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| CEXI.OB > SEC Filings for CEXI.OB > Form 10QSB on 17-Mar-2008 | All Recent SEC Filings |
17-Mar-2008
Quarterly Report
The following discussion should be read 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, and detection of the diversion of narcotics and controlled substances);
2. Security and Public Safety - Identification of substances of concern (e.g., explosives, illegal drugs, 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 the mathematically processed 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 clients. 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 which currently stands at over 160 signatures. CDEX continues to sell and install its ValiMed product line to major US hospitals.
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 first quarter of FY 2008, CDEX announced a series of initiatives involving international expansion, hiring of a VP of International Sales and Marketing located in France, and a representative in the United Kingdom, as well as a partnership cooperation between CDEX and the London Imperial College Healthcare NHS Trust. This led to the February 2008, installation for reference testing of two ValiMed Units in the Charing Cross and Hammersmith Hospitals in London. The Company continues to expand its international presence for the ValiMed product line. While these companies may represent significant distribution opportunities for ValiMed(TM), CDEX management cannot guarantee that 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.
In the first fiscal quarter 2008, CDEX continued to expand the ValiMed product line with an increasing signature library and units for specialized applications.
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
In FY 2007, CDEX completed beta testing with law enforcement partners of its ID2, Methamphetamine Scanner, a hand held, battery operated device capable of detecting trace quantities of methamphetamine on virtually all surfaces in real time while in a scan mode. As a result of beta testing, the ID2 was modified and field tested. It is expected that the production cycle of the Methamphetamine Scanner will start in the second quarter of fiscal year 2008. Potential markets for the Methamphetamine Scanner include law enforcement, school systems, property inspection (e.g. homes, apartments, automobiles and hotels), healthcare and private investigation. There is no assurance that the Company will be successful in penetrating these markets.
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.
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 January 31, 2008 Compared to Three Months Ended January 31, 2007
Revenue: Revenue was $183,096 and $21,635 during the three months ended January 31, 2008 and January 31, 2007, respectively. The increase in revenue of $161,461 resulted primarily from the installation of ValiMed units along with higher installation and training fees and higher sales of customer supplies. In the first fiscal quarter of 2008, the Company recognized $84,000 of deferred revenue when it delivered ValiMed units to end users. As of January 31, 2008, the Company has deferred revenue of $162,000. The deferred revenue is for ValiMed(TM) units paid for by Baxa Corporation and for payments received from the Missouri State Highway Patrol for the beta testing of the Methamphetamine Detection Device.
Cost of revenue: Cost of revenue was $37,731 and $3,345 during the three months ended January 31, 2008 and January 31, 2007. The increase in the cost of revenue was primarily for the ValiMed units that were installed during the quarter.
Research and development costs: Research and development costs were $224,343 during three months ended January 31, 2008, compared with $182,519 during the three months ended January 31, 2007. The increase of $41,824 (or 23%) resulted primarily from an increase in non-payroll expenditures for materials used in research activities associated with continuing drug signature development and methamphetamine scanner development.
General and administrative expenses: General and administrative expenses were $373,874 during the three months ended January 31, 2008, compared with $268,273 during the three months ended January 31, 2007. This increase of $105,601(or 39%) resulted from an increase in professional services and travel expenses associated with marketing.
Other income (expense): Interest expense was $4,535 and $16,214, respectively, during three months ended January 31, 2008 and 2007.
Net loss was $457,387 during the three months ended January 31, 2008, compared with a net loss of $448,627 during the three months ended January 31, 2007, 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 January 31, 2008, we had negative working capital of $1,498,250 including $114,766 of cash and cash equivalents. We anticipate the need to raise additional capital over the next 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.
During the three months ended January 31, 2008, the Company had net cash flows from financing activities of $472,449 in funding, comprised of:
o $130,000 received from the sale of 325,000 shares of Class A restricted common stock at a price of $0.40 per share. The investors received warrants to purchase up to 325,000 shares at an exercise price of $.60 per share for a two year period from the effective dates of the share purchases.
o $322,000 received from the exercise of 1,611,247 warrants for an average price $.20 per share.
o $20,450 received from the exercise of 135,000 stock options for an average price of approximately $.15 per share.
o Issuance of 341,901 shares of common stock in the amount of $41,029 (which is included in Proceeds from sale of common stock in the Cash Flow statement) as repayment of a notes payable plus accrued interest.
We had a net increase in cash and cash equivalents of $87,382 during the three months ended January 31, 2008, compared with a net increase of $25,359 during the three months ended January 31, 2007. We used net cash of $385,067 and $440,731 in operating activities during the three months ended January 31, 2008 and 2007, respectively. We received net cash provided by financing activities in the amount of $472,449 and $516,090 from the sale of common stock to accredited investors less repayment of notes payable during the three months ended January 31, 2008 and 2007, 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 January 31, 2008 the Company recognized previously deferred revenue in the amount of $84,000 for ValiMed units shipped to BAXA Corporation. As of January 31, 2008, the Company has deferred revenue in the amount of $112,000 for ValiMed units. In addition, 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 $7,952 and $7206 for the three months ended January 31, 2008 and 2007, 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 $1,471 and $1,961 for the three months ended January 31, 2008 and 2007, 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
The following risk factors should carefully consider along with 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, 2007 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 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 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 being handled by a 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 2009. A permanent, full-time chief financial officer would better coordinate and oversee these procedures and our disclosure, bringing to bear specific financial and accounting expertise. Our part time chief financial officer currently performs this function with assistance from the CEO 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 revenue from the sale of our products, 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 funds of approximately $2,500,000 net to the Company through bank borrowings or equity or debt financing over the next twelve months. We continue to seek prospective investors who may provide some of this funding. However, such funding may not be available when needed or may not be available on favorable terms. Certain family members or business entities of our management team have loaned funds to CDEX on an as-needed basis although there is no definitive or legally binding arrangement to do so. If we do not produce revenues and become profitable, eventually, we will be unable to sustain our business.
IF WE ISSUE ADDITIONAL EQUITY TO FUND OPERATIONS OR ACQUIRE BUSINESSES OR TECHNOLOGIES, CDEX SHAREHOLDERS WILL EXPERIENCE DILUTION PROPORTIONAL TO THE ISSUED EQUITY.
If working capital or future acquisitions are financed through the issuance of equity securities, CDEX shareholders will experience dilution proportional to the equity issued. In addition, securities issued in connection with future financing activities or potential acquisitions may have rights and preferences senior to the rights and preferences of the currently outstanding CDEX shares of common stock. The conversion of future debt obligations into equity securities could also have a dilutive effect on our shareholders. Also, to conserve our cash, we may elect to compensate providers of services by issuing stock or stock options in lieu of cash.
OUR POTENTIAL INABILITY TO PROTECT THE PROPRIETARY RIGHTS IN CDEX'S TECHNOLOGIES AND INTELLECTUAL PROPERTY MAY HAMPER OUR ABILITY TO MANUFACTURE PRODUCTS WHICH WOULD PREVENT US FROM EARNING REVENUES OR BECOMING PROFITABLE.
Our success and ability to compete will depend in part on the protection of our potential patents and other proprietary information. We currently have two patents issued and others in various stages of government review for our chemical detection technologies. We rely on non-disclosure agreements and patent and copyright laws to protect the intellectual property that we have developed and plan to develop. However, such agreements and laws may provide insufficient protection. Moreover, other companies may develop products that are similar or superior to CDEX's or may copy or otherwise obtain and use our proprietary information without authorization. If a third party were to violate one or more of our patents, we may not have the resources to bring suit or otherwise protect the intellectual property underlying the patent. In the event of such a violation or if a third party appropriated any of our unpatented technology, such party may develop and market products which we intend to develop and/or market. We would lose any revenues which we would otherwise have received from the sale or licensing of those products. This could prevent our ever making a profit on any products based upon the misappropriated technology.
Policing unauthorized use of CDEX's proprietary and other intellectual property rights could entail significant expense and could be difficult or impossible. In addition, third parties may bring claims of copyright or trademark infringement against CDEX or claim that certain of our processes or features violate a patent, that we have misappropriated their technology or formats or otherwise infringed upon their proprietary rights. Any claims of infringement, with or without merit, could be time consuming to defend, result in costly litigation, . . .
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