Afexa Life Sciences Inc.

Afexa Life Sciences Inc.

June 14, 2007 18:37 ET

CV Technologies-Maker of COLD-fX®-Files Restated Financial Statements for Fiscal 2006 and First Quarter of Fiscal 2007; Announces Second Quarter Results

EDMONTON, ALBERTA--(Marketwire - June 14, 2007) - CV Technologies Inc. (TSX:CVQ) today released restatements of its previously reported consolidated financial statements for the year ended September 30, 2006 and interim consolidated financial statements for the three month period ended December 31, 2006. The restatement of the Company's consolidated financial statements followed an internal review of the Company's revenue recognition policy as it related to product returns in the U.S. and its effect on the Company's consolidated financial statements. The Company is also releasing the interim consolidated financial statements for the three month period ended March 31, 2007.

In the fourth quarter of fiscal year 2006, the Company entered the U.S. market and recognized revenue with the same revenue recognition criteria as used in Canada, a market with a strong history and nominal product returns. Given that the U.S. was a new market and that COLD-fX® was a new product for this market, the Company has now realized that in the absence of any history of returns, the criteria to recognize revenue were not met. The appropriate application of the revenue recognition policy would have prevented the recognition of such revenues until the right of return had expired.

Analysis of the Company's revenue recognition policy following the determination of slower than anticipated consumer product purchases in the U.S., indicated a greater than anticipated risk of product return. Prior to this restatement, the Company recorded revenue from the U.S. with estimates for product returns. However, actual experience has now indicated that there was significant uncertainty in estimating product returns from this new market. That uncertainty resulted in underestimating the amount of product returns and correspondingly overestimating revenue from product sales. The reporting of product sales is now undertaken to ensure that the recognition of revenue does not occur until the risk of product returns is substantially eliminated.

The Board of Directors of CV Technologies has determined that a restatement of the Company's consolidated financial statements and the appropriate application of its revenue recognition policy was warranted to correct the effects of this policy application, to ensure consistency with GAAP, and to correct an overstatement of U.S. product sales. The effect of the restatement, including the identification and correction of related misstatements in the previously issued consolidated financial statements, are reflected in the Company's restated consolidated financial statements and accompanying notes.

The appropriate application of the revenue recognition policy also affected the Company's policy on the translation of foreign currencies. Given the effects of the restatement and the change in the financial condition of its wholly owned subsidiaries, the Company has re-evaluated its classification of its foreign subsidiaries as self-sustaining. The Company concluded that Cold-fX Pharmaceuticals (USA) Inc. and fX Life Sciences International GmbH should be classified as integrated rather than self-sustaining foreign operations. The translation of these subsidiaries, which operate in U.S. dollars, has been amended from the current rate method to the temporal method.

Summary of Restatements

The reversal of U.S. product sales in the fourth quarter of fiscal 2006 decreased the year's revenue by $5.6 million and decreased net earnings for the year by $3.5 million to $639 thousand.

Summary of Restated Financial Information
(in $ thousands)

Fiscal Year 2006 Previously Adjustments As Restated
Sep 30, 2006 Reported

Net revenue 46,973 (5,586) 41,387
Gross margin 32,312 (4,212) 28,100
Gross margin % 68.8% (0.9)% 67.9%
Earnings (loss) before tax 8,407 (4,267) 4,140
Earnings (loss) after tax 4,137 (3,498) 639
Earnings (loss) per share - Basic $ 0.04 $(0.03) $ 0.01
Earnings (loss) per share - Diluted $ 0.04 $(0.03) $ 0.01
Cash flow from operations 4,180 - 4,180
Cash position 7,913 - 7,913
Total assets 44,335 (1,203) 43,132
Total liabilities 17,372 2,235 19,607
Shareholders' equity 26,963 (3,438) 23,525
Working capital 19,823 (3,438) 16,385
Common shares outstanding 102,773,340 102,773,340

The reversal of product sales in the first quarter of fiscal 2007 decreased
revenue by $2.5 million and increased the loss by $2.0 million to $3.6

Summary of Restated Financial Information
(in $ thousands)

First Quarter 2007 Previously Adjustments As Restated
Dec 31, 2006 Reported

Net revenue 25,151 (2,536) 22,615
Gross margin 18,261 (1,551) 16,710
Gross margin % 72.6% 1.3% 73.9%
Earnings (loss) before tax 1,789 (2,530) (741)
Earnings (loss) after tax (1,557) (2,027) (3,584)
Comprehensive (loss) (1,587) (1,997) (3,584)
Earnings (loss) per share - Basic $(0.02) $(0.01) $(0.03)
Earnings (loss) per share - Diluted $(0.01) $(0.02) $(0.03)
Cash flow from operations 13,420 - 13,420
Cash position 19,885 - 19,885
Total assets 57,374 2,704 60,078
Total liabilities 31,175 8,160 39,335
Shareholders' equity 26,199 (5,456) 20,743
Working capital 17,655 (5,421) 12,234
Common shares outstanding 103,525,506 103,525,506

Second Quarter Interim Results

Second quarter loss before tax was $2.1 million compared to net earnings of $2.1 million for the same quarter in the prior year. The loss after tax was $3.3 million compared to net earnings of $1.0 million for the same quarter in the previous year.

The second quarter sales compared to the same period last year decreased by $3.1 million, as a decline in cold and flu activity slowed customer replenishment orders in the second quarter. Sales for the first six months of fiscal year 2007 increased 2.0% to $30.5 million from the same period in the prior year. A national decrease of 9% in the number of respiratory illnesses (Flu/Cold/Respiratory Illness Activity Notification Program from Surveillance Data Intelligence (SDI) for the 28-week period ending March 23, 2007) contributed to a decline in consumer demand. The decrease in cold and flu activity was most pronounced in Western Canada, historically the leading sales region for COLD-fX®.

Summary of Interim Results
(in $ thousands)

2nd 2nd Year to Year to
Fiscal Year 2007 Quarter Quarter Date Date
Mar 31, Mar 31, Mar 31, Mar 31,
2006 2007 2006 2007

Net revenue 10,915 7,850 29,855 30,464
Gross margin 8,253 5,569 21,668 22,279
Gross margin % 75.6% 70.9% 72.6% 73.1%
Earnings (loss) before tax 2,087 (2,123) 9,550 (2,864)
Earnings (loss) after tax 987 (3,296) 5,403 (6,880)
Earnings (loss) per share
- Basic $0.01 $(0.03) $0.05 $(0.07)
Earnings (loss) per share
- Diluted $0.01 $(0.03) $0.05 $(0.07)
Cash flow from operations 3,998 (6,312) 15,571 7,109
Cash position 21,274 11,431 21,274 11,431
Total assets 34,277 49,254 34,277 49,254
Working capital 23,995 7,654 23,995 7,654
Common shares outstanding 102,033,340 103,551,006 102,033,340 103,551,006

Reference should be made to the complete set of Restated and Interim Financial Reports that will be made available on SEDAR ( and on the Company's website at

With cash invested in higher than anticipated inventory and slowing sales in the summer, the Company anticipates additional funding will be required for continued operations this summer. On June 12, 2007, the Company entered into a commitment letter providing for a demand operating line of credit up to a maximum of $10 million based on margining of accounts receivable and inventory and financing of the new corporate headquarters building up to $6.1 million. Inventory has a maximum limit of $6.0 million or 50-65% of inventory value, whichever is lower. The higher limit in inventory will fund operations through to the next selling season. The availability of this credit facility is conditional upon the finalization of typical definitive documentation. The Company plans to repackage some of the excess U.S. inventory for sale in Canada.

Management continues to explore and develop financing alternatives to strengthen the Company including raising funds through a share offering. Until the Alberta Securities Commission, the British Columbia Securities Commission and the Ontario Securities Commission lift the existing cease trade orders, the Company cannot currently access equity financing. The filing of the Company's financial restatements today is part of a process to meet the conditions for enabling the lifting of the cease trade orders.

Looking Forward

The Company has undertaken a number of initiatives to strengthen its operations. The Company is restructuring the senior management team and appointed Ross Montagano as its Chief Operating Officer effective in late May. Mr. Montagano, a Carleton University graduate, is a proven senior executive with extensive sales and marketing experience who has built and managed high performance teams at companies such as Pitney Bowes and Aramark. The Company is currently recruiting for the position of Vice President of Sales and is in the process of creating a senior executive advisory team that would include independent business professionals.

The Company is aligning its U.S. investment strategy with sales, and is implementing a marketing plan that is more targeted to health conscious consumers and their influencers. Management is implementing a number of sales, marketing and public relations strategies and programs to achieve these goals, including the launch of new products in Canada later this year. It also includes the pursuit of strategic marketing and distribution partners for the U.S.

The Company continues to manage its operating expenses and contain and reduce costs for the remainder of 2007. The Company is also realigning its manufacturing priorities with the objective of converting existing inventory into cash as soon as possible. This plan includes shipping excess U.S. inventory to Canada for repackaging and sale. COLD-fX®, which has a 5-year shelf life, was bottled for sale in the United States and has undergone the same quality testing as products produced in Canada and can easily be repackaged for sale in Canada. The Company will continue to pursue its application for refund of U.S. duties paid. COLD-fX® remains the number one selling cold and flu remedy in Canada, according to ACNielsen.(1)

"Our business goals are clear", says Dr. Jacqueline Shan, president, CEO and Chief Scientific Officer. "We will be working to convert large inventories to cash, we will be continuing to reduce operating expenses, and we are working diligently to seek a strategic business partner in the U.S. Under the direction of Ross Montagano, our recently appointed Chief Operating Officer, we will be in a stronger position to execute more targeted marketing campaigns to health conscious consumers. We will do this by taking advantage of our core scientific foundation and improved business operating activities. COLD-fX® continues to be the number one selling cold and flu remedy in Canada. Our Company is in a solid position with retailers and consumers and we believe the future is bright."


CV Technologies, founded in 1992, is a global leader in the development and commercialization of naturally derived, evidence based, natural therapeutics for disease prevention and health maintenance. The Company's lead product - COLD-fX - strengthens the immune system and is widely used in Canada as a leading over the counter (OTC) remedy for preventing and relieving cold and flu infections. A comprehensive treatment claim approved by Health Canada for COLD-fX states that it "helps reduce the frequency, severity and duration of cold and flu symptoms by boosting the immune system." Such therapeutic claims require support by randomized, double-blinded, placebo-controlled clinical trials which are the highest level of scientific evidence. COLD-fX, with its unique and patented mechanism of action is standardized according to the Company's ChemBioPrint (CBP) process. The CBP process precisely identifies the chemical profile and biological activity of multi-active compounds in evidence-based natural therapeutics, while providing a manufacturing protocol that ensures each batch of the final product delivers verifiable and provable health benefits. International manufacturing, marketing, patents and trademarks are held by fX Life Sciences International GmbH. COLD-fX is distributed and sold in the U.S. by COLD-fX Pharmaceuticals (USA) Inc. after receiving clearance from the FDA as a New Dietary Ingredient. Both companies are wholly-owned subsidiaries of CV Technologies Inc. fX Life Sciences International GmbH and COLD-fX Pharmaceuticals (USA) Inc. maintain a call center for product information: 1-877-490-3300.

(1) ACNielsen's MarketTrack Drug Service for Cold Remedies, Natural Supplements & Vitamins Categories for the 52 week period ending September 2, 2006

This news release contains forward-looking statements that are subject to risks and uncertainties that may cause actual results or events to differ materially from the results or events predicted in this release, including those comments predicting the Company's timely return to profitability, the availability of existing and future financing, and the impact and potential for new corporate initiatives, the timely completion of definitive banking documents and the timely removal of the Cease Trade Orders. Although we believe that the forward-looking statements contained herein are reasonable, we can give no assurance that our expectations are correct and that the results, performance or achievements expressed in, or implied by, forward-looking statements within this disclosure will occur, or if they do, that any benefits may be derived from them. All forward-looking statements are expressly qualified in their entirety by this cautionary statement. For a more in-depth account of risks and uncertainties, please refer to documents filed with the Canadian securities regulatory authorities through the System for Electronic Document Analysis and Retrieval (SEDAR). Subject to its obligations under applicable law, the Company assumes no duty to update this disclosure. The Company is a 12g3-2(b) SEC registrant.

Please Note: Details of an investor conference call will be announced in the next few days.

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