PURE BIOSCIENCE, INC.
For the period ended Jan 31, 2025. Filed Mar 17, 2025.
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A company's report for each of its first three quarters. The financial statements are not audited. It shows how the business has moved since the last annual report, and what management says changed.
Jan 31, 2025 · Filed Mar 17, 2025
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Item 1. Financial Statements
Condensed Consolidated Balance Sheets
| January 31, 2025 | July 31, 2024 | |
|---|---|---|
| (Unaudited) | ||
| Assets | ||
| Current assets | ||
| Cash and cash equivalents | $202,000 | $349,000 |
| Accounts receivable | 180,000 | 298,000 |
| Inventories, net | 75,000 | 56,000 |
| Restricted cash | 75,000 | 75,000 |
| Prepaid expenses | 30,000 | 27,000 |
| Total current assets | 562,000 | 805,000 |
| Property, plant and equipment, net | 12,000 | 13,000 |
| Total assets | $574,000 | $818,000 |
| Liabilities and stockholders’ deficiency | ||
| Current liabilities | ||
| Accounts payable | $700,000 | $601,000 |
| Accrued liabilities | 166,000 | 132,000 |
| Total current liabilities | 866,000 | 733,000 |
| Long-term liabilities | ||
| Convertible notes payable to related parties | 3,975,000 | 2,949,000 |
| Total long-term liabilities | 3,975,000 | 2,949,000 |
| Total liabilities | 4,841,000 | 3,682,000 |
| Commitments and contingencies | - | - |
| Stockholders’ deficiency | ||
| Preferred stock, $0.01 par value: 5,000,000 shares authorized, no shares issued and outstanding | — | — |
| Common stock, $0.01 par value: 200,000,000 shares authorized, 111,856,473 shares issued and outstanding at January 31, 2025, and July 31, 2024 | 1,119,000 | 1,119,000 |
| Additional paid-in capital | 132,696,000 | 132,612,000 |
| Accumulated deficit | (138,082,000) | (136,595,000) |
| Total stockholders’ deficiency | (4,267,000) | (2,864,000) |
| Total liabilities and stockholders’ deficiency | $574,000 | $818,000 |
Condensed Consolidated Statements of Operations
| Six Months Ended · Three months Ended | ||||
|---|---|---|---|---|
| January 31, | January 31, | |||
| 2025 | 2024 | 2025 | 2024 | |
| Net product sales | $946,000 | $1,043,000 | $391,000 | $325,000 |
| Royalty revenue | 1,000 | 5,000 | — | 1,000 |
| Total revenue | 947,000 | 1,048,000 | 391,000 | 326,000 |
| Cost of goods sold | 395,000 | 429,000 | 164,000 | 149,000 |
| Gross profit | 552,000 | 619,000 | 227,000 | 177,000 |
| Operating costs and expenses | ||||
| Selling, general and administrative | 1,752,000 | 2,138,000 | 871,000 | 1,065,000 |
| Research and development | 152,000 | 156,000 | 81,000 | 76,000 |
| Total operating costs and expenses | 1,904,000 | 2,294,000 | 952,000 | 1,141,000 |
| Loss from operations | (1,352,000) | (1,675,000) | (725,000) | (964,000) |
| Other income (expense) | ||||
| Other income (expense), net | (3,000) | — | (3,000) | — |
| Interest expense, net | (132,000) | (62,000) | (70,000) | (38,000) |
| Total other income (expense) | (135,000) | (62,000) | (73,000) | (38,000) |
| Net loss | $(1,487,000) | $(1,737,000) | $(798,000) | $(1,002,000) |
| Basic and diluted net loss per share | $(0.01) | $(0.02) | $(0.01) | $(0.01) |
| Shares used in computing basic and diluted net loss per share | 111,856,473 | 111,856,473 | 111,856,473 | 111,856,473 |
Condensed Consolidated Statement of Stockholders’ Equity (Deficiency)
| Six Months Ended January 31, 2025 · Six Months Ended January 31, 2024 | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Common Stock · Additional Paid-In · Accumulated · Total Stockholders’ · Common Stock · Additional Paid-In · Accumulated · Total Stockholders’ | ||||||||||
| Shares | Amount | Capital | Deficit | Equity | Shares | Amount | Capital | Deficit | Equity | |
| Balances at beginning of period | 111,856,473 | $1,119,000 | $132,612,000 | $(136,595,000) | $(2,864,000) | 111,856,473 | $1,119,000 | $132,398,000 | $(133,245,000) | $272,000 |
| Share-based compensation expense - stock options | — | — | 84,000 | — | 84,000 | — | — | 144,000 | — | 144,000 |
| Share-based compensation expense - restricted stock units | — | — | — | — | — | — | — | — | — | — |
| Net loss | — | — | — | (1,487,000) | (1,487,000) | — | — | — | (1,737,000) | (1,737,000) |
| Balances at end of period (Unaudited) | 111,856,473 | $1,119,000 | $132,696,000 | $(138,082,000) | $(4,267,000) | 111,856,473 | $1,119,000 | $132,542,000 | $(134,982,000) | $(1,321,000) |
| Three Months Ended January 31, 2025 · Three Months Ended January 31, 2024 | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Common Stock · Additional Paid-In · Accumulated · Total Stockholders’ · Common Stock · Additional Paid-In · Accumulated · Total Stockholders’ | ||||||||||
| Shares | Amount | Capital | Deficit | Equity | Shares | Amount | Capital | Deficit | Equity | |
| Balances at beginning of period (Unaudited) | 111,856,473 | $1,119,000 | $132,669,000 | $(137,284,000) | $(3,496,000) | 111,856,473 | $1,119,000 | $132,478,000 | $(133,980,000) | $(383,000) |
| Share-based compensation expense - stock options | — | — | 27,000 | — | 27,000 | — | — | 64,000 | — | 64,000 |
| Share-based compensation expense - restricted stock units | — | — | — | — | — | — | — | — | — | — |
| Net loss | — | — | — | (798,000) | (798,000) | — | — | — | (1,002,000) | (1,002,000) |
| Balances at end of period (Unaudited) | 111,856,473 | $1,119,000 | $132,696,000 | $(138,082,000) | $(4,267,000) | 111,856,473 | $1,119,000 | $132,542,000 | $(134,982,000) | $(1,321,000) |
Condensed Consolidated Statements of Cash Flows
| Six Months Ended | ||
|---|---|---|
| January 31, | ||
| 2025 | 2024 | |
| Operating activities | ||
| Net loss | $(1,487,000) | $(1,737,000) |
| Adjustments to reconcile net loss to net cash used in operating activities: | ||
| Share-based compensation | 84,000 | 144,000 |
| Depreciation and amortization | 1,000 | 74,000 |
| Changes in operating assets and liabilities: | ||
| Accounts receivable | 118,000 | 114,000 |
| Inventories | (19,000) | 14,000 |
| Prepaid expenses | (3,000) | (1,000) |
| Interest on note payable to related parties | 126,000 | 56,000 |
| Accounts payable and accrued liabilities | 133,000 | 13,000 |
| Net cash used in operating activities | (1,047,000) | (1,323,000) |
| Financing activities | ||
| Net proceeds from note payable to related parties | 900,000 | 785,000 |
| Net cash provided by financing activities | 900,000 | 785,000 |
| Net decrease in cash, cash equivalents, and restricted cash | (147,000) | (538,000) |
| Cash, cash equivalents, and restricted cash at beginning of period | 424,000 | 1,170,000 |
| Cash, cash equivalents, and restricted cash at end of period | $277,000 | $632,000 |
| Reconciliation of cash, cash equivalents, and restricted cash to the condensed consolidated balance sheets | ||
| Cash and cash equivalents | $202,000 | $557,000 |
| Restricted cash | $75,000 | $75,000 |
| Total cash, cash equivalents and restricted cash | $277,000 | $632,000 |
| Supplemental disclosure of cash flow information | ||
| Cash paid for taxes | $— | — |
Notes to Condensed Consolidated Financial Statements
(Unaudited)
For the three and six months ended January 31, 2025 and 2024
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,” “its” and the “Company” refer to PURE Bioscience, Inc. and our wholly owned subsidiary, ETI H20 Inc.
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 six months ended January 31, 2025 are not necessarily indicative of the results that may be expected for other quarters or the year ending July 31, 2025. The July 31, 2024 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, 2024 included in our Annual Report on Form 10-K covering such period filed with the Securities and Exchange Commission, or SEC, on October 29, 2024.
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 and Going Concern
The Company has a history of recurring losses, and as of January 31, 2025 it has a stockholders deficiency of $4,267,000. During the six months ended January 31, 2025, it recorded a net loss of $1,487,000 on recorded net revenue of $947,000. In addition, during the six months ended January 31, 2025 the Company used $1,047,000 in operating activities resulting in a cash balance of $202,000 as of January 31, 2025. The Company’s history of recurring operating losses, and negative cash flows from operating activities give rise to substantial doubt regarding its ability to continue as a going concern. The Company’s independent registered public accounting firm, in its report on the Company’s consolidated financial statements for the year ended July 31, 2024, has also expressed substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result from our possible inability to continue as a going concern.
The Company’s 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, its products; the Company’s success and the success of its partners in selling our products; the Company’s success and the success of its partners in obtaining regulatory approvals to sell its products; the costs of further developing the Company’s existing products and technologies; the extent to which the Company invests in new product and technology development; and the costs associated with the continued operation, and any future growth, of its business. The outcome of these and other forward-looking factors will substantially affect its liquidity and capital resources.
Until the Company can continually generate positive cash flow from operations, it will need to continue to fund its operations with the proceeds of offerings of our equity and debt securities. However, the Company cannot ensure that additional financing will be available when needed or that, if available, financing will be obtained on terms favorable to the Company or to its stockholders. If the Company raises additional funds from the issuance of equity securities, substantial dilution to its existing stockholders would likely result. If the Company raises 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 its ability to operate its business.
3. Significant Accounting Policies
Revenue Recognition
The Company recognizes revenue in accordance with the Financial Accounting Standards Board or the FASB, Accounting Standards Codification or ASC, Topic 606, Revenue from Contracts with Customers or Topic 606. Under Topic 606, revenue is recognized at an amount that reflects the consideration to which it expects to be entitled in exchange for transferring goods or services to a customer. This principle is applied using the following 5-step process:
| 1. | Identify the contract with the customer |
| 2. | Identify the performance obligations in the contract |
| 3. | Determine the transaction price |
| 4. | Allocate the transaction price to the performance obligations in the contract |
| 5. | Recognize revenue when (or as) each performance obligation is satisfied |
Under Topic 606, the Company recognizes revenue when it satisfies a performance obligation by transferring control of the promised goods or services to its customers, in an amount that reflects the consideration it expects to be entitled to in exchange for those goods or services.
The Company’s technology platform is based on patented stabilized ionic silver, and its initial products contain silver dihydrogen citrate, or SDC. SDC is a broad-spectrum, non-toxic antimicrobial agent, which offers residual protection and formulates well with other compounds. The Company sells various configurations and dilutions of SDC direct to customers and through distributors. The Company currently offers PURE® Hard Surface as a food contact surface sanitizer and disinfectant to restaurant chains, food processors and food transportation companies. The Company also offers 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 it considers to be a customer’s contract in all cases. The unit price is considered the observable stand-alone selling price for the arrangements. Any promotional or sales discounts are applied evenly to the units sold for purposes of calculating standalone selling price.
Product sales generally consist of a single performance obligation that it satisfies at a point in time. The Company recognizes product revenue when the following events have occurred: (a) it has transferred physical possession of the products, (b) it has 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.
The Company’s direct customer and distributor sales are invoiced based on received purchase orders. Its payment terms on invoiced direct customer and distributor sales range between 30 and 90 days after it satisfies its performance obligation. The majority of our customers are on 30 day payment terms. The Company currently offers 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.
The Company does 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.
A summary of our revenue by product type for the six months ended January 31, 2025 and 2024 is as follows:
| January 31, | ||
|---|---|---|
| 2025 | 2024 | |
| PURE Hard Surface | $774,000 | $1,036,000 |
| SILVÉRION | 172,000 | 7,000 |
| Revenue | $946,000 | $1,043,000 |
A summary of our revenue by product type for the three months ended January 31, 2025 and 2024 is as follows:
| January 31, | ||
|---|---|---|
| 2025 | 2024 | |
| PURE Hard Surface | $384,000 | $325,000 |
| SILVÉRION | 7,000 | — |
| Revenue | $391,000 | $325,000 |
Variable Consideration
The Company records revenue from customers in an amount that reflects the transaction price it expects to be entitled to after transferring control of those goods or services. From time to time, the Company offer sales promotions on its products such as discounts. Variable consideration is estimated at contract inception only to the extent that it is probable that a significant reversal of revenue will not occur.
Use of Estimates
The preparation of consolidated financial statements in 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 estimates for reserves of uncollectible accounts, inventory obsolescence, depreciable lives of property and equipment, realization of deferred tax assets, accruals for potential liabilities and assumptions made in valuing stock instruments issued for services.
Net Loss Per Share
Basic net loss per common share is computed as net loss divided by the weighted average number of common shares outstanding for the period. The Company’s diluted net loss per common share is the same as its basic net loss per common share because it incurred a net loss during each period presented, 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, 2025 and 2024, stock options, shares issuable upon the conversion of debt, and shares issuable under restricted stock unit awards of 42,075,936 and 21,481,458, respectively, have been excluded from the computation of diluted shares outstanding.
| January 31, | ||
|---|---|---|
| 2025 | 2024 | |
| Common stock options | 9,895,000 | 8,355,625 |
| Restricted stock units | 712,500 | 712,500 |
| Shares issuable upon the conversion of debt | 31,468,436 | 12,413,333 |
| Total | 42,075,936 | 21,481,458 |
Accounts Receivable
Trade accounts receivable are recorded net of allowances for doubtful accounts. The Company evaluates the collectability of its trade accounts receivable based on a number of factors. In circumstances where the Company become aware of a specific customer’s inability to meet its financial obligations to the Company, a specific reserve for bad debts is estimated and recorded, which reduces the recognized receivable to the estimated amount the Company believes will ultimately be collected. In addition to specific customer identification of potential bad debts, bad debt charges are recorded based on our historical losses and an overall assessment of past due trade accounts receivable outstanding. Management determined no allowance for doubtful accounts was necessary at January 31, 2025 and July 31, 2024.
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. 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:
| January 31, 2025 | July 31, 2024 | |
|---|---|---|
| Raw materials | $3,000 | $4,000 |
| Finished goods | 72,000 | 52,000 |
| Inventories | $75,000 | $56,000 |
Inventories at January 31, 2025 and July 31, 2024, are net of reserve for inventory obsolescence of $230,000 and $238,000, respectively.
Share-Based Compensation
The Company periodically issues stock options and restricted stock awards to employees and non-employees in non-capital raising transactions for services. It accounts for such grants issued and vesting to employees based on ASC 718, whereby the value of the award is measured on the date of grant and recognized as compensation expense on the straight-line basis over the vesting period.
The Company estimates the fair value of share-based payment awards at the date of grant using the Black-Scholes option valuation model. 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.
Concentrations
Gross product sales. For the three months ended January 31, 2025, one customer accounted for 12% of net product sales. For the six months ended January 31, 2025, two customers accounted for 18% and 11% of net product sales, respectively. For the three months ended January 31, 2024, one customer accounted for 12% of net product sales. For the six months ended January 31, 2024, one customer accounted for 30% of net product sales.
*Accounts receivable.*As of January 31, 2025, the Company had accounts receivable from one customer that comprised 12% of total accounts receivable. As of January 31, 2024, the Company had accounts receivable from two customers that comprised of 19% and 17% of total accounts receivable, respectively.
*Purchases.*For the three months ended January 31, 2025, one vendor accounted for 22% of purchases. For the six months ended January 31, 2025, one vendor accounted for 28% of purchases. For the three months ended January 31, 2024, one vendor accounted for 12% of purchases. For the six months ended January 31, 2024, two vendors accounted for 16% and 12% of purchases.
Accounts payable. As of January 31, 2025, the Company’s largest vendor accounted for 10% of the total trade accounts payable. As of January 31, 2024, the Company’s largest vendor accounted for 10% of the total accounts payable.
Segments
The Company operates inone segment for the manufacture and distribution of our products. In accordance with the “Segment Reporting” Topic of the ASC, its chief operating decision maker has been identified as the Chief Executive Officer and President, who reviews operating results to make decisions about allocating resources and assessing performance for the entire Company. Existing guidance, which is based on a management approach to segment reporting, establishes requirements to report selected segment information quarterly and to report annually entity-wide disclosures about products and services, major customers, and the countries in which the entity holds material assets and reports revenue. All material operating units qualify for aggregation under “Segment Reporting” due to their similar customer base and similarities in: economic characteristics; nature of products and services; and procurement, manufacturing and distribution processes. Since the Company operates in one segment, all financial information required by “Segment Reporting” can be found in the accompanying financial statements.
4. Recent Accounting Pronouncements
In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosure, or ASC 280, which is intended to improve reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expense categories that are regularly provided to the chief operating decision maker and included in each reported measure of a segment’s profit or loss. The update also requires all annual disclosures about a reportable segment’s profit or loss and assets to be provided in interim periods and for entities with a single reportable segment to provide all the disclosures required by ASC 280, including the significant segment expense disclosures. This standard will be effective for the Company beginning in fiscal year 2025. The Company adopted ASU 2023-07 on August 1, 2024, and there was no material impact on its financial statements.
In November 2024, FASB issued ASU 2024-03 Income Statement—Reporting Comprehensive Income—Expense Disaggregation Disclosures (Subtopic 220-40) Disaggregation of Income Statement Expenses. The guidance in ASU 2024-03 requires public business entities to disclose in the notes to the financial statements, among other things, specific information about certain costs and expenses including purchases of inventory; employee compensation; and depreciation and amortization expense for each caption on the income statement where such expenses are included. The update is effective for annual reporting periods beginning after December 15, 2026, and interim reporting periods beginning after December 15, 2027. Early adoption is permitted, and the amendments may be applied prospectively to reporting periods after the effective date or retrospectively to all periods presented in the financial statements. We are currently evaluating the provisions of this guidance and assessing the potential impact on our financial statement disclosures.
Other 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 financial statements.
5. Convertible Notes Payable to Related Parties
On September 16, 2024, the Company entered into a Note Purchase Agreement, or the 2025 Note Purchase Agreement, with certain accredited investors, or 2025 Lenders, pursuant to which the Company issued the Lenders convertible promissory notes, or the 2025 Notes, collectively with the 2025 Note Purchase Agreement, the 2025 Note Documents, with an aggregate principal balance of $500,000, or the 2025 Private Placement. The 2025 Note Documents provide for subsequent closings for an aggregate offering size of $3.0 million in principal balance. Tom Y. Lee, a member of the Company’s Board of Directors, or the Board, invested $500,000 in the 2025 Private Placement, through affiliates or directly. The disinterested members of the Board approved the 2025 Private Placement.
During the six months ended January 31, 2025, the Company issued additional 2025 Notes to Mr. Lee pursuant to the 2025 Note Purchase Agreement in a subsequent closing with an aggregate principal of $400,000. As of January 31, 2025, $900,000 of principal was outstanding under the 2025 Note Documents.
The 2025 Note Documents provided that the interest to the 2025 Lenders shall accrue at rates between 6.79% and 7.88%, compounded annually. The Maturity Date (as defined in the 2025 Notes) of the 2025 Notes is the third-year anniversary of the date of issuance, or such earlier date as the 2024 Notes provide.
Conversion. All or any portion of the principal amount of the 2025 Notes, plus accrued and unpaid interest, is convertible at any time, in whole or in part, at a 2025 Lender’s or the Company’s option, into shares of the Company’s common stock at a conversion price equal to the 30-day volume-weighted average price of the Company’s common stock as reported on the market or exchange on whichthe Company’s common stock is listed or quoted for trading, or the VWAP, on the date of conversion on the last trading day prior to the date of conversion, provided that such conversion price is at least $0.095 per share and less than or equal to $0.175 per share, subject to certain customary adjustments. Additionally, at any time following September 16, 2025, the holders of a majority of the outstanding principal balance under the 2025 Notes may elect specified in writing to convert all of the 2025 Notes at a conversion price equal to the VWAP, provided that the conversion price is equal to at least $0.095 per share, subject to certain customary adjustments.
March and June 2024 Convertible Note Purchase Agreements
On March 22, 2024, the Company entered into a Note Purchase Agreement, or the 2024 Note Purchase Agreement, with certain accredited investors, or 2024 Lenders, pursuant to which the Company issued the Lenders convertible promissory notes, or the 2024 Notes, collectively with the 2024 Note Purchase Agreement, the 2024 Note Documents, with an aggregate principal balance of $500,000, or the 2024 Private Placement. Tom Y. Lee, a member of the Company’s Board, invested $500,000 in the 2024 Private Placement, through affiliates or directly.
On June 21, 2024, the Company issued an additional 2024 Note to Mr. Lee pursuant to the 2024 Note Purchase Agreement in a subsequent closing with an aggregate principal of $500,000. The disinterested members of the Board approved the 2024 Private Placement. As of January 31, 2025, $1,000,000 of principal was outstanding under the 2024 Note Documents.
The 2024 Note Documents provided that the interest to the 2024 Lenders shall accrue at the rate of 7.81%, compounded annually. The Maturity Date (as defined in the 2024 Notes) of the 2024 Notes is the third-year anniversary of the date of issuance, or such earlier date as the 2024 Notes provide.
Conversion. All or any portion of the principal amount of the 2024 Notes, plus accrued and unpaid interest, is convertible at any time, in whole or in part, at a 2024 Lender’s or the Company’s option, into shares of the Company’s common stock at a conversion price equal to the 30-day volume-weighted average price of the Company’s common stock as reported on the market or exchange on whichthe Company’s common stock is listed or quoted for trading, or the VWAP, on the date of conversion on the last trading day prior to the date of conversion, provided that such conversion price is at least $0.13 per share and less than or equal to $0.21 per share for the March 2024 Note and at least $0.115 per share and less than or equal to $0.195 per share for the June 2024 Note, subject to certain customary adjustments. Additionally, at any time following March 22, 2025, the holders of a majority of the outstanding principal balance under the 2024 Notes may elect specified in writing to convert all of the 2024 Notes at a conversion price equal to the VWAP, provided that the conversion price is equal to at least $0.115 and $0.13 per share, as discussed above, subject to certain customary adjustments.
July and October 2023 Convertible Note Purchase Agreements
In July, 2023, the Company entered into a Note Purchase Agreement, or the 2023 Note Purchase Agreement with certain accredited investors, or the 2023 Lenders, pursuant to which the Company issued the 2023 Lenders convertible promissory notes, or the 2023 Notes, collectively with the 2023 Note Purchase Agreement, or the 2023 Note Documents, with an aggregate principal balance of $1,015,000 the 2023 Private Placement. The 2023 Note Documents provide for subsequent closings for an aggregate offering size of $1.8 million in principal balance. Messrs. Tom Y. Lee and Ivan Chen, each a member of the Company’s Board invested $1,000,000 and $15,000, as of July 31, 2023, respectively in the 2023 Private Placement, through affiliates or directly. On October 20, 2023, we issued an additional 2023 Note to Mr. Lee pursuant to the 2023 Note Purchase Agreement in a subsequent closing with an aggregate principal of $785,000. The disinterested members of the Board approved the 2023 Private Placement. As of January 31, 2025, $1,800,000 of principal was outstanding under 2023 Note Documents.
The 2023 Note Documents provided that the interest to the Lender shall accrue at the rate of 7.55% and 7.81%, compounded annually, for the 2023 Notes issued in July 2023 and the October 2023 Note issued in October 2023, respectively. The Maturity Date (as defined in the Notes) of the 2023 Notes is the third-year anniversary of the date of issuance, or such earlier date as the 2023 Notes provide.
*Conversion.*All or any portion of the principal amount of the 2023 Notes, plus accrued and unpaid interest, is convertible at any time, in whole or in part, at a 2023 Lender’s or the Company’s option, into shares ofthe Company’s common stock at a conversion price equal to the VWAP on the date of conversion on the last trading day prior to the date of conversion, provided that such conversion price is at least $0.15 per share and less than or equal to $0.23 per share, subject to certain customary adjustments. Additionally, at any time following July 3, 2024, the holders of a majority of the outstanding principal balance under the 2023 Notes may elect specified in writing to convert all of the Notes at a conversion price equal to the VWAP, provided that the conversion price is equal to at least $0.15 per share, subject to certain customary adjustments.
Other terms of the Note Agreements.
Further, on all the notes discussed above, in the event of certain corporate transactions, all outstanding principal and unpaid accrued interest due on such Notes shall be automatically converted into conversion shares on the trading day immediately prior to the closing date of such corporate transaction. The number of shares to be issued upon such conversion shall be based on the VWAP on the last trading day prior to the public announcement of the execution of the definitive documents with respect to such transaction.
Events of Default. The Notes Documents provide for certain events of default that are typical for a transaction of this type, including, among other things, default in the payment of principal or interest for more than 30 days, the Company’s making an assignment for the benefit of creditors, within 15 days after the commencement of bankruptcy proceedings against the Company, or breach of certain covenants described below.
Covenants. The Company will be subject to certain customary covenants regarding the current public information, reservation of adequate share reserve, and maintenance of intellectual property rights, among other customary matters.
During the six months ended January 31, 2025 and 2024, the Company recognized $126,000 and $56,000 of interest expense related to the 2025, 2024 and 2023 Notes, respectively. As of January 31, 2025, interest of $275,000 was added to the principal resulting in a balance owed of $3,975,000. In addition, as of January 31, 2025, the Notes and accrued interest were convertible into 31,468,436 shares of common stock.
6. Stockholders’ Equity
Restricted Stock Units
The Company issues restricted stock unit awards, or RSUs, to key management and as compensation for services to consultants and others. The RSUs typically vest over aone tothree-year period and carry aten-year term. Each RSU represents the right to receive one share of common stock, issuable at the time the RSU subsequently settles, as set forth in the Restricted Stock Unit Agreement. The Company determines that fair value of those awards at the date of grant, and amortize those awards as 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 January 31, 2025, all the RSUs had vested and 712,500 RSUs are issuable as of January 31, 2025.
Stock Option Plans
2024 Equity Incentive Plan
The Company’s shareholders approved its 2024 Equity Incentive Plan, or the 2024 Plan, in February 2024, which has a share reserve of 10,000,000 shares of common stock that were registered under a Form S-8 filed with the SEC in August 2024. The 2024 Plan provides for the grant of incentive and non-qualified stock options, as well as other share-based payment awards, to its 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. The 2024 Plan replaced the prior amended and restated 2007 and 2017 shareholder approved equity plans. As of January 31, 2025, there were 7,845,000 shares available for issuance under the 2024 Plan.
During the six months ended January 31, 2025, the Compensation Committee of the Board of Directors granted 2,500,000 stock options to the Company’s employees, officers, directors and consultants with a fair value of $148,000 as determined by the Black Scholes option pricing model. The vesting terms of the options vary betweenone andtwo years and carry aten-year term. There wereno stock options granted during the three months ended January 31, 2025 and 2024.
A summary of our stock option activity is as follows:
| Shares | Weighted- Average Exercise Price | Aggregate Intrinsic Value | |
|---|---|---|---|
| Outstanding at July 31, 2024 | 7,740,000 | $0.40 | $— |
| Granted | 2,500,000 | $0.07 | — |
| Exercised | — | $— | — |
| Cancelled | (345,000) | $0.11 | — |
| Outstanding at January 31, 2025 | 9,895,000 | $0.33 | $— |
The weighted-average remaining contractual term of options outstanding at January 31, 2025 was 7.14 years.
At January 31, 2025, options to purchase 8,575,417 shares of common stock were exercisable. These options had a weighted-average exercise price of $0.33 and a weighted average remaining contractual term of 6.78 years. The total unrecognized compensation cost related to unvested stock option grants as of January 31, 2025 was approximately $72,000 and the weighted average period over which these grants are expected to vest is 0.54 years.
For the six months ended January 31, 2025, share-based compensation expense for stock options that vested during the period was $84,000. For the six months ended January 31, 2024, share-based compensation expense for stock options that vested during the period was $144,000.
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:
| For the six months ended January 31, | ||
|---|---|---|
| 2025 | 2024 | |
| Volatility | 118.49% | 110.95% |
| Risk-free interest rate | 3.86% | 4.18% |
| Dividend yield | —% | —% |
| Expected life | 5.26 | 5.36 |
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 expected life of options was estimated using the average between the contractual term and the vesting term of the options.
7. Related Party Transactions
As of January 31, 2025 and January 31, 2024, accounts payable include $228,000 and $102,600 in board fees due to officers and directors, respectively.
8. Subsequent Events
Subsequent to January 31, 2025, the Company issued additional 2025 Notes to Mr. Lee pursuant to the 2025 Note Purchase Agreement in a subsequent closing with an aggregate principal of $500,000. The conversion and terms of the Notes are practically identical to the Notes issued during the six months ended January 31, 2025.
The text of this filing, as the company filed it with the SEC, without its images or exhibits. This is not investment advice.