update will have on our consolidated financial statements and related disclosures.

In May 2014, the FASB issued ASU 2014-09,Revenue from Contracts with Customers (Topic 606) which amended the existing accounting standards for revenue recognition. ASU 2014-09 establishes principles for recognizing revenue upon the transfer of promised goods or services to customers, in an amount that reflects the expected consideration received in exchange for those goods or services. In July 2015, the FASB deferred the effective date for annual reporting periods beginning after December 15, 2017. We will adopt ASU 2014-09 in the first fiscal quarter of 2019. We currently do not have any material revenue contracts with customers and will review any new contracts entered into prior to the adoption of the new standard. We are evaluating the effect that this update will have on our consolidated financial statements and related disclosures.

In December 2017, the United States (“U.S.”) enacted the Tax Cuts and Jobs Act (the “2017 Act”), which changes existing U.S. tax law and includes various provisions that are expected to affect public companies. The 2017 Act (i) changes U.S. corporate tax rates, (ii) generally reduces a company’s ability to utilize accumulated net operating losses, and (iii) requires the calculation of a one-time transition tax on certain previously unrepatriated foreign earnings and profits (“E&P”). The 2017 Act will also impact estimates of a company’s deferred tax assets and liabilities. We are currently in the early stages of evaluating the financial statement impact of the 2017 Act. Based on initial assessments, we expect significant adjustments to our gross deferred tax assets and liabilities; however, we also expect to record a corresponding offset to our estimated full valuation allowance against our net deferred tax assets, which should result in minimal net effect to our provision for income taxes. In accordance with SEC issued guidance under Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB 118”), we have not recorded any provisional income tax effects of the 2017 Act in our financial statements as our anticipated impact is minimal and we do not have the necessary information available, prepared or analyzed (including computations) in reasonable detail to complete accounting for the change in tax law.

12. Subsequent Events

None.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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

The discussion in this section contains forward-looking statements. These statements relate to future events or our future financial performance. We have attempted to identify forward-looking statements by terminology such as “anticipate,” “believe,” “can,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “should,” “would” or “will” or the negative of these terms or other comparable terminology, but their absence does not mean that a statement is not forward-looking. These statements are only predictions and involve known and unknown risks, uncertainties and other factors, which could cause our actual results to differ from those projected in any forward-looking statements we make. Several risks and uncertainties we face are discussed in more detail under “Risk Factors” in Part II, Item 1A of this Quarterly Report or in the discussion and analysis below. You should, however, understand that it is not possible to predict or identify all risks and uncertainties and you should not consider the risks and uncertainties identified by us to be a complete set of all potential risks or uncertainties that could materially affect us. You should not place undue reliance on the forward-looking statements we make herein because some or all of them may turn out to be wrong. We undertake no obligation to update any of the forward-looking statements contained herein to reflect future events and developments, except as required by law. The following discussion should be read in conjunction with the condensed consolidated financial statements and the notes to those condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.

Overview

We are focused on developing and commercializing proprietary antimicrobial products that provide safe and cost-effective solutions to the health and environmental challenges of pathogen and hygienic control. Our technology platform is based on patented stabilized ionic silver, and our initial products contain silver dihydrogen citrate, or SDC. SDC is a broad-spectrum, non-toxic antimicrobial agent, which offers 24-hour residual protection and formulates well with other compounds. As a platform technology, we believe SDC is distinguished from existing products in the marketplace because of its superior efficacy, reduced toxicity, non-causticity, and the inability of bacteria to form a resistance to it.

We do not currently believe that our existing cash resources are sufficient to meet our anticipated needs over the next twelve months from the date hereof and based on our current plans and available resources, we believe we can maintain our current operations through the end of July 2018.  As a result, to continue to fund our ongoing operations, beyond July 2018, we would need to secure significant additional capital. If we were unable to secure additional capital on a timely basis or at all, we will be required to curtail our current business plans and substantially reduce our expenses and development costs such as reducing our headcount and limiting our sales and marketing efforts and may ultimately be required to cease operations altogether. Moreover, our expenses may exceed our current plans and expectations, which would require us to secure additional capital or wind-down our operations sooner than anticipated. 

Business Overview

Our SDC-based technology platform has potential application in a number of industries. Our near-term focus is on offering products that address food safety risks across the food industry supply chain. In 2011, the Centers for Disease Control and Prevention (CDC) reported that foodborne illnesses affect more than 48 million people annually in the U.S., causing 128,000 hospitalizations and 3,000 fatalities. The CDC estimated that more than 9 million of these foodborne illnesses were attributed to major pathogens. The CDC reported that contaminated produce was responsible for approximately 46% of the foodborne illnesses caused by pathogens and 23% of the foodborne illness-related deaths in the US between 1998 and 2008. Among the top pathogens contributing to foodborne illness in the U.S. are Norovirus,Salmonella,Campylobacter,Staphylococcus, Shiga toxin–producingEscherichia coli andListeria.Salmonella is the leading cause of hospitalization, followed by Norovirus, and is the leading cause of deaths related to foodborne illness.

Based on these statistics, we believe there is a significant market opportunity for our safe, non-toxic and effective SDC-based solutions. We currently offer PURE^® Hard Surface as a food contact surface sanitizer and disinfectant to restaurant chains, food processors, and food transportation companies. We also offer PURE Control^® as a direct food contact processing aid. We received the required FDA approvals to market PURE Control^® as a direct food contact processing aid for raw poultry and fresh produce in December 2015 and January 2016, respectively. Because additional USDA approval was not required, we began marketing PURE Control as a direct food contact processing aid for fresh produce following our receipt of FDA approval in January 2016.

In July 2016, we received a “No Objection Letter” from the USDA’s Food Safety and Inspection Service (FSIS) granting approval for SDC-based PURE Control to be used as a spray or dip applied to poultry carcasses, parts and organs in pre-OLR (on-line reprocessing) and post chill processing of fresh poultry. In January 2017, we submitted an additional FCN to the FDA to allow use of higher SDC concentrations in poultry processing, allowing the flexibility to adjust to varying plant and processing conditions. In May 2017, we received a Final Letter from the FDA for this FCN as well as a “No Objection Letter” from the USDA’s Food Safety and Inspection Service (FSIS) granting approval for the higher concentrations of SDC-based PURE Control to be used as a spray or dip applied to poultry carcasses, parts and organs in pre-OLR (on-line reprocessing) and post chill processing of fresh poultry. We are currently focused on completing in-plant validation trials for PURE Control in pre- and post OLR poultry processing applications, which represents approximately 6565% to 75% of the total processing aid market for poultry processing. We are also conducting in-plant trialscontinuing to optimize the application of PURE Control in OLR to attempt to gain USDA approval for use in this stage of poultry processing.

Subject to the results of our focused in-plant validation efforts for our approved produce and poultry solutions, we intend to seek approval to utilize PURE Control as a direct food contact processing aid for raw meats, including beef and pork. In addition to our direct sales efforts with PURE Hard Surface and PURE Control, we market and sell our SDC-based products indirectly through third-party distributors.

Recent Events Related to COVID-19

The global outbreak of COVID-19 has led to severe disruptions in general economic activities, as businesses and federal, state, and local governments take increasingly broad actions to mitigate this public health crisis. As a result, we have addressed the ongoing pandemic’s impact, including taking precautionary measures and making operational adjustments where necessary. The impact of COVID-19 and responses of governments, businesses, consumers, and others to the pandemic are affecting our business in various ways; however, we believe that the actions we are taking will help us emerge from this global pandemic in a position for long-term growth.

While we have experienced some delays related to final third-party validation of certain of our products and product rollouts by customers using PURE Control, we have not experienced a material disruption in our business. Additionally, we have significantly increased our manufacturing production capacity due to increased and continued demand for our products. Additionally, to date, we have had no material disruption in our access to necessary raw materials or with our distribution network.

Our business is dependent on the continued health and productivity of our employees, including our sales staff and corporate management team. Individually and collectively, the consequences of the COVID-19 outbreak could have a material adverse effect on our business, sales, results of operations and financial condition.

Additionally, our liquidity could be negatively impacted if these conditions continue for a significant period of time and we may be required to pursue additional sources of financing to obtain working capital, maintain appropriate inventory levels, and meet our financial obligations. Currently, capital and credit markets have been disrupted by the crisis and our ability to obtain any required financing is not guaranteed and largely dependent upon evolving market conditions and other factors. Depending on the continued impact of the crisis, further actions may be required to improve our cash position and capital structure.

For further discussion of the possible impacts of the COVID-19 pandemic on our business, financial conditions and results of operations, see “Risk Factors” in Part II, Item 1A of this Report.

Business Strategy

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

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

Liquidity & Going Concern Update

Our condensed consolidated financial statements have been prepared and presented on a basis assuming we will continue as a going concern. The factors below raise substantial doubt about our ability to continue as a going concern. The condensed consolidated financial statements do not include any adjustments that might be necessary from the outcome of this uncertainty.

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. We have a history of recurring losses, and as of January 31, 2018, we have incurred a cumulative net loss of $113,848,000.

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 January 31, 2018, we had $2,129,000 in cash and cash equivalents, and $449,000 of accounts payable. As of January 31, 2018, we have no long-term debt. In October 2017, we completed the Tender Offer, resulting in net receipts of approximately $2.6 million in cash proceeds from the exercise of 4,756,163 outstanding warrants. We do not currently believe that our existing cash resources are sufficient to meet our anticipated needs over the next twelve months from the date hereof and based on our current plans and available resources, we believe we can maintain our current operations through the end of the July 2018.  As a result, to continue to fund our ongoing operations, beyond July 2018, we would need to secure significant additional capital. If we were unable to secure additional capital on a timely basis or at all, we will be required to curtail our current business plans and substantially reduce our expenses and development costs such as reducing our headcount and limiting our sales and marketing efforts and may ultimately be required to cease operations altogether.  Moreover, our expenses may exceed our current plans and expectations, which would require us to secure additional capital or wind-down our operations sooner than anticipated.

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

Until we can 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. 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 may include delaying, scaling back or eliminating some or all of 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. If adequate funds are not available when needed, we may be required to reduce or cease operations altogether.

Financial Overview

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

Revenue

We contract manufacture and sell SDC-based products for end use, and as a raw material for manufacturing use. We also licenserecognize revenue when we satisfy a performance obligation by transferring control of the promised goods or services to our products and technologycustomers, in an amount that reflects the consideration we expect to development and commercialization partners. Revenue is recognized when realizedbe entitled to in exchange for those goods or realizable and earned.services. Any amounts received prior to satisfying revenue recognition criteria are recorded as deferred revenue.

Cost of Goods Sold

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

Selling, General and Administrative

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

Research and Development

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

Other Income (Expense)

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

Results of Operations

Fluctuations in Operating Results

Our results of operations have fluctuated significantly from period to period in the past and are likely to continue to do so in the future. We anticipate that our results of operations will be affected for the foreseeable future by several factors that may contribute to these periodic fluctuations, including the demand for our products, the timing and amount of our product sales, and the progress and timing of expenditures related to sales and marketing, as well as product development. Due to these fluctuations, we believe that the period-to-period comparisons of our operating results are not a reliable indication of our future performance.

Comparison of the Three Months Ended January 31, 2018April 30, 2020 and 20172019

Net Product Sales

Net product sales were $411,000$2,221,000 and $447,000$312,000 for the three months ended January 31, 2018April 30, 2020 and 2017,2019, respectively. The decreaseincrease of $36,000$1,909,000 was primarily attributable to increased sales fluctuations withinacross our existing legacy customer base.distribution and end-user network servicing the food processing and transportation industry.

For the three months ended January 31, 2018, threeApril 30, 2020, two individual customers accounted for 33%, 19%22% and 12% of our net product sales. No other individual customer accounted for 10% or more of our net product sales. The geographic breakdown of net product sales was as follows: 100% U.S.

For the three months ended January 31, 2017, one individual customer accounted for 56% of our net product sales. No other individual customer accounted for 10% or more of our net product sales. The geographic breakdown of net product sales was as follows: 100% U.S.

Cost of Goods Sold

Cost of goods sold was $161,000 and $134,000 for the three months ended January 31, 2018 and 2017, respectively. The increase of $27,000 was primarily attributable to an inventory write-down caused by a fire in a third-party warehouse (See Note 5 to the condensed consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q).

Gross margin as a percentage of net product sales, or gross margin percentage, was 61% and 70% for the three months ended January 31, 2018 and 2017, respectively. Gross margin percentage, excluding the inventory write-down discussed above, was 67% and 70% for the three months ended January 31, 2018 and 2017, 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 quarter ended January 31, 2018, as compared with the prior period.

Selling, General and Administrative Expense

Selling, general and administrative expense was $1,418,000 and $1,333,000 for the three months ended January 31, 2018 and 2017, respectively. The increase of $85,000 was primarily attributable to increased business development, marketing and travel expenses.

Research and Development Expense

Research and development expense was $120,000 and $214,000 for the three months ended January 31, 2018 and 2017, respectively. The decrease of $94,000 was primarily attributable to reduced personnel costs and reduced spending on research supporting our FDA approvals.

Share-Based Compensation

Share-based compensation expense was $740,000 and $170,000 for the three months ended January 31, 2018 and 2017, respectively. The increase of $570,000 is primarily due to the vesting of stock options and restricted stock units granted to employees, directors and consultants supporting our selling, general and administrative, and research and development functions.

Change in Derivative Liabilities

Change in derivative liabilities for the three months ended January 31, 2018 was zero. All warrant containing derivative features were exercised during the three months ended October 31, 2017 (See Notes 8 and 9 to the condensed consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q). Change in derivative liabilities for the three months ended January 31, 2017 was a decrease of $459,000. The overall decrease in the derivative liability was due to updates to the assumptions used in the fair value pricing model at the end of the reporting period.

Interest Expense

Interest expense for the three months ended January 31, 2018 and 2017 was $1,000 and $2,000, respectively.

Other Income (Expense)

Other income for the three months ended January 31, 2018 and 2017 was $2,000 and $11,000, respectively.

Comparison of the Six Months Ended January 31, 2018 and 2017

Net Product Sales

Net product sales were $875,000 and $978,000 for the six months ended January 31, 2018 and 2017, respectively. The decrease of $103,000 was primarily attributable to reduced food safety sales and fluctuations within our existing legacy customer base.

For the six months ended January 31, 2018, three individual customers accounted for 41%, 11% and 10%, of our net product sales, respectively. No other individual customer accounted for 10% or more of our net product sales. The geographic breakdown of net product sales was as follows: 100%95% U.S., 5% international.

For the sixthree months ended January 31, 2017,April 30, 2019, two individual customers accounted for 35%13% and 26%,12% of our net product sales. No other individual customer accounted for 10% or more of our net product sales. All of our net product sales were U.S. based sales.

Cost of Goods Sold

Cost of goods sold was $972,000 and $117,000 for the three months ended April 30, 2020 and 2019, respectively. The increase of $855,000 was primarily attributable to increased product sales.

Gross margin as a percentage of net product sales, or gross margin percentage, was 56% and 63% for the three months ended April 30, 2020 and 2019, 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 three months ended April 30, 2020, as compared with the prior period.

Selling, General and Administrative Expense

Selling, general and administrative expense was $690,000 and $1,022,000 for the three months ended April 30, 2020 and 2019, respectively. The decrease of $332,000 was primarily attributable to decreased personnel costs, as well as, decreased business development, marketing, board fees and share-based compensation.

Share-based compensation expense included in selling, general and administrative expense, was $46,000 and $136,000 for the three months ended April 30, 2020 and 2019, respectively. The decrease of $90,000 is primarily due to the prior year vesting of stock options and restricted stock units granted to employees, directors and consultants supporting our selling, general and administrative functions.

Research and Development Expense

Research and development expense was $85,000 for the three months ended April 30, 2020 and 2019, respectively. Research and development expense primarily consists of personnel costs and consulting fees supporting our FDA approvals.

Inducement to Exercise Warrants

Inducement expense was zero and $960,000 for the three months ended April 30, 2020 and 2019, respectively. During the three months ended April 30, 2019, we amended outstanding warrants held by investors participating in our 2014 private placement financings. In accordance with the terms of the amendment the strike price for the warrants was reduced. As a result, we recorded a one-time inducement expense of $960,000 during the three months ended April 30, 2019.

Comparison of the Nine Months Ended April 30, 2020 and 2019

Net Product Sales

Net product sales were $2,968,000 and $1,296,000 for the nine months ended April 30, 2020 and 2019, respectively. The increase of $1,672,000 was primarily attributable to increased sales across our distribution and end-user network servicing the food processing and transportation industry.

For the nine months ended April 30, 2020, two individual customers accounted for 17% and 12% of our net product sales, respectively. No other individual customer accounted for 10% or more of our net product sales. The geographic breakdown of net product sales was as follows: 100%96% U.S., 4% international.

For the nine months ended April 30, 2019, two individual customers accounted for 12% and 11% of our net product sales, respectively. No other individual customer accounted for 10% or more of our net product sales. All of our net product sales were U.S. based sales.

Cost of Goods Sold

Cost of goods sold was $307,000$1,270,000 and $399,000$480,000 for the sixnine months ended January 31, 2018April 30, 2020 and 2017,2019, respectively. The decreaseincrease of $92,000$790,000 was primarily attributable to decreasedincreased product sales offset by an inventory write-down caused by a fire in a third-party warehouse (See Note 5 to the condensed consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q).sales.

Gross margin as a percentage of net product sales, or gross margin percentage, was 65%57% and 59%63% for the sixnine months ended January 31, 2018April 30, 2020 and 2017, respectively. Gross margin percentage, excluding the inventory write-down discussed above, was 68% and 59% for the six months ended January 31, 2018 and 2017,2019, respectively. The increasedecrease in gross margin percentage was primarily attributable to the sale of higherlower margin formulations and packaging configurations of our products during the sixnine months ended January 31, 2018April 30, 2020, as compared with the prior period.

Selling, General and Administrative Expense

Selling, general and administrative expense was $2,863,000$2,790,000 and $2,670,000$5,334,000 for the sixnine months ended January 31, 2018April 30, 2020 and 2017,2019, respectively. The increasedecrease of $193,000$2,544,000 was primarily attributable to increased business development and board of director’s expense,decreased personnel costs, as well as, personnel costs.decreased business development, marketing, board fees and share-based compensation.

Share-based compensation expense included in selling, general and administrative expense, was $593,000 and $2,337,000 for the nine months ended April 30, 2020 and 2019, respectively. The decrease of $1,744,000 is primarily due to the prior year accelerated vesting of stock options and restricted stock units held by Dave Pfanzelter, the former Chairman of our Board(See Note 6 to the condensed consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q).

Research and Development Expense

Research and development expense was $264,000$227,000 and $462,000$249,000 for the sixnine months ended January 31, 2018April 30, 2020 and 2017,2019, respectively. The decrease of $198,000$22,000 was primarily attributable to reduced personnel costs and reductions in third-party testing andspending on research supporting our FDA approval efforts.approvals.

Share-Based Compensation

Liquidity and Capital Resources

OurThe condensed consolidated financial statements set forth in this quarterly report have been prepared and presented on a going concern basis, assumingwhich contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. As reflected in the accompanying condensed consolidated financial statements, during the nine months ended April 30, 2020, we will continue asincurred a going concern. Thenet loss of $1,318,000 and used cash in operations of $1,162,000. These factors below raise substantial doubt about our ability to continue as a going concern.concern within one year after the date of the financial statements being issued. Our ability to continue as a going concern is dependent upon our ability to generate positive operating cash flow and implement the Company’s business plan. The condensed consolidated financial statements do not include any adjustments that might be necessary fromif we are unable to continue as a going concern. In addition, our independent registered public accounting firm, in its report on the outcome of this uncertainty.Company’s July 31, 2019 financial statements, has raised substantial doubt about the Company’s ability to continue as a going concern.

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. WeWhile we have a history of recurring losses, and as of January 31, 2018during the three months ended April 30, 2020, we have incurredgenerated a cumulative net loss of $113,848,000.

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 January 31, 2018, we had $2,129,000 in cash and cash equivalents compared with $1,640,000 in cash and cash equivalents as of July 31, 2017. The net increase in cash and cash equivalents was primarily attributable to the successful closing of the tender offer. Additionally, as of January 31, 2018, we had $682,000 of current liabilities, including $449,000 in accounts payable, compared with $2,528,000 of current liabilities, including $426,000 in accounts payable as of July 31, 2017. The net decrease in current liabilities was primarily due to the removal of the derivative liability incurred from the issuance of warrants associated with our November 2015 financing(See Notes 8 and 9to the condensed consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q).

While we completed a tender offer to amend and exercise outstanding warrants held by the investors participating in our 2014, 2015 and 2017 private placement financings,sales resulting in net receiptsincome of approximately $2.6 million in cash proceeds from the exercise of 4,756,163 outstanding warrants,$473,000. However, we do not currently believecannot be certain that our existing cash resources are sufficient to meet our anticipated needs over the next twelve months from the date hereof and based on our current plans and available resources, we believe we can maintain our current operations through the end of July 2018. As a result, to continue to fund our ongoing operations, beyond July 2018, we would need to secure significant additional capital. If we were unable to secure additional capital on a timely basis or at all, wethis sales momentum will be required to curtail our current business plans and substantially reduce our expenses and development costs such as reducing our headcount and limiting our sales and marketing efforts and may ultimately be required to cease operations altogether.  Moreover, our expenses may exceed our current plans and expectations, which would require us to secure additional capital or wind-down our operations sooner than anticipated. 

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 January 31, 2018, no events have occurred resulting in the obligation of any such payments.continue.

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.

While we generated net income for the three months ended April 30, 2020 and, as of the date hereof, expect to commence generating positive operating cash flow by July 31, 2020, we do not have, and may never have, significant cash inflows from product sales or from other sources of revenue to fund our operations. Until we can continually generate significantpositive cash flow from operations, we expectwill need to continue to fund our operations with the proceeds of offerings of our equity and debt securities. However, we cannot assure you that additional financing will be available when needed or that, if available, financing will be obtained on terms favorable to us or to our stockholders. If we raise additional funds from the issuance of equity securities, substantial dilution to our existing stockholders would likely result. If we raise additional funds by incurring debt financing, the terms of the debt may involve significant cash payment obligations as well as covenants and specific financial ratios that may restrict our ability to operate our business. Further, any contracts or license arrangements

As of April 30, 2020, we enter intohad $2,097,000 in cash and cash equivalents compared with $473,000 in cash and cash equivalents as of July 31, 2019. The net increase in cash and cash equivalents was primarily attributable to raise funds may require usreceived by our October 2019 and March 2020 private placement financings offset by cash used to relinquishrun our rightsoperations.

Additionally, as of April 30, 2020, we had $1,491,000 of current liabilities, including $1,286,000 in accounts payable, compared with $738,000 of current liabilities, including $553,000 in accounts payable as of July 31, 2019. The net increase in current liabilities was primarily due to trade payables due to our productscontract manufacture.

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 technology, andwhen we cannot assure you that we will be able to enter intohave met our obligations under these agreements. As of April 30, 2020, no events have occurred resulting in the obligation of 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.payments.

We do not have any unused credit facilities or other sources of capital

While, as discussed above, certain factors raise substantial doubt about our ability to continue as a going concern, we currently believe our available cash, our current efforts to us at this time. We intendmarket and sell our products, and our ability to secure additional working capital through sales of additional debt or equity securities. Our intended financing initiatives are subjectsignificantly reduce expenses, will provide sufficient cash resources to risk, and we cannot provide any assurance aboutsatisfy our needs over the availability or terms of these or any future financings.next 12 months.

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 may include delaying, scaling back or eliminating some or all of 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. If adequate funds are not available when needed, we may be required to reduce or cease operations altogether.

Critical Accounting Policies and Estimates

The discussion and analysis of our financial condition and results of operations are based on our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States, or GAAP. The preparation of these condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses, and related disclosures. We evaluate our estimates on an ongoing basis. We base our estimates on historical experience and on other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

In addition, the condensed consolidated financial statements included in this Quarterly Report have been prepared and presented on a basis assuming we will continue as a going concern. Until we can generate significant cash from operations, we expect to continue to fund our operations with the proceeds of offerings of our equity and debt securities. However, we cannot assure you that additional financing will be available when needed or that, if available, financing will be obtained on terms favorable to us or to our stockholders. If we raise additional funds from the issuance of equity securities, substantial dilution to our existing stockholders would likely result. If we raise additional funds by incurring debt financing, the terms of the debt may involve significant cash payment obligations as well as covenants and specific financial ratios that may restrict our ability to operate our business. Further, any contracts or license arrangements we enter into to raise funds may require us to relinquish our rights to our products or technology, and we cannot assure you that we will be able to enter into any such contracts or license arrangements on acceptable terms, or at all. Having insufficient funds may require us to delay or scale back our marketing, distribution and other commercialization activities or cease our operations altogether. Our condensed consolidated financial statements do not include any adjustment relating to recoverability or classification of recorded assets and classification of recorded liabilities.

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

Revenue Recognition

We sell our productsEffective August 1, 2018, we adopted the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”), Topic 606, Revenue from Contracts with Customers (“Topic 606”). Under Topic 606, revenue is recognized at an amount that reflects the consideration to distributors and end users. We recordwhich we expect to be entitled in exchange for transferring goods or services to a customer. This principle is applied using the following 5-step process:

Under Topic 606, we recognize revenue when we sell productssatisfy a performance obligation by transferring control of the promised goods or services to our customers, rather than when our customers resell productsin an amount that reflects the consideration we expect to third parties. When we sell productsbe entitled to our customers, we reduce the balance of our inventory with a corresponding charge to cost ofin exchange for those goods sold. We do not currently have any consignment sales.or services.

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

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

Product sales are recognizedgenerally consist of a single performance obligation that we satisfy at a point in time. We recognize product revenue when deliverythe following events have occurred: (a) we have transferred physical possession of the products, (b) we have a present right to payment, (c) the customer has occurred (which is generally at the time of shipment),legal title has passed to the products, and (d) the customer bears significant risks and rewards of ownership of the selling price is fixed or determinable, collectability is reasonably assuredproducts.

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

Shipping and handling are treated as activities to fulfill promises to customers and any amounts received priorbilled to satisfying these revenue recognition criteriaa customer, if applicable, represent revenues earned for the goods provided. Costs related to such shipping and handling billings are recordedclassified as deferred revenue. We record product sales netcost of discounts at the time of sale and report product sales net of such discounts.sales.

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

Variable Consideration

We record revenue from customers in an amount that reflects the transaction price we expect to be entitled to after transferring control of those goods or services. From time to time, we offer sales promotions on our products and technologysuch as discounts. Variable consideration is estimated at contract inception only to development and commercialization partners. License feethe extent that it is probable that a significant reversal of revenue consists of product and technology license fees earned. If multiple-element arrangements require on-going services or performance, then upfront product and technology license fees under such arrangements are deferred and recognized over the period of such services or performance. Non-refundable amounts received for substantive milestones are recognized upon achievement of the milestone. Any amounts received prior to satisfying these revenue recognition criteria are recorded as deferred revenue.will not occur.

Share-Based Compensation

We grant equity-based awards under share-based compensation plans or stand-alone contracts. We estimate the fair value of share-based payment awards using the Black-Scholes option valuation model. This fair value is then amortized over the requisite service periods of the awards. The Black-Scholes option valuation model requires the input of subjective assumptions, including price volatility of the underlying stock, risk-free interest rate, dividend yield, and expected life of the option. Share-based compensation expense is based on awards ultimately expected to vest, and therefore is reduced by expected forfeitures. Changes in assumptions used under the Black-Scholes option valuation model could materially affect our net loss and net loss per share.

Impairment of Long-Lived Assets

In accordance with GAAP, if indicators of impairment exist, we assess the recoverability of the affected long-lived assets by determining whether the carrying value of such assets can be recovered through undiscounted future operating cash flows. If impairment is indicated, we measure the amount of such impairment by comparing the carrying value of the asset to the fair value of the asset and we record the impairment as a reduction in the carrying value of the related asset and a charge to operating results. Estimating the undiscounted future cash flows associated with long-lived assets requires judgment, and assumptions could differ materially from actual results.

For purposes of testing impairment, we group our long-lived assets at During 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 thethree and nine months ended April 30, 2020 and 2019, no impairment of long-lived assets consisting of property, plant, and equipment and our patent portfolio, whenever eventswas indicated or circumstances indicate that the carrying value may not be recoverable. Examples of such events or circumstances include:

Additionally, on a quarterly basis we review the significant assumptions underlying our impairment assessment to determine whether our previous conclusions remain valid.

Recoverability of assets to be held and used in operations is measured by a comparison of the carrying amount of an asset to the future net cash flows expected to be generated by the assets. The factors used to evaluate the future net cash flows, while reasonable, require a high degree of judgment and the results could vary if the actual results are materially different than the forecasts. In addition, we base useful lives and amortization or depreciation expense on our subjective estimate of the period that the assets will generate revenue or otherwise be used by us. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less selling costs.

We also periodically review the lives assigned to our intangible assets to ensure that our initial estimates do not exceed any revised estimated periods from which we expect to realize cash flows from the assets. If a change were to occur in any of the above-mentioned factors or estimates, the likelihood of a material change in our reported results would increase.

Derivative Financial Instruments

We do not use derivative instruments to hedge exposures to cash flow or market or foreign currency risks.

We review the terms of the common stock, warrants and convertible debt we issue to determine whether there are derivative instruments, including embedded conversion options that are required to be bifurcated and accounted for separately as derivative financial instruments. In circumstances where the host instrument contains more than one embedded derivative instrument, including a conversion option, that is required to be bifurcated, the bifurcated derivative instruments are accounted for as a single, compound derivative instrument.

Derivatives are initially recorded at fair value and are then revalued at each reporting date with changes in the fair value reported as non-operating income or expense. When the equity or convertible debt instruments contain embedded derivative instruments that are to be bifurcated and accounted for as liabilities, the total proceeds received are first allocated to the fair value of all the bifurcated derivative instruments. The remaining proceeds, if any, are then allocated to the host instruments themselves, usually resulting in those instruments being recorded at a discount from their face value.recorded.

Recent Accounting Pronouncements

See Note 114 to the condensed consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q.

Off Balance Sheet Arrangements

We do not have any off balance sheet arrangements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

As a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934, or the Exchange Act, and as provided 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.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified by the rules and forms of the Securities and Exchange Commission, or SEC, and that such information is accumulated and communicated to our management, including our Principal Executive Officer and Principal Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.

As required by Rule 13a-15(b) under the Exchange Act, our management conducted an evaluation, under the supervision and with the participation of our Principal Executive Officer and our Principal Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report. Based on the foregoing evaluation, our Principal Executive Officer and Principal Financial Officer concluded that as of the end of the period covered by this report our disclosure controls and procedures were effective.

Changes in Internal Control Over Financial Reporting

In connection with the evaluation required by Exchange Act Rule 13a-15(d), our management, under the supervision and with the participation of our Principal Executive Officer and our Principal Financial Officer, concluded that there were no changes in our internal controls over financial reporting during the three months ended January 31, 2018April 30, 2020 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

PART II – Other Information

Item 1. Legal Proceedings

From time to time, we may become involved in various lawsuits and legal proceedings that arise in the ordinary course of our business. The impact and outcome of litigation, if any, is subject to inherent uncertainties, and any adverse result in these or other matters may arise from time to time that could 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.

Item 1A. Risk Factors

In evaluating us and our common stock, we urge you to carefully consider the risks and other information in this Quarterly Report on Form 10-Q, including the risk factor included below, as well as the risk factors disclosed in Item 1A. to Part I of our Annual Report on Form 10-K for the fiscal year ended July 31, 2017,2019, which we filed with the SEC on October 26, 201730, 2019 (the “Form 10-K”). Other than the risk factor included below, the risks and uncertainties described in “Item 1A — Risk Factors” of our Form 10-K have not materially changed. Any of the risks discussed in this Quarterly Report on Form 10-Q, including the risk factor included below, or any of the risks disclosed in “Item 1A — Risk Factors” of our Form 10-K, as well as additional risks and uncertainties not currently known to us or that we currently deem immaterial, could materially and adversely affect our results of operations, financial condition or prospects.

Risks Related to Our Business and Industry

As a result of our historical lack of financial liquidity, we do not currently have sufficient working capital to fund our planned operations and may not be able to continue as a going concern beyond July 2018.

We have a history of recurring losses, and aswe may not maintain profitability.

We had a loss of January$6.6 million for the fiscal year ended July 31, 2018,2019, and a loss of $7.4 million for the fiscal year ended July 31, 2018. As of July 31, 2019, we have incurred a cumulative net loss of $113,848,000. Asapproximately $124 million. We had net income of January 31, 2018, we had $2,129,000 in cash and cash equivalents and $449,000 in accounts payable. During$473,000 for the sixthree months ended January 31, 2018, our cash outflows for operating activities and for investmentsApril 30, 2020. We cannot be certain that we will generate net income in patents and fixed assets were $2.14 million. As a result, our existing cash resources are not sufficient to meet our anticipated needs over the next twelve months from the date hereof,future periods and we will need to raise additional capital to continue our operations and to implement our business plan, which capital may not be available on acceptable terms or at all. Based on our current plans and available resources, we believe we can maintain our current operations through the end of July 2018.  As a result, to continue to fundhave losses in future periods. Other than our ongoing operations, beyond July 2018,agreement with Packers Sanitation Services, Inc., none of our existing agreements, including those with Subway and Chipotle, contain provisions that provide for fixed or minimum revenues. If the penetration into the marketplace of PURE Hard Surface, PURE Control and our other SDC-based products is unsuccessful, our revenue growth is slower than anticipated or our operating expenses exceed expectations, we would needmay not maintain profitability, and we may never achieve profitability again. Slower than anticipated revenue growth could force us to secure significant additional capital. If we were unable to secure additional capital on a timely basis or at all, we will be required to curtail our current business plans and substantially reduce our expenses and development costs such as reducing our headcount and limiting our sales and marketing efforts, our product testing and may ultimately be requiredoptimization, and our product development and regulatory initiatives, and/or force us to reduce the size and scope of our operations, to sell or license our technologies to third parties, or to cease operations altogether. Moreover,Given our expensesrecent introduction of our SDC-based products in the food safety market, we are unable to predict the extent of any future income or our future losses and we may exceed our current plans and expectations, which would require usnot be able to secure additional capitalsustain or wind-down our operations sooner than anticipated.increase profitability on an ongoing basis.

The currently evolving situation related to the COVID-19 pandemic could adversely affect our business, financial condition and results of operations.

The global outbreak of COVID-19 has led to severe disruptions in general economic activities, as businesses and federal, state, and local governments take increasingly broad actions to mitigate this public health crisis.While we have experienced some delays related to final third-party validation of certain of our products and product rollouts by customers using PURE Control, we have notexperienced a material disruption to our business. However, on a go-forward basis, we cannot guarantee the overall economic conditions will not affect our business, as these conditions may significantly negatively impact all aspects of our business. Our business is dependent on the continued health and productivity of our employees, including our sales staff and corporate management team. 

Additionally, our liquidity could be negatively impacted if these conditions continue for a significant period of time and we may be required to pursue additional sources of financing to obtain working capital, requirementsmaintain appropriate inventory levels, and meet our financial obligations. Currently, capital and credit markets have been disrupted by the crisis and our ability to obtain any required financing is not guaranteed and largely dependent upon evolving market conditions and other factors. Depending on the continued impact of the crisis, further actions may be required to improve our cash position and capital structure.

The extent to which the COVID-19 outbreak ultimately impacts our business, sales, results of operations and financial condition will depend on many factors,future developments, which are highly uncertain and cannot be predicted, including, among others:but not limited to, the duration of the outbreak, its severity, the actions to contain the virus or treat its impact, and how quickly and to what extent normal economic and operating conditions resume and, more specifically, the effect it has on our customers and suppliers. Even after the COVID-19 outbreak has subsided, we may experience significant impacts to our business as a result of its global economic impact, including any economic downturn or recession that has occurred or may occur in the future.

The above factors, along with our history and near term forecast of incurring net losses and negative operating cash flows, raise substantial doubt about our ability to continue as a going concern beyond July 2018. If we do not obtain additional capital from external sources, we will not have sufficient working capital to fund our planned operations or be able to continue as a going concern. We cannot assure you that additional financing will be available when needed or that, if available, we can obtain financing 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.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not Applicable.

Item 5. Other Information

None.

Item 6. Exhibits

The following Exhibits are filed as part of this report pursuant to Item 601 of Regulation S-K:

Signatures

Pursuant to the requirement of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.