ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operation
Our discussion and analysis of the financial condition and results of operations should be read in conjunction with the unaudited consolidated financial statements and the related disclosures included elsewhere herein and in Management’s Discussion and Analysis of Financial Condition and Results of Operations included as part of our Annual Report on Form 10-K for the fiscal year ended October 31, 2012.
Cautionary Note Regarding Forward-Looking Statements
Certain statements in this Quarterly Report on Form 10-Q constitute forward-looking statements within the meaning of the securities laws. Forward-looking statements include all statements that do not relate solely to the historical or current facts, and can be identified by the use of forward looking words such as "may", "believe", "expect", "expected", "project", "anticipate", "anticipated”, “estimates", "plans", "strategy", "target", "prospects", ”should”, “intends”, “estimates” "continue" and other words of similar meaning. These forward looking statements are based on the current plans and expectations of our management and are subject to a number of uncertainties and risks that could significantly affect our current plans and expectations, as well as future results of operations and financial condition and may cause our actual results, performances or achievements to be materially different from any future results, performances or achievements expressed or implied by such forward-looking statements.
Important factors that could cause our actual results to differ materially from our expectations are described as Risk Factors in our Annual Report on Form 10-K for the fiscal year ended October 31, 2012. Although we believe that the expectations reflected in such forward-looking statements are reasonable, there can be no assurance that such expectations will prove to have been correct. We do not assume any obligation to update these forward-looking statements to reflect actual results, changes in assumptions, or changes in other factors affecting such forward-looking statements.
OVERVIEW
CDEX Inc. (“CDEX,” “we,” “us,” “our” or the “Company”) is a technology development company incorporated in the State of Nevada on July 6, 2001 with a corporate office and research and development facility in Tucson, Arizona. Our Class A common stock is currently being traded on the OTCBB under the symbol "CDEX.OB." Our long term strategic plans focus on applying our patented and patents pending chemical detection technologies to develop products in various markets including the healthcare, security and brand protection markets, as addressed below:
1. Healthcare - Validation of medications, training and quality assurance (e.g., validation of prescription and compounded medications to provide for patient safety, training of medical staff regarding compounding practices 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).
The Company is also exploring unique opportunities in select markets verticals where its proprietary technology may provide low cost/ realtime solutions to a growing concern such as conducting urine, blood and saliva analysis for detecting illegal drugs and performance enhancement substances. Virtually all CDEX product development has been based on applying the same underlying technologies. CDEX anticipates developing and/or acquiring other technologies in the future through partnering and investment. However, unless and until such time as we acquire or develop other technology assets, all of the Company's revenues will come from products developed from our current suite of patents and patents pending technologies, or through licensing arrangements with companies with related intellectual property.
On September 4, 2012, the United States Bankruptcy Court for the District of Arizona, Judge James Marlar, signed the Order Confirming CDEX' Chapter 11 Plan of Reorganization (“Plan”). The effect of the Order is to create a new contract between CDEX and its creditors as set forth in the Plan. The Plan was effective October 5, 2012.
Effective April 30, 2013, the Bankruptcy Court ordered the closing of the Company’s Bankruptcy case thus releasing CDEX from further reporting its financial activity to the Bankruptcy Court
Our Technology
Our research and development efforts have centered on, but are not limited to, the use of excitation energy sources and patented/patents pending processing technology for substance verification, authentication and identification. When certain substances are exposed to excitation energy the substances produce photons at specific wavelengths that form unique spectral fingerprints, which can be used as signatures to validate and authenticate the substances.
CDEX creates reference signatures of substances of interest, such as selected narcotics, explosive compounds and medicines. CDEX software validates a substance of interest by comparing its signature against the known reference signature of the substance of interest.
The CDEX advantage is that substances of interest are tested at the base levels and their signatures are compared to the known signatures of the substance of interest. This provides rapid validation and authentication that the substance is genuine. CDEX technology is not centered on packaging schemes such as holograms, inks, ingredient taggants or Radio Frequency Identification (or RFID) tags, all of which can be defeated by determined counterfeiters.
Products
We are currently focusing our resources on marketing and improving real-time (within seconds) chemical detection products using proprietary, patented and patents pending technologies. Our primary focus in 2012 was the development and enhancement of our ValiMed system and ID2 products for use in the medical and security markets with our principal product lines noted below. The Company continues to explore unique opportunities where its proprietary technology may provide low cost/real time solutions to growing security or liability concerns such as conducting urine, blood and saliva analysis for detecting illegal drugs and performance enhancement substances in the work place or sporting environment.
Healthcare Market.
ValiMed™ Medication Validation System (MVS) Product Line – Consists of two products: Our third generation ValiMed known as the ValiMed CCT and the ValiMed G4 system (VG4). Both Valimed systems help healthcare providers ensure patient safety and control costs by reducing medication errors, utilizing our patented and patent pending process known as Enhanced Photoemission Spectroscopy (EPS). The VG4 system uses a patented detection process providing a real time (within seconds), quantitative (strength/concentration) as well as qualitative (identification of an unknown) analysis of high-risk single component compounded medications and treatment solutions. The Valimed CCT system that is operating in numerous hospital settings around the country, provides the healthcare industry with verification of a known substance, specifically a known drug with a known strength/concentration, in a known diluent. This current system also utilizes our proprietary cuvettes in the process. Both devices help healthcare facilities comply with Joint Commission on Accreditation of Healthcare Organizations compliance requirements and United States Pharmacopeia's General Chapter 797 Pharmaceutical Compounding—Sterile Preparations (“USP 797”) guidelines for compounding sterile preparations. Both product lines provide a recurring revenue stream and address three problem areas in the healthcare market: (i) human error in the compounding of medications, with an emphasis on, but not limited to high risk medications; (ii) harmful counterfeit medications and (iii) diversion of hospital narcotics. In the near future, we expect the VG4 product line to address multi component compounded mixtures, such as total parenteral nutrition. We expect to add oncology drugs to our formulary in 2013 as well. One of the most significant improvements with the VG4 is the capability of analyzing through most containers that are currently being used in pharmaceutical settings. This provides our end users with a more streamlined application, with less labor, without any compromising of the sterility of the compounded admixtures.
Security Market.
CDEX ID2™ Product Line – real time detection of specified illegal drugs. This product line currently comprises two instruments. Both of the devices are hand held models that detect methamphetamine. The ID2 Meth Scanner is a device that is used for the detection of methamphetamine in the home inspection and remediation industries, as well as by housing authorities and the hotel industry and most recently its use in our nation’s prisons and jails. The Pocket ID2 is a pocket sized hand held device that currently detects visible and prosecutable quantities of methamphetamine, with other drugs such as cocaine, heroin, OxyContin and Ecstasy expected to come in the near future. We continue to explore the use of applying the ValiMed technology to a table top device that is expected to be portable and able to detect trace amounts of specified illegal drugs and explosives in virtually real time. Each of these products would most likely be of interest to all areas of law enforcement, such as police and sheriff departments, U.S. border patrol, port authorities, the TSA, the FBI, all of the U.S. military, and many other agencies.
INTELLECTUAL PROPERTY RIGHTS
We rely on non-disclosure agreements, patent, trade secret and copyright laws to protect the intellectual property that we have and plan to develop, but such laws may provide insufficient protection. Moreover, other companies may develop products that are similar or superior to ours or may copy or otherwise obtain and use our proprietary information without authorization. In addition, certain of our know-how and proprietary technology may not be patentable. Policing unauthorized use of our proprietary and other intellectual property rights could entail significant expense and could be difficult or impossible to do. 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, divert management’s attention, and/or require CDEX to enter into costly royalty or licensing arrangements to prevent further infringement, any of which could adversely affect our operating results. The Company makes business decisions regarding which inventions to patent, and in what countries.
Our competitive position also depends upon unpatented trade secrets. Trade secrets are difficult to protect. Our competitors may independently develop proprietary information and techniques that are substantially equivalent to ours or otherwise gain access to our trade secrets, such as through unauthorized or inadvertent disclosure of our trade secrets.
RESULTS OF OPERATIONS
COMPARISON OF OPERATIONS FOR THE THREE MONTHS ENDED APRIL 30, 2013 AND 2012:
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
389,232
|
|
|
$
|
70,164
|
|
Cost of revenue
|
|
|
53,153
|
|
|
|
24,815
|
|
Selling, general and administrative
|
|
|
220,039
|
|
|
|
159,608
|
|
Research and development
|
|
|
23,821
|
|
|
|
35,055
|
|
Other income (expense)
|
|
|
29,885
|
|
|
|
(620,655
|
)
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
122,104
|
|
|
$
|
(769,969
|
)
|
REVENUE
Revenue was approximately $389,000 and $70,000 during the three months ended April 30, 2013 and 2012, respectively. The increase in revenue of approximately $319,000 resulted primarily from the sale of Valimed CCTs to Al-Essa Medical & Scientific Equipment Company in Safat, Kuwait.
COST OF REVENUE
Cost of revenue was approximately $53,000 and $25,000 during the three months ended April 30, 2013 and 2012, respectively, an inecrease of approximately $28,000.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses were approximately $220,000 during the three months ended April 30, 2013, compared with $160,000 during the three months ended April 30, 2012. The increase of approximately $60,000 resulted primarily from the increase in non-cash share-based expense and employee compensation of $52,000, an increase in insurance and supplies of $3,000 and an increase in professional and consulting expenses of $3,000.
RESEARCH AND DEVELOPMENT
Research and development (R&D) costs were approximately $24,000 during the three months ended April 30, 2013, compared with $35,000 during the three months ended April 30, 2012, a decrease of approximately $11,000 which is primarily attributable to decreases in R&D compensation.
OTHER INCOME (EXPENSE)
Other income (net) for the three months ended April 30, 2013 was approximately $30,000 compared to $621,000 other expense (net) for the three months ended April 30, 2012. The net change of approximately $651,000 reflects primarily the cessation of interest accrual and amortization on notes payable in the third quarter of 2012, due to the resolution of the Company debt through its bankruptcy, offset by the approximately $46,000 of forgiveness of debt from those creditors opting out of the bankruptcy plan in the second quarter of 2013, which was offset by approximately $13,000 in fees paid to the United States Bankruptcy Trustee in the second quarter of 2013.
NET INCOME (LOSS)
The net income was approximately $122,000 during the three months ended April 30, 2013, compared with a net loss of $770,000 during the three months ended April 30, 2012, due to the foregoing factors.
RESULTS OF OPERATIONS
COMPARISON OF OPERATIONS FOR THE SIX MONTHS ENDED APRIL 30, 2013 AND 2012:
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
428,964
|
|
|
$
|
133,829
|
|
Cost of revenue
|
|
|
69,701
|
|
|
|
57,254
|
|
Selling, general and administrative
|
|
|
767,165
|
|
|
|
341,780
|
|
Research and development
|
|
|
59,545
|
|
|
|
62,055
|
|
Other income (expense)
|
|
|
27,935
|
|
|
|
(824,986
|
)
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(439,512
|
)
|
|
$
|
(1,152,246
|
)
|
REVENUE
Revenue was approximately $429,000 and $134,000 during the six months ended April 30, 2013 and 2012, respectively. The increase in revenue of approximately $295,000 resulted primarily from the sale of Valimed CCTs to Al-Essa Medical & Scientific Equipment Company in Safat, Kuwait.
COST OF REVENUE
Cost of revenue was approximately $70,000 and $57,000 during the six months ended April 30, 2013 and 2012, respectively, an inecrease of approximately $13,000.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses were approximately $767,000 during the six months ended April 30, 2013, compared with $342,000 during the three months ended April 30, 2012. The increase of approximately $425,000 resulted primarily from the increase in non-cash share-based expense and employee compensation of $417,000, an increase in professional and consulting expenses of $11,000 offset by a decrease in marketing and travel expenses of $22,000.
RESEARCH AND DEVELOPMENT
Research and development (R&D) costs were approximately $60,000 during the six months ended April 30, 2013, compared with $62,000 during the six months ended April 30, 2012, a decrease of approximately $2,000 which is primarily attributable to R&D compensation.
OTHER INCOME (EXPENSE)
Other income (net) for the six months ended April 30, 2013 was approximately $28,000 compared to other expense (net) of $825,000 for the six months ended April 30, 2012. The net change of approximately $853,000 reflects primarily the cessation of interest accrual and amortization on notes payable in the third quarter of 2012, due to the resolution of the Company debt through its bankruptcy, offset by the approximately $46,000 of forgiveness of debt from those creditors opting out of the bankruptcy plan in the second quarter of 2013, which was offset by approximately $15,000 in fees paid to the United States Bankruptcy Trustee in the second quarter of 2013.
NET INCOME (LOSS)
The net loss was approximately $440,000 during the six months ended April 30, 2013, compared with a net loss of $1,152,000 during the three months ended April 30, 2012, due to the foregoing factors.
LIQUIDITY AND CAPITAL RESOURCES
The accompanying financial statements have been prepared assuming the Company will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. We have experienced net losses since our inception and, as of April 30, 2013, had an accumulated deficit of approximately $35 million. We do not expect to have positive cash flow from operations until we have deployed a sufficient number of our ValiMed G4 drug validation systems. As of April 30, 2013, we had approximately $402,000 in cash.
We had a net decrease in cash of approximately $159,000 during the six months ended April 30, 2013 from the use of cash in operating activities. This amount is comprised primarily of our net loss of $440,000 an increase in inventory of $61,000, gain on forgiveness of debt of $43,000 and a decrease in our current liabilities of $40,000, offset by non-cash share-based compensation expense of $397,000, depreciation and amortization of $16,000 and a reduction of our accounts receivable of $12,000.