Business Context and Reporting Period
This is a Quarterly Report on Form 10-Q for Nuvilex, Inc. (f/k/a eFoodSafety.com, Inc.), a Nevada corporation. The report covers the three and six-month periods ended October 31, 2010. The Company is a smaller reporting company and a shell company is not applicable. As of January 21, 2011, there were 348,387,581 shares of Common Stock outstanding. The Company operates in the health and wellness sector, marketing products such as Cinnergen (glucose metabolism), Cinnechol (cardiovascular health), and Infinitink (tattoo ink), though it has faced significant operational challenges.
Key Financial Metrics
| Metric | Six Months Ended Oct 31, 2010 | Six Months Ended Oct 31, 2009 | Three Months Ended Oct 31, 2010 | Three Months Ended Oct 31, 2009 |
|---|---|---|---|---|
| Revenues | $42,829 | $138,118 | $15,869 | $70,171 |
| Gross Profit | $33,048 | $44,357 | $13,015 | $18,201 |
| Net Loss | $(180,079) | $(1,340,234) | $(45,820) | $(514,343) |
| Cash Flow from Operations | $(14,445) | $(824,599) | N/A | N/A |
| Cash and Equivalents (End of Period) | $0 | $9,228 | $0 | N/A |
| Total Assets | $1,178,575 | $1,202,217 | $1,178,575 | N/A |
| Total Liabilities | $3,309,799 | $3,153,362 | $3,309,799 | N/A |
| Working Capital Deficit | $(3,296,774) | N/A | $(3,296,774) | N/A |
| Accumulated Deficit | $(36,731,056) | $(36,550,977) | $(36,731,056) | N/A |
Debt and Liquidity: The Company has a significant debt burden with total current liabilities of $3,309,799, including $2,377,543 in current portion of long-term debt and $178,645 in accrued interest. Cash balances are effectively zero ($0) as of October 31, 2010, with a cash overdraft of $629. The Company holds assets for sale (Cherry Hill facility) valued at $1,081,000.
Material Changes vs. Prior Period
- Revenue Decline: Revenues decreased by approximately 69% for the six months ended October 31, 2010, compared to the prior year. This is primarily attributed to a decline in Cinnergen retail wholesale orders.
- Expense Reduction: Operating expenses dropped significantly. Research and development expenses fell from $441,428 to $5,359, and sales and marketing expenses fell from $241,260 to $7,000 for the six-month period. Management cites a decrease in available financial resources as the cause.
- Asset Impairment: In the prior fiscal year (ended April 30, 2010), the Company recorded a $2,309,842 impairment charge related to goodwill, building, and intangible assets acquired in the Freedom-2 Holdings acquisition, as these assets were deemed to have no current or future value.
- Restatements: The Company restated its financial statements for the year ended April 30, 2009, and the quarter ended October 31, 2009, to apply the purchase method of accounting correctly and record assets/liabilities at fair value.
Outlook, Risks, and Management Commentary
Going Concern: The Company's independent auditors have raised substantial doubt about its ability to continue as a going concern. The Company has an accumulated deficit of over $36 million and a working capital deficit of over $3.2 million. Continued operations depend on raising additional capital and generating sufficient revenue.
Management Strategy: Management's plan to stabilize the company includes: (1) reducing the cash burn rate to breakeven; (2) selling or leasing the Cherry Hill, New Jersey property; (3) establishing a workout plan with lenders and creditors; and (4) pursuing a product sales and growth strategy.
Risks and Contingencies:
- Debt Resolution: An ad hoc committee of creditors, chaired by Cornerstone Bank, is overseeing the sale of real estate and liquidation of assets to extinguish debt. The pending sale of the building accelerates the potential payment of the mortgage to the current year.
- Related Party Delinquency: A related party, Charlston Kentrist 41 Direct, Inc. (CK-41), is delinquent on a $150,000 minimum royalty payment due March 1, 2010. The Company is now recognizing royalties on a cash-received basis.
- Internal Controls: Management concluded that disclosure controls and procedures were not adequately effective as of October 31, 2010, and are in the process of implementing corrective measures.
- Regulatory Compliance: The Company anticipates significant costs and difficulty in complying with Section 404 of the Sarbanes-Oxley Act due to its current capital position.
Investor Verification Checklist
- Cash Position: Verify the current cash balance and any new financing arrangements, as the company reported $0 cash and a cash overdraft.
- Debt Workout Status: Confirm the status of the ad hoc creditor committee and the timeline for the sale of the Cherry Hill facility to satisfy the $1.8M+ mortgage.
- Related Party Receivables: Assess the collectability of the $150,000 delinquent royalty from CK-41 and the likelihood of future royalty payments.
- Going Concern Viability: Review subsequent filings for evidence of new equity or debt financing required to cover the $3.3M working capital deficit.
- Revenue Sustainability: Evaluate the trend in Cinnergen sales, which drove the majority of the revenue decline, to determine if the business model is viable without significant R&D spend.