UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended April 30, 2015
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From _____ to ____
Commission File Number 000-49845
CDEX INC.
(Exact Name of Registrant as Specified in Its Charter)
| Nevada | | 52-2336836 | |
| (State or other jurisdiction of | | (I.R.S. Employer | |
| incorporation or organization) | | Identification No.) | |
| | | | |
| 4555 South Palo Verde Road, Suite 123, Tucson, Arizona | | 85714 | |
| (Address of Principal Executive Offices) | | (Zip Code) | |
Registrant's Telephone Number, Including Area Code 520-745-5172
Indicate by check 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 x 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 x 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. (Check one):
Large accelerated filer: o Accelerated filer: o Non-accelerated filer: o Smaller reporting company: x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12,13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes x No o
As of June 12, 2015, 81,452,520 shares of the registrants Class A common stock, par value $.005 per share, were outstanding.
| CDEX, INC. |
| QUARTERLY REPORT ON FORM 10-Q |
| TABLE OF CONTENTS |
| Part I FINANCIAL INFORMATION |
| | |
| ITEM 1. Financial Statements | |
| | | |
| | Balance Sheets as of April 30, 2015 (unaudited) and
October 31, 2014 | 1 |
| | | |
| | Statements of Operations for the three months ended
April 30, 2015 and 2014 (unaudited) | 2 |
| | | |
| | Statements of Operations for the six months ended
April 30, 2015 and 2014 (unaudited) | 3 |
| | | |
| | Statements of Cash Flow for the six months ended
April 30, 2015 and 2014 (unaudited) | 4 |
| | | |
| | Notes to Financial Statements (unaudited) | 5 |
| | | |
| ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations | 9 |
| | | |
| ITEM 4. Controls and Procedures | 12 |
| | | |
| Part II OTHER INFORMATION |
| | | |
| ITEM 5. Other Information | 14 |
| | | |
| ITEM 6. Exhibits | 14 |
| | | |
| Signatures | 15 |
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
CDEX INC.
BALANCE SHEETS
| | | April 30, 2015 | | | October 31. 2014 | |
| | | Unaudited | | | | |
| Assets | | | | | | |
| Current assets | | | | | | |
| Cash | | $ | 49,273 | | | $ | 90,915 | |
| Accounts receivable | | | 5,535 | | | | 6,935 | |
| Inventory - net | | | 250,126 | | | | 250,751 | |
| Prepaid expenses and deposits | | | 2,938 | | | | 19,078 | |
| Total current assets | | | 307,872 | | | | 367,679 | |
| Property and equipment, net | | | 18,438 | | | | 28,709 | |
| Patents, net | | | 44,863 | | | | 46,913 | |
| Other assets | | | 1,399 | | | | 1,399 | |
| Total assets | | $ | 372,572 | | | $ | 444,700 | |
| | | | | | | | | |
| Liabilities and stockholders' equity | | | | | | | | |
| Current liabilities | | | | | | | | |
| Accounts payable and accrued expenses | | $ | 46,087 | | | $ | 72,885 | |
| Deferred revenue - current | | | 61,000 | | | | 67,000 | |
| Line of credit payable | | | 499,401 | | | | 135,288 | |
| Total current liabilities | | | 606,488 | | | | 275,173 | |
| Total liabilities | | | 606,488 | | | | 275,173 | |
| | | | | | | | | |
| Commitments and Contingencies | | | | | | | | |
| | | | | | | | | |
| Stockholders' equity | | | | | | | | |
Preferred stock - undesignated - $.005 par value per share,
350,000 shares authorized and none outstanding | | | - | | | | - | |
Preferred stock - series A - $.005 par value per share,
150,000 shares authorized and 6,250 outstanding at
April 30, 2015 and at October 31, 2014 | | | 31 | | | | 31 | |
Class A common stock - $.005 par value per share, 300,000,000
shares authorized and 69,452,958 outstanding at April 30,
2015 and at October 31, 2014 | | | 347,263 | | | | 347,263 | |
| Additional paid in capital | | | 35,619,772 | | | | 35,619,772 | |
| Accumulated (deficit) | | | (36,200,982 | ) | | | (35,797,539 | ) |
| Total stockholders' equity (deficit) | | | (233,916 | ) | | | 169,527 | |
| Total liabilities and stockholders' equity | | $ | 372,572 | | | $ | 444,700 | |
The accompanying notes are an integral part of these financial statements.
CDEX INC.
STATEMENTS OF OPERATIONS
(unaudited)
| | | For the three months ended | |
| | | April 30, | |
| | | 2015 | | | 2014 | |
| | | | | | | |
| Revenue | | $ | 36,762 | | | $ | 50,277 | |
| | | | | | | | | |
| Cost of revenue | | | 9,532 | | | | 6,239 | |
| | | | | | | | | |
| Gross profit | | | 27,230 | | | | 44,038 | |
| | | | | | | | | |
| | | | | | | | | |
| Operating Expenses | | | | | | | | |
| Selling, general and administrative | | | 139,119 | | | | 152,769 | |
| Research and development | | | 39,971 | | | | 34,596 | |
| Total operating expenses | | | 179,090 | | | | 187,365 | |
| | | | | | | | | |
| Loss from operations | | | (151,860 | ) | | | (143,327 | ) |
| | | | | | | | | |
| Other income | | | | | | | | |
| Interest expense | | | (47,434 | ) | | | - | |
| Other income | | | 7,931 | | | | - | |
| Total other income | | | (39,503 | ) | | | - | |
| | | | | | | | | |
| Net loss | | $ | (191,363 | ) | | $ | (143,327 | ) |
| | | | | | | | | |
Basic net loss
per common share: | | $ | (0.01 | ) | | $ | (0.01 | ) |
| | | | | | | | | |
Basic weighted average
common shares outstanding | | | 69,452,958 | | | | 54,344,042 | |
The accompanying notes are an integral part of these financial statements.
CDEX INC.
STATEMENTS OF OPERATIONS
(unaudited)
| | | For the six months ended | |
| | | April 30 | |
| | | 2015 | | | 2014 | |
| | | | | | | |
| Revenue | | $ | 58,884 | | | $ | 126,284 | |
| | | | | | | | | |
| Cost of revenue | | | 16,252 | | | | 25,904 | |
| | | | | | | | | |
| Gross profit | | | 42,632 | | | | 100,380 | |
| | | | | | | | | |
| | | | | | | | | |
| Operating Expenses | | | | | | | | |
| Selling, general and administrative | | | 284,114 | | | | 274,796 | |
| Research and development | | | 84,686 | | | | 91,151 | |
| Total operating expenses | | | 368,800 | | | | 365,947 | |
| | | | | | | | | |
| Loss from operations | | | (326,168 | ) | | | (265,567 | ) |
| | | | | | | | | |
| Other income (expense) | | | | | | | | |
| Interest expense | | | (87,386 | ) | | | - | |
| Other income | | | 10,111 | | | | 6,805 | |
| Total other income (expense) | | | (77,275 | ) | | | 6,805 | |
| | | | | | | | | |
| Net loss | | $ | (403,443 | ) | | $ | (258,762 | ) |
| | | | | | | | | |
Basic net loss
per common share: | | $ | (0.01 | ) | | $ | (0.01 | ) |
| | | | | | | | | |
Basic weighted average
common shares outstanding | | | 69,452,958 | | | | 53,645,503 | |
The accompanying notes are an integral part of these financial statements.
CDEX INC.
STATEMENTS OF CASH FLOWS
(unaudited)
| | | For the six months ended | |
| | | April 30, | |
| | | 2015 | | | 2014 | |
| Cash Flows from Operating Activities | | | | | | |
| Net loss | | $ | (403,443 | ) | | $ | (258,762 | ) |
Adjustments to reconcile net loss to cash used by
operating activities | | | | | | | | |
| Depreciation and amortization | | | 8,293 | | | | 11,491 | |
Non-cash amortization of bonus interest
on notes payable | | | 44,640 | | | | - | |
Non-cash amortization of warrants issued on notes payable | | | 24,424 | | | | - | |
| Share-based compensation | | | - | | | | 8,780 | |
| Interest expense | | | 18,322 | | | | - | |
| (Gain) loss recognized on disposal of equipment | | | (10,111 | ) | | | - | |
| Changes in operating assets and liabilities | | | | | | | | |
| Accounts receivable | | | 1,400 | | | | 7,348 | |
| Inventory | | | 625 | | | | 8,282 | |
| Deferred costs and other assets | | | 2,000 | | | | 2,607 | |
| Current liabilities | | | (32,798 | ) | | | 109,382 | |
| Net cash used by operating activities | | | (346,648 | ) | | | (110,872 | ) |
| | | | | | | | | |
| Cash Flows from Investing Activities | | | | | | | | |
| Proceeds on sale of equipment | | | 14,139 | | | | - | |
| Purchase of equipment | | | - | | | | (10,212 | ) |
| Net cash provided (used) by investing activities | | | 14,139 | | | | (10,212 | ) |
| | | | | | | | | |
| Cash Flows from Financing Activities | | | | | | | | |
Proceeds received under line of credit | | | 305,000 | | | | - | |
Proceeds from warrant exchange offer | | | - | | | | 140,000 | |
| Repayment under line of credit | | | (14,133 | ) | | | - | |
| Net cash provided by financing activities | | | 290,867 | | | | 140,000 | |
| | | | | | | | | |
| Net decrease in cash | | | (41,642 | ) | | | 18,916 | |
| | | | | | | | | |
| Cash, beginning of the period | | | 90,915 | | | | 98,967 | |
| Cash, end of the period | | $ | 49,273 | | | $ | 117,883 | |
| | | | | | | | | |
| Supplemental Cash Flow Information | | | | | | | | |
| Cash payments for interest expense | | $ | 14,133 | | | $ | - | |
The accompanying notes are an integral part of these financial statements.
CDEX Inc.
NOTES TO FINANCIAL STATEMENTS
April 30, 2015
(Unaudited)
1. Basis of Presentation
The accompanying interim unaudited condensed financial statements include the accounts of CDEX Inc. as of April 30, 2015. In the opinion of management, all adjustments (which include normal recurring adjustments) necessary for a fair presentation of the results for the interim periods presented have been made. The results for the three-month and six-month periods ended April 30, 2015 may not be indicative of the results for the entire year. The interim unaudited condensed financial statements should be read in conjunction with the Company's audited financial statements contained in our Annual Report on Form 10-K. Our lack of earnings history and continued future losses could adversely affect our financial position and if we are unable to generate funds or obtain funds on acceptable terms, we may not be able to continue operations.
The accompanying unaudited financial statements are presented pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and note disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information not misleading.
Recent Developments
We have experienced net losses since our inception and, as of April 30, 2015, had an accumulated deficit of approximately $36 million. We do not expect to have positive cash flow from operations until we have deployed a sufficient number of our ValiMedTM G4 drug validation systems. As of April 30, 2015, we had approximately $49,000 in cash which was provided primarily through proceeds from our Lines of Credit.
Use of Estimates
The preparation of financial statements in conformity with United States generally accepted accounting principles requires management to make estimates, judgments and assumptions that affect the amounts reported in the financial statements and accompanying notes. Management bases its assumptions on historical experiences and on various other assumptions that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. In addition, management considers the basis and methodology used in developing and selecting these estimates, the trends in and amounts of these estimates, specific matters affecting the amount of and changes in these estimates, and any other relevant matters related to these estimates, including significant issues concerning accounting principles and financial statement presentation. Such estimates and assumptions could change in the future as more information becomes known which could impact the amounts reported and disclosed herein. Significant estimates include revenue recognition, the valuation of inventory and stock-based compensation expense.
Recent Accounting Pronouncements
The Company has reviewed, and continues to review, issued accounting pronouncements with the intent of adopting any that are applicable to it. The Company does not expect any recent pronouncements to have an impact on its results of operations or financial position.
Our inventories consisted of the following:
CDEX Inc.
NOTES TO FINANCIAL STATEMENTS
April 30, 2015
(Unaudited)
| | | April 30, 2015 | | | October 31, 2014 | |
| | | | | | | |
| Raw materials | | $ | 228,311 | | | $ | 223,464 | |
| Finished goods | | | 47,651 | | | | 52,301 | |
| Subtotal | | | 275,962 | | | | 275,765 | |
| Obsolescence reserve | | | (25,836 | ) | | | (25,014 | ) |
| | | | | | | | | |
| Total inventory | | $ | 250,126 | | | $ | 250,751 | |
| 3 | Property and equipment, net |
Our property and equipment consisted of the following:
| | | April 30, 2015 | | | October 31, 2014 | |
| | | | | | | |
| Furniture, fixtures and leasehold improvements | | $ | 2,931 | | | $ | 2,931 | |
| Equipment | | | 502,244 | | | | 605,007 | |
| Leased equipment | | | 70,654 | | | | 70,654 | |
| | | | | | | | | |
| Total | | | 575,829 | | | | 678,592 | |
| | | | | | | | | |
| Less accumulated depreciation | | | (557,391 | ) | | | (649,883 | ) |
| | | | | | | | | |
| Net property and equipment | | $ | 18,438 | | | $ | 28,709 | |
Our patents consisted of the following:
| | | April 30, 2015 | | | October 31, 2014 | |
| | | | | | | |
| Patents | | $ | 100,000 | | | $ | 100,000 | |
| | | | | | | | | |
| Less accumulated amortization | | | (55,137 | ) | | | (53,087 | ) |
| | | | | | | | | |
| Net patents | | $ | 44,863 | | | $ | 46,913 | |
CDEX Inc.
NOTES TO FINANCIAL STATEMENTS
April 30, 2015
(Unaudited)
| 5 | Accounts Payable and Accrued Expenses |
Accounts payable and accrued expenses consisted of the following:
| | | April 30, 2015 | | | October 31, 2014 | |
| Legal fees | | $ | - | | | $ | 61,571 | |
| Accrued compensation | | | 10,314 | | | | 3,430 | |
| Accounts payable | | | 33,398 | | | | 5,509 | |
| Accrued payable to a distributor | | | 2,375 | | | | 2,375 | |
| | | | | | | | | |
| | | $ | 46,087 | | | $ | 72,885 | |
Effective October 16, 2014, CDEX Inc. (the “Company”) entered into a Line of Credit Agreement with each of two lenders, one of whom is our CEO, Jeffrey K. Brumfield, and the other of which is a significant shareholder, PEMCO LLC. The Line of Credit Agreements provide for the lenders to make available to the Company an aggregate amount of up to $430,000 in funding, upon which the Company may draw funds as needed at any time from the effective date until the maturity date which has been extended to June 30, 2015. The Lines of Credit are secured by all assets of the Company. Pursuant to each Line of Credit Agreement, the Company has issued each lender a Revolving Note (collectively, the “Notes”) evidencing the net amount drawn by the Company during the term of the Line of Credit Agreement. The Notes bear interest at a rate of 12% per annum. Interest on the balance of the Notes accrues and is payable on the first day of each month beginning on November 1, 2014. On the maturity date, the Company must pay to the lenders an amount equal to 110% of the principal due on the Notes plus any accrued and unpaid interest as of that date. The Company may prepay any principal balance on the Notes, but it must still pay 110% of such principal amount when paid. As additional incentive for the lenders to enter into the Line of Credit Agreements and make available to the Company funds thereunder, the Company has issued to the lenders Warrants to purchase up to 2,150,000 shares of the Company’s Class A common stock in the aggregate. The Warrants are exercisable for a period of five years at an exercise price of $0.25 per share. The following reconciles notes payable as of April 30, 2015 and October 31, 2014:
| | | April 30, 2015 | | | October 31, 2014 | |
| | | | | | | |
Line of credit - PEMCO LLC - 12% interest payable monthly - matures June 30, 2015 | | | 350,000 | | | | 105,173 | |
| | | | | | | | | |
Line of credit - Jeffrey K Brumfield - 12% interest payable monthly - matures June 30, 2015 | | | 100,000 | | | | 40,039 | |
| | | | | | | | | |
| Recognition of 10% bonus interest on lines of credit draws | | | 45,000 | | | | 14,500 | |
| Recognition of warrant value on lines of credit | | | (25,075 | ) | | | (25,075 | ) |
| Accrued Interest | | | 4,401 | | | | - | |
| Amortization of warrant value on lines of credit | | | 25,075 | | | | 651 | |
| | | | | | | | | |
| Total lines of credit | | | 499,401 | | | | 135,288 | |
| 7. | Share-Based Compensation |
For the six month periods ended April 30, 2015 there was no share-based compensation expense. For the three and six months ended April 30, 2014, share-based compensation expense was approximately $9,000, primarily attributable to restricted stock grants issued to our independent Directors under the CDEX Inc. Board Compensation Plan.
CDEX Inc.
NOTES TO FINANCIAL STATEMENTS
April 30, 2015
(Unaudited)During the six month periods ended April 30, 2015 there was no option or stock grant activity. During the six months ended April 30, 2014, 15,000 options were forfeited and approximately 276,000 shares of restricted stock were issued.
We determine the fair value of share-based awards at their grant date, using a Black-Scholes Option Pricing Model. No options were granted for the six month periods ended April 30, 2015 and April 30, 2014.
As of April 30, 2015, there were no unrecognized compensation costs related to unvested restricted stock grants.
During the three month periods ended April 30, 2015 and April 30, 2014, there was no stock activity.
| 9. | Commitments and Contingencies |
Litigation
We may from time to time be involved in legal proceedings arising from the normal course of business. As of the date of this report, we have not received notice of any other legal proceedings and the Company is not aware of any pending claims or assessments which may have a material adverse impact on the Company’s financial position or results of operations.
10. Subsequent Events
The Company’s management has evaluated subsequent events occurring after April 30, 2015, the date of our most recent balance sheet, through the date our financial statements were issued.
Effective May 28, 2015, CDEX Inc. (the “Company”) entered into a Consulting Advisory Services Agreement (the “Agreement”) with Osprey Capital Advisors, LLC, a Florida limited liability company (the “Consultant”). The Agreement calls for the Consultant to provide advisory and consulting services to the Company, including introduction to, and establishing relationships with, individuals and entities for possible investment in the Company, guidance on markets, product distribution, employment, board development and related matters, business plan development, review of the Company’s long- and short-term growth objectives, investor relations and public relations services and the Company’s approach to its business and financial strategy and efforts taken by the Company to date to develop investor interest.
As consideration for such services, the Company has agreed to issue to the Consultant an aggregate of 12 million shares of its Class A common stock, 7.5 million of such shares issuable upon signing of the Agreement. The Agreement has a term of 240 days.
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, 2014.
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”, "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, 2014. 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 OTCQB under the symbol "CDEX."
Our Company is widely recognized as a global leader in Enhanced Photoemission Spectroscopy. We have pioneered proprietary, patented technology that has been applied to create and bring to market two in-demand, proprietary product lines: ValiMed™ for the healthcare industry and ID2™ for the security industry.
Key competitive differentiators of CDEX’s solutions include:
| | · | Powerful, real-time chemical detection and medication validation capabilities. |
| | · | Highly reliable and accurate measurements. |
| | · | Lower in cost to customers when compared to competing or alternative technologies. |
| | · | Reduces potential errors in human interpretation. |
| | · | CDEX has created an extensive and very valuable library of reference signatures (200+ for current CCT Model) and an ever expanding signature library for the ValiMed G4 of substances of interest, such as selected narcotics and high risk liquid compounded admixtures. Proprietary 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. |
| | · | Our technology is not centered on packaging schemes such as holograms, inks, ingredient taggants or Radio Frequency Identification (RFID) tags, all of which can be defeated by determined counterfeiters. |
| | · | Our technology can be adapted to other products and markets, including identifying counterfeit drugs, protecting brands and identifying explosives’ signatures, among others. |
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 patent pending technologies, or through licensing arrangements with companies with related intellectual property.
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 select 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 in the database.
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 contained in the database. 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 2014, which continued through the six months ended April 30, 2015, was the continued development and enhancement of our ValiMed G4 system (“VG4”) for use in the pharmaceutical market and sales of our ID2 product for the 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.
Our ValiMed Medication Validation System (“MVS”) product line – consists of two products: our third generation ValiMed system, marketed as ValiMed CCT (“CCT”)and the ValiMed G4 (“VG4”). Both ValiMed systems help healthcare providers ensure patient safety and control costs by reducing medication errors and mitigating drug diversion, utilizing our patented and patent pending process known as Enhanced Photoemission Spectroscopy.
The VG4 system uses a patented detection process providing a real time (within seconds), quantitative (strength/concentration) and qualitative (identification of known) analysis of high-risk single component compounded medications and treatment solutions. The CCT system, which is operating in numerous hospital settings around the country, provides the healthcare industry with the ability to verify a known substance, specifically a known drug with a known strength/concentration, in a known diluent. The CCT 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 systems also 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 admixtures, such as total parenteral nutrition. We expect to add oncology drugs to our formulary in 2016 as well. One of the most significant improvements with the VG4 is the capability to analyze through most containers that are currently being used in pharmaceutical settings. This provides our end users with a more streamlined application, with less labor and without compromising the sterility of the compounded admixtures.
Security Market.
Our ID2 product line – provides solutions for real time (within seconds) detection of specified illegal drugs. This product line currently comprises two devices, both which 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 industries, by housing authorities, the hotel industry and in our nation’s prisons and correctional facilities. The Pocket ID2 is a pocket-sized hand-held device that currently detects visible and prosecutable quantities of methamphetamine. We expect to expand our detection capabilities to include other drugs such as cocaine, heroin, OxyContin and Ecstasy in the near future.
We continue to explore opportunities to apply the ID2 technology to a table top device that will be portable and able to detect trace amounts of specified illegal drugs and explosives in real-time. Our ID2 products have applications in all areas of law enforcement, including local police and sheriff departments, U.S. border patrol, port authorities, TSA, FBI, U.S. Military, and other agencies engaged in counternarcotics.
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, 2015 AND 2014:
| | | 2015 | | | 2014 | |
| | | | | | | |
| Revenue | | $ | 36,762 | | | $ | 50,277 | |
| Cost of revenue | | | 9,532 | | | | 6,239 | |
| Selling, general and administrative | | | 139,119 | | | | 152,769 | |
| Research and development | | | 39,971 | | | | 34,596 | |
| Other income | | | (39,503 | ) | | | - | |
| | | | | | | | | |
| Net loss | | $ | (191,363 | ) | | $ | (143,327 | ) |
REVENUE
Revenue was approximately $37,000 and $50,000 during the three months ended April 30, 2015 and 2014, respectively. The decrease in revenue of approximately $13,000 resulted primarily from a reduction of sales of our ID2 Meth Scanners of $12,000 and a reduction in maintenance fees of $5,000, partially offset by a $3,000 increase in revenues from the sale of customer supplies.
COST OF REVENUE
Cost of revenue was approximately $10,000 and $6,000 during the three months ended April 30, 2015 and 2014, respectively, a decrease of approximately $4,000. The gross margin percentage decreased from approximately 88% to 74%.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses were approximately $139,000 during the three months ended April 30, 2015, compared with $153,000 during the three months ended April 30, 2014. The decrease of approximately $14,000 resulted primarily from a decrease in employee compensation of $24,000, consulting and professional expenses of $12,000, general expenses of $6,000, partially offset by an increase marketing and travel of $14,000 and equipment rent expense of $11,000.
RESEARCH AND DEVELOPMENT
Research and development (“R&D”) costs were approximately $40,000 during the three months ended April 30, 2015, compared with $35,000 during the three months ended April 30, 2014, an increase of approximately $5,000, which is primarily attributable to an increase in R&D compensation of $16,000 partially offset by a $12,000 decrease in R&D material.
OTHER INCOME (EXPENSE)
Other expense (net) for the three months ended April 30, 2015 was approximately $40,000 compared to $-0- for the three months ended April 30, 2014 a change of approximately $40,000 which is primarily due to approximately $47,000 amortization/interest expense on the Lines of Credit in 2015, offset by approximately $8,000 proceeds from the sale of obsolete equipment in 2015.
NET LOSS
The net loss was approximately $191,000 during the three months ended April 30, 2015, compared with a net loss of $143,000 during the three months ended April 30, 2014, due to the foregoing factors.
RESULTS OF OPERATIONS
COMPARISON OF OPERATIONS FOR THE SIX MONTHS ENDED APRIL 30, 2015 AND 2014:
| | | 2015 | | | 2014 | |
| | | | | | | |
| Revenue | | $ | 58,884 | | | $ | 126,284 | |
| Cost of revenue | | | 16,252 | | | | 25,904 | |
| Selling, general and administrative | | | 284,114 | | | | 274,796 | |
| Research and development | | | 84,686 | | | | 91,151 | |
| Other income (expense) | | | (77,275 | ) | | | 6,805 | |
| | | | | | | | | |
| Net loss | | $ | (403,443 | ) | | $ | (258,762 | ) |
REVENUE
Revenue was approximately $59,000 and $126,000 during the six months ended April 30, 2015 and 2014, respectively. The decrease in revenue of approximately $67,000 resulted primarily from a recognition in the first six months of fiscal 2014 of $34,000 from a client opting out of their supply contract in 2014 and electing to pay the contracted exit fee as well as reduced pay-per-use revenues and a reduction in ValiMed maintenance revenues of $15,000 and a reduction of sales of our ID2 Meth Scanners of $12,000 partially offset by a $2,000 increase in revenues from the sale of customer supplies.
COST OF REVENUE
Cost of revenue was approximately $16,000 and $26,000 during the six months ended April 30, 2015 and 2014, respectively, a decrease of approximately $10,000. The gross margin percentage decreased from approximately 79% to 72%.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses were approximately $284,000 during the six months ended April 30, 2015, compared with $275,000 during the six months ended April 30, 2014. The increase of approximately $9,000 resulted primarily from an increase marketing and travel of $28,000 and equipment leasing of $11,000, partially offset by decreases in consulting and professional expenses of $15,000, general expenses of $14,000 and compensation of $5,000.
RESEARCH AND DEVELOPMENT
Research and development (“R&D”) costs were approximately $85,000 during the six months ended April 30, 2015, compared with $91,000 during the six months ended April 30, 2014, a decrease of approximately $6,000, which is primarily attributable to decreases in R&D material of $14,000 and R&D Travel of $6,000 partially offset by an increase in R&D compensation of $14,000.
OTHER INCOME (EXPENSE)
Other expense (net) for the six months ended April 30, 2015 was approximately $77,000 compared to other income (net) of $7,000 for the six months ended April 30, 2014 a change of approximately $84,000 which is primarily due to approximately $87,000 amortization/interest expense on the Lines of Credit in 2015, partially offset by approximately $10,000 in gains from the sale of obsolete equipment in 2015.
NET LOSS
The net loss was approximately $403,000 during the six months ended April 30, 2015, compared with a net loss of $259,000 during the six months ended April 30, 2014, 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, 2015, had an accumulated deficit of approximately $36 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, 2015, we had approximately $49,000 in cash.
We had a net decrease in cash of approximately $42,000 during the six months ended April 30, 2015 primarily from the use of cash in operating activities offset by cash provided by our financing activities and cash provided from our investing activities. This amount is comprised primarily of our net loss of approximately $403,000 and a decrease in our current liabilities of $33,000, gain recognized on disposal of equipment of $10,000, offset by amortization/interest expense on the Lines of Credit of $87,000, depreciation and amortization of $8,000 offset by $305,000 from the proceeds received under the line of credit and $14,000 proceeds provided by the sale of obsolete equipment.
ITEM 4. Controls and Procedures
Disclosure Controls and Procedures.
The Company’s Chairman and Chief Executive Officer and its Vice President of Finance and Chief Financial Officer, after evaluating the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of April 30, 2015, have concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act, as amended, is recorded, processed and summarized and reported on a timely basis and is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting.
There were no changes in the Company’s internal control over financial reporting during the Company’s fiscal quarter ended April 30, 2015 that materially affected, or are reasonably likely to materially affect, the Company���s internal control over financial reporting.
PART II - OTHER INFORMATION
| ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds |
| | | |
| | Not Applicable |
| | | |
| ITEM 5. Other Information |
| | | |
| | (a) Not Applicable |
| | |
| | (b) The Company has not adopted formal procedures for the nomination by stockholders of candidates to serve on its Board of Directors. |
| | | |
| ITEM 6. Exhibits |
| | | |
| 10.1 | Form of Consulting Agreement. |
| | | |
| 31.1 | Certification of Chief Executive Officer. |
| | | |
| 31.2 | Certification of Chief Financial Officer. |
| | | |
| 32.1 | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Executive Officer). |
| | | |
| 32.2 | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Financial Officer). |
| | | |
| 101.INS | XBRL Instance Document |
| | | |
| 101.SCH | XBRL Schema Document |
| | | |
| 101.CAL | XBRL Calculation Linkbase Document |
| | | |
| 101.DEF | XBRL Definition Linkbase Document |
| | | |
| 101.LAB | XBRL Label Linkbase Document |
| | | |
| 101.PRE | XBRL Presentation Linkbase Document |
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on June 12, 2015.
CDEX INC.
| By: | /s/ Jeffrey K. Brumfield |
| | Jeffrey K. Brumfield |
| | Chief Executive Officer |
| | |
| | |
| By: | /s/ Stephen A. McCommon |
| | Stephen A. McCommon |
| | Chief Financial Officer and |
| | Vice President of Finance |
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