UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549







FORM
10-Q





ý
            QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934FOR
      THE QUARTERLY PERIOD ENDED JANUARY 31, 2010o
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT
      OF 1934





Commission
File Number 0-21019





PURE
Bioscience


(Exact
name of registrant as specified in its charter)


California
            
            33-0530289(State
      or other jurisdiction of incorporation or organization)
            
            (I.R.S.
      Employer Identification No.)1725
      Gillespie Way
              El
      Cajon, California
            
            92020(Address
      of principal executive offices)
            
            (Zip
      Code)





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





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 ý No o





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 o No o





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




Large
accelerated filer  o    Accelerated
filer  ý    Non-accelerated
filer  o   Smaller
reporting company  ý





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).


Yes o No ý





As of
March 10, 2010, there were 34,848,808 shares of the registrant’s common stock,
no par value, outstanding.












PURE
Bioscience




FORM
10-Q




for
the Quarterly Period Ended January 31, 2010




TABLE OF CONTENTS




PART 1 —
FINANCIAL INFORMATION
  Item 1.
              
              Consolidated
      Financial Statements:
  Consolidated
      Balance Sheets as of January 31, 2010 (unaudited) and July 31,
      2009
 Consolidated
      Statements of Operations for the three and six months ended January 31,
      2010 and
2009 (unaudited)
 Consolidated
      Statements of Cash Flows for the six months ended January 31, 2010 and
      2009 (unaudited)
 Notes
      to Consolidated Financial Statements
(unaudited)
 Item 2.
                        
                        Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
 Item 3.
                          
                          Quantitative
      and Qualitative Disclosures about Market
  Risk
 Item 4.
                  
                  Controls
      and Procedures
 PART II —
OTHER INFORMATION
 Item 1.
                  
                  Legal
      Proceedings Item 1A.
                      
                      Risk
      Factors Item 5.
                              
                              Other
      Information
 Item 6.
                          
                          Exhibits
  SIGNATURES










PURE
      BioscienceCONSOLIDATED BALANCE SHEETS(Unaudited)January
      31,
              
              
              July
      31,2010
              
              
              2009ASSETSCurrent
      AssetsCash and cash equivalents
              
              $
              4,004,754
              
              
              $
              4,213,744Accounts receivable, net of allowance for doubtful
accountsof $0 at January 31, 2010 and $0 at July 31, 2009
              
              
              136,083
              
              
              
              143,031Inventories, net
              
              
              573,137
              
              
              
              421,655Prepaid expenses
              
              
              156,113
              
              
              
              69,317Total current assets
              
              
              4,870,087
              
              
              
              4,847,747Property,
      plant and equipment, net
              
              
              909,793
              
              
              
              856,504Patents
              
              
              1,924,042
              
              
              
              1,944,701Total assets
              
              $
              7,703,922
              
              
              $
              7,648,952LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      LiabilitiesAccounts payable
              
              $
              347,032
              
              
              $
              368,418Accrued liabilities
              
              
              214,882
              
              
              
              192,348Customer deposits
              
              
              9,400
              
              
              
              -Taxes payable
              
              
              -
              
              
              
              2,400Total current liabilities
              
              
              571,314
              
              
              
              563,166Deferred
      rent
              
              
              19,150
              
              
              
              19,351Total liabilities
              
              
              590,464
              
              
              
              582,517Stockholders'
      EquityPreferred Stock, no par value:5,000,000 shares authorized, no shares issued
              
              
              -
              
              
              
              -Class A common stock, no par value:50,000,000 shares authorized34,848,808 issued and outstanding at January 31, 2010, and32,307,966 issued and outstanding at July 31, 2009
              
              
              40,624,255
              
              
              
              38,498,904Additional Paid-In Capital
              
              
              5,139,983
              
              
              
              4,566,024Warrants:2,229,906 issued and outstanding at January 31, 2010, and1,411,725 issued and outstanding at July 31, 2009
              
              
              3,326,753
              
              
              
              2,501,682Accumulated deficit
              
              
              (41,977,533
              )
              
              
              (38,500,175
              )Total stockholders' equity
              
              
              7,113,458
              
              
              
              7,066,435Total liabilities and stockholders' equity
              
              $
              7,703,922
              
              
              $
              7,648,952


The
accompanying notes are an integral part of the consolidated financial
statements




















PURE
      BioscienceCONSOLIDATED STATEMENTS OF
      OPERATIONS(Unaudited)For
      the Six Months Ended
              
              
              For
      the Three Months EndedJanuary
      31,
              
              
              January
      31,2010
              
              
              2009
              
              
              2010
              
              
              2009REVENUES
      FROM PRODUCT SALESNet
      revenues
              
              $
              548,852
              
              
              $
              145,382
              
              
              $
              326,981
              
              
              $
              34,762Cost
      of sales
              
              
              193,032
              
              
              
              70,634
              
              
              
              112,875
              
              
              
              10,822Gross
      profit
              
              
              355,820
              
              
              
              74,748
              
              
              
              214,106
              
              
              
              23,940OTHER
      REVENUESRevenue
      from license agreements
              
              
              -
              
              
              
              250,000
              
              
              
              -
              
              
              
              250,000Cost
      of other revenue
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Gross
      Profit
              
              
              -
              
              
              
              250,000
              
              
              
              -
              
              
              
              250,000-Total gross profit
              
              
              355,820
              
              
              
              324,748
              
              
              
              214,106
              
              
              
              273,940Selling
      expenses
              
              
              446,776
              
              
              
              337,131
              
              
              
              226,838
              
              
              
              185,938General
      and administrative expenses
              
              
              2,604,883
              
              
              
              3,120,782
              
              
              
              1,420,304
              
              
              
              1,858,348Research
      and development
              
              
              909,693
              
              
              
              740,953
              
              
              
              451,825
              
              
              
              453,991Total
      operating expenses
              
              
              3,961,352
              
              
              
              4,198,866
              
              
              
              2,098,967
              
              
              
              2,498,277Loss
      from operations
              
              
              (3,605,532
              )
              
              
              (3,874,118
              )
              
              
              (1,884,861
              )
              
              
              (2,224,337
              )Other
      income and (expense):Interest income
              
              
              18,174
              
              
              
              10,263
              
              
              
              8,698
              
              
              
              1,500Other
              
              
              110,000
              
              
              
              38,789
              
              
              
              110,000
              
              
              
              3,087Total
      other income (expense)
              
              
              128,174
              
              
              
              49,052
              
              
              
              118,698
              
              
              
              4,587Net
      loss before income taxes
              
              
              (3,477,358
              )
              
              
              (3,825,066
              )
              
              
              (1,766,163
              )
              
              
              (2,219,750
              )Income
      tax provision
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Net
      loss
              
              $
              (3,477,358
              )
              
              $
              (3,825,066
              )
              
              $
              (1,766,163
              )
              
              $
              (2,219,750
              )Net
      loss per common share, basic and diluted
              
              $
              (0.10
              )
              
              $
              (0.13
              )
              
              $
              (0.05
              )
              
              $
              (0.07
              )Weighted
      average common shares used incomputing
      basic and diluted net loss per common share
              
              
              33,991,693
              
              
              
              29,896,168
              
              
              
              34,529,176
              
              
              
              30,124,247








The
accompanying notes are an integral part of the consolidated financial
statements














PURE
      BioscienceCONSOLIDATED STATEMENTS OF CASH
      FLOWS(Unaudited)For
      the Six MonthsEnded
      January 31,2010
              
              
              2009Cash
      flows from operating activities:Net loss
              
              $
              (3,477,358
              )
              
              $
              (3,825,066
              )Adjustments to reconcile net loss to net cashused in operating activities:Amortization and depreciation
              
              
              228,244
              
              
              
              218,519Stock-based compensation
              
              
              656,148
              
              
              
              185,727Allowance for doubtful accounts
              
              
              -
              
              
              
              781,627Changes in assets and liabilities:Accounts receivable
              
              
              6,948
              
              
              
              34,132Prepaid expense
              
              
              (86,796
              )
              
              
              (69,017
              )Inventories
              
              
              (151,482
              )
              
              
              (105,436
              )Deferred rent
              
              
              (201
              )
              
              
              3,173Deferred revenue
              
              
              -
              
              
              
              (256,793
              )Customer deposits
              
              
              9,400
              
              
              
              -Accounts payable and accrued liabilities
              
              
              1,148
              
              
              
              (318,189
              )Income tax payable
              
              
              (2,400
              )
              
              
              (800
              )Net cash (used)
      in operating activities
              
              
              (2,816,349
              )
              
              
              (3,352,123
              )Cash
      flows from investing activitiesInvestment in patents
              
              
              (68,171
              )
              
              
              (39,684
              )Purchase of property, plant and equipment
              
              
              (192,703
              )
              
              
              (66,632
              )Purchases of short-term investments
              
              
              -
              
              
              
              (4,076,992
              )Sales of short-term investments
              
              
              -
              
              
              
              5,136,212Net cash
      provided by (used) in investing activities
              
              
              (260,874
              )
              
              
              952,904Cash
      flows from financing activitiesNet proceeds from the sale of common stock
              
              
              2,783,233
              
              
              
              -Proceeds from exercise of stock options and warrants
              
              
              85,000
              
              
              
              894,179Net cash
      provided by financing activities
              
              
              2,868,233
              
              
              
              894,179Net
      (decrease) in cash and cash equivalents
              
              
              (208,990
              )
              
              
              (1,505,040
              )Cash
      and cash equivalents at beginning of period
              
              
              4,213,744
              
              
              
              2,024,400Cash
      and cash equivalents at end of period
              
              $
              4,004,754
              
              
              $
              519,360Supplemental
      disclosures of cash flow informationCash paid for taxes
              
              $
              4,955
              
              
              $
              -


The
accompanying notes are an integral part of the consolidated financial
statements


Notes
to Consolidated Financial Statements (Unaudited)





Note
1.  Basis of Presentation




PURE
Bioscience (sometimes referred to herein as the “Company” or “we”) was
incorporated in the state of California on August 24, 1992.  The
accompanying unaudited financial statements include the consolidated accounts of
PURE Bioscience and its subsidiary, ETIH2O Corporation, a Nevada
corporation.  All inter-company balances and transactions have been
eliminated.




The
financial statements included herein have been prepared by PURE Bioscience
without audit, in accordance with the instructions to Securities and Exchange
Commission (“SEC”) Form 10-Q and Article 10 of Regulation
S-X.  Certain information and footnote disclosures normally included
in the financial statements prepared in accordance with U.S. generally accepted
accounting principles (“GAAP”), have been condensed or omitted as allowed by
such rules and regulations, however we believe that the accompanying unaudited
financial statements contain all adjustments (including normal recurring
adjustments) necessary to present fairly the financial condition, results of
operations and cash flows for the periods presented.  The unaudited
consolidated financial statements presented herein should be read in conjunction
with our audited financial statements for our most recently completed fiscal
year ended July 31, 2009, and their accompanying notes, as filed with the SEC in
our 10-K on October 13, 2009.




The
preparation of the consolidated financial statements requires management to make
estimates and assumptions that affect the amounts reported in the statements and
accompanying notes, and actual results could differ materially from those
estimates.  The results of operations for the three month period ended
January 31, 2010 (the “Second Quarter”), and for the six month period ended
January 31, 2010 (the “Six Months”), are not necessarily indicative of the
results of operations for the full year, or any future periods.




Note
2.   Nature of Business and Summary of Significant Accounting
Policies




Concentration
of Credit Risk




As of
January 31, 2010 and July 31, 2009, all cash deposits were invested in either
U.S. FDIC insured bank accounts or institutional money market mutual funds
investing in A-1 (S&P) or Prime-1 (Moody’s).




At
January 31, 2010, $3,503,000 of our cash and cash equivalents were maintained at
three separate major financial institutions in the United States in accounts
that are insured by the Federal Deposit Insurance Corporation
(“FDIC”).  Such insurance is limited to $250,000 through December 31,
2013.  On January 1, 2014, the standard insurance amount will become
$100,000 per depositor.




Also at
January 31, 2010, $501,600 of our cash and cash equivalents were held in an
account maintained at a major financial institution in the United States that is
provided with protection by the Securities Investor Protection Corporation
(“SIPC”) should such a firm close due to bankruptcy or other financial
difficulties and customer assets are missing.  Cash and cash
equivalent claims, such as for money market funds and certificates of deposit,
are limited to $100,000, however other investments are protected with up to
$500,000 of insurance by the SIPC.




As of
January 31, 2010 and July 31, 2009, we had no short-term
investments.




We have
not experienced any losses in our cash, cash equivalents and short-term
investments and believe we are not exposed to any significant credit
risk.  At times, deposits held may exceed the amount of insurance
provided by the FDIC or SIPC.  Generally, these deposits may be
redeemed upon demand and, therefore, are believed to bear low risk.




Other
financial instruments that potentially subject us to concentrations of credit
risk consist of accounts receivable. We extend credit to our customers based on
credit evaluations and past payment performance, but do not obtain collateral to
secure our accounts receivable.




Revenue
Recognition




During
the periods presented herein our product revenue was derived from the sale of
silver dihydrogen citrate (“SDC”) concentrate and the sale of finished packaged
products containing SDC.  We recognize revenue from sales of these
products under the provisions of the applicable authoritative guidance governing
revenue recognition, which is generally when we ship the products free on board
from either our facility or from third party packagers, we have transferred
title to the goods, and we have eliminated our risk of loss.




Cost
of Goods Sold




Cost of
goods sold for product sales includes direct and indirect costs to manufacture
products, including materials consumed, manufacturing overheads, shipping costs,
salaries, benefits and related expenses of operations.




Intangible
Assets / Long-Lived Assets




Our
intangible assets primarily consist of the worldwide patent portfolio of our
silver ion technologies.  Outside legal costs and filing fees related
to obtaining patents are capitalized as incurred.  The total amounts
capitalized for pending patents were $9,200 and $20,000 in the three month
periods ended January 31, 2010 and 2009, respectively, and $68,200 and $39,700
in the six month periods ended January 31, 2010 and 2009,
respectively.   Patents are stated net of accumulated
amortization of $1,341,100 and $1,252,200 at January 31, 2010 and July 31, 2009,
respectively. The cumulative cost of acquiring patents is amortized on a
straight-line basis over the estimated remaining useful lives of the patents,
generally between 17 and 20 years from the date of issuance.  At
January 31, 2010, the weighted average remaining amortization period for all
patents was approximately 10.6 years.  Amortization expense for the
three month periods ended January 31, 2010 and 2009 was $44,600 and $42,900,
respectively, and for the six month periods ended January 31, 2010 and 2009 was
$88,800 and $85,500, respectively.




Accounting
for Stock-Based Compensation




We
utilize the fair value method of accounting for stock-based compensation
arrangements. Accordingly, the compensation cost of share-based awards exchanged
for employee and director services is measured at the grant date based on the
estimated fair value of the award, and is recognized as expense over the
applicable service period.  We do not have, and have not had during
the six month periods ended January 31, 2010 or 2009, any stock option awards
with market or performance conditions.












Stock
Options to Non-Employees




Charges
for stock options granted to non-employees have been determined using the
estimated fair value of the stock options issued, based on the Black-Scholes
Option Pricing Model.  During the Second Quarter we recorded $500 in
selling expense, $1,500 in general and administrative expense, and $3,600 in
research and development expense; and during the three month period ended
January 31, 2009 we recorded $702 in research and development
expense.  During the Six Months, we recorded $11,000 in selling
expense, $4,300 in general and administrative expense, and $7,700 in research
and development expense; and during the six month period ended January 31, 2009
we recorded $5,700 in research and development expense.




Cash,
Cash Equivalents, Short-term Investments and Liquidity




We
consider all liquid investments with maturities of ninety days or less when
purchased to be cash equivalents.  Our short-term investments have
maturities of greater than ninety days from the date of purchase.  We
classify securities as “available for sale” in accordance with authoritative
guidance, and carry these investments at fair value with any unrealized gains
and losses reported as a component of shareholders’ equity on the consolidated
balance sheets and in the statements of shareholders’ equity.  At
January 31, 2010 and July 31, 2009 we had no short-term
investments.




On May
28, 2009, we closed a registered direct offering whereby we sold $3 million of
our common stock and warrants to institutional
investors.  Subsequently, on September 3, 2009, we closed a registered
direct offering whereby we sold an additional $3 million of our common stock and
warrants to institutional investors.  After fees and expenses, the
aggregate net proceeds of the two offerings to us were approximately $5.55
million.




We do not
currently believe that our current cash resources are sufficient to meet our
anticipated needs during the next twelve months and as a result, we expect that
we will need to increase our liquidity and capital resources, by raising
additional financing in future periods through the issuance of debt, equity, or
convertible securities, entering into partnership, license, or other
arrangements with third parties, reducing the exercise price of outstanding
warrants, or through other means, any one of which could reduce the value to us,
perhaps substantially, of our technology and its commercial
potential.  Such financing, if any, could also lead to the dilution of
our existing shareholders.  There can be no assurance that additional
financing will be available, or if available, that such financing can be
obtained on satisfactory terms.  Insufficient funds 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 unanticipated
customer requirements, and further may require us to delay, scale back or
eliminate some or all of our research and product development programs, license
to third parties the right to commercialize products or technologies that we
would otherwise commercialize ourselves, or to reduce or cease operations. If
adequate funds are not available when needed, we may be required to
significantly modify our business model to reduce spending to a sustainable
level. Such modification of our business model could also result in an
impairment of assets which cannot be determined at this time.




Comprehensive
Income




We
display comprehensive income or loss and its components as part of our
consolidated financial statements.  Our comprehensive loss includes
our net loss and certain changes in equity that are excluded from our net loss,
including unrealized holding gains and losses on available for sale
securities.  Such changes in shareholders’ equity are included in
accumulated other comprehensive income or loss.  For the three month
periods ended January 31, 2010 and 2009, our comprehensive loss was $1,766,200
and $2,205,900, respectively.  During the Second Quarter, we did not
record unrealized gains on available for sale securities; whereas during the
three month period ended January 31, 2009, we recorded unrealized gains on
available for sale securities of $13,800.  For the Second Quarter, we
did not record any realized gains on the sale of available for sale
securities.  Realized gains on the sale of available for sale
securities for the three month period ended January 31, 2009, which are included
in our net loss for the period, were $3,100. During the Six Months, we did not
record unrealized gains on available for sale securities; whereas during the six
month period ended January 31, 2009, we recorded a reduction in unrealized gains
on available for sale securities of $700.  For the Six Months, we did
not record any realized gains on the sale of available for sale
securities.  Realized gains on the sale of available for sale
securities for the six month period ended January 31, 2009, which are included
in our net loss for the period, were $38,788.




Net
Loss Per Common Share




We
compute basic loss per share by dividing the applicable net loss by the weighted
average number of common shares outstanding during the respective
period.  Diluted per share amounts assume the conversion, exercise or
issuance of all potential common stock equivalents, which include stock options,
common stock warrants and unvested restricted stock; unless the effect is to
reduce a loss or increase the income per common share from continuing
operations.  As we incurred losses in the three and six month periods
ended January 31, 2010 and 2009, we did not include common stock equivalent
shares in the computation of net loss per share as the effect would have been
anti-dilutive.  Therefore, both the basic and diluted loss per common
share for the three and six month periods ended January 31, 2010 and 2009 are
based on the weighted average number of shares of our common stock outstanding
during the periods.  As of January 31, 2010, anti-dilutive instruments
excluded from the computation of net loss per share were made up of 5,320,716
stock options, 2,229,906 warrants, and 65,100 shares of unvested restricted
stock; a total of 7,615,722 potential common stock equivalents.




Recent
Accounting Pronouncements




In
February 2008, the Financial Accounting Standards Board (“FASB”) issued
authoritative guidance providing a one year deferral of the effective date of
fair market value measurement for non-financial assets and non-financial
liabilities. Effective August 1, 2009, the Company implemented the guidance for
non-financial assets and liabilities that are remeasured at fair value on a
non-recurring basis. The adoption of this guidance did not have a material
impact on our financial position or results of operations. The Company continues
to evaluate the impact of the guidance, if any, on our consolidated financial
statements for future periods.




In
December 2007, the FASB issued authoritative guidance to establish accounting
and reporting standards for the non-controlling interest in a subsidiary and for
the deconsolidation of a subsidiary. It also clarifies that a non-controlling
interest in a subsidiary is an ownership interest in the consolidated entity
that should be reported as equity in the consolidated financial
statements.  It also changes the way the consolidated income statement
is presented, requires additional disclosures, and requires that a parent
recognize a gain or loss in net income when a subsidiary is deconsolidated. The
guidance became effective for us as of August 1, 2009; however, it did not have
a material impact on our consolidated financial statements.











In April
2008, the FASB issued authoritative guidance amending the factors that should be
considered in developing renewal or extension assumptions used to determine the
useful life of a recognized intangible asset.  The intent of the
position is to improve the consistency between previously existing standards.
The guidance became effective for us as of August 1, 2009; however, it did not
have a material impact on our consolidated financial statements.




In June
2008, the FASB ratified authoritative guidance providing a framework for
determining whether an equity-linked financial instrument (or embedded feature)
is indexed to an entity’s own stock, including evaluating the instrument’s
contingent exercise and settlement provisions, in order to determine whether the
instrument should be classified as an equity instrument or a derivative
instrument.  The guidance became effective for us as of August 1,
2009.  We have performed an evaluation of our equity-linked financial
instruments that are subject to the guidance, including outstanding common stock
warrants, and determined that they should be classified as equity within the
consolidated balance sheets.  The guidance did not have a material
impact on our consolidated financial statements.




In June
2009, the FASB issued authoritative guidance for the consolidation of variable
interest entities, to require an issuer to perform an analysis to determine
whether the issuer’s variable interest or interests give it a controlling
financial interest in a variable interest entity, if any. This analysis
identifies the primary beneficiary of a variable interest entity as one with the
power to direct the activities of a variable interest entity that most
significantly impact the entity’s economic performance and the obligation to
absorb losses of the entity that could potentially be significant to the
variable interest.  The guidance will be effective as of the beginning
of the annual reporting period commencing after November 15, 2009 (our fiscal
year ending July 31, 2011).  We will assess the potential impact, if
any, of the adoption of the guidance on our consolidated financial statements
when this guidance becomes effective for us.




In June
2009, the FASB issued accounting guidance which establishes the FASB Accounting
Standards Codification (the “Codification”) as the source of authoritative
accounting principles recognized by the FASB to be applied by nongovernmental
entities in the preparation of financial statements in conformity with GAAP.
Rules and interpretive releases of the SEC under authority of federal securities
laws are also sources of authoritative GAAP for SEC registrants. The
Codification superseded all existing non-SEC accounting and reporting
standards.  All other non-grandfathered, non-SEC accounting literature
not included in the Codification is non-authoritative. This guidance became
effective for us as of our fiscal quarter ended October 31, 2009 (the “First
Quarter”). The Codification does not change GAAP and did not impact our
financial position or results of operations.




In August
2009, the FASB issued new authoritative guidance for the fair value measurement
of liabilities when a quoted price in an active market is not available. The
guidance became effective for us as of November 1, 2009; however it did not have
a material impact on our consolidated financial statements.




In
September 2009, the FASB issued authoritative guidance that provides additional
guidance on using the net asset value per share, provided by an investee, when
estimating the fair value of an alternate investment that does not have a
readily determinable fair value, and enhances the disclosures concerning these
investments. Examples of alternate investments that fall within the scope of
this standard include investments in hedge funds and private equity, real
estate, and venture capital partnerships. The guidance became effective for us
as of November 1, 2009; however, we do not currently have any investments that
fall within the scope of this new guidance, and it did not have a material
impact on our consolidated financial statements or related
disclosures.




In
October 2009, the FASB issued authoritative guidance that amends existing
revenue recognition accounting pronouncements related to multiple-deliverable
revenue arrangements. The new guidance provides accounting principles and
application guidance on whether multiple deliverables exist, how the arrangement
should be separated, and how the consideration should be allocated. This
guidance eliminates the requirement to establish the fair value of undelivered
products and services and instead provides for separate revenue recognition
based upon management’s estimate of the selling price for an undelivered item
when there is no other means to determine the fair value of that undelivered
item. The new guidance is effective prospectively for revenue arrangements
entered into or materially modified in fiscal years beginning on or after June
15, 2010 (our fiscal year ending July 31, 2011).  We do not currently
expect the implementation of this guidance to have a material impact on our
consolidated financial statements.




In
December 2009, the FASB issued authoritative guidance that changes how a
reporting entity determines when an entity that is insufficiently capitalized or
is not controlled through voting (or similar rights) should be consolidated. The
new guidance also requires a reporting entity to provide additional disclosures
about its involvement with variable interest entities and any significant
changes in risk exposure due to that involvement. The new guidance is effective
at the start of a reporting entity’s first fiscal year beginning after November
15, 2009 (our fiscal year ending July 31, 2011). We do not currently expect the
implementation of this guidance to have a material impact on our consolidated
financial statements.




In
January 2010, the FASB issued authoritative guidance that requires new
disclosures and clarifies certain existing disclosure requirements about fair
value measurements. The new guidance requires a reporting entity to disclose
significant transfers in and out of Level 1 and Level 2 fair value measurements,
to describe the reasons for the transfers and to present separately information
about purchases, sales, issuances and settlements for fair value measurements
using significant unobservable inputs. The new guidance is effective for interim
and annual reporting periods beginning after December 15, 2009 (our fiscal
quarter ending April 30, 2010), except for the disclosures about purchases,
sales, issuances and settlements in the roll forward of activity in Level 3 fair
value measurements, which is effective for interim and annual reporting periods
beginning after December 15, 2010 (our fiscal quarter ending April 30, 2011). We
do not currently expect the adoption of this guidance to have a material impact
on our consolidated financial statements.




In
February 2010, the FASB issued updated authoritative guidance regarding the
reporting of subsequent events, removing the requirement for an issuer to
disclose a date through which subsequent events have been
evaluated.   The guidance was effective upon issuance in February
2010, and has been adopted herein.  The adoption of this guidance did
not have a material impact on our consolidated financial
statements.












Note
3.  Accounts Receivable




Trade
accounts receivable are recorded net of allowances for doubtful
accounts.  Estimates for allowances for doubtful accounts are
determined based on payment history and individual customer
circumstances.  The allowance for doubtful accounts was zero at
January 31, 2010 and July 31, 2009, respectively.




During
the fiscal year ended July 31, 2008, we granted non-exclusive distribution and
blending rights to a new distributor for the sale of SDC-based products in
Colombia.  In addition, we granted non-exclusive distribution and
blending rights to a second distributor, which was affiliated with the first
distributor, for the sale of SDC-based products in Argentina, Venezuela, Panama
and Costa Rica. The invoiced total for both distributors was
$781,600.  The $781,600 receivable included $57,000 for amounts billed
at cost to the distributors in August 2008 for parts shipped directly to them by
one of our U.S. packaging suppliers.  Subsequent to this transaction,
we have not sold any products to either of the two referenced
distributors.




During
the three month period ended January 31, 2009, we determined these accounts to
be delinquent, established a full reserve and recorded $781,600 as bad debt
expense, within general and administrative expense.  The referenced
amounts remain uncollected, and we have written off the full receivable of
$781,600.




Management
currently considers all other accounts receivable to be fully
collectible.




Note
4.  Sales of Common Stock




On
September 3, 2009 we closed a registered direct offering whereby we sold $3
million of our common stock and warrants to institutional
investors.  A shelf registration statement relating to the securities
sold in the offering was declared effective by the SEC on May 8,
2009.  Under the terms of the offering, we issued to the investors
1,818,182 shares of our common stock, and warrants to purchase 727,272 shares of
our common stock.  The common stock was sold at a price of $1.65 per
share, and the investors received warrants to purchase 0.4 shares of our common
stock at an exercise price of $2.10 per share for each share of common stock
they purchased in the offering.   The fair value of the investor
warrants, based on their fair value relative to the common stock issued, was
$1,270,100 (based on the Black-Scholes Option Pricing Model assuming no dividend
yield, volatility of 159.59%, and a risk-free interest rate of 2.39%). The
warrants will be exercisable as of March 3, 2010, and will expire five years
from that date.  In addition we paid a fee of $180,000 to Rodman &
Renshaw, LLC (“Rodman”) in consideration for its services as the placement agent
in the offering.  We also issued to Rodman and its principals,
warrants to purchase 90,909 shares of our common stock at an exercise price of
$2.0625 per share.  The fair value of the warrants issued to Rodman,
based on their fair value relative to the common stock issued, was $154,900
(based on the Black-Scholes Option Pricing Model assuming no dividend yield,
volatility of 159.59%, and a risk-free interest rate of 2.39%). These warrants
will be exercisable as of March 3, 2010, and will expire on May 7,
2014.




After
fees and expenses, the net proceeds of the offering to us were $2,783,233, which
is being used and will be used for working capital.





Note
5.  Other Equity and Common Stock Transactions




We paid
no cash dividends during any of the periods presented, and have never paid cash
dividends.




In August
2009, we entered into a one year agreement with two independent third party
consultants who joined our Advisory Panel.  Each consultant was
granted an option to purchase 25,000 shares of our common stock, with a two year
term and vesting in bi-annual increments over one year.  The options,
which have exercise prices of $1.85 and $1.79, were valued at $16,600 (based on
the Black-Scholes Option Pricing Model, assuming no dividend yield, volatility
of 99.87% and a risk free interest rate of 0.43%) and $14,800 (based on the
Black-Scholes Option Pricing Model, assuming no dividend yield, volatility of
99.92% and a risk free interest rate of 0.42%), respectively.  The
options will be revalued quarterly until fully vested, with any change in fair
value expensed.




No stock
options or warrants were exercised during the First Quarter.




On
October 12, 2009, the Company entered into an amended and restated employment
agreement with Michael L. Krall, our Chief Executive Officer, which agreement
amends and restates in its entirety the employment agreement the Company
previously entered into with Mr. Krall effective as of April 17,
1996.  In addition, on October 12, 2009, the Company entered into
employment agreements with Andrew Buckland, our Chief Financial Officer, and
Donna Singer, our Executive Vice President.  The three agreements are
collectively referred to as “the Agreements”.  Included in the
Agreements is a provision for the executive to have a period of not less than
one hundred twenty (120) days to exercise their then outstanding stock options
following any termination of the executive’s employment for any reason other
than for Cause (as defined in the Agreements).  Such period (the
“Washout Period”) can in no event be beyond the maximum permitted expiration
date.  Prior to the Agreements, the Washout Period defined in the
stock option agreements for the outstanding options held by each of the
executives ranged from three (3) days to 90 days.  We determined the
fair value of the change in the terms of the options to be the difference in the
estimated fair value immediately before and immediately after the date of the
Agreements, using the Black-Scholes Option Pricing Model.  We recorded
a change in fair value of $29,000 related to vested options as an expense within
the consolidated statement of operations for the First Quarter. A change in fair
value of $5,500 related to unvested options will be amortized over the remaining
vesting periods.  During the First Quarter we also recorded $221,700
of expense for stock and options issued to employees, officers and directors in
prior periods.




During
the Second Quarter we received $85,000 from the exercise of employee stock
options to purchase 170,000 shares of our common stock.  In addition,
there were net exercises by a director and by two of our officers, on an
aggregate of 800,000 common stock options, which resulted in the issuance of
542,660 shares of our common stock.  As these shares were net
exercised, as permitted under the respective option plans, we did not receive
any cash.




Additionally
during the Second Quarter, we issued 10,000 shares of our common stock in
exchange for consulting services valued at $16,600, and recorded $338,400 of
expense for options issued to employees, officers and directors in prior
periods.











At
January 31, 2010 we had outstanding warrants to purchase 2,229,906 shares of our
common stock with exercise prices ranging from $2.06 to $8.60. These warrants
expire at various times between March 2011 and March 2015.  In June
2008, the FASB ratified authoritative guidance, which became effective for us as
of August 1, 2009, providing a framework for determining whether an
equity-linked financial instrument (or embedded feature) is indexed to an
entity’s own stock, including evaluating the instrument’s contingent exercise
and settlement provisions, in order to determine whether the instrument should
be classified as an equity instrument or a derivative instrument.  We
performed an evaluation, at August 1, 2009 and October 31, 2009, of our
equity-linked financial instruments subject to the guidance, including
outstanding common stock warrants, and determined that they should be classified
as equity within the consolidated balance sheets.  No additional
warrants have been issued subsequent to October 31, 2009.




Note
6.  Stock-Based Compensation




We have,
or have had during the fiscal years presented herein, the following equity
incentive plans (the “Plans”) pursuant to which we have granted options to
acquire our common stock:  the 1998 Directors and Officers Stock
Option Plan; the 2001 Directors and Officers Stock Option Plan:  the
2001 ETIH2O Stock Option Plan; the 2001 Consultants and Advisors Stock Option
Plan; the 2002 Non-Qualified Stock Option Plan; the 2002 Employee Incentive
Stock Option Plan; the 2004 Consultants and Advisors Stock Option Plan; and the
2007 Equity Incentive Plan.  The Plans are administered by the
Compensation Committee of the Board of Directors (the “Compensation
Committee”).  The exercise price for stock options, or the value of
other incentive grants granted under the Plans, are set by the Compensation
Committee but may not be for less than the fair market value of the shares on
the date the award is granted. The period in which options can be exercised is
set by the Compensation Committee but is not to exceed five years from the date
of grant.




We
recognize compensation expense for stock option awards on a straight-line basis
over the applicable service period of the award.  The service period
is generally the vesting period, with the exception of options granted subject
to a consulting agreement, whereby the option vesting period and the service
period are defined pursuant to the terms of the consulting agreement.
Share-based compensation expense for awards granted subsequent to July 31, 2006
is based on the grant date fair value estimated using the Black-Scholes Option
Pricing Model.  The following methodology and assumptions were used to
calculate share based compensation for the six month periods ended January 31,
2010 and 2009:




For
      the six month periods ended January 31,2010
            
            
            2009Expected
      price volatility
            
            
            99.8%
      - 158.1%
            
            
            
            97.7%
      - 128.7%Risk-free
      interest rate
            
            
            0.42%
      - 2.20%
            
            
            
            0.25%
      - 2.00%Expected
      rate of forfeiture
            
            
            0.0%
            
            
            
            0.0%Expected
      dividend yield
            
            
            0.0%
            
            
            
            0.0%Weighted
      average expected term
            
            2.98
      years
            
            
            2.56
      years




Expected
price volatility is the measure by which our stock price is expected to
fluctuate during the expected term of an option.  Expected 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.  For stock options granted subsequent to July 31, 2006, we
have excluded the period prior to November 1, 2005 from our historical price
volatility, as during this period our market price reflected significant
uncertainty associated with both our arbitration proceedings against Falken
Industries and our ability to close the sale of the assets of the Water
Treatment Division.  We believe that the volatility of the market
price of our common stock during periods prior to November 1, 2005 is not
reflective of future expected volatility.




Following
the guidance of Staff Accounting Bulletin No. 107 (“SAB 107”), we have been
following the “Simplified Method” to determine the expected term of “Plain
Vanilla” options issued to employees and directors.  All of our
outstanding options granted to employees and directors are Plain Vanilla
options.  Under the Simplified Method, the expected term is presumed
to be the mid-point between the vesting date and the end of the contractual
term.  In SAB 107, the Staff stated that it would not expect a company
to use the Simplified Method for share option grants after December 31, 2007,
however on December 21, 2007 the SEC published Staff Accounting Bulletin No. 110
(“SAB 110”), which expressed the views of the Staff regarding the continued use
of the Simplified Method in certain circumstances where a company is unable to
rely on historical data.  We are unable to rely on our historical
exercise data as there have been only a limited number of option exercises in
recent periods; our common stock was traded until April 2008 on the illiquid
Bulletin Board but our common stock is now listed on the NASDAQ Capital Market;
we have had over recent years significant trading blackout periods for employees
and directors; there has been minimal employee and director turnover; we have
periodically changed the terms of employee stock option grants to amend the
standard term of such grants; there are no comparable companies in terms of
size, location and industry (particularly as we are developing a platform
technology and operate in multiple industries); and we have had significant
structural changes in our business including the sale of the Water Treatment
Division and abandonment of our Triglycylboride technology, and expect to
continue to change in the foreseeable future.  We are therefore, under
the guidance of SAB 110, continuing to use the Simplified Method to determine
the expected term of options issued to employees and directors, but will
continually evaluate our historical data as a basis for determining the expected
terms of such options.




Our
estimation of the expected term for stock options granted to parties other than
employees or directors is the contractual term of the option
award.  For the purposes of estimating the fair value of stock option
awards, the risk-free interest rate used in the Black-Scholes calculation is
based on the prevailing U.S. Treasury yield as determined by the U.S. Federal
Reserve.  We have never paid any cash dividends on our common stock
and do not anticipate paying cash dividends on our common stock in the
foreseeable future.




Stock-based
compensation expense recognized in the consolidated statements of operations is
based on awards ultimately expected to vest, reduced for estimated
forfeitures.  Authoritative guidance requires forfeitures to be
estimated at the time of grant, and revised, if necessary, in subsequent periods
if actual forfeitures differ from those estimates. Historically, we have not had
significant forfeitures of stock options granted to employees and
directors.  A significant number of our historical stock option grants
were fully vested at issuance or were issued with short vesting
provisions.  Therefore, we have estimated the forfeiture rate of our
outstanding stock options as zero, but will continually evaluate our historical
data as a basis for determining expected forfeitures.











The following table sets forth the
share-based compensation expense recorded in our consolidated statements of
operations for the three and six month periods ended January 31, 2010 and 2009
resulting from share-based compensation awarded to our employees, directors and
third party service providers:




Three
      Months Ended
              January
      31, 2010
            
            
            Three
      Months Ended
              January
      31, 2009Share-based
      compensation for employees and directors:Selling
      expense
            
            $
            12,300
            
            
            $
            -General
      and administrative expenses
            
            
            348,800
            
            
            
            64,000Research
      and development
            
            
            15,400
            
            
            
            -Total
      share-based compensation for employees and directors
            
            
            376,500
            
            
            
            64,000





Share-based
      compensation for third party service providers:Selling
      expense
            
            $
            500
            
            
            $
            -General
      and administrative expenses
            
            
            18,100
            
            
            
            34,000Research
      and development
            
            
            3,600
            
            
            
            700Total
      share-based compensation for third party service providers
            
            
            22,200
            
            
            
            34,700Total
      share-based compensation expense
            
            $
            398,700
            
            
            $
            98,700







Six
      Months Ended
              January
      31, 2010
            
            
            Six
      Months Ended
              January
      31, 2009Share-based
      compensation for employees and directors:Selling
      expense
            
            $
            32,000
            
            
            $
            -General
      and administrative expenses
            
            
            544,300
            
            
            
            121,400Research
      and development
            
            
            40,200
            
            
            
            -Total
      share-based compensation for employees and directors
            
            
            616,500
            
            
            
            121,400





Share-based
      compensation for third party service providers:Selling
      expense
            
            $
            11,000
            
            
            $
            -General
      and administrative expenses
            
            
            20,900
            
            
            
            58,600Research
      and development
            
            
            7,700
            
            
            
            5,700Total
      share-based compensation for third party service providers
            
            
            39,600
            
            
            
            64,300Total
      share-based compensation expense
            
            $
            656,100
            
            
            $
            185,700

















A summary
of stock option activity is as follows:




Number
      of Shares
            
            
            Weighted-Average
      Exercise Price
            
            
            Aggregate
      Intrinsic Value ($000’s)Balance
      at July 31, 2009
            
            
            6,175,216
            
            
            $
            1.80
            
            
            $
            3,836Granted
            
            
            50,000
            
            
            $
            1.82Exercised
            
            
            -
            
            
            
            -Forfeited
      / Cancelled
            
            
            (113,300
            )
            
            $
            1.99Balance
      at October 31, 2009
            
            
            6,111,916
            
            
            $
            1.79
            
            
            $
            3,388Granted
            
            
            328,300
            
            
            $
            1.60Exercised
            
            
            (712,660
            )
            
            $
            0.52Forfeited
      / Cancelled
            
            
            (406,840
            )
            
            $
            2.03Balance
      at January 31, 2010
            
            
            5,320,716
            
            
            $
            1.93
            
            
            $
            907







Outstanding
              
              ExercisableRange
      of Exercise Prices
              
              Number
      of Shares Outstanding
              
              Weighted
      Average Remaining Contractual Life (in years)
              
              Weighted
      Average Exercise Price
              
              Number
      of Shares Exercisable
              
              Weighted
      Average Remaining Contractual
      Life       (in years)
              
              Weighted
      Average Exercise Price$0.50
      to $0.75
              
              590,000
              
              0.93
              
              $0.53
              
              590,000
              
              0.93
              
              $0.53$0.80
      to $1.20
              
              711,666
              
              0.86
              
              $0.81
              
              711,666
              
              0.86
              
              $0.81$1.40
      to $7.50
              
              4,019,050
              
              2.34
              
              $2.34
              
              2,967,900
              
              1.73
              
              $2.395,320,716
              
              1.99
              
              $1.93
              
              4,269,566
              
              1.48
              
              $1.87





Cash
received from options and warrants exercised for the three month periods ended
January 31, 2010 and 2009 was $85,000 and $729,100, respectively. The intrinsic
value of all stock options exercised during the three month periods ended
January 31, 2010 and 2009 was $612,000 and $1,331,557, respectively, and the
weighted-average grant date fair value of stock options granted during the three
month periods ended January 31, 2010 and 2009 was $1.32 and $2.16,
respectively.




Cash
received from options and warrants exercised for the six month periods ended
January 31, 2010 and 2009 was $85,000 and $894,179, respectively. The intrinsic
value of all stock options exercised during the six month periods ended January
31, 2010 and 2009 was $612,000 and $1,837,300, respectively, and the
weighted-average grant date fair value of stock options granted during the six
month periods ended January 31, 2010 and 2009 was $1.20 and $1.91,
respectively.




As of
January 31, 2010, there was $1,431,400 of unrecognized non-cash compensation
cost related to unvested options, which will be recognized over a weighted
average period of 3.1 years.




A summary
of restricted stock activity is as follows:




Number
      of SharesUnvested
      at July 31, 2009
            
            
            86,800Granted
            
            
            -Exercised
            
            
            -Forfeited
      / Cancelled
            
            
            (21,700
            )Unvested
      at October 31, 2009
            
            
            65,100Granted
            
            
            -Exercised
            
            
            -Forfeited
      / Cancelled
            
            
            -Unvested
      at January 31, 2010
            
            
            65,100






During
the three month periods ended January 31, 2010 and 2009, we recognized stock
based compensation expense for restricted stock of $38,100 and zero
respectively.  During the six month periods ended January 31, 2010 and
2009, we recognized stock based compensation expense for restricted stock of
$65,600 and zero respectively.  As of January 31, 2010, there was
$44,400 of unrecognized non-cash compensation cost related to unvested
restricted shares, which will be recognized over a weighted average period of
0.28 years.

















Note
7.   Inventory




Inventories
are stated at the lower of cost or net realizable value using the average cost
method.  Inventories at January 31, 2010 and July 31, 2009 consisted
of:




January
      31, 2010
            
            
            July
      31, 2009Raw
      Materials
            
            $
            356,000
            
            
            $
            194,700Work
      in Progress
            
            
            4,600
            
            
            
            -Finished
      Goods
            
            
            212,500
            
            
            
            227,000$
            573,100
            
            
            $
            421,700




Included
in our inventory of finished goods as of January 31, 2010 and July 31, 2009 are
approximately 12,000 gallons of SDC concentrate that we purchased from an
unrelated third party in a lien sale for $27,500.  This transaction
had no material impact on our consolidated statements of operations for the Six
Months, however it is expected to temporarily reduce our cost of goods sold per
gallon of SDC concentrate sold in future periods.





Note
8.   Legal Settlement




Included
in other income within the consolidated statements of operations for the three
and six month periods ended January 31, 2010 is $110,000 received pursuant to
the settlement of a warranty claim in a suit against a software
vendor.





Note
9.  Business Segment and Sales Concentrations




Operating
segments are defined as components of an enterprise for which separate financial
information is available and evaluated regularly by the chief operating decision
maker, or decision-making group, in deciding how to allocate resources and in
assessing performance. We believe that based upon the end use of our products,
the value added contributions made by us, the regulatory requirements, our
customers and partners, and the strategy required to successfully market
finished products, we are operating in a single segment.




To date,
our customers have primarily been strategic partners who develop markets for,
and distributors who sell, products containing our SDC
technology.  During the Second Quarter, 89% of product sales were made
to five such customers.  75% of product revenue for the Second Quarter
was derived from sales made to U.S. domestic customers, and 25% was derived from
sales made to international customers.  During the Six Months, 89% of
product sales were made to five such customers. 58% of product revenue for the
period was derived from sales made to U.S. domestic customers, and 42% was
derived from sales made to international customers.  In some cases we
have, or may have in future periods, distributors or strategic partners to whom
we have granted rights to sell our technology in multiple countries. Generally,
we do not require distributors to report to us the quantities of products that
they sell in each country.  In such cases, we report revenues based on
the country to which we first ship products.




During
the Second Quarter, 32% of our product sales were of bulk Axen30 or finished
packaged products containing Axen30, our ready to use product, and 68% of our
sales were of bulk SDC concentrate.  During the same period of the
prior year, 79% of our product sales were of bulk Axen30 or finished packaged
products containing Axen30, and 21% of our sales were of bulk SDC
concentrate.




During
the Six Months, 59% of our product sales were of bulk Axen30 or finished
packaged products containing Axen30, and 41% of our sales were of bulk SDC
concentrate.  During the same period of the prior year, 88% of our
product sales were of bulk Axen30 or finished packaged products containing
Axen30, and 12% of our product sales were of bulk SDC concentrate.




All of
our tangible assets are located in the United States.




Note
10.  Subsequent Events




None.




















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




This
report contains forward-looking statements. These statements relate to future
events or our future financial performance. In some cases, you can identify
forward-looking statements by terminology such as “may,” “will,” “should,”
“expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential” or
“continue,” the negative of such terms or other comparable terminology. These
statements are only predictions. Actual events or results may differ
materially.




Although
we believe that the expectations reflected in the forward-looking statements are
reasonable, we cannot guarantee future results, levels of activity, performance
or achievements. Moreover, neither we, nor any other person, assume
responsibility for the accuracy and completeness of the forward-looking
statements. We are under no obligation to update any of the forward-looking
statements after the filing of this Quarterly Report on Form 10-Q to conform
such statements to actual results or to changes in our
expectations.




The
following discussion of our financial condition and results of operations should
be read in conjunction with our consolidated financial statements and the
related notes and other financial information appearing elsewhere in this
Quarterly Report. Readers are also urged to carefully review and consider the
various disclosures made by us which attempt to advise interested parties of the
factors which affect our business, including without limitation the disclosures
made in Item 1A of Part II of this Quarterly Report under the Caption “Risk
Factors” and in our audited consolidated financial statements and related notes
included in our Annual Report on Form 10-K for the fiscal year ended July 31,
2009 (“Fiscal 2009”), previously filed with the Securities and Exchange
Commission (“SEC”).




Risk
factors that could cause actual results to differ from those contained in the
forward-looking statements include but are not limited to: our limited operating
history; our history of losses; our future capital needs; the rapidly changing
technologies and market demands; the failure of our products to achieve broad
acceptance; our failure to successfully compete; our dependence on a single
product; our failure to comply with government regulation; the loss of a key
member of our management team; our failure to protect our intellectual property;
our exposure to intellectual property and product liability claims; changes in
government policies and other risks identified in Part II, Item 1A of this
Quarterly Report on Form 10-Q.




The
financial statements presented herein, and discussed below, have been prepared
in accordance with U.S. Generally Accepted Accounting Principles.




Overview





PURE
Bioscience (sometimes referred to herein as the “Company,” “we” “us” or “our”)
was incorporated in the state of California on August 24, 1992. We began as a
provider of pharmaceutical water purification products for the pharmacy
market.  In 2000, we commenced investments in the development of novel
bioscience technologies, and subsequent to the May 2005 sale of our Water
Treatment Division we have been exclusively focused on the development and
commercialization of our current and future bioscience products.




We are
expanding into markets that we believe have broad potential, by developing new,
proprietary bioscience products based upon our patented silver ion antimicrobial
technology. We are primarily developing antimicrobial products, initially based
on our silver dihydrogen citrate technology, which we believe can provide novel,
non-toxic solutions to numerous global health challenges and represent
innovative advances in diverse markets. We believe that our technology is in a
position to contribute significantly to today’s global trend toward industrial
and consumer use of environmentally friendly products, while providing
competitive advantages in efficacy and safety.




Technology





Our
flagship bioscience technology is a patented, aqueous antimicrobial called
silver dihydrogen citrate (“SDC”). A new molecular entity, SDC is an
electrolytically generated source of stabilized ionic silver that can serve as
the basis for a broad range of products in diverse markets. SDC liquid is
colorless, odorless, non-caustic and formulates well with other compounds. As a
platform technology, we believe that our SDC-based antimicrobial is
distinguished from competitors in the marketplace because of its superior
efficacy combined with reduced toxicity. We are producing pre-formulated,
ready-to-use products for sale under our own brand names, ready-to-use products
for private label distribution, and varying strengths of SDC concentrate as an
additive or raw material for inclusion in other companies’ products, including
as an active pharmaceutical ingredient. In addition to SDC, we have obtained
patent protection for ionic silver-based molecular entities utilizing 14 organic
acids other than citric acid, which we may attempt to commercialize in the
future.




Sources
of Revenue





Our
principal sources of revenue are comprised of sales of SDC concentrate as well
as both bulk and individually bottled SDC-based hard surface disinfectant. SDC
concentrate is sold to distributors that either resell the concentrate as an
active ingredient or preservative in other companies’ products, or blend the
product into hard surface disinfectant products for sale to retail, commercial
and institutional customers. SDC-based hard surface disinfectant has
historically been sold in bulk and as individually bottled products to
distributors that in turn sell the product to retail, commercial and
institutional customers.




In
October 2009, we announced that we had expanded our business strategy through an
alliance with a Dallas-based sales and marketing organization, Richmont
Sciences, LLC (“Richmont”).  Richmont will provide us with sales,
marketing and branding services that will enable us to sell SDC-based
antibacterial, antiviral and antifungal hard surface disinfectants directly to
global retail, commercial and institutional customers.  On March 1,
2010, we announced the U.S. launch of our EPA-approved Axen30 hard surface
disinfectant under our own label, IV-7 Ultimate Germ DefenseTM
(“IV-7”).  Richmont is now marketing IV-7 on our behalf, with initial
emphasis on the institutional, janitorial and sanitation
markets.  Richmont will also market, after regulatory approvals are
obtained, our sanitizer for surfaces touched by food in restaurants, hotels,
food processing plants, and other environments.  In  future
periods, Richmont may also sell, on our behalf, SDC concentrate as an active
ingredient and as a preservative.  We currently anticipate that all
products sold via our Richmont relationship will be marketed under the IV-7
brand name.  We expect to recognize the revenues for products sold
under the agreement, and to pay marketing fees to Richmont based upon those
revenues.











We will
also continue to sell products through our existing distributors.  We
have entered into distribution agreements with multiple distributors in the
United States to market our EPA-approved Axen30 hard surface disinfectant under
their own labels, and a number of such products have recently been
launched.   We also have a strategic agreement with BASF, whereby
we have granted BASF the right to resell our SDC concentrate within the global
personal care, household and institutional markets; currently on a non-exclusive
basis.




Our
revenues have historically fluctuated from period to period.  For
example, in Fiscal 2009 we reported revenues from product sales of $478,000,
compared with revenue from product sales for our fiscal year ended July 31, 2008
(“Fiscal 2008”), of $1,487,000.  Among other factors, during Fiscal
2008 we recorded product revenue of $997,000 for sales to two international
distributors for whom we did not recognize any revenue in Fiscal
2009.




In future
periods, we expect our revenues to continue to fluctuate, however we are not
currently able to accurately predict such revenues.  We expect to
commence sales of hard surface disinfectant products under our IV-7 brand during
the current fiscal year.  The commencement of sales of additional
products, such as our sanitizer for surfaces touched by food, and products sold
by our distributors and strategic partners, are, or may be, dependent on
approvals from U.S. or overseas regulatory agencies.




Cost
of Revenues and Operating Expenses





Costs of Revenue.
  Costs of product revenue include materials consumed, manufacturing
overheads, shipping costs, salaries, benefits and related expenses of
operations.  In addition, included in our inventory of finished goods
as of January 31, 2010 are approximately 12,000 gallons of SDC concentrate that
we purchased from an unrelated third party in a lien sale.  This
transaction did not have a material impact on our consolidated statements of
operations for the three month period ended January 31, 2010 (the “Second
Quarter”), or the six month period ended January 31, 2010 (the “Six Months”),
however it is expected to temporarily reduce our cost of goods sold per gallon
of SDC concentrate sold in future periods.




Gross
profit on product sales represents net revenue less the costs of revenue. Gross
profit percentage is highly dependent on product mix, pricing, contractual
agreements, material costs, overhead allocations and other
factors.  We do not believe that historical gross profit margins on
product sales are a reliable indicator of future gross profit
margins.




Selling and Marketing.  Selling and marketing expenses consist primarily of salaries
and benefits, and amounts paid to third party providers for marketing, sales,
public relations and advertising, along with promotional and trade show costs
and travel expenses. Sales and marketing expenses also include share-based
compensation expense allocable to employees and third party advisors performing
services related to sales and marketing.




General and Administrative.  General and administrative expenses include employee salaries
and benefits, and amounts paid to third party providers for finance and
accounting, legal activities, insurance, information technology, and other
administrative activities.  General and administrative expenses also
include share-based compensation expense allocable to employees and third party
advisors performing general and administrative services.




Research and
Development.   Research and development costs include in-house
research costs, expenditures for third party testing, patent amortization,
outside legal costs for maintaining issued patents, and product registration
expenditures. We do not currently expect our research and development expense to
grow significantly in future periods, however if opportunities arise,
particularly in the development and testing of new formulations, we will
evaluate the need for additional research expenditures based on potential market
sizes and our estimation of the likelihood of our technology achieving
successful results.  Research and development expenses include
share-based compensation expense allocable to employees and third party advisors
performing services related to research and development.




Critical
Accounting Policies




Accounting
for Long-Lived Assets / Intangible Assets




We assess
the impairment of long-lived assets, consisting of property, plant, equipment
and finite-lived intangible assets, whenever events or circumstances indicate
that the carrying value may not be recoverable.  Examples of such
events or circumstances include:




·
            An
      asset’s ability to continue to generate income from operations and
      positive cash flow in future
periods;




·
            Loss
      of legal ownership or title to an
asset;




·
            Significant
      changes in our strategic business objectives and utilization of the
      asset(s); and




·
            The
      impact of significant negative industry or economic
  trends.




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, requires 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 technologies.  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.













Accounting
for Stock-Based Compensation




Stock-based
compensation expense for all stock-based compensation awards granted after
August 1, 2006 is based on the grant date fair value estimated in accordance
with the provisions of applicable authoritative guidance. Specifically, we
estimate the weighted-average fair value of options granted using the
Black-Scholes Option Pricing Model based on evaluation assumptions regarding
expected volatility, dividend yield, risk-free interest rates, the expected term
of the option and the expected forfeiture rate. Each of these assumptions, while
reasonable, requires a certain degree of judgment and the fair value estimates
could vary if the actual results are materially different than those initially
applied.  Prior to August 1, 2006, we were not required to record
compensation cost in the consolidated financial statements for stock options
issued to employees or directors.




Results
of Operations for the Three Months Ended January 31, 2010 vs. Three Months Ended
January 31, 2009




Revenue and Gross
Margin




For the
Second Quarter, product revenues of $327,000 increased by $292,200 compared with
comparable revenues of $34,800 in the same period of the prior
year.  Approximately $200,000 of the increase is derived from new
customers to whom we commenced shipping product subsequent to January 31,
2009.  To date, our customers have been strategic partners who develop
markets for, and distributors who sell, products containing our SDC
technology.  During the Second Quarter, 89% of product sales were made
to five customers.




75% of
product revenue for the Second Quarter was derived from sales made to U.S.
domestic customers, and 25% was derived from sales made to an international
distributor in Taiwan, for further distribution and sale by our distributor to
several Asian countries.  32% of our product sales for the Second
Quarter were of bulk Axen30 or finished packaged products containing Axen30, our
ready to use product, and 68% of our sales were of bulk SDC
concentrate.




Gross
profit on product sales for the Second Quarter was $214,100, compared with
comparable gross profit of $23,900 in the same period of the prior fiscal
year.  The gross margin percentage for the Second Quarter was 65%,
compared with 69% in the comparable period of the prior fiscal
year.




In the
three month period ended January 31, 2009 we recorded $250,000 of licensing
revenue related to a non-refundable fee received subject to an agreement whereby
we allowed a third party a limited time period to exclusively evaluate our SDC
technology.  No licensing revenue was recorded during the Second
Quarter.




Operating
Costs




Operating
costs declined by $399,300, or 16%, from $2,498,300 in the three month period
ended January 31, 2009, to $2,099,000 in the Second Quarter.  Within
these aggregate operating costs, selling expense increased $40,900 in the Second
Quarter compared with the same period in the prior fiscal year, primarily due to
additional payroll, payroll related expense, and stock option
expense.




General
and administrative expense declined by $438,000, from $1,858,300 in the three
month period ended January 31, 2009, to $1,420,300 in the Second
Quarter.  Included in general and administrative expense for the prior
year period was $781,600 of bad debt expense, whereas we did not record any bad
debt expense in the Second Quarter.  Additionally, over the same
period, legal fees declined by $133,100.  These reductions in expense
in the Second Quarter were partially offset by increases of $286,200 in stock
option and restricted stock expense, and $111,300 in payroll and related expense
in the Second Quarter, compared with the three months ended January 31,
2009.  The increase in stock option and restricted stock expense
relates to stock option grants made to both new and existing non-officer
employees, and to a change in practice for officer and director
grants.  In May 2009 we granted option and restricted stock awards to
officers and directors which are subject to vesting provisions, whereas prior
practice had been for such awards to vest immediately.  Awards with
vesting provisions are expensed over the vesting period, rather than on their
date of grant.




Research
and development costs of $451,800, including in-house costs, patent
amortization, outside legal costs for maintaining approved patents, and product
registration expenditures, were primarily unchanged in the Second Quarter
compared with the three months ended January 31, 2009, as increased payroll and
related expense was offset by reduced patent registration expense.  We
do not currently expect our research and development expense to grow
significantly in future periods; however, if opportunities arise, particularly
in the development and testing of new formulations, we will evaluate the need
for additional research expenditures based on potential market sizes and our
estimation of the likelihood of our technology achieving successful
results.




Our loss
from operations before taxes declined by $339,400, from a loss of $2,224,300 for
the three months ended January 31, 2009 to a loss of $1,884,900 for the Second
Quarter.




Other
Income




Other
income increased by $114,100 in the Second Quarter compared to the same period
of the prior fiscal year, due primarily to the receipt of $110,000 from a legal
settlement during the Second Quarter.




Net Loss




Our net
loss after taxes declined by $453,600, from a net loss of $2,219,800 or $0.07
per share for the three months ended January 31, 2009 to a net loss of
$1,766,200 or $0.05 per share for the Second Quarter.















Results
of Operations for the Six Months Ended January 31, 2010 vs. Six Months Ended
January 31, 2009




Revenue and Gross
Margin




For the
Six Months, product revenues of $548,900 increased by $403,500 compared with
comparable revenues of $145,400 in the same period of the prior
year.  Approximately $360,000 of the increase is derived from new
customers to whom we commenced shipping product subsequent to January 31,
2009.  To date, our customers have been strategic partners who develop
markets for, and distributors who sell, products containing our SDC
technology.  During the Six Months, 89% of product sales were made to
five customers.




58% of
product revenue for the Six Months was derived from sales made to U.S. domestic
customers, and 42% was derived from sales made to an international distributor
in Taiwan, for further distribution and sale by our distributor to several Asian
countries.  59% of our product sales for the Six Months were of bulk
Axen30 or finished packaged products containing Axen30, and 41% of our sales
were of bulk SDC concentrate.  In the same period of the prior year,
all revenue from product sales was derived from sales made to U.S. domestic
customers, of which 88% were of bulk Axen30 or finished packaged products
containing Axen30, and 12% of such sales were of bulk SDC
concentrate.




Gross
profit on product sales for the Six Months was $355,800, compared with
comparable gross profit of $74,700 in the same period of the prior fiscal
year.  The gross margin percentage for the Six Months was 65%,
compared with 51% in the comparable period of the prior fiscal year, due
primarily to the higher proportion of concentrate sold during the Six
Months.  We generally sell concentrate at higher margins than our
other products.




During
the six month period ended January 31, 2009 we recorded $250,000 of licensing
revenue related to a non-refundable fee received subject to an agreement whereby
we allowed a third party a limited time period to exclusively evaluate our SDC
technology.  No licensing revenue was recorded during the Six
Months.




Operating
Costs




Operating
costs declined by $237,500, or 6%, from $4,198,900 in the six month period ended
January 31, 2009, to $3,961,400 in the Six Months.  Within these
aggregate operating costs, selling expense increased by $109,600 in the Six
Months compared with the same period in the prior fiscal year, due primarily to
increases in stock option, payroll, and public relations expense.




General
and administrative expense declined by $515,900, from $3,120,800 in the six
month period ended January 31, 2009, to $2,604,900 in the Six
Months.  Included in general and administrative expense for the prior
year period was $781,600 of bad debt expense, whereas we did not record any bad
debt expense in the Six Months. Additionally, legal fees accounted for a decline
of $236,000 over the same period.  These reductions in expense were
partially offset by an increase of $427,200 in stock option and restricted stock
expense, related to stock option grants made to both new and existing
non-officer employees, and to a change in practice for officer and director
grants.  In May 2009 we granted option and restricted stock awards to
officers and directors which are subject to vesting provisions, whereas prior
practice had been for such awards to vest immediately.  Awards with
vesting provisions are expensed over the vesting period, rather than on their
date of grant.  Research and development costs, including in-house
costs, patent amortization, outside legal costs for maintaining approved
patents, and product registration expenditures, increased by $168,700, from
$741,000 in the six month period ended January 31, 2009 to $909,700 in the Six
Months.  The increase is primarily related to the cost of third party
testing, and in higher payroll, payroll related expense, and stock option
expense, due to new hires for research and product development
activities.




Our loss
from operations before taxes declined by $268,600, from a loss of $3,874,100 for
the six month period ended January 31, 2009 to a loss of $3,605,500 for the Six
Months.




Other
Income




Other
income increased by $79,100 in the Six Months compared to the same period of the
prior fiscal year, due primarily to the receipt of $110,000 from a legal
settlement during the most recent quarterly period, partially offset by gains on
the sale of U.S. Treasury Bills in the six months ended January 31,
2009.




Net Loss




Our net
loss after taxes declined by $347,700, from a net loss of $3,825,100 or $0.13
per share for the six months ended January 31, 2009 to a net loss of $3,477,400
or $0.10 per share for the Six Months.




Liquidity
and Capital Resources




From
inception through the present, we have financed our operations primarily through
sales of our equity securities, through lines of credit and the issuance of
debentures, and in May 2005 by the sale of our Water Treatment
Division.




At
January 31, 2010, we had cash and cash equivalents of $4,004,800.  Net
cash used in operations, and for investments in both intangible and fixed
assets, was $3,077,200 in the Six Months, $6,107,400 in Fiscal 2009, and
$4,829,600 in Fiscal 2008.  Our future capital needs and our future
profits, if any, are uncertain, and will depend on many factors including, among
others, the acceptance of, and demand for, our products; our success and the
success of our partners and distributors 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, and developing new,
products or technologies; the extent to which we invest in new technology and
product development; and the costs associated with the continued operation, and
any future growth, of our business.  We do not currently believe that
our current cash resources are sufficient to meet our anticipated needs during
the next twelve months and as a result, we expect that we will need to increase
our liquidity and capital resources, by raising additional financing in future
periods through the issuance of debt, equity, or convertible securities,
entering into partnership, license, or other arrangements with third parties,
reducing the exercise price of outstanding warrants, or through other means, any
one of which could reduce the value to us, perhaps substantially, of our
technology and its commercial potential.  Such financing, if any,
could also lead to the dilution of our existing shareholders.  There
can be no assurance that additional financing will be available, or if
available, that such financing can be obtained on satisfactory
terms.   Insufficient funds 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 unanticipated customer requirements, and
further may require us to delay, scale back or eliminate some or all of our
research and product development programs, license to third parties the right to
commercialize products or technologies that we would otherwise commercialize
ourselves, or to reduce or cease operations. If adequate funds are not available
when needed, we may be required to significantly modify our business model to
reduce spending to a sustainable level. Such modification of our business model
could also result in an impairment of assets which cannot be determined at this
time.











On
September 3, 2009, we closed a registered direct offering whereby we sold $3
million of our common stock and warrants to institutional
investors.  Under the terms of the offering, we issued to the
investors 1,818,182 shares of our common stock, and warrants to purchase 727,272
shares of our common stock.  The common stock was sold at a price of
$1.65 per share, and the investors received warrants to purchase 0.4 shares of
our common stock at an exercise price of $2.10 per share for each share of
common stock they purchased in the offering.   In addition we
paid a fee of $180,000 to Rodman & Renshaw, LLC (“Rodman”) in consideration
for its services as the placement agent in the offering.  We also
issued to Rodman and its principals, warrants to purchase 90,909 shares of our
common stock at an exercise price of $2.0625 per share.  After fees
and expenses, the net proceeds of this offering to us were approximately $2.78
million.




At
January 31, 2010, we had no short-term investments and no long-term
debt.  Total current assets at January 31, 2010 were $4,870,100, an
increase of $22,300 from July 31, 2009.




Cash used
in operating activities for the Six Months was $2,816,300, compared with
$3,352,100 for the same six month period of the prior fiscal
year.  The decline in operating cash expenditures, of $535,800, is
primarily due to increased collections, reduced general and administrative
spending and the receipt of $110,000 from a legal settlement during the most
recent six month period.




During
the Six Months, cash used in investing
activities was $260,900, consisting of investments in patents of $68,200 and
purchases of property, plant and equipment of $192,700.  At January
31, 2010 the net value of our capitalized patents and our property, plant and
equipment was $1,924,000 and $909,800, respectively.  In the six month
period ended January 31, 2009, cash provided by investing
activities was $952,900.  Investments in patents of $39,700 and
purchases of property, plant and equipment of $66,600 were offset by a net
amount (cash sales less cash purchases) of $1,059,200 provided by
short-term investments.




During
the Six Months, cash provided by financing activities was $2,868,200, $2,783,200
of which was derived from the net proceeds of our September 2009 registered
direct offering, and $85,000 of which was provided by proceeds from exercise of
common stock options.  In the prior year period, cash provided by
financing activities was $894,200, all of which came from the exercise of stock
options and warrants.




At
January 31, 2010, we had total liabilities of $590,500, an increase of $7,900
from July 31, 2009.




Off
Balance Sheet Arrangements




We do not
have any off balance sheet arrangements.













Item
3. Quantitative and Qualitative Disclosures About Market Risk




Our
exposure to interest rate risk at January 31, 2010 is related to our investment
portfolio which consists largely of debt instruments and other securities of
high quality corporate issuers and the U.S. government and its
agencies.  From time to time our investments may be exposed to market
risk related to changes in interest rates.  Our current investment
policy is to maintain an investment portfolio consisting only of diversified
institutional money market mutual funds investing in  A-1 (S&P) or
Prime-1 (Moody’s); U.S. Treasury Securities, or United States Government
obligations issued by or backed by a federal agency of the United States
Government.  We do not enter into investments for trading or
speculative purposes, and our cash is deposited in, and invested through, highly
rated financial institutions in the United States.  While our
available for sale securities are subject to interest rate risk and would fall
in value if market interest rates increased, we estimate that the fair value of
our investment portfolio would not decline by a material amount in the event of
an increase in market interest rates.  We therefore would not expect
our operating results or cash flows to be affected to any significant degree by
the effect of a change in market interest rates on our investments.




We have
operated mainly in the United States, and the majority of our sales since
inception have been made in U.S. dollars. Further, all of our sales to
international markets have been to independent parties in transactions
denominated in U.S. dollars.  Accordingly, we have not had any
material exposure to foreign currency rate fluctuations.





Item
4. 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 in the
SEC’s rules and forms, and that such information is accumulated and communicated
to our management, including our Chief Executive Officer and Chief Financial
Officer, who also acts as our Principal Accounting Officer, as appropriate, to
allow timely decisions regarding required disclosure based closely on the
definition of “disclosure controls and procedures” in Rule 13a-14(c). In
designing and evaluating the disclosure controls and procedures, management
recognized that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control
objectives, and management necessarily was required to apply its judgment in
evaluating the cost-benefit relationship of possible controls and
procedures.




Evaluation
of Disclosure Controls and Procedures




We have
carried out an evaluation under the supervision and with the participation of
our management, including our Chief Executive Officer and our Chief Financial
Officer/Principal Accounting Officer, of the effectiveness of the design and
operation of all of our disclosure controls and procedures. Based on the
foregoing, our Chief Executive Officer and Chief Financial Officer/Principal
Accounting Officer concluded that our disclosure controls and procedures were
effective as of January 31, 2010.




Changes
in Internal Control Over Financial Reporting




We made
no changes in our internal control over financial reporting during the Second
Quarter that have materially affected, or are reasonably likely to materially
affect, our internal control 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 which
arise in the ordinary course of business. However, litigation is subject to
inherent uncertainties, and an adverse result in these or other matters may
arise from time to time that may harm our business. We are not currently aware
of any such legal proceedings or claims that we believe will have, individually
or in the aggregate, a material adverse effect on our business, financial
condition or operating results.




Item
1A.  Risk Factors


Except
for the historical information contained herein or incorporated by reference,
this quarterly report on Form 10-Q and the information incorporated by reference
contains forward-looking statements that involve risks and uncertainties. These
statements include projections about our accounting and finances, plans and
objectives for the future, future operating and economic performance and other
statements regarding future performance. These statements are not guarantees of
future performance or events. Our actual results may differ materially from
those discussed here. Factors that could cause or contribute to differences in
our actual results include those discussed in the following section, as well as
those discussed in Part I, Item 2 entitled “Management’s Discussion and Analysis
of Financial Condition and Results of Operations” and elsewhere throughout this
quarterly report on Form 10-Q and in any other documents incorporated by
reference into this report. You should consider carefully the following risk
factors, together with all of the other information included or incorporated in
this quarterly report on Form 10-Q. Each of these risk factors, either alone or
taken together, could adversely affect our business, operating results and
financial condition, as well as adversely affect the value of an investment in
our common stock. There may be additional risks that we do not presently know of
or that we currently believe are immaterial which could also impair our business
and financial position.   If any of the events described below
were to occur, our financial condition, our ability to access capital resources,
our results of operations and/or our future growth prospects could be materially
and adversely affected and the market price of our common stock could
decline.  As a result you could lose some or all of any investment you
may have made or may make in our common stock.




We
have a history of losses, and we may not achieve or maintain
profitability




We had a
loss of $3,477,400 after taxes for the Six Months, a loss of $7,067,300 after
taxes for Fiscal 2009, and a loss of $6,540,300 after taxes for Fiscal
2008.  As of January 31, 2010, we had an accumulated deficit of
approximately $42.0 million. We expect to continue to have losses in future
periods.  If the penetration into the marketplace of SDC takes longer
than anticipated or is otherwise unsuccessful, revenue growth is slower than
anticipated or operating expenses exceed expectations, it may take an unforeseen
period of time to achieve or sustain profitability and we may never achieve or
sustain profitability.  Slower than anticipated revenue growth could
force us to reduce research, testing, development and marketing of our
technology and/or force us to reduce the size and scope of our operations, or
cease operations altogether.




We do not
yet have, and we may never have, significant cash inflows from product sales or
from other sources of revenue to offset our ongoing and planned investments in
corporate infrastructure, research and development projects, regulatory
submissions, business development activities, and sales and marketing, among
other investments.  These investments may not be
successful.  In addition, some of these investments cannot be
postponed and we may be contractually or legally obligated to make
them.  In future periods we expect to need to seek additional capital
through the issuance of debt, equity, convertible securities or through other
means, any one of which could reduce the value, perhaps substantially, of our
outstanding common stock.  We currently have no long-term debt,
however the issuance of debt, equity, convertible securities, or other financial
instruments in future periods, if any, could lead to the dilution of our
existing shareholders.  There is no guarantee that we would be able to
obtain capital on terms acceptable to us, or at all.  Insufficient
funds 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 unanticipated customer requirements, and further may require us to delay,
reduce or eliminate some or all of our research and product development
programs, license to third parties the right to commercialize products or
technologies that we would otherwise commercialize ourselves, sell some or all
of our intellectual property, to reduce operations, or to cease operations
altogether.




The risks
associated with our business may be more acute during periods of economic
slowdown or recession.  In addition to other consequences, these
periods may be accompanied by decreased consumer and institutional spending
generally, as well as decreased demand for, or additional downward pricing
pressure on, our products.  Accordingly, any prolonged economic
slowdown or a lengthy or severe recession with respect to either the U.S. or the
global economy is likely to have a material adverse effect on our results of
operations, financial condition and business prospects.  As a result,
given the recent deterioration in the U.S. and global economies, as well as the
decreasing purchasing power of consumers and institutions, we expect that our
business will continue to be adversely affected for so long as, and to the
extent that, such adverse economic conditions exist.




If
our efforts to achieve and maintain market acceptance of our core SDC technology
are not successful, or we fail to obtain necessary governmental approvals, we
are unlikely to attain profitability




We have
invested most of our time and financial resources in recent periods in the
development and commercialization of our core SDC technology.  We
expect that sales of SDC concentrate and SDC-based products will constitute a
substantial portion, or all, of our revenues in future periods.  Any
material decrease in the level of sales or expected sales of, or the prices for,
SDC, whether as a result of competition, change in customer demand, or any other
factor, would have a materially adverse effect on our business, financial
condition and results of operations.











We are
marketing SDC and SDC-based products to industrial and consumer
markets.  These products have not yet been accepted into the
marketplace, and may never be accepted.  In addition, even if our
products achieve market acceptance, we may not be able to maintain product sales
or other forms of revenue over time if new products or technologies are
introduced that are more favorably received than our products, are more
cost-effective or otherwise render our products less attractive or
obsolete.  Other risks involved in introducing these new products
include liability for product effectiveness and safety, and competition from
existing or emerging sources.  Additionally, government regulation in
the U.S. and in other countries is a significant factor in the development,
manufacturing and marketing of many of our products and in our ongoing research
and development activities. We believe that all products derived from SDC, or
products that may be derived from SDC in future periods, require or will require
approval by government agencies prior to marketing or sale in the U.S. or
overseas.  Complying with applicable government regulations and
obtaining necessary clearances or approvals can be time consuming and expensive,
and there can be no assurance that regulatory review will not involve delays or
other actions adversely affecting the marketing and sale of our
products.  For example, regulatory review of SDC by the EPA has
historically been time consuming and expensive, due in part, we believe, to the
novel nature of our technology.  While we cannot accurately predict
the outcome of such regulatory processes, we expect the review process to remain
time consuming and expensive as we, or our partners, apply for approval to
market new formulations or to make additional claims.  We also cannot
predict the extent or impact of future legislation or regulation in the U.S. or
overseas.




Some of
our new bioscience applications, for example those aimed at healthcare, food
preparation and agriculture markets, will also require approval by government
agencies prior to marketing or sale in the U.S. or overseas.  Until
we, or our partners, obtain approvals from the appropriate regulatory
authorities for future potential product applications, if any, we will not be
able to market or sell such products, which would limit our
revenues.  Even after approval, if any, we will remain subject to
changing governmental policies regulating antimicrobial products.




If
we are not able to manage our anticipated growth effectively, we may not become
profitable




If our
efforts to achieve and maintain market acceptance of our SDC technology are
successful, we will need to expand our business operations, and will also be
required to address potential new market opportunities for SDC.  There
can be no assurance that our infrastructure will be sufficiently scalable to
manage any future growth, or that we will have sufficient resources to do
so.  There also can be no assurance that if we continue to invest in
additional infrastructure, we will be effective in expanding our operations or
that our systems, procedures or controls will be adequate to support such
expansion. In addition, we will need to provide additional sales and support
services to our partners if we achieve our anticipated growth with respect to
the sale of our SDC technology for various applications.  Failure to
properly manage an increase in customer demands could result in a material
adverse effect on customer satisfaction, our ability to meet our contractual
obligations, and on our operating results.




The
industries in which we operate are heavily regulated and we may be unable to
compete effectively




We are a
bioscience company focused on the marketing and continued development of our
electrolytically generated stabilized ionic silver technology, including our
flagship SDC antimicrobial.  The risks, regulatory hurdles and costs
of doing business in our target markets are high. Our SDC is a platform
technology rather than a single use applied technology. As such, products
developed from the platform fall under the jurisdiction of multiple U.S. and
international regulatory agencies. We currently have U.S. EPA registration for
our 2400-parts per million (ppm) technical grade SDC concentrate (trade name
Axenohl), as well as for our Axen and Axen30 hard surface disinfectant
products.  In addition, in August 2009 we obtained Federal EPA
registration for an SDC-based sanitizer for food contact surfaces.  In
addition to the Federal EPA, each of the 50 United States has its own government
agencies that regulate the sale or shipment of our products into their state.
Prior to distributing a product into any of these states, a registration from
the state is required.  There can be no guarantee that a particular
state, or any state, will continue to allow the sale of SDC-based products, or
for new applications of our products, in future periods.




We intend
to fund and manage additional EPA-regulated product development internally, in
conjunction with our regulatory consultants and by partnering with other third
parties.  We have also partnered, or intend to partner, with third
parties who are seeking, or intend to seek, approvals to market SDC-based
products in markets outside the U.S.  However, the introduction of
additional regulated antimicrobial products in the U.S. or in markets outside
the U.S. could take several years, or may never be achieved.  Existing
state, federal or international approvals may not be
maintained.  Additionally, doing business internationally carries a
great deal of risk with regard to foreign government regulation, banking,
currency fluctuation, and many other factors.




We
are subject to intense competition




Our
SDC-based products compete in highly competitive markets dominated by extremely
large, well financed domestically and internationally recognized chemical and
pharmaceutical companies. Many of our competitors have greater financial
resources than we do in all areas of our business, including sales, marketing,
branding and product development, and we expect to face additional competition
from these competitors in the future.  Many of our competitors already
have well established brands and distribution.  Competition by
existing chemical and pharmaceutical manufacturers and distributors could
substantially limit or eliminate our potential market share and ability to
profit from our products and technologies.  Our ability to compete
will depend upon our ability, and the ability of our distributors and other
partners, to develop brand recognition and novel distribution methods, and to
displace existing, established and future products in our relevant target
markets.  We, or our distributors and partners, may not be successful
and/or diligent in doing so.




We
rely on a small number of key supply ingredients in order to manufacture our
products




All of
the supply ingredients used to manufacture our products are readily available
from multiple suppliers.  However, commodity prices for these
ingredients can vary significantly and the margins that we are able to generate
could decline if prices rise.  For example, both silver and citric
acid prices have been volatile recently.  In many of our distribution
and development agreements, we are unable to raise our product prices to our
customers quickly to maintain our margins, and significant price increases for
key inputs would therefore have an adverse effect on our results of
operations.




We
are subject to substantial regulation related to quality standards applicable to
our manufacturing and quality processes and our failure to comply with
applicable quality standards could have an adverse effect on our business,
financial condition, or results of operations




The EPA
regulates the registration, manufacturing, and sales and marketing of many of
our products, and those of our distributors and partners, in the United
States.  Significant government regulation also exists in overseas
markets.  Compliance with applicable regulatory requirements is
subject to continual review and is monitored through periodic inspections and
other review and reporting mechanisms.











Failure
by us or our partners to comply with current or future governmental regulations
and quality assurance guidelines could lead to temporary manufacturing
shutdowns, product recalls or related field actions, product shortages or delays
in product manufacturing. Efficacy or safety concerns and/or manufacturing
quality issues with respect to our products or those of our partners could lead
to product recalls, fines, withdrawal of approvals, declining sales, and/or our
failure to successfully commercialize SDC or otherwise achieve revenue
growth.




In
addition, the FDA and comparable agencies in many foreign countries impose
substantial limitations on the introduction of new products through costly and
time-consuming laboratory and clinical testing and other
procedures.  The process of obtaining FDA and other required
regulatory approvals is lengthy, expensive and uncertain.  There is no
guarantee that we, or our partners, will be able to obtain the resources
necessary to further develop our technology or obtain regulatory approvals, or
that the products will be successful in meeting the strict criteria imposed by
the FDA.  It may be several years before we, or any third party to
whom we grant rights to use our silver ion technologies, are able to introduce
any FDA regulated antimicrobial pharmaceutical products containing our
technology.




If
a natural or man-made disaster strikes our manufacturing facility, we will be
unable to manufacture our products for a substantial amount of time and our
sales and profitability will decline




Our sole
manufacturing facility and the manufacturing equipment we use to produce our
products would be costly to replace and could require substantial lead-time to
repair or replace.  The facility may be affected by natural or
man-made disasters and in the event they were affected by a disaster, we would
be forced to set up alternative production capacity, or rely on third party
manufacturers to whom we would have to disclose our trade
secrets.  Although we possess insurance for damage to our property and
the disruption of our business from casualties, such insurance may not be
sufficient to cover all of our potential losses, may not continue to be
available to us on acceptable terms, or at all, and may not address the
marketing and goodwill consequences of our inability to provide products for an
extended period of time.




If
we are unable to successfully develop or commercialize new applications of our
SDC technology, our operating results will suffer




In
addition to its use on inanimate surfaces, we believe that our SDC technology
also shows promise as a broad-spectrum antimicrobial for use in human and
veterinary healthcare products.  We plan to pursue additional EPA, FDA
and other required regulatory approvals for other applications. We have entered
into agreements with FTA Therapeutics (“FTA”) for the development and
commercialization of certain FDA regulated SDC-based
products.  However, we do not exercise any control over
FTA.  FTA’s resources are limited and progress to date on all
indications has been slow.  Any products developed may never achieve
regulatory approval and may never be commercialized.  If they are
commercialized, we may not receive a share of future revenues that provides an
adequate return on our historical or future investment.




Our
ability to generate increased revenue depends in part upon the ability and
willingness of our current and potential strategic partners to increase
awareness of our technology and its applications to their customers, and to
provide implementation services. If our strategic partners fail to increase
awareness of our technology for any reason, or to assist us in getting access to
decision-makers, then we may need to increase our marketing expenses, change our
marketing strategy or enter into marketing relationships with different parties,
any of which could impair our ability to generate increased revenue or to
generate profits from our technology.




Because
we are an early stage company, it is difficult to evaluate our prospects; our
financial results may fluctuate and these fluctuations may cause our stock price
to fall




Since
acquiring the rights to our SDC technology, we have encountered and likely will
continue to encounter risks and difficulties associated with new and rapidly
evolving markets. These risks include the following, among others:




·
            we
      may not increase our sales to our existing customers and expand our
      customer base;




·
            we
      may not succeed in maintaining or expanding our current sales and in
      penetrating other markets and applications of our SDC
      technology;




·
            we
      or our partners and/or distributors may not establish and maintain
      effective marketing programs and create product awareness or brand
      identity;




·
            our
      partners’ and/or distributors’ goals and objectives may not be consistent
      with our own;




·
            we
      may not attract and retain key business development, technical and
      management personnel;




·
            we
      may not succeed in locating strategic partners and licensees of our
      technology;




·
            we
      may not effectively manage our anticipated growth;
  and




·
            we
      may not be able to adequately protect our intellectual
      property.




In
addition, because of our limited operating history and the early stage of market
development for our SDC technology, we have limited insight into trends that may
emerge and affect our business.  Forecasting future revenues is
difficult, especially since our technology is novel, and market acceptance of
our products could change rapidly.  In addition, our customer base is
highly concentrated.  Fluctuations in the buying patterns of our
current or potential customers could significantly affect the level of our sales
on a period to period basis.  As a result, our financial results could
fluctuate to an extent that may not meet market expectations and that also may
adversely affect our stock price.  There are a number of other factors
that could cause our financial results to fluctuate unexpectedly, including
product sales, the mix of product sales, the cost of product sales, our ability
for any reason to be able to meet demand, the achievement and timing of research
and development and regulatory milestones, changes in expenses including
non-cash expenses such as the fair value of stock options granted, and
manufacturing or supply issues, among other issues.











We
have no product distribution experience and we expect to rely on third parties
who may not successfully sell our products




We have
no product distribution experience and currently rely and plan to rely primarily
on product distribution arrangements and/or sales and marketing services
provided by third parties.  We have licensed or plan to license our
technology to certain third parties for commercialization of multiple
applications.  We expect to enter into additional distribution
agreements and licensing agreements in the future, and we may not be able to
enter into these additional agreements on terms that are favorable to us, if at
all. In addition, we may have limited or no control over the distribution
activities of these third parties. These third parties could sell competing
products and/or may devote insufficient sales efforts to our products. As a
result, our future revenues from sales of our products, if any, will depend on
the success of the efforts of these third parties.




We
expect to rely on third parties to develop SDC-based products and they may not
do so successfully or diligently




We rely
in part on third parties to whom we license rights to our technology to develop
products containing SDC for many of the applications for which we believe
SDC-based products have, or may have, market
opportunities.  Generally, under our contractual relationships with
these third parties, we rely on the third party to fund and direct product
development activities and appropriate regulatory filings.  Any of
these third parties may not be able to successfully develop such SDC-based
products, due to, among other factors, a lack of capital; a lack of appropriate
diligence; a change in the evaluation by the third party of the market potential
for SDC-based products; technical failures; and poorer than expected test
results resulting from trial use of any products that may be
developed.




If
we are unable to obtain, maintain or defend patent and other intellectual
property ownership rights relating to our technology, we or our collaborators
and distributors may not be able to develop and market products based on our
technology, which would have a material adverse impact on our results of
operations




We rely
and expect in the future to rely on a combination of patent, trademark, trade
secret and copyright protections, and contractual restrictions, to protect the
proprietary aspects of our technology and business. These legal protections
afford only limited protection for our intellectual property and trade secrets.
Despite efforts to protect our proprietary rights, unauthorized parties may
attempt to copy aspects of our proprietary technology or otherwise obtain and
use information that we regard as proprietary.  As a result, we cannot
assure you that our means of protecting our proprietary rights will be adequate,
and the infringement of such rights could have a material negative impact on our
business and on our results of operations.




We have
filed for U.S. and foreign patent applications and trademark registrations for
our patents and trademarks. We may not be successful in obtaining these patents
and trademarks, and we may be unable to obtain additional patent and trademark
protection in the future. Furthermore, legal standards relating to the validity,
enforceability and scope of protection of intellectual property rights are
uncertain.  It is possible that, despite our efforts, competitors or
others will create and use products in violation of our patents and/or adopt
service names similar to our service names or otherwise misappropriate our
intellectual property. Such patent infringement or misappropriation could have a
material adverse effect on our business. Any unauthorized production of our
SDC-based products, whether in the U.S. or overseas, would or could reduce our
own sales of SDC-based products, thereby reducing, perhaps significantly, our
actual or potential profits.  Adopting similar names and trademarks by
competitors could lead to customer confusion. Any claims or customer confusion
related to our trademarks could negatively affect our business.




Litigation
may be necessary to enforce our intellectual property rights and protect our
trade secrets. If third parties prepare and file applications in the U.S. or
other countries that claim trademarks used or registered by us, we may oppose
those applications and may be required to participate in proceedings before the
regulatory agencies who determine priority of rights to such trademarks. Any
litigation or adverse priority proceeding could result in substantial costs and
diversion of resources, and could seriously harm our business and operating
results.




If we are
found to have violated the trademark, trade secret, copyright, patent or other
intellectual property rights of others, such a finding could result in the need
to cease use of a trademark, trade secret, copyrighted work or patented
invention in our business and the obligation to pay a substantial amount for
past infringement. It could also be necessary for us to pay a substantial amount
in the future if the rights holders are willing to permit us to continue to use
the intellectual property rights. Either having to cease use or pay such amounts
could make us much less competitive and could have a material adverse impact on
our business, operating results and financial condition.




To the
extent that we operate internationally, the laws of foreign countries may not
protect our proprietary rights to the extent as do the laws of the U.S. Many
countries have a “first-to-file” trademark registration system. As a result, we
may be prevented from registering or using our trademarks in certain countries
if third parties have previously filed applications to register or have
registered the same or similar trademarks. Our means of protecting our
proprietary rights may not be adequate, and our competitors, or potential
competitors, could independently develop similar technology.




We
may become subject to product liability claims




As a
business which manufactures and markets products for use by consumers and
institutions, we may become liable for any damage caused by our products,
whether used in the manner intended or not. Any such claim of liability, whether
meritorious or not, could be time-consuming and/or result in costly litigation.
Although we maintain general liability insurance, our insurance may not cover
potential claims of the types described above and may not be adequate to
indemnify for all liabilities that may be imposed. Any imposition of liability
that is not covered by insurance or is in excess of insurance coverage could
harm our business and operating results, and you may lose some or all of any
investment you have made, or may make, in our common stock.




Litigation
or the actions of regulatory authorities may harm our business or otherwise
distract our management




Substantial,
complex or extended litigation could cause us to incur major expenditures and
would distract our management. For example, lawsuits by employees, former
employees, shareholders, partners, customers, or others, or actions taken by
regulatory authorities, could be very costly and substantially disrupt our
business.  Such lawsuits or actions could from time to time be filed
against us and/or or our executive officers and directors.  Such
lawsuits and actions are not uncommon, and we cannot assure you that we will
always be able to resolve such disputes or actions on terms favorable to us, or
that there will be sufficient capital resources available to defend such
actions.













Maintaining
compliance with our obligations as a public company may strain our resources and
distract management, and if we do not remain compliant our stock price may be
adversely affected




Our
common stock is registered under the Securities Exchange Act of 1934, as amended
(the “Exchange Act”).  It is therefore subject to the information,
proxy solicitation, insider trading and other restrictions and requirements of
the SEC under the Exchange Act.  The SEC continues to issue new and
proposed rules, and complying with existing and new rules has resulted, and will
continue to result, in the requirement for us to devote significant financial
and other resources in order for us to maintain our status as a public
company.  In addition, in April 2008 we obtained a listing of our
common stock on the NASDAQ Capital Market, adding the additional cost and
administrative burden of maintaining such a listing.  These additional
regulatory costs and requirements will reduce our future profits or increase our
future losses, and more management time and effort will be needed to meet our
regulatory obligations than was needed prior to 2008.




We are
required to evaluate our internal controls systems in order to allow management
to report on our internal controls as required by Section 404 of the
Sarbanes-Oxley Act.  Our management is required to attest to, and have
our Independent Registered Public Accounting Firm attest to, the adequacy of our
internal controls.  Recent SEC pronouncements suggest that in the next
several years we may be required to report our financial results using new
International Financial Reporting Standards, replacing GAAP, which would require
us to make significant investments in training, hiring, consulting and
information technology, among other investments.  All of these and
other reporting requirements and heightened corporate governance obligations
that we face, or will face, will further increase the cost to us, perhaps
substantially, of remaining compliant with our obligations under the Exchange
Act and the Sarbanes-Oxley Act.  In order to meet these incremental
obligations, we will need to invest in our corporate and accounting
infrastructure and systems, and acquire additional services from third party
auditors and advisors.  As a result of these requirements and
investments, we will incur significant additional expenses and will suffer a
significant diversion of management’s time.  There is no guarantee
that we will be able to continue to meet these obligations in a timely manner,
and we could therefore be subject to sanctions or investigation, or the
delisting of our common stock, by regulatory authorities such as the SEC or the
NASDAQ Capital Market.  Any such actions could adversely affect our
financial results and the market price of our common stock, perhaps
significantly.




Our
publicly-filed reports are reviewed from time to time by the SEC, and any
significant changes or amendments required as a result of any such review may
result in material liability to us and may have a material adverse impact on the
trading price of our common stock




The
reports of publicly-traded companies are subject to review by the SEC from time
to time for the purpose of assisting companies in complying with applicable
disclosure requirements, and the SEC is required, pursuant to the Sarbanes-Oxley
Act of 2002, to undertake a comprehensive review of a company’s reports at least
once every three years.  SEC reviews may be initiated at any time.
While we believe that our previously filed SEC reports comply, and we intend
that all future reports will comply, in all material respects with the published
rules and regulations of the SEC, we could be required to modify, amend or
reformulate information contained in prior filings as a result of an SEC review.
Any modification, amendment or reformulation of information contained in such
reports could be significant and result in material liability to us and have a
material adverse impact on the trading price of our common stock.




We
are dependent on our management team, and the loss of any key member of this
team may prevent us from achieving our business plan in a timely
manner




Our
success depends largely upon the continued services of our executive officers
and other key personnel. Our executive officers and key personnel could
terminate their employment with us at any time without penalty. We do not
maintain key person life insurance policies on our executive officers or other
employees, other than Michael L. Krall, our President and Chief Executive
Officer.  The policy we have on Mr. Krall would likely not provide a
benefit sufficient to offset the financial losses resulting from the loss of Mr.
Krall’s future services.  The loss of one or more of our executive
officers or key employees could seriously harm our business, results of
operations, financial condition, and/or the market price of our common stock. We
cannot assure you that in such an event we would be able to recruit qualified
personnel able to replace these individuals in a timely manner, or at all, on
terms acceptable to either us or any qualified candidates.




Because
competition for highly qualified business development and bioengineering
personnel is intense, we may not be able to attract and retain the employees we
need to support our planned growth




To
successfully meet our objectives, we must continue to attract and retain highly
qualified business development and bioengineering personnel with specialized
skill sets focused on the industries in which we compete, or intend to
compete.  Competition for qualified business development and
bioengineering personnel can be intense.  Our ability to meet our
business development objectives will depend in part on our ability to recruit,
train and retain top quality people with advanced skills who understand our
technology and business.  In addition, it takes time for our new
personnel to become productive and to learn our business.  If we are
unable to hire or retain qualified business development and bioengineering
personnel, it will be difficult for us to sell our products or to license our
technology, and we may experience a shortfall in revenue and not achieve our
anticipated growth.




Anti-takeover
provisions under our charter documents and California law could delay or prevent
a change of control and could also limit the market price of our
stock




Certain
provisions of our charter and by-laws may delay or frustrate the removal of
incumbent directors and may prevent or delay a merger, tender offer, or proxy
contest involving us that is not approved by our Board of Directors (the
“Board”), even if such events may be beneficial to the interests of
shareholders. For example, our Board, without shareholder approval, has the
authority and power to issue all authorized and unissued shares of common stock
which have not otherwise been reserved for issuance, on such terms as the Board
determines. The Board could also issue 5,000,000 shares of preferred stock and
such preferred stock could have voting or conversion rights which could
adversely affect the voting power of the holders of our common stock. In
addition, California law contains provisions that have the effect of making it
more difficult for others to gain control of the Company.













The
price of our common stock may be volatile, which may cause investment losses for
our shareholders




Since our
initial public offering in August 1996, the price and trading volume of our
common stock have been highly volatile. The price has ranged from below $1 per
share to over $8 per share, and the monthly trading volume has varied from under
200,000 shares to over 7.8 million shares.  During the twelve months
prior to March 10, 2010, the closing price of our common stock on any given day
has ranged from $1.38 to $2.19 per share, and the monthly trading volume has
varied from approximately 1.2 million shares to approximately 5.4 million
shares. In the future, the market price of our common stock may be volatile and
could fluctuate substantially due to many factors, including:




·
            actual
      or anticipated fluctuations in our results of
  operations;




·
            the
      introduction of new products or services, or product or service
      enhancements by us or our
competitors;




·
            developments
      with respect to our or our competitors’ intellectual property rights or
      regulatory approvals or denials;




·
            announcements
      of significant acquisitions or other agreements by us or our
      competitors;




·
            the
      sale by us of our common or preferred stock or other securities, or the
      anticipation of sales of such
securities;




·
            sales
      or anticipated sales of our common stock by our insiders (management and
      directors);




·
            the
      trading volume of our common stock, particularly if such volume is
      light;




·
            conditions
      and trends in our industry;




·
            changes
      in our pricing policies or the pricing policies of our
      competitors;




·
            changes
      in the estimation of the future size and growth of our markets and, among
      other factors;




·
            general
      economic conditions.




In
addition, the stock market in general, the NASDAQ Capital Market, and the market
for shares of novel technology and biotechnology companies in particular, have
experienced extreme price and volume fluctuations that have often been unrelated
or disproportionate to the operating performance of those companies. Further,
the market prices of bioscience companies have been unusually volatile in the
last year, and many economists expect such unusual volatility to continue for
the foreseeable future. These broad market and industry factors may materially
harm the market price of our common stock, regardless of our operating
performance. In the past, following periods of volatility in the market price of
a company’s securities, shareholder derivative lawsuits and securities class
action litigation have often been instituted against that company. Such
litigation, if instituted against the Company or our officers and directors,
could result in substantial costs and a diversion of management’s attention and
resources.  In addition, this volatility could adversely affect an
investor’s ability to sell shares of our common stock and/or the available price
for such shares, and could result in lower prices being available to an investor
if the investor wishes to sell their shares at any given time.




Our
future capital needs are uncertain, and we currently expect that we will need
additional funds in the future which may not be available on acceptable terms or
at all




Our
capital requirements will depend on many factors, including, among other
factors:




·
            acceptance
      of, and demand for, our products;




·
            the
      success of our strategic partners in developing and selling products
      derived from our technology;




·
            the
      costs of further developing our existing, and developing new, products or
      technologies;




·
            the
      extent to which we invest in new technology, testing and product
      development;




·
            the
      number and timing of acquisitions and other strategic transactions, if
      any; and




·
            the
      costs associated with the continued operation, and any future growth, of
      our business.




We do not
currently believe that our current cash resources are sufficient to meet our
anticipated needs during the next twelve months and as a result, we expect that
we will need to increase our liquidity and capital resources, by raising
additional financing in future periods through the issuance of debt, equity, or
convertible securities, entering into partnership, license, or other
arrangements with third parties, reducing the exercise price of outstanding
warrants, or through other means, any one of which could reduce the value to us,
perhaps substantially, of our technology and its commercial
potential.  Such funds may not be available on favorable terms, or at
all. Furthermore, if we issue equity or convertible debt securities to raise
additional funds, our existing shareholders may experience dilution, and the new
equity or debt securities may have rights, preferences and privileges senior to
those of our existing shareholders.  If we incur additional debt, it
may increase our leverage relative to our earnings or to our equity
capitalization. If we cannot raise funds on acceptable terms, we may need to
scale back our expenditures through reductions in our workforce and operations,
and we may not be able to develop or enhance our technologies and/or products,
execute our business plan, take advantage of future opportunities, or respond to
competitive pressures or unanticipated consumer requirements.











We
may not be able to maintain our NASDAQ listing




In April
2008, we obtained a listing for our common stock on the NASDAQ Capital
Market.  In order to maintain our listing, we will need to continue to
meet certain minimum listing standards that include, or may include, our
shareholders’ equity, the market value of our listed or publicly held
securities, the number of publicly held shares, our net income, a minimum bid
price for our common stock, the number of shareholders, the number of market
makers, and certain of our corporate governance policies.  If we fail
to maintain the standards required now or in future by the NASDAQ Capital
Market, our common stock could be delisted from the NASDAQ Capital
Market.  Such delisting could cause our stock to be classified as
“penny stock,”, among other potentially detrimental consequences, any of which
could significantly impact your ability to sell your shares or to sell your
shares at a price that you may deem to be acceptable.




If
outstanding options and warrants to purchase shares of our common stock are
exercised, or if other remaining authorized shares of our common stock are
issued, the interests of our shareholders could be diluted




We have
7,615,722 shares of common stock reserved for issuance, which includes shares
under equity compensation plans, vested and unvested options, warrants, and
unvested restricted stock.  The outstanding stock options and warrants
have a weighted-average exercise price of approximately $2.45.  In
addition, 7,535,470 authorized shares of our common stock remain available for
future issuance under equity compensation plans or otherwise.  The
exercise of options and warrants, and the sale of shares underlying such options
or warrants, could have an adverse effect on the market for our common stock,
including the price that an investor could obtain for their
shares.  Investors may experience dilution in the net tangible book
value of their investment upon the exercise of outstanding options and warrants
granted under our stock option plans, and options and warrants yet to be granted
or issued.




We
may not be able to utilize all of, or any of, our tax net operating loss
carry-forwards and our future after-tax earnings, if any, could be
reduced




At
January 31, 2010, we had federal and California tax net operating loss
carry-forwards of approximately $50 million and $40 million,
respectively.  Utilization of the net operating loss carry-forwards
may be subject to a substantial annual limitation due to ownership change
limitations that may have occurred or that could occur in the future, as
required by Section 382 of the Internal Revenue Code as well as similar state
provisions. These ownership changes may limit the amount of net operating loss
carry-forwards that can be utilized annually to offset future taxable income and
tax, respectively. In general, an ownership change, as defined by Section 382 of
the Internal Revenue Code results from a transaction or series of transactions
over a three-year period resulting in an ownership change of more than 50
percentage points of the outstanding stock of a company by certain stockholders
or public groups. Since the Company’s formation, we have raised capital through
the issuance of capital stock on several occasions (both before and after our
initial public offering in 1996) which, combined with the purchasing
shareholders’ subsequent disposition of those shares, may have resulted in such
an ownership change, or could result in an ownership change in the future upon
subsequent disposition.  While we believe that the Company has not
experienced an ownership change, the pertinent tax rules related thereto are
complex and subject to varying interpretations, and thus complete assurance
cannot be provided that the taxing authorities would not take an alternative
position.




In
addition, our federal tax loss carry-forwards began expiring in the current
fiscal year, and will completely expire in the fiscal year ending July 31,
2028.  Between July 31, 2010 and July 31, 2012, $3,323,800 of our
federal net operating loss carry-forwards will expire, and the balance of our
current federal net operating loss carry-forwards will expire between July 31,
2018 and July 31, 2028.  Our California tax loss carry-forwards will
begin to expire in the year ending July 31, 2014, and will completely expire in
the fiscal year ending July 31, 2029.   If we are unable to earn
sufficient profits to utilize the carry-forwards by these dates, they will no
longer be available to offset future profits, if any.




We
are subject to tax audits by various tax authorities in multiple
jurisdictions




From time
to time we may be audited by tax authorities to whom we are
subject.  Any assessment resulting from such audits, if any, could
result in material changes to our past or future taxable income, tax payable or
deferred tax assets, and could require us to pay penalties and interest that
could materially adversely affect our financial results.




We
may never pay dividends




We have
never paid any cash dividends on our common stock and do not anticipate paying
cash dividends on our common stock in the foreseeable future. The future payment
of dividends on our common stock, if any, is dependent on the discretion of our
Board, our earnings, our financial condition and other business and economic
factors which our Board may consider relevant.













Item 5.  Other
Information




On
January 20, 2010 our Annual Meeting of Shareholders was held in San Diego,
California.   Matters on which our shareholders voted
were:





(1)
            To
      elect six (6) directors to hold office until the next annual meeting of
      shareholders and until their successors are elected and qualified, or
      until their earlier death, resignation or removal.  The voting
      results were as follows:






Total Shares
      Voted:
            8,366,875Broker
    Non-Votes
            20,922,242







Total
      Votes for Each Director
            
            Total
      Votes Withheld from Each DirectorGregory
      H. Barnhill
            4,998,337
            
            3,368,538Dennis
      Brovarone
            3,699,384
            
            4,667,491John
      J Carbone, MD
            4,814,686
            
            3,552,189Michael
      L. Krall
            4,444,627
            
            3,922,248Paul
      V. Maier
            4,721,426
            
            3,645,449Donna
      Singer
            4,371,019
            
            3,995,856








(2)
            To
      ratify the appointment of Mayer Hoffman McCann P.C. as PURE Bioscience’s
      independent registered public accounting firm for the fiscal year ending
      July 31, 2010.  The voting results were as
    follows:




For
            
            Against
            
            Abstained
            
            Broker
      Non-Votes24,839,873
            
            3,720,731
            
            728,513
            
            None

















Item
6. Exhibits




A.   Exhibits




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




31.1
            -- Certification of Chief Executive Officer pursuant to
      Section 302 of the Sarbanes-Oxley Act of
  2002*





31.2
            -- Certification of Chief Financial Officer pursuant to
      Section 302 of the Sarbanes-Oxley Act of
  2002*





32.1
            -- Certification of Chief Executive Officer pursuant to
      Section 906 of the Sarbanes-Oxley Act of
  2002*





32.2
            -- Certification of Chief Financial Officer pursuant to
      Section 906 of the Sarbanes-Oxley Act of 2002*







* Filed
herewith.
















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.




PURE
      BioscienceBy:
            /s/
      Michael L. KrallMichael
      L. Krall
              President
      / Chief Executive Officer
              (Principal
      Executive Officer)
              March
      11, 2010By:
            /s/
      Andrew J. BucklandAndrew
      J. Buckland
              Chief
      Financial Officer
              (Principal
      Financial Officer)
              March
      11, 2010