clemex intelligent microscopy interimmanagement discussion … 2012-07-12 · interimmanagement...

CLEMEX intelligent microscopy

Discussion & Analysis Q2-2011

InterimManagement

1www.clemex.com

InterimManagement Discussion and Analysis

For the quarter ended October 31st, 2010

This discussion and analysis is provided to assist readers in their assessment and understanding of the consolidated results of operations, the financial position and changes in cash flows of Clemex Technologies Inc. for this second quarter ended October 31st, 2010.

The following Management Discussion and Analysis (MD&A) for the period ended October 31st, 2010 compared with the period ended October 31st, 2009, should be read in conjunction with the consolidated Financial Statements and accompanying notes of April 30 th, 2010. This MD&A has been reviewed and approved by the Company’s Board of Directors. It includes all important events that occurred before December 21st, 2010.

Description of BusinessClemex Technologies, Inc. (“Clemex” or “the Company”) develops, manufactures and markets Image Analysis Systems and software used by quality control and research microscopy laboratories. Clemex’s customer base spans over many countries around the world and encompasses large manufacturing concerns in numerous industries including automotive, aerospace, raw materials manufacturing, pharma-ceuticals, mining, and other sectors.

Clemex Technologies, Inc. is headquartered in Longueuil, Québec, and has a business address in the US, as well as distributors in Europe, Asia, South America, and the Middle East. The Company is publicly traded on the TSX stock exchange under the symbol “CXG.A”.

Some sections of this MD&A present forward-looking statements which, by their nature, involve certain risks and uncertainties. Actual results may be different from those presented.

Risks and UncertaintiesActivities in which the Company is committed involve risks and uncertainties that could have a negative impact on its financial statements and operating results. The risks listed below are not the only ones to which the Company is subject, and other risks may occur in the future.

Intellectual Property and Competition

Protection in the form of patents is generally not available for software products such as those produced by the Company. There can be no assurance that the Company’s means of protecting its proprietary rights will be adequate or that the Company’s competitors will not independently develop similar technology. However the Company does take whatever steps it can to protect itself. Furthermore, a patent is still pending for a “System and method for automatic measurement and calibration of computerized magnifying instruments in the United States and Europe.”

2 MD&A, Q2-2011

Economic Conditions

Changes in economic or political environments, the dependence of certain industries, and fluctuations in sales cycles can affect the demand for the Company’s products. Any slowdown in economic growth can adversely affect the Company’s business, its revenues and financial situation.

Currency Fluctuations

Fluctuation in exchange rates between Canada and the United States can affect the consolidated results when converting in Canadian currency since the distribution of sales and purchases between the two currencies is not a balanced one. In fact, a large share of income is made in US currency, while a large share of expenditure is in Canadian currency.

Dependence on Suppliers

The Company’s manufacturing of systems is linked to the availability of components and products that are manufactured by only a few suppliers. Delivery times and inventory shortages could have a negative impact on the ability to meet delivery dates for orders from its customers. However, the Company expects to be able to buy from other manufacturers if that were to be the case.

Credit Risks

The Company is reviewing and monitoring closely its accounts receivable. In addition, when dealing with its international accounts, the Company uses its credit insurance in order to minimize its risk.

Warranties and Lawsuits

The Company is exposed to guarantee costs, lawsuits, and other claims that may harm the development of its business and reputation. To minimize these risks, the Company took out yearly liability insurance on its products and on its trustees’ responsibilities. However, it is possible that some claims may not be covered by the insurance in whole or in part. Financial obligations could result in adverse effects on its financial statements and operating results.

Dependence on Key Personnel

The ability to attract and retain key employees in its area of expertise is such that it could affect the Company’s success. Failure to retain key personnel could affect development activities and product marketing and thereby harm the Company’s operating results.

Changes in Accounting StandardsGoodwill and Intangible Assets

On May 1, 2009, in accordance with applicable transitional provisions, the Company adopted the new recommendations in the Canadian Institute of Chartered Accountants Handbook (CICA) included in Section 3064 «Goodwill and Intangible Assets”, replacing Section 3062, «Goodwill and Intangible Assets”. The release of this new section has resulted in the withdrawal of Section 3450, «Research & Development» and guidelines of the Emerging Issues Committee Abstract of Issue Discussed EIC-27, «Revenues and Expenditures During the Pre-operating Period», as well as amendments to Section 1000, «Financial Statement Concepts» clarifying the criteria for recognition of assets, and to Accounting Guideline AcG-11, “Enterprises in the Development Stage”.

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This new section establishes standards for the recognition, measurement, presentation and disclosure of goodwill and intangible assets for profit organizations. It clarifies guidelines for the accounting methods used for intangible assets produced internally. However, the standards relating to goodwill are identical to those contained in Section 3062, “Goodwill and Intangible Assets”.

The adoption of this Section had no impact on the consolidated financial statements.

Financial Instruments - Disclosure

In June 2009, the Accounting Standards Board issued amendments to the CICA Handbook’s Section 3862, “Financial Instruments – Disclosures”. This section has been amended to include additional disclosure requirements about fair value measurement for financial instruments and liquidity risk disclosures for publicly accountable enterprises. These amendments require a three-level hierarchy that reflects the significance of the inputs used in making the fair value measurements. The definitions for each level are: Level 1, quoted unadjusted prices in active markets for identical assets or liabilities; Level 2, inputs other than quoted prices included in Level 1 that are based on observable market data for assets or liabilities, either directly (i.e., as prices) or indirectly (i.e., derived from prices); and Level 3, inputs for assets or liabilities are on the basis of the best available information as observable market data is not available.

The amended section relates only to disclosures and had no impact on the consolidated financial statements.

Future Accounting ChangesBusiness Combinations and Consolidated Financial Statements

In January 2009, the Canadian Institute of Chartered Accountants (CICA) issued Section 1582 «Business Combinations” which replaces Section 1581 of the same title. Moreover, on the same date, the CICA issued new Sections 1601, «Consolidated Financial Statements» and 1602 «Non-controlling Interests». These two new sections replace Section 1600, «Consolidated Financial Statements”

The objective of Section 1582 is to improve the relevance, reliability and comparability of the information that a reporting entity provides in its financial statements about a business combination and its effects. Section 1601 establishes standards for the preparation of consolidated financial statements following a business combination that involves a purchase of an equity interest by one company in another. Section 1602 establishes standards for accounting for a non-controlling interest in a subsidiary in consolidated financial statements subsequent to a business combination.

Section 1582 must be applied to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after January 1, 2011 and Sections 1601 and 1602 are effective for fiscal years beginning on or after January 1, 2011. The Company will apply these new sections as of May 1, 2011. The Company’s management has not yet measured the impact that the application of these new standards will have on the consolidated financial statements.

Multiple Deliverable Revenue Arrangements

In December 2009, the EIC issued EIC-175, «Multiple Deliverable Revenue Arrangements» to amend EIC-142, of the same name. EIC-175 addresses how to determine whether an arrangement involving multiple deliverables contains more than one accounting unit and, if so, how the consideration specified in the multiple element arrangement should be distributed between different accounting units. These recom-mendations are to be applied prospectively to revenue arrangements with multiple deliverables entered into or materially modified in the first annual fiscal period beginning on or after January 1, 2011. The Company will implement these new recommendations starting on May 1, 2012. The Company has not yet assessed the impact of these new recommendations on its consolidated financial statements.

4 MD&A, Q2-2011

International Financial Reporting Standards (IFRS)

In February 2008, the Canadian Accounting Standards Board (AcSB) announced that the use of International Financial Reporting Standards (IFRS) established by the International Accounting Board will be mandatory for fiscal years beginning January 1, 2011 for publicly accountable enterprises. Accordingly, the Company expects to adopt these new standards during its fiscal year beginning on or after May 1, 2011. The AcSB has also stated that, during the transition period, companies will be required to provide comparative data for the previous year established under IFRS. IFRS issued by the International Accounting Standards Board (IASB) require the submission of additional information in the financial statements and, although the conceptual framework of IFRS is similar to Canadian GAAP, companies must take into account diffe-rences in accounting principles. The Company is currently evaluating the impact of adopting these new standards on its consolidated financial statements, but it cannot reasonably establish the current impact of this accounting change on its financial position.

The conversion project consists of four important phases:

Diagnostic and Awareness phase – This involves the development of a communication and training plan for all employees affected by the project, along with a preliminary evaluation of IFRS standards, particularly the IFRS 1 exemptions for first time adopters and its consequences on the Company’s financial statement. Conception and Evaluation phase – This involves the evaluation and in depth study of the effects brought about by differences between IFRS and Canadian GAAP standards on the Company’s existing accounting systems and processes. Implementation phase – This involves implementing changes to internal controls and processes, preparing the transition balance under IFRS standards in parallel with Canadian GAAP, as well as preparation of interim financial statements under the new IFRS standards for the first quarter of Fiscal Year 2011-2012.

Post-Implementation phase – This consists in an evaluation of the conversion processes and developing necessary improvements for a sustainable IFRS business model, along with future internal control envi-ronment testing.

As of this date, the Diagnostic and Awareness phase has been completed, and Management is able to continue its work on subjects that have been identified as important in the conversion process, thus ensuring that all relevant historical information will be on hand when compliance to the new IFRS standards comes into force in 2011.

The impact of these changes cannot be accurately determined at this time since the IASB will continue to issue new standards during the transition period. However, as of this date, Management believes that no major changes will be made during the conversion.

The project is progressing on schedule. Management closely monitors the evolution of important diffe-rences between Canadian GAAP and IFRS standards, and may revise its intentions in response to changes that are made to standards as they become implemented.

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Analysis of Financial Position and Results of OperationsConsolidated results on Operations for periods ended October 31st ; Second Quarter Six Months 2011 2010 2011 2010 $ $ $ $

Sales 1,144,906 1,025,059 2,161,761 1,753,690 Cost of sales 441,101 414,153 818,423 679,000 Gross margin 703,805 610,906 1,343,338 1,074,690 Operating expenses : Commercial expenses 288,740 256,276 574,868 495,083Administrative expenses 203,544 177,064 374,808 346,081Financial expenses 21,471 18,283 43,169 41,285Depreciation on capital assets 30,058 29,244 60,116 58,200 R&D expenses, net of tax credits 120,375 68,907 198,809 152,791Loss (gain) on foreign currency transactions 9,359 10,260 8,494 7 1,407

673,547 560,035 1,260,264 1,164,847 Net Earnings (Loss) 30,258 50,871 83,074 ( 90,157 )

SalesFor this second quarter of Fiscal 2011, sales reached $1,144,906 ($1,025,059 for Q2 2010), an 11.7% increase over the same period last year.

Sales in North America remain slow even if the confidence is slowly improving. We note a slight decline in sales from $732,088 to $660,249 for this second quarter of FY 2011. A significant drop in sales in Canada contributed to the overall decrease in sales for North America this last quarter as they dropped from $327,178 to $55,417. However, this drop in sales is compensated by an increase in the United States as sales increased from $404,910 to $604,832. Sales from the beginning of the FY in North America are stable from $1,222,426 to $1,224,735 after six months into this Fiscal Year.

On the International side, sales have increased again this quarter compared to last year rising from $292,971 to $484,657. Sales in Europe have also almost doubled with an increase of 97.7%, from $55,813 last year to $104,090 for the same period this year.

From the beginning of the Fiscal Year, total sales reached $2,161,761 compared to $1,753,690 after six months. Europe has the most important increase which reaches 97.7% with sales from $152,845 to $302,264 after six months. Total International sales have increased by 76.3% from $531,845 to $937,026.

6 MD&A, Q2-2011

Gross Margin The gross margin is at 61.5% for Q2 2011 (59.6 % for Q2 2010). After six months, the gross margin is at 62.1 %, very similar to last year at 61.3%

The types of products sold by the Company have different characteristics and include hardware and software that are often unevenly distributed which explains why the gross margin may vary slightly from one quarter to another. Many small critical parts used in assembling image analysis systems are being produced in-house, which reduces their cost and has had a positive effect on the gross margin.

The Canadian dollar’s fluctuation against other currencies can slightly affect the cost of goods sold, as some parts are bought in foreign currencies, especially in American dollars. Close monitoring of production costs allows the Company to maintain a stable gross margin throughout the year.

Operating Expenses Commercial Expenses

Commercial expenses totaled $288,740 this second quarter of 2011 ($256,276 for Q2 2010). Since the beginning of the fiscal year, commercial expenses reached $574,868 compared to $495 083 for the previous year.

Travel and global expenses to attend the different trade shows have increased by $8,704, promotional expenses by $9,912 and salaries by $12,534 which explains the increase in commercial expenses this quarter compared to the same period last year. From the beginning of the year, expenses have increased by $79,785 mainly due to an increase in marketing and promotional expenses to attend trade shows.

All costs are still closely monitored even if increases in commercial expenses were expected for this fiscal year in connection with trade shows, promotional campaigns, and other advertising expenses set in budget by the sales and marketing teams when compared to the same period last year.

Research & Development Expenses

R&D expenses include labor and external consulting services in product development.

During the first quarter, R&D expenses totaled $120,375 compared to $68,907 for the same period last year. After six months, expenses have reached $198,809 this fiscal year as they were $152,791 last year.

The NRC-IRAP grant received for the development of a new analysis tool in hematology has reached the maximum claimable over this quarter and that explains the increase in research and development costs this last quarter compared the last year. This grant allowed the Company to recover a portion of the salaries paid to employees of the R&D team as well as part of the costs used for subcontractors who have worked on this project since June 2009. The total claimed for this quarter reached $28,427 in comparison to $74,135 for the same period last year. To date, a total of $474,213 on a maximum of $480,000 has been claimed for the project. The hematology project is near completion and the instrument will be entering the pre-commercial phase shortly.

Administration Expenses

Administrative expenses totaled $203,544 compared to $177,064 for the same period last year. Year-to-date administrative expenses reach $374,808 this year compared to $346,081 last year.

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Administration expenses include mainly payroll expenses, external professional fees, all other general admi-nistration fees and expense for public companies. Expenses with regards to the issuance of the debenture and the increase in payroll expenses explain the increase for this quarter when compared to last year.

Financial Expenses

Financial expenses represent interest paid on loans and bank charges. During the last quarter, the following financial expenses were incurred. There are no extraordinary financial expenses to report.

Second Quarter Six Months 2011 2010 2011 2010 $ $ $ $ Interest and bank charges 9,189 4,751 16,837 12,803 Interest on the long-term debt 12,282 13,532 26,332 28,482

21,471 18,283 43,169 41,285

Loss (Gain) on Foreign Currency Currency fluctuations have an effect on the Company’s results from one quarter to another, since exposure to foreign currency, more specifically the US dollar, is considerable. Conversely, the Canadian dollar’s fluctuations versus the US dollar also affect sales since 70% of our sales are made in US dollars.

During this quarter, a loss of $9,359 was recorded to the Company’s results compared to a loss of $10,260 for the same period last year. Year-to-date loss on foreign currency reaches $8,494 compared to $71,407 after six months last year. Whenever possible, the Company uses mechanisms to protect itself from currency fluctuations in the markets, such as foreign exchange contracts. However, it is virtually impossible to predict these behaviors, especially with sales cycles being so long.

Net Earnings (Loss)

This second quarter ended with a net profit of $30,258 compared to a net profit of $50,871 for the same period last year. After six months, the Company presents a net profit of $83,074 this year compared to a net loss of $90,157 last year.

The 11.69% increase in sales this second quarter of this Fiscal Year compared with the same period last year is responsible for the largest share of the Net Profit generated by the Company despite the increase in operating expenses when compared to the first quarter. From the beginning of this Fiscal Year, sales have increased by 23.3% over last year and explain the year-to-date Net Profit compared to the same period last year. While drastic measures to reduce expenditures had been implemented last year to limit its losses to acceptable levels given the economic slowdown, these measures are slowly reevaluated even though global expenses are sill under close supervision.

8 MD&A, Q2-2011

Selected Quarterly Financial Information

2011 2010 2009 T2 T1 T4 T3 T2 T1 T4 T3 $ $ $ $ $ $ $ $ Sales 1,144,906 1,016,855 915,064 990,375 1,025,059 728,631 1,040,461 1,294,858 Net Earnings/(loss) 30,258 52,816 (182,248 ) 10,886 50,871 (141,029 ) (71,610 ) 7,262 Net Earnings (loss) per share 0,001 0,003 (0,009 ) 0,001 0,002 (0,007 ) (0,004 ) -

Net Earnings (loss) per share (diluted) 0,001 0,003 (0,009 ) 0,001 0,002 (0,007 ) (0,004 ) -

Cash FlowsThe following summarizes the Company’s cash flows Q2 Six Months 2011 2010 2011 2010 Funds generated by operations before working capital items 61,974 82,450 152,727 (27,806 )Non-cash working capital (112,124 ) (323,685 ) (255,610 ) (67,432 )

Operating activities (50,150 ) (241,235 ) (102,883 ) (95,238 )Financing activities 128,756 104,167 191,284 5,366Net investment activities (12,260 ) (14,554 ) (45,445 ) 17,605

Variation in Net cash and Cash Equivalents 66,346 (151,622 ) 42,956 (72,267 )

Operating activities before elements of working capital have fluctuated slightly this quarter when compared to the same quarter last year, net profit being similar. Elements of non-cash working capital have fluctuated, largely due to a decrease in accounts receivable when compared to the same period last year. Since the beginning of this fiscal year, fluctuations with accounts receivables ( increase of $105,085) tax credits ( increase of $91,501) and accounts payables ( decrease of $65,698) explain the variation of the non-cash working capital elements.

Financing activities generated $128,756 during this second quarter, and are distinguished by increase in bank loan and the reimbursement of a portion of the debenture. To this, we deduct the repayment of long-term debt by $24,467. Since the beginning of this fiscal year, financing activities have generated $191,284.

Net investment activities used $12,516 during this second quarter, mostly linked to the acquisition of computer equipment. After six months, investing activities have used $45,445 for the acquisition of labo-ratory and computer equipment to replace old and obsolete equipment.

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Capital Management In capital management, the Company includes the following in the definition of capital: components of equity, long-term debt, and the convertible debenture.

The main objective of the Company’s capital management is to ensure it has sufficient financial resources to fund its research and development, continue its marketing efforts and support its ongoing operations, i.e. the development of new image analysis tools and the hematology project, despite tough economic times.

To ensure the necessary capital to pursue these plans, the Company may seek additional funds by issuing new debt or new shares, or by entering into licensing and distribution agreements.

The Company is not subject to any requirement imposed by regulatory authorities regarding its capital.

On October 31st, 2010, the cash flow and working capital ratio are 1.80 and 1.24 respectively.

Effects of the Current Economic SituationEvents that occurred on the markets over the last two years have created several disturbances which brought a serious impact on several industrial sectors which are targeted by the Company’s products, such as the automotive, aerospace, and manufacturing industries.

Although market activities have somewhat resumed over the last few quarters, activities are only slowly regaining as the economic environment is still somewhat strained. In our opinion, it is normal for sales to still be affected as purchases of our products require a significant capital investment from many of our customers.

We notice, even after a few months of improvement, that clients remain very careful with these economic uncertainties.

Balance Sheet AnalysisConsolidated Balance Sheet Notes As of October 31st As of April 30th 2010 2010 (unaudited) (audited) $ $

Assets Short-term assets : Cash and cash equivalent 24,625 - Accounts receivable 948,156 843,071 Investment tax credits receivable 224,933 133,432 Inventories 542,660 538,715 1 Prepaid expenses 12,782 23,345 1,753,156 1,538,563 Capital assets 501,418 521,400 2,254 574 2,059,963

10 MD&A, Q2-2011

Liabilities and Shareholders’ Equity

Short-term liabilities : Bank loan & overdraft 200,000 18,331 Revolving bank loan 86,845 - 2 Payables and accrued liabilities 596,284 660,962 Clients deposits & deferred income 56 1,020 Short-term component of convertible debenture - 192,965 4 Short-term component of long term debt 89,825 142,446 973,010 1,015,724 Long-term debt 91,411 87,574 3Deferred rental incentive benefits 35,000 40,000 Shareholders’ Equity :

Components of shareholders’ equity 53,546 36,019 Capital stock 4,653,310 4,653,310 5Contributed surplus 259,301 256,078 Deficit ( 3,945,668) ( 4,028,742 )

1,020,489 916,665

2,254,574 2,059,963

References to the Consolidated Balance Sheet Summary1. Inventories

An increase of $23,574 during this last quarter, and an increase of $3,945 since the beginning of the year.

Inventory represents the goods that the Company has on hand to prepare orders and to resell its finished products to its customers.

Inventories are primarily made up of microscope parts, cameras, motorized stages, and several computer parts.

Stock level is adjusted according to customer orders. Since orders are down from last year, the inventory level has been adjusted accordingly. However, equipment diversity requires the Company to maintain a minimum inventory level in order to respond quickly to customer orders. Some components in the inventory are ordered using the Economic Order Quantity model, which makes stock levels fluctuate from one quarter to the next.

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2. Banking debt and banking loans

The Company has at its disposal a revolving operating line of credit of $500,000. This credit bears interest at the bank prime rate plus 2.25% and is secured by a first rank moveable mortgage of $1,275,000 on the universality of goods.

The Company has a revolving bank loan of $95,000 at the bank prime rate plus 2.75% secured by a moveable mortgage on receivable tax credits maturing in February 2011 is also available. (86 845 was used as of October 31st, 2010). The company also has at its disposable a revolving bank loan of $131,000 at bank prime rate plus 3.50% secured by a moveable mortgage on receivable tax credits, falling due in February 2012 (unused).

3. Long-term debt

A decrease of $24,317 during this second quarter and $48,784 since the beginning of the fiscal year.

Details of long-term debt are as follows: October 31st April 30th

2010 2010 $ $

Obligations under capital leases, secured by machining equipment with a net book value of $179,483 at 6.75%, repayable in monthlyinstallments of $3,646, principal and interest due in October 2013. 102,506 117,590Term loan, bearing interest at prime plus 2.75% for a maximum amount of $90,000, repayable by monthly payments of $2,500, maturing in October 2011. 32,500 47,500$107,000 term-debt due in October 2011, bearing interest at the basic rate plus 2.5%, with monthly payment of capital of $1,782.65. 24,897 35,597Term loan of $32,000 bearing interest at the basic rate plus 3.0%, repayable by monthly Payments of $1,333, maturing in February 2012. 21,333 29,333

Short-term portion of long-term debt ( 89,825 ) (142,446 )

Long-term debt 91,411 87,574

12 MD&A, Q2-2011

4. Convertible debenture

A decrease of $63,926 during this quarter and from the beginning of the year.

On August 27th 20010, the Company proceeded to the redemption of 25 % of the debenture for a total amount of $50,000 in cash. The existing balance, of $150,000, was settled by the issuance of a new debenture. This new debenture issued on September 10th, 2010, bears interest of 11% and can be converted at any time by the holder at a conversion rate of $0.125 per class “A” share.

The debenture will be reimbursed at the nominal value plus accrued and unpaid interest on September 1st, 2012, or by anticipation, according to certain conditions.

5. Share capital

A total of 230,000 options were granted this quarter.

Issued common share capital is as follows: December 21st October 31st April 30th

2010 2010 2010

Options issued and outstanding 1,368,500 1,368,500 1,138,500

Shares issued and outstanding 20,749,810 20,749,810 20,749,810

Subsequent EventsA new agreement has been concluded between the Company and Leica Microsystems on November 30th, 2010. This new agreement will grant the Company the exclusive distribution of Leica Microscopy products in specific Market Segments in Canada. This agreement comes into effect as of March 2011.

Disclosure Controls and ProceduresManagement is responsible for establishing and maintaining adequate internal control over financial reporting to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP. No changes were made in our internal control over financial reporting during the period ended October 31st, 2010, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

This Management Discussion and Analysis report was prepared on December 21st, 2010. For more information, please visit the SEDAR website at: www.sedar.com.

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InformationHeadquartersClemex Technologies Inc., 800 Guimond, Longueuil, Quebec J4G 1T5 CanadaTelephone: (450) 651-6573, Fax: (450) 651-9304, [email protected], www.clemex.comSubsidiaryClemex Corp, 17195 Silver Parkway, suite 409, Fenton, MI USA 48430-3426Transfer AgentCIBC Mellon Trust, Montreal, QuebecAuditorsRaymond Chabot Grant Thornton L.L.P., Chartered Accountants, Longueuil, QuebecSolicitorsMiller, Thompson, Pouliot, Montreal, QuebecBankersNational Bank of Canada, Montreal, QuebecTrading SymbolTrading Symbol Clemex Technologies Inc. is listed on TSX Venture Exchange under the symbol CXG.AAuthorized Number of Class A SharesUnlimitedIssued Class A Shares20,749,810

Board of Directors○● Me Lisane Dostie, ASC (Certified Board Director) Chairperson of the Board and Corporate Secretary, President, ISA Legal inc.○● Normand Beauregard Director, Marketing Consultant and UQAM Adjunct Professor○● Gilles L’Espérance, PhD Director, Professor, École Polytechnique de Montréal○● Clément Forget Director, President and Chief Executive Officer, Clemex Technologies Inc.○● Erik Grandjean Director, President, Compumedia Design (CMD) Inc.○● Fréderic Tremblay Director, Senior Consultant, Tower Watson

Officers○● Clément Forget President and Chief Executive Officer, Clemex Technologies Inc.○● Caroline Trudel, MBA Treasurer, Vice-President, Finances & Administration, Clemex Technologies Inc.○● Monique Dallaire, ing., MBA Vice-President, Marketing and Product Development, Clemex Technologies Inc.

December 21st 2010

CLEMEXwww.clemex.com

CLEMEX intelligent microscopy

InterimFinancial Statements Q2-2011

2 Financial Statements, Q2-2011

Consolidated Earnings and Comprehensive Income & Consolidated Deficit 1Consolidated Cash Flow Statement 2Consolidated Balance Sheet 3Notes to Financial Statements 4Information 13

The interim consolidated financial statements as of October 31st, 2010, have been prepared by the Management of Clemex Technologies Inc., and have not been reviewed by the Company’s external auditors. They should be read in conjunction with the Annual Financial Statements of April 30th, 2010. These statements contain forward-looking statements based on assumptions reflecting the Company’s expectations. A number of risks and uncertainties are related to these statements, which could cause actual results and actual events to be different from those expected.

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Consolidated Earnings and Comprehensive Income & Consolidated Deficit for the 3 and 6 month periods ending October 31st (unaudited) Second Quarter Six Months 2011 2010 2011 2010 $ $ $ $

Consolidated Earnings & Comprehensive Income Sales 1,144,906 1,025,059 2,161,761 1,753,690

Cost of sales 441,101 414,153 818,423 679,000 Gross profit 703,805 610,906 1,343,338 1,074,690 Operating expenses: Commercial expenses 288,740 256,276 574,868 495,083 Administrative expenses 203,544 177,064 374,808 346,081 Financial Expenses 21,471 18,283 43,169 41,285 Depreciation of capital assets 30,058 29,244 60,116 58,200 R&D expenses, net of tax credits 120,375 68,907 198,809 152,791 Loss (gain) on foreign currency transactions 9,359 10,260 8,494 71,407

673,547 560,035 1,260,264 1,164,847Net Earnings (Loss) & Comprehensive income 30,258 50,871 83,074 ( 90,157 ) Net Earnings (loss) per share: Basic 0.001 0.002 0.004 ( 0.004 ) Diluted 0.001 0.002 0.004 ( 0.004 )

Consolidated Deficit Deficit, beginning of period ( 3,975,926 ) ( 3,908,251 ) ( 4,028,742 ) ( 3,767,222 )

Net Earnings (Loss) 30,258 50,871 83,074 ( 90,157 )

Defict, end of period ( 3,945,668 ) ( 3,857,380 ) ( 3,945,668 ) ( 3,857,379 )

See accompanying notes to the consolidated financial statements.


Consolidated Cash Flow Statement for the 3 and 6 month periods ending October 31st (unaudited) Second Quarter Six Months 2011 2010 2011 2010 $ $ $ $

Operating Activities Net earning (net loss) from operations 30,258 50,871 83,074 ( 90,158 ) Adjustments for : Amortization 30,058 29,244 60,116 58,200 Increased value of the convertible debenture 3,601 4,300 9,226 9,000 Deferred rental incentive benefit amortization ( 2,500 ) ( 2,500 ) ( 5,000 ) ( 5,000 ) Loss (gain) on disposal of capital assets 557 535 5,311 152

61,974 82,450 152,727 ( 27,806 ) Net change in non-cash working capital items ( 112,124 ) ( 323,685 ) ( 255,610 ) ( 67,432 )

Cash flows from operating activities ( 50,150 ) ( 241,235 ) ( 102,883 ) ( 95,238 )

Financing Activities Bank loan 200,000 125,000 200,000 - R&D Tax Credit financing - - 86,845 37,811 Issuance of long-term debt - - - 8,968 Other components of shareholders’ equity 3,223 - 3,223 - Purchase of a portion of the debenture ( 50,000 ) - ( 50,000 ) - Repayment of long-term debt ( 24,467 ) ( 20,833 ) ( 48,784 ) ( 41,413 ) Cash flows from financing activities 128,756 104,167 191,284 5,366 Investing Activities Acquisition of capital assets ( 12,516 ) ( 18,191 ) ( 50,081 ) ( 36,309 ) Proceeds from disposal of capital assets 256 3,637 4,636 3,914 Receival of rental incentive benefits - leasehold improvements - - - 50,000 Cash flows from investing activities ( 12,260 ) ( 14,554 ) ( 45,445 ) 17,605

Net increase (net decrease) in cash and cash equivalents from operations 66,346 ( 151,622 ) 42,956 ( 72,267 ) Cash and Cash equivalents, beginning ( 41,721 ) 127,795 ( 18,331 ) 48,440 Cash and cash equivalents, end 24,625 ( 23,827 ) 24,625 ( 23,827 )


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Consolidated Balance Sheets

as of October 31st, 2010 and April 30th, 2010 October 31st April 30th 2010 2010 (unaudited) (audited) $ $

Assets Current assets : Cash and cash equivalents 24,625 - Accounts receivable 948,156 843,071 R&D Investment tax credits 224,933 133,432 Inventories 542,660 538,715 Prepaid expenses 12,782 23,345 1,753,156 1,538,563

Capital assets (note 3) 501,418 521,400 2,254,574 2,059,963

Liabilities and Shareholders’ Equity Current liabilities : Bank loans & Overdraft (note 4) 200,000 18,331 Payables and accrued liabilities (note 5) 596,284 660,962 Clients Deposits & Deffered Income 56 1,020 Revolving bank loan (note 4) 86,845 - Short-term component of convertible debenture - 192,965 Short-term component of long term debt (note 6) 89,825 142,446 973,010 1,015,724 Long-term debt (note 6) 91,411 87,574 Deferred rental incentive benefits (note 13) 35,000 40,000 Convertible Debenture (note 7) 134,664 - Shareholders’ Equity : Equity component of convertible debenture 53,546 36,019 Share capital 4,653,310 4,653,310 Contributed surplus 256,301 256,078 Deficit (3,945,668 ) (4,028,742 ) 1,020,489 916,665 2,254,574 2,059,963



Notes to Financial Statements (unaudited) As of October 31st, 2010

1. Nature of Activities Clemex Technologies, Inc. designs and manufactures Image analysys systems and software for microscopy in research and quality control laboratories.

Basis of presentation

These consolidated financial statements have been prepared in accordance with accounting principles generally accepted in Canada. These same accounting policies were used by the Company in the financial statements included in the latest annual report. These consolidated financial statements do not include all disclosures required by accounting principles generally accepted in Canada, and therefore should be read in conjunction with the consolidated financial statements and notes there to included in the Company’s latest annual report.

Seasonability of Interim Period Operations

Given the long sales cycles, the Company’s results can fluctuate from quarter to quarter, especially during summer season. The enclosed unaudited financial statements are in accordance with generally accepted accounting prin-ciples applicable to interim financial statements and does not include all information required of a complete financial statement. The interim financial statements and related notes should be read in conjunction with the Company’s audited financial statements for the year ended April 30, 2010. The operating results for this interim period are not necessarily indicative of results expected for the year. 2. Changes in Accounting Standards

Goodwill and Intagible Assets

On May 1, 2009, in accordance with applicable transitional provisions, the Company adopted the new recommendations in the Canadian Institute of Chartered Accountants Handbook (CICA) included in Section 3064 «Goodwill and Intangible Assets”, replacing Section 3062, «Goodwill and Intangible Assets”. The release of this new section has resulted in the withdrawal of Section 3450, «Research & Development» and guidelines of the Emerging Issues Committee Abstract of Issue Discussed EIC-27, «Revenues and Expenditures During the Pre-operating Period», as well as amendments to Section 1000, «Financial Statement Concepts» clarifying the criteria for recognition of assets, and to Accounting Guideline AcG-11, “Enterprises in the Development Stage”.

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Notes to Financial Statements (cont’d)

This new section establishes standards for the recognition, measurement, presentation and disclosure of goodwill and intangible assets for profit organizations. It clarifies guidelines for the accounting methods used for intangible assets produced internally. However, the standards relating to goodwill are identical to those contained in Section 3062, “Goodwill and Intangible Assets”. The adoption of this Section had no impact on the consolidated financial statements.

Financial Instruments - Disclosure

In June 2009, the Accounting Standards Board issued amendments to the CICA Handbook’s Section 3862, “Financial Instruments – Disclosures”. This section has been amended to include additional disclosure requirements about fair value measurement for financial instruments and liquidity risk disclosures for publicly accountable enterprises. These amendments require a three-level hierarchy that reflects the significance of the inputs used in making the fair value measurements. The definitions for each level are: Level 1, quoted unadjusted prices in active markets for identical assets or liabilities; Level 2, inputs other than quoted prices included in Level 1 that are based on observable market data for assets or liabilities, either directly (i.e., as prices) or indirectly (i.e., derived from prices); and Level 3, inputs for assets or liabilities are on the basis of the best available information as observable market data is not available. The amended section relates only to disclosures and had no impact on the consolidated financial statements.

Future Accounting Standards

Business Combinations and Consolidated Financial Statements

In January 2009, the Canadian Institute of Chartered Accountants (CICA) issued Section 1582 «Business Combinations” which replaces Section 1581 of the same title. Moreover, on the same date, the CICA issued new Sections 1601, «Consolidated Financial Statements» and 1602 «Non-controlling Interests». These two new sections replace Section 1600, «Consolidated Financial Statements”

The objective of Section 1582 is to improve the relevance, reliability and comparability of the information that a reporting entity provides in its financial statements about a business combination and its effects. Section 1601 establishes standards for the preparation of consolidated financial statements following a business combination that involves a purchase of an equity interest by one company in another.

Section 1582 must be applied to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after January 1, 2011 and Sections 1601 and 1602 are effective for fiscal years beginning on or after January 1, 2011. The Company will apply these new sections as of May 1, 2011. The Company’s management has not yet measured the impact that the application of these new standards will have on the consolidated financial statements.



Multiple Deliverable Revenue Arrangements

In December 2009, the EIC issued EIC-175, «Multiple Deliverable Revenue Arrangements» to amend EIC-142, of the same name. EIC-175 addresses how to determine whether an arrangement involving multiple deliverables contains more than one accounting unit and, if so, how the consideration specified in the multiple element arrangement should be distributed between different accounting units. These recom-mendations are to be applied prospectively to revenue arrangements with multiple deliverables entered into or materially modified in the first annual fiscal period beginning on or after January 1, 2011. The Company will implement these new recommendations starting on May 1, 2011. The Company has not yet assessed the impact of these new recommendations on its consolidated financial statements.

International Financial Reporting Standards (IFRS)

In February 2008, the Canadian Accounting Standards Board (AcSB) announced that the use of International Financial Reporting Standards (IFRS) established by the International Accounting Board will be mandatory for fiscal years beginning January 1, 2011 for publicly accountable enterprises. Accordingly, the Company expects to adopt these new standards during its fiscal year beginning on or after May 1, 2011. The AcSB has also stated that, during the transition period, companies will be required to provide comparative data for the previous year established under IFRS. IFRS issued by the International Accounting Standards Board (IASB) require the submission of additional information in the financial statements and, although the conceptual framework of IFRS is similar to Canadian GAAP, companies must take into account diffe-rences in accounting principles. The Company is currently evaluating the impact of adopting these new standards on its consolidated financial statements, but it cannot reasonably establish the current impact of this accounting change on its financial position. 3. Capital Assets Cost Cumulated Net value amortization $ $ $

To October 31st, 2010 (unaudited)

Equipement 318,073 269,297 48,776 Machining equipement 62,115 8,789 53,326 Vehicule equipment 13,059 5,009 8,050 Moving laboratory 214,184 165,040 49,144 R&D equipment 747,342 614,834 132,508 Computer equipment 148,499 127,834 20,665 Furniture and fixtures 211,662 198,295 13,367 Leasehold improvements 38,098 12,648 25,450 Property leased under lease- purchase contract - Machining equipment 185,070 34,938 150,132 1,938,102 1,436,684 501,418

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Cost Cumulated Net value amortization $ $ $

To April 30th, 2010 (audited) Equipement 314,060 263,056 51,004Machining equipement 62,115 7,501 54,614Vehicule equipment 24,889 5,056 19,833Moving laboratory 214,184 154,340 59,844R&D equipment 705,680 600,067 105,613 Computer equipment 147,078 122,439 24,639Furniture and fixtures 211,663 195,910 15,753Leasehold improvements 38,098 9,014 29,084Property leased under lease- purchase contract - Machining equipment 185,070 24,054 161,016

1,902,837 1,381,437 521,400

4. Bank Debt and Bank Loans

The Company has at its disposal a revolving operating line of credit of $500,000. This credit bears interest at the bank prime rate plus 2.25% and is secured by a first rank moveable mortgage of $1,275,000 on the universality of goods. The Company has at its disposal a revolving bank loan of $95,000 at bank prime rate plus 2.75% secured by a moveable mortgage on receivable tax credits, falling due in February 2011. ($86,845 was used as of October 31st, 2010). The Company has at its disposal a revolving bank loan of $131,000 at bank prime rate plus 3.50% secured by a moveable mortgage on receivable tax credits, falling due in February 2012. (unused as of October 31st, 2010)

5. Accounts Payables and Accrued Liabilities

October 31st April 30th 2010 2010 (unaudited) (audited) $ $

Suppliers 427,929 407,166Accrued liabilities 134,388 206,029Salaries and fringe benefits 33,967 47,767

596,284 660,962



6. Long-term Debt October 31st April 30th 2010 2010 (unaudited) (audited) $ $

Obligations under capital leases, secured by machining equipment with a net book value of $179,483 at 6.75% repayable in monthly installments of $3,646, principal and interest due in October 2013. 102,506 117,590 Term loan, bearing interest at prime plus 2.75% for a maximum amount of $90,000, repayable in monthly installments of $2,500, maturing in October 2011. 32,500 47,500 Term-debt of $107,000 due in October 2011, carrying interest at the basic rate plus 2.5%, with monthly capital payment of $1,782.65. 24,897 35,597

Term-debt of $ 32,000 , carrying interest at basic rate plus 3%, with monthly capital payment of $ 1,333, maturing in February 2012. 21,333 29,333

181,236 230,020

Short-term portion of long-term debt (a) ( 89,825 ) (142,446 )

Long-term debt 91,411 87,574

(a) The financing agreement is subject to several restrictions, including the maintenance of financial ratios. As of April 30, 2010, the Company is not in compliance with these restrictions. Therefore, the long term portion of the debt has been presented in short term.

7. Convertible Debenture

On August 27th 20010, the Company proceeded to the redemption of 25 % of the debenture for a total amount of $50,000 in cash. The existing balance, of $150,000, was settled by the issuance of a new debenture .This new debenture bears interest of 11% and can be converted at any time by the holder at a conversion rate of $0.125 per class “A” share. It is possible for the Company to force the conversion of the principal amount at the above-mentioned conversion rate, provided the average quotation price for class “A” shares bought or sold at the stock exchange where the corporate security is registered remains at a minimum amount of $0.70 for a period of 20 days prior to the date when the Company requests the forced conversion. The debenture can be reimbursed at the nominal value plus accrued and unpaid interest on September 1st, 2012, or by anticipation, according to certain conditions.

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8. Stock Option Plan

As per the stock option plan, the Corporation may grant options from time to time to its employees and directors. Options granted under the plan may be exercised over a period of 5 years from the date they were granted and expire no later then the anniversary date.

Variations in stock-option oustanding and the effect on the weighted average exercise price are summa-rized as follows: Weighted Number average of shares exercise price

Balance, as of April 30th and July 31st, 2010 1,138,500 0.19

Options granted on September 27th, 2010 230,000 0.10

Balance, as of October 31th and December 21st, 2010 1,368,500 0.17

An expense of $3,223 was recorded during this second quarter as compensation based on share options issued. 9. Segmented Information

The sales are broken in geographic area as follows. The sales attributed to each geographic area are based on the location of the customer.

2011 (unaudited) 2010 (audited) Q2 Six Months Q2 Six Months

Sales $ $ $ $Canada 55,417 178,180 327,178 391,127United States of America 604,832 1,046,555 404,910 831,299Europe 104,090 302,264 55,813 152,845Other Countries 380,567 634,762 237,158 378,419

1,144,906 2,161,761 1,025,059 1,753,690

10. Share Capital

The Company’s share capital consists of an unlimited number of ordinary Class «A» shares. There has been no variation in the share-capital on the Company this second quarter and since the beginning of this fiscal year.



The following table shows issued and outstanding shares. # of shares $

Balance as of April 30th and October 31st, 2010 20,749,810 4,653,310 Balance as of December 21st, 2010 20,749,810 4,653,310

11. Capital Management

The Company’s capital management objective is to preserve its ability to continue its operations and to provide returns to shareholders and benefits to other stakeholders. In capital management, the Company includes the following in the definition of capital: equity compo-nents, long-term debt, and convertible debenture.On October 31st 2010, the Company’s capital, as defined above, totalled $1,336 389. The main objective of the Company’s capital management is to ensure it has sufficient financial resources to fund its research and development, continue its marketing efforts and support its ongoing operations. To ensure the necessary capital to pursue these plans, the Company may seek additional funds by issuing new debt or new shares, or by entering into licensing or distribution agreements. The Company is not subject to any requirement imposed by regulatory authorities regarding its capital. The Company is subject to certain financial and non-financial covenants concerning its long-term debt and debenture. The Company complied with all these covenants as of October 31st, 2010. The Company manages its capital through various measures, including maintaining a coverage ratio of debt service of at least 1.1, maintaining a debt ratio not exceeding 2.00 and maintaining a minimum tangible net worth of $1,000,000. The tangible net worth consists of share capital, deficit, surplus capital, the equity component of the convertible debenture, and the liability component of the convertible debenture. As at October 31st, 2010, the Company respected all theses convenants.

October 31st April 30th

2010 2010

Debt ratio 1.04 0.27Debt service coverage ratio 6.50 ( 0.26 )Tangible net worth 1,020,489 $ 916,665 $

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12. Management of Financial Risks

The Company may be exposed to risks of varying degrees in the course of normal business activities related to market changes as credit risks, foreign currency risks, interest rate risks and liquidity risks.

Credit Risk

The credit risk is the risk associated to the possibility that the client becomes unable to pay the amounts owed to the Company. Management asseses that risk to be fairly low due to rigourous follow up of the Company’s accounts receivable and credit verifications of new clients. The Company also has accounts receivable insurance through EDC for foreign clients.

Liquidity Risk

The liquidity risks is defined as the risk that the Company may not be able to meet its financial obligations as they arise, or at a reasonable price. The Company establishes a budget for its needs in liquidity and does budget comparison to assure it does have the necessary funds to meet its obligations. In addition, the Company has no guarantees on future financing conditions.

Foreign Currency Risk

The Company is exposed to currency risk due to cash held in currencies other than Canadian, as well as goods and equipment purchased in currencies other than Canadian. In Management’s opinion, the fluctuation in exchange rates may have an important influence on the Company’s overall results.

Interest Rate Risk

The Company is exposed to currency risk due to cash held in currencies other than Canadian, as well as goods and equipment purchased in currencies other than Canadian. In Management’s opinion, the fluc-tuation in exchange rates may have an important influence on the Company’s overall results. 13. Rental commitments

In May 2009, the lease was renegotiated to replace the original lease that would have expired on October 31st, 2011. This new lease will be in effect until April 30th, 2014, and has rental incentive advantages worth $50,000 which consists of benefits in respect of leasehold improvements in the amount of $833.33 per month which are credited to deferred incentive benefits.

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InformationHeadquartersClemex Technologies Inc., 800 Guimond, Longueuil, Quebec J4G 1T5 CanadaTelephone: (450) 651-6573, Fax: (450) 651-9304, [email protected], www.clemex.comSubsidiaryClemex Corp, 17195 Silver Parkway, suite 409, Fenton, MI USA 48430-3426Transfer AgentCIBC Mellon Trust, Montreal, QuebecAuditorsRaymond Chabot Grant Thornton L.L.P., Chartered Accountants, Longueuil, QuebecSolicitorsMiller, Thompson, Pouliot, Montreal, QuebecBankersNational Bank of Canada, Montreal, QuebecTrading SymbolTrading Symbol Clemex Technologies Inc. is listed on TSX Venture Exchange under the symbol CXG.AAuthorized Number of Class A SharesUnlimitedIssued Class A Shares20,749,810

Board of Directors○● Me Lisane Dostie, ASC (Certified Board Director) Chairperson of the Board and Corporate Secretary, President, ISA Legal inc.○● Normand Beauregard Director, Marketing Consultant and UQAM Adjunct Professor○● Gilles L’Espérance, PhD Director, Professor, École Polytechnique de Montréal○● Clément Forget Director, President and Chief Executive Officer, Clemex Technologies Inc.○● Erik Grandjean Director, President, Compumedia Design (CMD) Inc.○● Fréderic Tremblay Director, Senior Consultant, Tower Watson

Officers○● Clément Forget President and Chief Executive Officer, Clemex Technologies Inc.○● Caroline Trudel, MBA Treasurer, Vice-President, Finances & Administration, Clemex Technologies Inc.○● Monique Dallaire, ing., MBA Vice-President, Marketing and Product Development, Clemex Technologies Inc.

December 21st, 2010

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clemex intelligent microscopy interimmanagement discussion … 2012-07-12 · interimmanagement...

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