Add
CEXI.OB to Portfolio
Set Alert
Email to a
Friend
| |||
|
|
Quotes & Info
|
| CEXI.OB > SEC Filings for CEXI.OB > Form 10QSB on 14-Sep-2007 | All Recent SEC Filings |
14-Sep-2007
Quarterly Report
You should read the following discussion in conjunction with our unaudited financial statements and related notes included elsewhere in this document. The following discussion (as well as other discussions in this document) contains forward-looking statements. Please see Forward-Looking Statements for a discussion of uncertainties, risks and assumptions associated with these statements.
PLAN OF OPERATION
General
CDEX Inc. is a technology development company that is currently applying its patented and patents pending chemical detection technologies to develop products in the healthcare, security, and brand protection markets. CDEX is a public company and its common stock is traded on the OTC Bulletin Board (OTCBB) under the symbol "CEXI.OB". CDEX was incorporated in the State of Nevada on July 6, 2001 and maintains its corporate offices and research and development laboratories in Tucson, Arizona. Currently, CDEX is focused in three distinct markets:
1. Healthcare - Validation of substances and quality assurance (e.g., validation of prescription and compounded medications to provide for patient safety, detection of the diversion of narcotics and controlled substances returned from operating room suites to the operating room pharmacy);
2. Security and Public Safety - Identification of substances of concern (e.g., explosives, illegal drugs, chemical/biological weapons, and the detection of counterfeit drugs and medications to assist in the protection of the nation's drug supply); and
3. Brand Protection - Detection of counterfeit or sub-par products for brand protection (e.g., inspection of incoming raw materials, outgoing final products, and products in the distribution channel).
ValiMed(TM) Product Line
ValiMed is the medical product line of CDEX. The current ValiMed product line uses Enhanced Photoemission Spectroscopy to validate, in virtually real time, high-risk medication admixtures, as well as returned narcotics to provide an increased level of patient safety. Products in the ValiMed(TM) line compare a spectroscopic signature of a tested medication to the correct signature in the CDEX Medication Signature Library and return an easy to understand "validated" or "not validated" result, requiring no user interpretation.
In 2006, CDEX management and staff successfully completed second stage implementation of the production plan for the ValiMed(TM) Medication Validation System, and began shipment of production units to end user clients and to our exclusive U.S. and Canadian ValiMed distributor. In the first half of FY 2007, CDEX began the expansion of the ValiMed Product Line and its corresponding Medication Signature Library. This expansion was announced and associated sales launched in the 3rd fiscal quarter of 2007. This has resulted in an influx of prospective clients and contracts for sale of ValiMed units signed with new and existing clients. During the first half of fiscal year 2007, CDEX also contacted all of its existing ValiMed clients to allow them to convert to the expanded ValiMed Units and Signature Library. CDEX is continuing to add signatures to its Medication Signature Library and expects that there will be over 150 by the end of calendar year 2007.
All ValiMed(TM) production units are shipped with the TUV mark indicating that ValiMed(TM) meets the electrical safety, electromagnetic interference (EMI), and electromagnetic compatibility (EMC) test requirements for products sold in the USA, Canada, and the European Union. In addition, ValiMed(TM) has also been tested to the TUV CB Scheme which opens opportunities to market and sell ValiMed(TM) production units in countries other than the US, Canada, and the European Union.
In the third quarter of FY 2007, CDEX continued discussions with companies outside the USA who have shown an interest in representing CDEX as a ValiMed(TM) distributor. CDEX expects to enter into its first agreement for distribution outside the USA in CY 2007. While these companies may represent significant distribution opportunities for ValiMed(TM), CDEX management cannot guarantee that it will be able to close a distribution agreement with any of the companies in these markets, nor that if an agreement is closed it will result in substantial revenue for CDEX.
ValiMed(TM) has transitioned from a beta-test product to a production product. Management does not expect the revenues from ValiMed(TM) to grow in a linear or predictable manner due to the fact that ValiMed(TM) is a relatively new product. It is more likely that revenues will be variable over the next year; with an increasingly stabilized upward trend. This will continue into the foreseeable future until we are better able to predict the product's traction in the marketplace.
In the third fiscal quarter, CDEX finalized the testing prototype of a new ValiMed product, the ValiMed LVM (a lower cost unit capable of validation of a limited number of medication signatures). The ValiMed LVM was placed in a Tucson hospital for beta testing in August 2007.
In order to increase sales, CDEX must receive additional investment funding to implement its business plan, fund its international marketing and sales initiatives, and provide working capital in order to purchase production materials and parts inventories. CDEX is continuing to seek such funding.
Illicit Drug Detector
On August 29, 2006, CDEX entered into a contract with Missouri State Highway Patrol (MSHP) for beta testing and possible volume sales of a new Methamphetamine Detection Device. This Device is hand held, battery operated and detects trace quantities of Methamphetamine in real time while scanning surfaces, including skin and clothing. In the first half of fiscal year 2007, CDEX also began beta testing of the Device with two other law enforcement organizations. The results of the first round of beta testing was completed in the second fiscal quarter of 2007 and design changes made based on beta test partner comments. The second round of beta testing for the device began in August 2007. CDEX has entered this "beta test" process to refine the Methamphetamine Detection Device for eventual planned introduction into the marketplace in calendar year 2007.
R&D
In the first half of fiscal year 2007, CDEX continued research and development efforts with several other potential products for the medical and security markets. In addition, in the 2nd fiscal quarter of 2007, CDEX teamed with a major distributor of security products in a combined application for a federal grant in the law enforcement market.
Intellectual Property
The Company relies on non-disclosure agreements, patent, trade secret and copyright laws to protect the Company's intellectual property. The Company makes a business decision regarding which inventions to patent, and in what countries. Currently, the company has two patents issued or allowed, and others in various stages of prosecution. In addition the Company has filed international counterparts to its US patents and applications where it deems appropriate.
RESULTS OF OPERATIONS
Three Months Ended July 31, 2007 Compared to Three Months Ended July 31, 2006
Revenue: Revenue was $303,976 and $69,316 during the three months ended July 31, 2007 and July 31, 2006, respectively. In the third fiscal quarter of 2007, the Company recognized $280,000 of deferred revenue when it delivered ValiMed units to BAXA Corporation. As of July 31, 2007, the Company has deferred revenue of $358,000 which it expects to recognize as revenue in 2007. The deferred revenue is for ValiMed(TM) units paid for by Baxa Corporation and held in the Company's facility (commonly referred to as bill and hold inventory) and payment from the Missouri State Highway Patrol for the beta testing of the Methamphetamine Detection Device.
Cost of revenue: Cost of revenue was $103,015 and $13,138 during the three months ended July 31, 2007 and July 31, 2006. The increase in the cost of revenue was primarily for the ValiMed units that were shipped during the quarter.
Research and development costs: Research and development costs were $214,829 during three months ended July 31, 2007, compared with $280,518 during the three months ended July 31, 2006. The decrease of $65,689 (or 23%) reflects CDEX's more balanced focus on production and resulted from a decrease primarily in payroll expenditures and secondarily in expenditures for consultants and materials.
General and administrative expenses: General and administrative expenses were $369,993 during the three months ended July 31, 2007, compared with $560,577 during the three months ended July 31, 2006. This decrease of $190,584 (or 34%)
resulted from a decrease in payroll resulting from the consolidation of the Company's operations, lower legal expenses, and the implementation of additional expense controls.
Other income (expense): Interest expense was $651 and $3,107, respectively, during three months ended July 31, 2007 and 2006. The decrease in interest expense resulted from a lower level of notes payable.
Net loss was $384,512 during the three months ended July 31, 2007, compared with a net loss of $788,024 during the three months ended July 31, 2006, due to the foregoing factors.
Nine Months Ended July 31, 2007 Compared to Nine Months Ended July 31, 2006
Revenue: Revenue was $352,596 and $258,730 during the nine months ended July 31, 2007 and July 31, 2006, respectively, an increase of $93,866 (or 36%). During the third quarter of 2007, the Company recognized $280,000 of deferred revenue for ValiMed units delivered to BAXA Corporation.
Cost of revenue: Cost of revenue was $109,706 and $137,734 during the nine months ended July 31, 2007 and July 31, 2006, respectively, a decrease of $28,028 (or 20%).
Research and development costs: Research and development costs were $514,115 during nine months ended July 31, 2007, compared with $1,010,788 during the nine months ended July 31, 2006. The decrease of $496,673 (or 49%) reflects CDEX's more balanced focus on production and resulted from a decrease primarily in payroll and expenditures for materials and consultants.
General and administrative expenses: General and administrative expenses were $939,022 during the nine months ended July 31, 2007, compared with $1,703,860 during the nine months ended July 31, 2006. This decrease of $764,838 (or 45%) resulted from a decrease in payroll and stock compensation expense, lower legal expenditures resulting in part from the settlement of a patent infringement lawsuit, and the implementation of additional expense controls.
Other income (expense): Other expense was $17,410 during nine months ended July 31, 2007, compared with income of $4,094 during the nine months ended July 31, 2006. The expense during the first nine months of 2007 was interest expense on notes payable. The income in fiscal year 2006 was primarily from cash in an interest earning account.
Net loss was $1,227,657 during the nine months ended July 31, 2007, compared with a net loss of $2,589,554 during the nine months ended July 31, 2006, due to the foregoing factors.
LIQUIDITY AND CAPITAL RESOURCES
To date, CDEX has incurred substantial losses and will require financing for working capital and to finance its operations. We anticipate that we will require financing on an ongoing basis unless and until we are able to support our operating activities with additional revenues.
As of July 31, 2007, we had negative working capital of $1,120,666 including $28,716 of cash and cash equivalents. We anticipate the need to raise approximately $500,000 over the next six months, and an additional $2,000,000 over the following six months. Our continued operations will depend upon our ability to implement our business plan and to raise additional funds through bank borrowings, equity or debt financing. The Company is actively seeking new investments from its current accredited investors as well as new accredited investors. On July 6, 2007, the Company entered into a short term exclusive placement agreement (with limited exception) with Stonegate Securities for the purpose of assisting the Company in its capital raising efforts.
During the nine months ended July 31, 2007, the Company had net cash flows from financing activities of $1,293,390 in funding, comprised of:
o $216,540 received from the sale of preferred stock. These preferred shares were never issued and were converted into 2,346,212 shares of common stock during the second quarter of 2007.
o $1,473,040 received from the sale of 13,277,998 shares of common stock at an average price of approximately $0.11 per share. The investors received warrants to purchase up to 15,419,279 shares at exercise prices ranging from $.15 per share to $.39 per share from time periods ranging from one year to 2.5 years from the effective dates of the share purchases.
o $62,850 for note payables.
o Repayment of a note payable in the amount of $220,000.
o Repayment of redeemable preferred stock liabilities of $239,040 which were recorded during 2006 and the quarter ended January 31, 2007 to reflect the liability incurred by the Company prior to issuance of the preferred shares pending the finalization of the negotiation of terms and conditions.
We had a net decrease in cash and cash equivalents of $27,613 during the nine months ended July 31, 2007, compared with a net decrease o$1,462,212 during the nine months ended July 31, 2006. We used net cash of $1,271,003 and $1,738,551 in operating activities during the nine months ended July 31, 2007 and 2006, respectively, and capitalized $50,000 and $0 in patent costs during the nine months ended July 31, 2007 and 2006, respectively. We received net cash provided by financing activities in the amount of $1,293,390 and $312,500 from the sale of preferred stock, common stock and notes payable to accredited investors during the nine months ended July 31, 2007 and 2006, respectively.
OFF-BALANCE SHEET ARRANGEMENTS
CDEX has not participated in any off balance sheet financing or other arrangements.
CRITICAL ACCOUNTING POLICIES
The discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate these estimates, including those related to bad debts, inventory obsolescence, intangible assets, payroll tax obligations, and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of certain assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions.
We have identified below certain accounting policies which we apply in the preparation of our financial statements. We believe that the policies discussed below are those most critical to our business operations. These policies form the basis of our discussion throughout this section and affect our reported and expected financial results.
USE OF ACCOUNTING ESTIMATES: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions. These estimates and assumptions affect (i) the reported amounts of assets and liabilities, (ii) disclosure of contingent assets and liabilities at the date of the financial statements and (iii) the reported amounts of revenues and expenses during the periods covered by our financial statements. Actual results could differ from those estimates.
REVENUE RECOGNITION: Revenue is recognized in compliance with Staff Accounting Bulletin (SAB) No. 104, Revenue Recognition, and EITF Issue No. 00-21, Revenue Arrangements with Multiple Deliverables. Sales revenues are recognized when persuasive evidence of an agreement with the customer exists, products are shipped or there is a fixed schedule for delivery, title passes pursuant to the terms of the agreement with the customer, the amount due from the customer is fixed or determinable, collectibility is reasonably assured, and there are no significant future performance obligations. Service revenues are recognized at time of performance. Service maintenance revenues are recognized ratably over the term of the agreement.
DEFERRED REVENUE: Deferred revenue represents amounts invoiced or received but not recognized as revenue if the above revenue recognition terms are not met. During the three month period ended July 31, 2007 the Company recognized previously deferred revenue in the amount of $280,000 for ValiMed units shipped to BAXA Corporation. As of July 31, 2007, the Company has deferred revenue in the amount of $308,000 for ValiMed units purchased by BAXA Corporation that are warehoused at the Company's Tucson facility per BAXA's request (commonly referred to as bill and hold transactions). Further, the Company deferred $50,000 from the Missouri State Highway Patrol (MSHP) for the Meth Gun Pilot Test Program as the program continues beyond July 31, 2007.
CASH AND CASH EQUIVALENTS: We maintain cash balances that may exceed federally insured limits. We do not believe that this results in any significant credit risk. We consider all highly liquid investments with original maturities of 90 days or less to be cash equivalents.
RISKS, UNCERTAINTIES AND CONCENTRATIONS: Financial instruments that potentially subject CDEX to significant concentration of credit risk consist primarily of cash equivalents and accounts receivable. In addition, at times CDEX's cash balances exceed federally insured amounts. Accounts receivable represents a portion of the revenue outstanding on these contracts. We provide for estimated credit losses at the time of revenue recognition.
FAIR VALUE OF FINANCIAL INSTRUMENTS: The carrying amounts of items reflected in current assets and current liabilities approximate their fair value due to the short-term nature of their underlying terms.
INVENTORY: Inventory is valued at the lower of actual cost based on a first-in, first-out basis or market. Inventory includes the cost of component raw materials and manufacturing.
PROPERTY AND EQUIPMENT: Property and equipment are stated at historical cost and are depreciated using the straight-line method over the estimated useful lives of the related assets, ranging from two to seven years. Depreciation expenses were $21,618 and $16,588 for the nine months and $7,206 and $7,206 for the three months ended July 31, 2007 and 2006, respectively.
PATENT: The Company capitalizes the costs of obtaining patents when patents are granted. Patents are amortized over their useful lives, generally 17 years. Amortization expenses were $3,922 and $0 for the nine months and $1,471 and $0 for the three months ended July 31, 2007 and 2006, respectively.
RESEARCH AND DEVELOPMENT: Total research and development costs include labor and stock compensation for employees and contractors, rent, professional services, materials, lab equipment and disposals. These costs are expensed on the accompanying Statements of Operations as development costs.
INCOME TAXES: We file our income tax returns on the cash basis of accounting, whereby revenue is recognized when received and expenses are deducted when paid. To the extent that items of income or expense are recognized in different periods for income tax and financial reporting purposes, deferred income taxes are provided to give effect to these temporary differences. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured by applying presently enacted statutory tax rates, which are applicable to the future years in which deferred tax assets or liabilities are expected to be settled or realized, to the differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in operations in the period that the tax rate is enacted.
As we have never operated at a profit, no tax benefit has been reflected in the statement of operations and a valuation allowance has been established reducing the net carrying value of the deferred tax asset to zero.
STOCK-BASED COMPENSATION: Prior to the first quarter of 2007, we provided restricted stock grants to employees and consultants as part of their compensation. Since the first quarter of 2007, we no longer provide restricted stock grants to employees as part of their compensation. We determine compensation expense as the fair value, at the measurement date, of the service received or the common stock issued, whichever is more reliably determined. In the case of employees, the measurement date is the date of grant. In the case of outside consultants, the measurement date is the date at which their performance is complete. This total cost is first reflected as deferred compensation in stockholders' equity (deficit) and then amortized to compensation expense on a straight-line basis over the period over which the services are performed. When the fair value of the common stock is used and the measurement date is not the date of grant, the total cost is re-measured at the end of each reporting period based on the fair market value on that date, and the amortization is adjusted.
We have also utilized employment and consulting agreements which combine cash and stock elements of compensation, where a fixed dollar value of stock is awarded to settle non-cash compensation. We have awarded some of the common shares in advance of when the service is performed although these shares are subject to forfeiture in the event of non-performance. We have also paid performance bonuses in awards of common stock.
RISKS RELATED TO OUR BUSINESS
You should carefully consider each of the following risk factors and all of the other information in this report. The following risks relate principally to CDEX's business and contain forward-looking statements. Actual results could differ materially from those set forth in the forward-looking statements. See "Cautionary Statement Regarding Forward-Looking Statements" below.
A HISTORY OF OPERATING LOSSES AND AN ACCUMULATED DEFICIT MAY AFFECT CDEX'S ABILITY TO SURVIVE.
We have a history of operating losses and an accumulated deficit. Since our principal activities to date have been limited to organizational activities, research and development, product development and limited marketing and sales, CDEX has produced only limited revenues. In addition, we have only limited assets. As a result, we cannot be certain that CDEX will continue to generate revenues or become profitable in the future. If we are unable to obtain customers and generate sufficient revenues to operate profitably, our business will not succeed.
CDEX HAS RECEIVED A GOING CONCERN OPINION FROM ITS INDEPENDENT AUDITORS THAT EXPRESSES UNCERTAINTY REGARDING ITS ABILITY TO CONTINUE AS A GOING CONCERN.
We have received a report from our independent auditors for the fiscal year ended October 31, 2006 containing an explanatory paragraph that expresses uncertainty regarding our ability to continue as a going concern due to historical negative cash flow. We cannot be certain that our business plans will be successful or what actions may become necessary to preserve our business. Any inability to raise capital may require us to reduce operations or could cause our business to fail.
Our limited operating history makes our future operating results unpredictable rendering it difficult to assess the health of our business or its likelihood of success. The inability to assess these factors could result in a total loss of an investor's investment in CDEX.
In the case of an established company in an ongoing market, investors may look to past performance and financial condition to get an indication of the health of the company or its likelihood of success. Our short operating history and the evolving nature of the explosives detection and chemical identification markets in which we focus make it difficult to forecast our revenues and operating results accurately. We expect this unpredictability to continue into the future due to the following factors:
o the timing of sales of our products and services, particularly in light of our minimal sales history;
o difficulty in keeping current with changing technologies;
o unexpected delays in introducing new products, new product features and services;
o increased costs and expenses, whether related to sales and marketing, manufacturing, product development or administration;
o deferral of recognition of our revenue in accordance with applicable accounting principles due to the time required to complete projects;
o the mix of product license and services revenue; and
o costs related to possible acquisitions of technologies or businesses.
CDEX could experience operating losses or even a total loss of our business which, as a result of the foregoing factors, would be difficult to anticipate and could thus cause a total loss of capital invested in CDEX.
THE ABSENCE OF A FULL TIME CHIEF FINANCIAL OFFICER LEAVES CDEX WITHOUT THE BENEFIT OF THIS TYPE OF EXPERTISE AND CONSISTENT MONITORING OF CONTROLS AND PROCEDURES WHICH A FULL-TIME CHIEF FINANCIAL OFFICER WOULD AFFORD.
We have not retained a permanent, full-time chief financial officer. The responsibilities of the principal accounting and financial officer are currently being handled by our CEO. As a result of the Company consolidating its operations in Tucson, the responsibilities of the principal accounting and financial officer are being transferred to a local qualified part-time chief financial officer on a consultancy basis.
The Sarbanes-Oxley Act requires public companies to maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in reports filed with the SEC is recorded, processed, summarized and reported within the time required. This includes controls and procedures to ensure that such information is accumulated and communicated to management,
including the chief executive and financial officers, so as to allow timely decisions regarding required disclosure of such information. The Sarbanes-Oxley Act also requires documentation of internal control procedures, remediation as needed, and periodic testing of the controls, and these requirements are expected to apply to smaller companies such as CDEX beginning in 2008. A permanent, full-time chief financial officer would coordinate and oversee these procedures and our disclosure, bringing to bear specific financial and accounting expertise. Our CEO currently performs this function with guidance from our part-time chief financial officer and others.
LACK OF ADDITIONAL FINANCING COULD PREVENT US FROM OPERATING PROFITABLY WHICH, EVENTUALLY, COULD RESULT IN A TOTAL LOSS OF OUR BUSINESS.
Since our inception, we have funded our operations through borrowings and financings. Current funds available to CDEX may not be adequate for us to be competitive in the areas in which we intend to operate, and we have no arrangements or commitments for ongoing funding. If funding is insufficient at any time in the future, we may not be able to grow revenue, take advantage of business opportunities or respond to competitive pressures. The unavailability of funding could prevent us from producing additional revenues or ever becoming profitable. Our continued operations, as well as the successful implementation of our business plan, may therefore depend upon our ability to raise additional . . .
|
|