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EX-32.1 - CDEX INC | ex32_1.htm |
EX-32.2 - CDEX INC | ex32_2.htm |
EX-31.1 - CDEX INC | ex31_1.htm |
EX-31.2 - CDEX INC | ex31_2.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-K
x
|
Annual
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
|
For
the fiscal year ended October 31, 2009
|
|
o
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Transition
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
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For
the transition period from __________ to
__________
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Commission
File Number 000-49845
CDEX
INC.
(Exact Name of Registrant as Specified in Its
Charter)
Nevada
(State or other jurisdiction
of
incorporation or organization) |
52-2336836
(I.R.S.
Employer
Identification No.) |
4555
South Palo Verde Road, Suite 123
Tucson,
Arizona, 85714
520-745-5172
(Address
of principal executive offices and registrant's phone number)
Securities
registered under Section 12(b) of the Exchange Act: None.
Securities
registered under Section 12(g) of the Exchange Act:
Common
stock, $.005 par value per share.
(Title
of Class)
Indicate
by check mark whether the registrant is a well-known seasoned issuer, as defined
in Rule 405 of the Securities Act. Yes o No
þ
Indicate
by check mark whether the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes o No
þ
Indicate
by check mark 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 o No
þ
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 o No o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in a definitive proxy or information statement
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. 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 þ
|
(Do
not check if a smaller reporting company)
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o No
þ
The
aggregate market value of the Class A common stock held by non-affiliates was
approximately $6,232,000 on April 30, 2009 (the last day of the registrant’s
most recently completed second quarter) based on the last reported sale price of
the registrant's Class A common stock on the Over-the-Counter Bulletin Board
(OTCBB).
The
number of Common Shares of the Registrant outstanding as of March 15, 2010 was
65,239,634.
DOCUMENTS
INCORPORATED BY REFERENCE – None
CDEX
INC.
ANNUAL
REPORT ON FORM 10-K
FOR
THE YEAR ENDED OCTOBER 31, 2009
PART
I
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Item
1.
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Business
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2
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Item
1A.
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Risk
Factors
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6
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Item
1B.
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Unresolved
Staff Comments
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11
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Item
2.
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Properties
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11
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Item
3.
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Legal
Proceedings
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11
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Item
4.
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(Removed
and Reserved)
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11
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PART
II
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Item
5.
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Market
for Registrant’s Common Equity, Related Stockholder Matters and
Issuer
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Purchases
of Equity Securities
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12
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Item
6.
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Selected
Financial Data
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13
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Item
7.
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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13
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Item
7A.
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Quantitative
and Qualitative Disclosures About Market Risk
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17
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Item
8.
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Financial
Statements and Supplementary Data
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17
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Item
9.
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Changes
in and Disagreements With Accountants on Accounting and Financial
Disclosure
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17
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Item
9A.
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Controls
and Procedures
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17
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Item
9B.
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Other
Information
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18
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PART
III
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Item
10.
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Directors,
Executive Officers and Corporate Governance
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19
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Item
11.
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Executive
Compensation
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22
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Item
12.
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Security
Ownership of Certain Beneficial Owners and Management and
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Related
Stockholder Matters
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26
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Item
13.
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Certain
Relationships and Related Transactions, and Director
Independence
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27
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Item
14.
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Principal
Accounting Fees and Services
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29
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PART
IV
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Item
15.
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Exhibits,
Financial Statement Schedules.
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30
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1
PART
I
CAUTIONARY
STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This
document contains forward-looking statements as that term is defined in the
federal securities laws. Forward-looking statements can be identified by the use
of words such as "expects," "plans," "may," "anticipates," "believes," "should,"
"intends," "estimates," and other words of similar meaning. These statements are
subject to risks and uncertainties that cannot be predicted or quantified and,
consequently, actual results may differ materially from those expressed or
implied by such forward-looking statements. Such risks and uncertainties
include, without limitation, the ability of the Company to raise capital to
finance the development of its products, the effectiveness, profitability and
the marketability of those products, the ability of the Company to protect its
proprietary information, the establishment of an efficient corporate operating
structure as the Company grows and, other risks detailed from time-to-time in
our filings with the Securities and Exchange Commission. The Company undertakes
no obligation to publicly update any forward-looking statements.
ITEM
1. BUSINESS
General
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 normally traded on the OTCBB under the symbol "CEXI.OB." As of
the date of this filing, our common stock is traded under the symbol “CEXIE.OB”,
which reflects the delinquent status of our financial reports, which by this
filing will be cured. Our long term strategic plans focus on applying our
patented and patents pending chemical detection technologies to develop products
in various markets including the healthcare, security and brand protection
markets, as addressed below:
|
1.
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Healthcare
- Validation of medications, training and quality assurance (e.g.,
validation of prescription and compounded medications to provide for
patient safety, training of medical staff regarding compounding practices
and detection of the diversion of narcotics and controlled
substances);
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2.
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Security
and Public Safety - Identification of substances of concern (e.g.,
explosives, illegal drugs and the detection of counterfeit drugs and
medications to assist in the protection of the nation's drug supply);
and
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3.
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Brand
Protection - Detection of counterfeit or sub-par products for brand
protection (e.g., inspection of incoming raw materials, outgoing final
products and products in the distribution
channel).
|
Virtually
all CDEX product development has been based on applying the same underlying
technologies. CDEX anticipates developing and/or acquiring other technologies in
the future through partnering and investment. However, unless and until such
time as we acquire or develop other technology assets, all of the Company's
revenues will come from products developed from our current suite of patents and
patents pending technologies, or through licensing arrangements with companies
with related intellectual property.
Our
Technology
Our
research and development efforts have centered on, but are not limited to, the
use of excitation energy sources and patented/patents pending processing
technology for substance verification, authentication and identification. When
certain substances are exposed to excitation energy the substances produce
photons at specific wavelengths that form unique spectral fingerprints, which
can be used as signatures to validate and authenticate the
substances.
CDEX
creates reference signatures of substances of interest, such as selected
narcotics, explosive compounds and medicines. CDEX software validates
a substance of interest by comparing its signature against the known reference
signature of the substance of interest.
2
The CDEX
advantage is that substances of interest are tested at the base levels and their
signatures are compared to the known signatures of the substance of interest.
This provides rapid validation and authentication that the substance is genuine.
CDEX technology is not centered on packaging schemes such as holograms, inks,
ingredient taggants or 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 area of focus in 2009 and beyond continues to
be products in the medical and security markets with our principal product lines
noted below:
|
1.
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Healthcare
Market. ValiMed™ Medication Validation System (MVS) Product
Line - Validation of substances, training and quality assurance. This
product line, with stand-alone units and ancillary products providing a
recurring revenue stream, is installed in a number of hospitals and
addresses three problem areas in the healthcare market: (i) human error in
the compounding of high risk medications; (ii) harmful counterfeit
medications; and (iii) diversion of hospital
narcotics.
|
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2.
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Security
Market. CDEX ID2™ Product Line – real time detection of
specified illegal drugs. This product line contains both hand-held and
table top devices that detect trace amounts of specified illegal drugs in
virtually real time. Currently, the products detect methamphetamine with
cocaine and heroin to be added.
|
2009
Year in Review
The
continuing global economic downturn in 2009 impacted CDEX, as virtually all
other businesses. CDEX was not able to maintain its trend of record
year over year revenues set in fiscal years 2007 and 2008. Sales in
our ValiMed MVS and ID2 product lines fell as capital expenditures at major
hospitals and local/state governments became problematic for new
equipment. Anticipating this situation, CDEX focused heavily on the
ValiMed MVS product line, instituting a new ValiMed MVS “Pay-Per-Use” marketing
program designed to align more closely with hospitals’ operating
budgets. In late 2009 sales activity increased providing higher
expectations for 2010. CDEX trimmed its workforce and expenses to
focus on sales, service and improvements of our ValiMed MVS product line while
reducing research expenditures until economic conditions warrant.
Until May
2009, our economic condition became more acute with employees voluntarily
deferring some or all of their salaries (for example during FY2009 the CEO did
not take a cash salary and in June 2009 eliminated his salary
altogether). Loyal investors stepped forward and in conjunction with
the recurring revenue stream of the ValiMed MVS product line kept the Company
going, while the country began the recovery process and the new CDEX marketing
initiatives began to take root. The end of 2009 saw indications of
recovery and the Company forecasts an improved 2010.
Research
and Development (“R&D”)
R&D
efforts were primarily directed towards continued refining and expansion of the
ValiMed MVS and ID2 product lines, with a principal focus on the ValiMed MVS
product line. R&D costs were $310,499 for fiscal 2009 compared to $943,416
for fiscal 2008..
We have
historically outsourced certain engineering and manufacturing tasks while
retaining control of critical technology and will continue this practice.
Previously, we entered into Master Services Agreements with several
engineering/manufacturing organizations. The agreements generally provide for
the contractors to provide services to CDEX from time to time, which are to be
set forth more specifically in "statements of work" to be executed by each
party. Such services may include, without limitation: (i) non-recurring
engineering services such as product design, creation and modification of bills
of materials, engineering drawing packages, work instructions, manufacturing
specifications, fabrication documents and drawings and survey documents; (ii)
prototyping services such as the development and testing of product prototypes;
and (iii) other related design and manufacturing services as needed. Payments
for services performed are on a time and materials or fix price basis all as set
forth in the statement of work pertaining to the particular
services.
3
Industry
and Competition
(i)
Healthcare
Healthcare
spending is fueled in some measure by an aging population and increasing cost of
healthcare technology. The past year saw a draw-down in the capital and a
tightening of the operating budgets of hospitals, due in part to the global
economic downturn and the uncertainty of health care reform
legislation. However, we do not expect an overall change in the mega
trend of increasing needs for health care products. There are
multiple drivers of demand for the Company's ValiMed products. Medication errors
are a major problem in the global healthcare market and we expect resources will
continue to be allocated to help prevent these errors from occurring. To
quantify the problem, it is estimated between 44,000 and 98,000 deaths occur
annually due to preventable errors and 770,000 patients are injured by adverse
drug events (Institute Of Medicine Report “To Err Is Human”). A study published
by Auburn University reported an 8% error rate while observing pharmacist mixing
IV preparations. Finally, the University of Michigan conducted a
study of the ValiMed unit and determined that even though they knew that high
risk compounded medications would be checked through the ValiMed system, five
major compounding errors were made in an 18 month time period that would have
gone undetected had not the ValiMed system been in place. In
addition, impaired clinicians present a major problem in healthcare. It is
published in the medical literature (AANA J. 1999 Apr; 67(2): 133-40) that
approximately 5% to 10% of all healthcare workers with access to narcotics are
users of these substances. Substitution of water or saline for injectable
narcotics is a common practice to divert and steal these
medications. Lastly, USP 797 regulations have been instituted to
promote quality and sterility of compounded IV medications in pharmacies. These
regulations are primarily focused on sterility of IV medications, but the
accuracy of the end product is also included in the regulation, with adoption of
a new zero tolerance policy for human error. Historically, pharmacists have
performed a visual examination of the end product for accuracy. Based on the
number of errors reported, this practice is not effective.
There are
approximately 6,600 hospitals in the U.S., 3,000 of which have greater than 300
beds (Billian's Healthdata). Adding in the targeted global market for
CDEX healthcare products, the number of hospitals would exceed 12,000. The
Company believes that its ValiMed products are applicable to a large number of
these hospitals and in many cases multiple units would be needed to fulfill the
institutions’ needs.
(ii)
Security and Public Safety
Illicit
and Counterfeit Drug Detection: According to DEA congressional
testimony by Joseph T. Rannazzisi, Deputy Chief, Office of Enforcement
Operations Drug Enforcement Administration, methamphetamine is the number one
drug problem in America today and the problem continues to increase. In a recent
report by the Rand Corporation it was estimated that methamphetamine use alone
costs the U.S. approximately $23 billion per year. Two competing technologies in
the methamphetamine detection marketplace are test kits and ion mobilization
units. Some of the test kits are inexpensive, but cannot readily detect trace
amounts of methamphetamine on surfaces and are a destructive test. The ion
mobilization units are expensive to purchase, and require a sophisticated user,
airborne substances and relatively high maintenance. CDEX technology has the
advantages of portability, ease of use, low maintenance and reduced
costs. The Company has also identified market opportunities for the
application of its technology in the detection of counterfeit
medications.
Explosive
Detection: CDEX believes the explosives detection marketplace is
potentially significant because of growing awareness of terrorism due to recent
world events. We believe that this marketplace possibly includes the following
potential customers: militaries, airport/building security organizations and
transportation related organizations, government, law enforcement organizations
and school systems. These markets are global in perspective and large in size.
Currently, domestic sales of people screening devices are dominated by a small
number of products sold by a handful of vendors. CDEX believes that if it
launches chemical detection products that those products will compete with
existing detection products, and, depending on the application, may have a
competitive advantage by being more advanced than existing tools in a number of
areas. There are large competitors in this space that have significantly more
resources than CDEX.
4
(iii)
Brand Protection
While not
currently a business focus, the Company believes Brand Protection may represent
a significant business opportunity for the application of its technology. Based
on worldwide counterfeit enforcement activity (investigations, raids, seizures,
arrests, charges, convictions, sentences and civil litigation) for 2005, as
reported through the DOPIP Security Counterfeit Intelligence Report, more than
3,700 incidents valued at approximately $3.2 trillion were analyzed from 133
countries. The eighth most commonly counterfeited category is Food & Alcohol
with 64 incidents worth $11 million, and the fourteenth most commonly
counterfeited category is Perfume & Cosmetics with 22 incidents worth $12
million. U.S. companies, for instance, estimate that between $200
billion and $250 billion in annual revenue is lost to counterfeiters. The E.U.
claims that 100,000 jobs are lost each year to the same trade. In 2003 it was
estimated that counterfeit goods cost the state of New York $34 billion,
depriving it of $1.6 billion in tax revenue (Scotsman.com news). The Company
will continue to monitor this market application.
Sales
and Marketing
Our
continuing business vision is to develop technologies to the point of market or
application viability and then, where management determines it to be beneficial,
team with organizations to complete commercial deployment and/or distribution
through our sales and marketing channels. In some instances, we may take a
technology directly to market. In others, we may seek to license the technology
to third parties who will then develop and market products employing it. Our
products and technologies may be licensed to original equipment manufacturers,
sold direct or via resellers as standalone end units, or be integrated as
sensors that gather and relay information to an integrated solution that is the
repository of information gathered from many sources (e.g., in security
applications from perimeter, environmental and structural security devices and
medication delivery systems). Accordingly, our prospective "client
base" varies depending on the application and the stage of development. In
marketing our chemical detection products and technologies, we intend to target,
via partnerships as well as direct sales, both U.S. and foreign governments, in
addition to private industry or individuals requiring confirmation of the
presence or absence of substances.
We are
currently reaching potential customers and partners through our website,
participating in industry events such as trade shows and public meetings,
distributing product information through targeted mailings and direct sales
activities which include demonstrations of product application and traditional
advertising. Planned advertising activities include trade and industry magazines
and managed clinical trials where researchers are likely to publish articles
discussing the results of the trials. We also anticipate reaching prospective
customers via strategic relationships.
As the
Company’s domestic markets related to ValiMed expand, we will focus more on
international markets. We have established an international presence
in Europe and the Middle East and have also received unsolicited contacts by
prospective partners from a number of other international areas, including
Taiwan, Vietnam, Korea, Malaysia, Japan, Australia and China based on
information on www.cdex-inc.com. These contacts were primarily interested in
explosive and drug detection, ValiMed and the technology's potential use in the
brand protection industry. These contacts may never result in revenue or
relationships that will benefit CDEX. CDEX has not applied for licenses or
permits to do business directly in any foreign country. CDEX has obtained TUV
certification for its ValiMed product with Elliott Labs in Fremont, CA. TUV
tests and certifies that products meet electrical safety standards and
electromagnetic interference and compatibility (EMI/EMC) standards. TUV tests
and certifies to UL standards for the U.S. market and CE standards for the
European Union market.
5
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.
Government
Regulation
The
products developed may be subject to various governmental regulations and
controls, including that associated with international manufacturing, handling
and transport; security products in airports; handling of sensitive substances
such as illegal drugs, medications, and explosive materials and related
potentially harmful energy such as x-ray energy. The storage and handling of
certain explosive materials and drugs is subject to licensure. It is possible
that government agencies may develop additional regulations that impact our
initial and future products.
The U.S.
Food and Drug Administration ("FDA") has jurisdiction to regulate computer
products and software as medical devices if they are intended for use in the
diagnosis, cure, mitigation, treatment or prevention of disease. We have
preliminarily determined that our initial products are not medical devices.
However, further investigation or a change in FDA policy could subject us to
regulation. Noncompliance with applicable FDA requirements can result in such
things as fines, injunctions and suspension of production.
Except as
mentioned above, we are not currently aware of any other U.S. federal, state or
local laws that would have a significant adverse impact on development and
distribution of our initial products. However, various federal, state or local
agencies may propose new legislation pertaining to the use of potentially
dangerous materials, to the discharge of materials into the environment, to the
manufacturing or marketing of chemical validation products (or designation of
one or more of our chemical validation products as medical devices) and/or
otherwise potentially relating to the our business that may require us to
allocate a portion of our operating budget to ensure full compliance with such
regulations.
Employees
At
October 31, 2009, the Company had eight full time employees.
ITEM
1A. RISK FACTORS
You
should carefully consider each of the following risk factors and all of the
other information in this annual report. The following risks relate principally
to our business and contain forward-looking statements. Actual results could
differ materially from those set forth in the forward-looking statements. See
"Cautionary Statement Regarding Forward-Looking Statements" at the beginning of
Part I of this annual report.
6
A
HISTORY OF OPERATING LOSSES AND AN ACCUMULATED DEFICIT MAY AFFECT OUR ABILITY TO
SURVIVE.
We have a
history of operating losses and an accumulated deficit. Since our principal
activities to date have been limited to organizational activities, research and
development, product development and marketing and sales, CDEX has produced
limited revenues. In addition, we have only limited assets. As a result, we
cannot be certain that CDEX will continue to generate increased revenues or
become profitable in the future. If we are unable to obtain sufficient customers
and generate sufficient revenues to operate profitably, our business will not
succeed.
CDEX
HAS RECEIVED A “GOING CONCERN” OPINION FROM ITS INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM THAT EXPRESSES UNCERTAINTY REGARDING ITS ABILITY TO CONTINUE AS
A GOING CONCERN.
We have
received reports from our independent registered public accounting firm for the
fiscal years ended October 31, 2004 through 2009 containing an explanatory
paragraph that expresses uncertainty regarding our ability to continue as a
going concern due to historical negative cash flow. We cannot be certain that
our business plans will be successful or what actions may become necessary to
preserve our business. Any inability to raise capital may require us to reduce
operations or could cause our business to fail.
Our
limited operating history makes our future operating results unpredictable
rendering it difficult to assess the health of our business or its likelihood of
success. The inability to assess these factors could result in a total loss of
an investor's investment in CDEX.
In the
case of an established company in an ongoing market, investors may look to past
performance and financial condition to get an indication of the health of the
company or its likelihood of success. Our short operating history and the
evolving nature of the chemical identification markets in which we focus make it
difficult to forecast our revenues and operating results accurately. We expect
this unpredictability to continue into the future due to the following
factors:
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·
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the
timing of sales of all of our products and services, particularly in light
of our limited sales history for some of our
products;
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·
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difficulty
in keeping current with changing
technologies;
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·
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unexpected
delays in introducing new products, new product features and
services;
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·
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increased
costs and expenses, whether related to sales and marketing, manufacturing,
product development or
administration;
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·
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deferral
of recognition of our revenue in accordance with applicable accounting
principles due to the time required to complete
projects;
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·
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the
mix of product license and services revenue;
and
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·
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costs
related to possible acquisitions of technologies or
businesses.
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CDEX
could experience operating losses or even a total loss of our business which, as
a result of the foregoing factors, would be difficult to anticipate and could
thus cause a total loss of capital invested in CDEX.
7
LACK
OF ADDITIONAL FINANCING COULD PREVENT US FROM OPERATING PROFITABLY WHICH,
EVENTUALLY, COULD RESULT IN A TOTAL LOSS OF OUR BUSINESS.
Since our
inception, we have funded our operations through revenue from the sale of our
products, borrowings and financings. Current funds available to CDEX may not be
adequate for us to be competitive in the areas in which we intend to operate,
and we have no arrangements or commitments for ongoing funding. If funding is
insufficient at any time in the future, we may not be able to grow revenue, take
advantage of business opportunities or respond to competitive pressures. The
unavailability of funding could prevent us from producing additional revenues or
ever becoming profitable. Our continued operations, as well as the successful
implementation of our business plan, may therefore depend upon our ability to
raise additional funds through bank borrowings or equity or debt financing over
the next twelve months. We continue to seek prospective investors who may
provide some of this funding. However, such funding may not be available when
needed or may not be available on favorable terms. Certain family members or
business entities of our management team have loaned funds to CDEX on an
as-needed basis, although there is no definitive or legally binding arrangement
to do so. If we do not produce revenues and become profitable, eventually, we
will be unable to sustain our business.
IF
WE ISSUE ADDITIONAL EQUITY TO FUND OPERATIONS OR ACQUIRE BUSINESSES OR
TECHNOLOGIES, CDEX SHAREHOLDERS WILL EXPERIENCE DILUTION PROPORTIONAL TO THE
ISSUED EQUITY.
If
working capital or future acquisitions are financed through the issuance of
equity securities, CDEX shareholders will experience dilution proportional to
the equity issued. In addition, securities issued in connection with future
financing activities or potential acquisitions may have rights and preferences
senior to the rights and preferences of the currently outstanding CDEX shares of
common stock. The conversion of future debt obligations into equity securities
could also have a dilutive effect on our shareholders. Regardless of whether our
cash assets prove to be inadequate to meet our operational needs, we may elect
to compensate providers of services by issuing stock or stock options in lieu of
cash.
OUR
POTENTIAL INABILITY TO PROTECT THE PROPRIETARY RIGHTS IN OUR TECHNOLOGIES AND
INTELLECTUAL PROPERTY MAY HAMPER OUR ABILITY TO MANUFACTURE PRODUCTS, WHICH
WOULD PREVENT US FROM EARNING REVENUES OR BECOMING PROFITABLE.
Our
success and ability to compete will depend in part on the protection of our
patents and other proprietary information. We currently have two patents issued
and others in various stages of government review for our chemical detection
technologies. We rely on non-disclosure agreements and patent and copyright laws
to protect the intellectual property that we have developed and plan to develop.
However, such agreements and 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. If a third party were to violate one or more of our patents, we
may not have the resources to bring suit or otherwise protect the intellectual
property underlying the patent. In the event of such a violation or if a third
party appropriated any of our unpatented technology, such party may develop and
market products that we intend to develop and/or market. We would lose any
revenues that we would otherwise have received from the sale or licensing of
those products. This could prevent our ever making a profit on any products
based upon the misappropriated technology.
Policing
unauthorized use of our proprietary and other intellectual property rights could
entail significant expense and could be difficult or impossible. 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 attention, and/or require CDEX to enter into costly royalty or
licensing arrangements to prevent further infringement, any of which could
increase our operating expenses and thus prevent us from becoming
profitable.
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. If this occurs, our competitors may
use our processes or techniques to develop competing products and bring them to
market ahead of us. This could prevent us from becoming profitable.
8
We may
rely on certain intellectual property licensed from third parties, and may be
required to license additional products or services in the future, in order to
move forward with our business plan. These third party licenses may be
unavailable on acceptable terms, when needed or at all. An inability to enter
into and maintain any of these licenses could prevent us from developing or
marketing products based upon the underlying technology and could prevent us
from earning revenues on these products or from becoming
profitable.
OUR
ABILITY TO SURVIVE MAY BE AFFECTED BY A LACK OF SUCCESSFUL MANUFACTURING
EXPERIENCE.
CDEX
itself has a growing but limited experience in manufacturing commercial
quantities of products. We presently have no plans for developing in-house
manufacturing capability beyond aggregating off-the-shelf components for our
initial and limited production units into a final assembly. Accordingly, we
primarily depend upon outside manufacturers to manufacture and assemble our
products. In our early stages with each new product, we plan to do the final
assembly and testing of the initial units in-house. We cannot be certain that
the terms of such arrangement will be favorable enough to permit our products to
compete effectively in the marketplace.
DEPENDENCE
ON OUTSOURCED MANUFACTURING MAY AFFECT OUR ABILITY TO BRING PRODUCTS TO
MARKET.
At
present, we do not plan to do in-house production manufacturing of any of our
products. While we currently do limited in-house assembly and primarily
outsource the production manufacturing/assembly of our product, we are
considering different possibilities for bringing different products to market,
among them, licensing to third parties. The risks of association with outsourced
manufacturers are related to their operations, finances and suppliers. CDEX
would have little control over an outsourced manufacturer and may suffer losses
if any outside manufacturer fails to perform its obligations to manufacture and
ship the manufactured product. These manufacturers' financial affairs may also
affect our ability to obtain product from them in a timely fashion should they
fail to continue to obtain sufficient financing during a period of incremental
growth. Problems with outsourced manufacturers could damage our relationships
with our clientele and cost us future revenues. If we are unable to contract
with adequate manufacturers, and in the absence of licensing or other means, we
may be unable to market our products. This would prevent us from earning
revenues.
LACK
OF MARKET ACCEPTANCE MAY LIMIT OUR ABILITY TO SELL PRODUCTS AND GENERATE
REVENUES, WHICH COULD PREVENT US FROM EARNING REVENUES OR BECOMING
PROFITABLE.
We cannot
be certain that any products that we successfully develop will ever achieve wide
market acceptance. Our products, if successfully developed, may compete with a
number of traditional products manufactured and marketed by major technology
companies, as well as new products currently under development by such companies
and others that may be based upon technology that is different from ours. While
we believe our technology is superior, we will have to demonstrate its
superiority to these potential customers in order to sell our products and
generate revenues. We may encounter similar obstacles in other application
areas. The degree of market acceptance of our products will depend on a number
of factors, including the establishment and demonstration of the efficacy of the
product candidates, their potential advantage over alternative methods and
reimbursement policies of government and third party payers. We cannot be
certain that the marketplace in general will widely accept and utilize any of
our products. If potential customers do not accept and purchase our products, we
will be unable to generate revenues and become profitable.
WE
INTEND TO MARKET OUR PRODUCTS IN INDUSTRIES WHERE TECHNOLOGY CHANGES RAPIDLY,
AND WE WILL INCUR COSTS TO KEEP OUR PRODUCTS CURRENT AND INNOVATIVE. OUR FAILURE
TO DO SO COULD RENDER OUR PRODUCTS OBSOLETE, WHICH COULD PREVENT US FROM EARNING
REVENUES OR BECOMING PROFITABLE.
We hope
to market our products in industries characterized by rapid change due to the
introduction of new and emerging technologies. Critical issues concerning the
governmental or commercial use of chemical detection mechanisms, including
security, reliability, accuracy, cost, ease of use, accessibility, or potential
tax or other government regulation, may affect the relevance and functionality
of our products. Future technology or market changes may cause some of our
products to become obsolete more quickly than expected. We will need to make
research and development expenditures to create new features for our products to
enhance their effectiveness and become and remain competitive. If we are
unsuccessful in timely assimilating development changes in the various
environments, we may be unable to achieve or maintain
profitability.
9
POTENTIAL
DEFECTS AND PRODUCT LIABILITY COULD RESULT IN DELAYS IN MARKET ACCEPTANCE,
UNEXPECTED LIABILITY AND COSTS AND DIMINISHED OPERATING RESULTS.
Technology-based
products frequently contain errors or defects, especially when first introduced
or when new versions are released. Defects and errors could be found in current
versions of our products, future upgrades to current products or newly developed
and released products. These defects could result in product liability suits,
delays in market acceptance or unexpected redevelopment costs, which could cause
any profits we might otherwise have to decline. We anticipate most of our
agreements with customers will contain provisions designed to limit our exposure
to potential product liability claims. It is possible, however, that we will be
unable to negotiate such provisions with certain customers or that these
provisions, if negotiated, may not be valid as a result of federal, state, local
or foreign laws or ordinances or unfavorable judicial decisions. While CDEX has
products liability insurance, a successful and significant product liability
claim could damage our business, operating results and financial
condition.
OUR
POTENTIAL FUTURE BUSINESS AND/OR TECHNOLOGY ACQUISITIONS MAY BE UNPREDICTABLE
AND MAY CAUSE OUR BUSINESS TO SUFFER.
CDEX
intends to expand its operations through the acquisition of additional
technologies, either by purchasing other businesses or acquiring their
technological assets, which it perceives to be unexploited, and develop products
based upon these technologies. We have not yet identified these specific
technologies, and some of these technologies may be outside our current field of
operations. However, we may be unable to identify any such businesses or
technologies. Expansion may involve a number of special risks, including
possible adverse effects on our operating results or financial condition
(particularly in the event of impairment of acquired long-lived assets),
diversion of management attention, inability to retain key personnel, risks
associated with unanticipated events, any of which could prevent us from
becoming profitable. In addition, if competition for acquisition candidates or
technologies were to increase, the cost of acquiring businesses or technologies
could increase as well. If we are unable to implement and manage our expansion
strategy successfully, our business may suffer or fail.
SUBSTANTIAL
COMPETITION MAY LIMIT OUR ABILITY TO SELL PRODUCTS AND THEREBY OUR CHANCES OF
BECOMING PROFITABLE.
We may
experience substantial competition in our efforts to locate and attract
customers for our products. There may be competitors who may have greater
experience, resources and managerial capabilities and may be in a better
position than we are to obtain access to and attract customers. A number of
larger companies similarly may enter some or all of our target markets and
directly compete with us. In the areas of medical and pharmaceutical validation
and brand protection, various existing technologies compete with ours and
already are in use in the marketplace. These include radio frequency
identification tags, taggant agents (chemical agents added to the target
substance to serve solely as identifying tags), laboratory testing,
refractometers and bar coding. If our competitors are more successful in
marketing their products, we may be unable to achieve or maintain
profitability.
LOSS
OF ANY OF OUR CURRENT MANAGEMENT OR INABILITY TO RECRUIT AND RETAIN QUALITY
PERSONNEL COULD ADVERSELY IMPACT OUR BUSINESS AND PROSPECTS. OUR DIRECTORS AND
OFFICERS EXERT SUBSTANTIAL CONTROL OVER OUR BUSINESS AND
OPERATIONS.
We are
dependent on our officers and other key personnel, and the loss of any of our
key personnel could materially harm our business because of the cost and time
necessary to retain and train a replacement. Such a loss would also divert
management attention away from operational issues. This would increase costs and
prevent or reduce our profits.
OUR
MANAGEMENT LACKS EXPERIENCE IN THIS MARKET.
Although
widely experienced in other industries, our current senior management team has
limited experience leading the development, marketing and sales of technology
products in the chemical detection and validation marketplace. This lack of
experience could lead to inefficiency and slow the process of marketing our
products and prevent us from making sales or becoming profitable.
10
LACK
OF KEY MAN INSURANCE
The
Company carries no key-man insurance. In the event that any of the Company's
senior executive officers departed the Company or passed away, the Company may
not have the available funds to attract an individual of similar experience. The
Company is considering obtaining key-man insurance once it has sufficient funds
to do so.
ITEM
1B. UNRESOLVED STAFF COMMENTS
None.
ITEM
2. PROPERTIES
The Company leases
approximately 3,000 square feet of office and laboratory space in Tucson,
Arizona on a month-to-month basis. Monthly rent as of October 31, 2009 is
approximately $2,600. Total rent expense was approximately $49,000 and $66,000
for the years ended October 31, 2009 and 2008, respectively.
ITEM
3. LEGAL PROCEEDINGS
We may
from time to time be involved in legal proceedings arising from the normal
course of business. In June 2008, a lawsuit was filed by Hutchinson &
Steffen in a Nevada District Court, Clark County, against the Company, alleging,
among other things, breach of contract. On July 2, 2008, Hutchinson &
Steffen and the Company entered into a settlement agreement, staying the legal
proceedings pending completion of the terms of the settlement agreement. As of
the date of this report, we have not received notice of any other legal
proceedings regarding Hutchinson & Steffen.
On July
20, 2009, a former employee filed a complaint with the Attorney General of
Arizona that CDEX discriminated against that employee because he did not attend
a bible study held by some employees. As no amount of potential loss is both
probable and estimable, no accrual has been made in the financial statements as
of October 31, 2009 and October 31, 2008. In the opinion of management, this
claim is without merit and the Company will be successful in its defense of this
complaint.
In July
2009, two employees filed claims in the Pima County Justice Court for payment of
their deferred wages totaling approximately $9,000. CDEX had accrued a provision
for possible settlement of these claims in the financial statements as of
October 31, 2009. The court ruled that the Pima County Justice Court was not the
correct venue for the case because the employment contracts for these employees
specified that all disputes would be determined in accordance with the rules of
the American Arbitration Association. CDEX has not received any further actions
regarding these claims.
In August
2009, four former employees and one former contractor filed demands for
arbitration with the American Arbitration Association related to deferred wages
of approximately $89,000 and other issues. Management disputes the amount of the
claim and has accrued a provision for possible settlement of this dispute in the
financial statements as of October 31, 2009. We intend to vigorously defend the
case.
Due to
the lack of liquidity, the Company is in arrears on a substantial number of its
financial obligations. To date, most creditors have been willing to renegotiate
the obligations as they become due or forestall any recourse they may have to
collect their debts. However, should any of these creditors pursue recourse, the
Company may not be able to continue as a going concern.
ITEM
4. REMOVED AND RESERVED
11
ITEM 5. MARKET FOR REGISTRANT’S
COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES
Market
Information
Our Class
A common stock is normally traded on the OTCBB under the symbol "CEXI.OB." As of
the date of this filing, our common stock is traded under the symbol “CEXIE.OB”,
which reflects the delinquent status of our financial reports, which will be
cured with submission of this filing. Our shares are thinly traded
with low average daily volume. This coupled with a limited number of market
makers impairs the liquidity of our common stock, not only in the number of
shares of common stock that can be bought and sold, but also through possible
delays in the timing of transactions, and lower prices for our common stock than
might otherwise prevail. This could make it difficult or impossible for an
investor to sell shares of our common stock or to obtain a desired
price.
Our
common stock may be subject to the low-priced security or so called "penny
stock" rules that impose additional sales practice requirements on
broker-dealers who sell such securities. The Securities Enforcement and Penny
Stock Reform Act of 1990 ("Reform Act") requires additional disclosure in
connection with any trades involving a stock defined as a "penny stock"
(generally defined as, according to recent regulations adopted by the U.S.
Securities and Exchange Commission, any equity security that has a market price
of less than $5.00 per share, subject to certain exceptions), including the
delivery, prior to any penny stock transaction, of a disclosure schedule
explaining the penny stock market and the risks associated therewith. The
regulations governing low-priced or penny stocks sometimes may limit the ability
of broker-dealers to sell our common stock and thus, ultimately, the ability of
the investors to sell their securities in the secondary market. Prices for CDEX
shares will be determined in the marketplace and may be influenced by many
factors, including the depth and liquidity of the market for the shares,
our results of operations, what investors
think of CDEX and the chemical detection and validation industry, changes in
economic conditions in the industry and general economic and market conditions.
Market fluctuations could have a material adverse impact on the trading price of
our shares.
If CDEX
is unable to maintain NASD registered broker/dealers as market makers, the
liquidity of our common stock could be impaired, not only in the number of
shares of common stock that could be bought and sold, but also through possible
delays in the timing of transactions, and lower prices for our common stock than
might otherwise prevail. Furthermore, the lack of market makers could result in
CDEX shareholders being unable to buy or sell shares of our common stock on any
secondary market. We may be unable to maintain such market makers.
The table
below sets forth the high and low sales price for our Class A common stock as
reported on the OTCBB for each of our last two fiscal years:
High
|
Low
|
|||||||
Fiscal
Year Ended October 31, 2009:
|
||||||||
First
quarter
|
$ | 0.19 | $ | 0.06 | ||||
Second
quarter
|
0.24 | 0.07 | ||||||
Third
quarter
|
0.15 | 0.05 | ||||||
Fourth
quarter
|
0.10 | 0.04 | ||||||
Fiscal
Year Ended October 31, 2008:
|
||||||||
First
quarter
|
$ | 0.80 | $ | 0.38 | ||||
Second
quarter
|
0.54 | 0.25 | ||||||
Third
quarter
|
0.39 | 0.22 | ||||||
Fourth
quarter
|
0.34 | 0.15 |
As the
foregoing are over-the-counter market quotations, they reflect inter-dealer
prices, without retail markup, markdown, or commissions, and may not represent
actual transactions.
12
Shareholders
As of
February 26, 2010, there were approximately 1,498 holders of record of our Class
A common stock. However, a large number of our shareholders hold their shares in
"street name" with brokerage accounts and, therefore, do not appear on the
shareholder list maintained by our transfer agent.
Dividends
We have
paid no cash dividends on our common stock and we do not anticipate paying any
cash dividends in the foreseeable future.
Sales
of Unregistered Securities and Use of Proceeds
During the fourth
quarter of fiscal year 2009, the Company granted 30,000 restricted Class A
common shares at $0.095 per share for an account of $2,846.
ITEM
6. SELECTED FINANCIAL DATA
Not
applicable.
ITEM
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
You
should read the following discussion in conjunction with our audited financial
statements and related notes included elsewhere in this document. The following
discussion (as well as other discussions in this document) contains
forward-looking statements. Please see “Cautionary Statement Regarding
Forward-Looking Statements” for a discussion of uncertainties, risks and
assumptions associated with these statements.
Results
of Operations
The
following table summarizes our operating results for fiscal 2009 compared to
fiscal 2008:
Percent
of
|
Percent
of
|
|||||||||||||||
2009
|
Revenue
|
2008
|
Revenue
|
|||||||||||||
Revenue
|
$ | 480,439 | 100.0 | % | $ | 835,764 | 100.0 | % | ||||||||
Cost
of revenue
|
105,671 | 22.0 | 220,316 | 26.4 | ||||||||||||
Gross
profit
|
374,768 | 78.0 | 615,448 | 73.6 | ||||||||||||
Operating
expenses:
|
||||||||||||||||
Selling,
general and administrative
|
1,326,852 | 276.2 | 1,598,969 | 191.3 | ||||||||||||
Research
and development
|
310,499 | 64.6 | 943,416 | 112.9 | ||||||||||||
Total
operating expenses
|
1,637,351 | 340.8 | 2,542,385 | 304.2 | ||||||||||||
Loss
from operations
|
$ | (1,262,583 | ) | (262.8 | )% | $ | (1,926,937 | ) | (230.6 | )% |
Revenue
was $480,439 and $835,764 for the fiscal years ended October 31, 2009 and 2008,
respectively, a decrease of $355,325 or 42.5%. This decrease was attributable to
the delivery of fewer ValiMed units and associated installation revenue,
partially offset by increases in the periodic lease and maintenance payments as
well as increases in supplies and sales of our ID2 product.
13
Cost of
revenue was $105,671 and $220,316 for the fiscal years ended October 31, 2009
and 2008, respectively, a decrease of $114,645 or 52.0%. This decrease was
attributable to the decreased number of ValiMed units that were sold during the
year. Gross profit margins were relatively consistent at 78.0% and 73.6% for
fiscal 2009 and 2008, respectively.
Selling,
general and administrative expense was $1,326,852 and $1,598,969 for the fiscal
years ended October 31, 2009 and 2008, respectively, a decrease of $272,117 or
17.0%. This decrease primarily relates to decreases in legal and
professional expenses of approximately $117,000, travel expenses of
approximately $94,000 and consulting fees of approximately $91,000. These
decreases were partially offset by an increase in non-cash stock-based
compensation expenses of approximately $40,000.
Research
and development expense was $310,499 and $943,416 for the fiscal years ended
October 31, 2009 and 2008, respectively, a decrease of $632,917 or 67.1%. The
decrease primarily relates to a decrease in employee and consultant compensation
expense, which was affected by a significant reduction in staffing levels in May
of 2009. Reductions in expenditures for research and development materials also
contributed to the decreased expense in fiscal 2009.
Other
expense was $587,617 and $207,235 for the fiscal years ended October 31, 2009
and 2008, respectively. Other expense primarily consists of interest expense,
which has increased for fiscal 2009 due to increased borrowing levels for fiscal
2009 compared to fiscal 2008.
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. To date, CDEX
has incurred substantial losses, and will require financing for operating
expense, working capital and other corporate purposes. We anticipate that we
will require financing on an ongoing basis unless and until we are able to
support our operating activities with additional revenues.
As of
October 31, 2009, we had negative working capital of $2,737,818, including
$7,769 of cash. We anticipate the need to raise additional capital over the next
twelve months to satisfy our current budgetary projections. Our continued
operations, as well as the implementation of our business plan, therefore will
depend upon our ability to raise additional funds through bank borrowings and
equity or debt financing. If we are not successful in raising the required
additional capital, we may default in our payments to creditors, which could
result in our filing of bankruptcy protection. The Company is actively seeking
new investments from its current accredited investors as well as new accredited
investors. There is no assurance that the Company will succeed in these
fund-raising efforts. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
During
February 2010, the Company entered into a Securities Purchase Agreement with its
largest creditor, Gemini Master Fund, Ltd (“Gemini”), and with three other
investors including an entity controlled by our CEO. Included in the agreement
is the restructuring of the June 25, 2008 Senior Convertible Note held by Gemini
where $1,151,100 of outstanding principal and accrued interest was capitalized
into a new note bearing interest at 10% and convertible into Class A common
stock at the rate of $0.05 per share for the first $800,000 of principal
converted, and $0.08 per share for converted balances in excess of $800,000. The
note matures on February 1, 2012, but has accelerated payment provisions and a
contingent security interest, if certain financial milestones are not met.
Additionally because of the restructuring, the common Stock Purchase Warrant
issued on June 25, 2008 to Gemini was adjusted. Included in the restructuring
was a $450,000 cash infusion consisting of $200,000 from an entity controlled by
our CEO and $250,000 from two other investors, for which the Company issued
notes similar to that issued to Gemini. Additionally, as a part of
this restructuring, $247,115 principal and accrued interest of existing
Convertible Notes Payables held by an entity controlled by our CEO were
consolidated and converted into a new convertible note similar to that
issued to Gemini.
The terms
of our notes payable and additional notes entered into subsequent to October 31,
2009 are more fully described in Note 9to the financial statements included
elsewhere in this annual report.
14
During
fiscal 2009, the Company received $599,800 in funding, comprised
of:
|
·
|
$349,800
from the net proceeds from 23 convertible notes payable. These notes bear
interest from 10% to 12% and have maturities up to two
years.
|
|
·
|
$250,000
from the sale of 2,400,000 shares of restricted Class A common stock at an
average price of approximately $0.10 per share. Investors who purchased
682,143 of these shares received warrants to purchase up to 1,200,000
shares at a weighted average exercise price of approximately $0.20 per
share for a two year period from the effective dates of the share
purchases.
|
We had a
net decrease in cash of $18,604 and $1,011 during the fiscal years ended October
31, 2009 and 2008, respectively. We used net cash of $618,404 and $1,921,272 in
operating activities during the fiscal years ended October 31, 2009 and 2008,
respectively. The decrease in cash used in operating activities for fiscal 2009
compared to fiscal 2008 primarily relates to cash provided by working capital
changes of $424,255 for fiscal 2009 compared to cash utilized by working capital
changes of $435,016 for fiscal 2008.
For
fiscal 2008 our cash flows from investing activities consisted of the purchase
of property and equipment for $21,443. For fiscal 2009, we had no cash flows
relative to investing activities.
Cash
flows provided by financing activities were $599,800 and $1,941,704 for fiscal
2009 and fiscal 2008, respectively. For fiscal 2009, we received
$250,000 in proceeds for the issuance of common stock and warrants and $349,800
for the issuance of convertible notes payable. For fiscal 2008, we
received $999,274 in proceeds for the issuance of common stock and warrants and
$942,430 for the issuance of convertible notes payable.
Off-Balance
Sheet Arrangements
CDEX has
not participated in any off balance sheet financing or other
arrangements.
Critical
Accounting Policies
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.
Revenue
Recognition
Sales
revenues are recognized when persuasive evidence of an agreement with the
customer exists, products are shipped and installation, if necessary, completed,
title passes pursuant to the terms of the agreement with the customer, the
amount due from the customer is fixed or determinable, collectability is
reasonably assured and there are no significant future performance obligations.
Service revenues are recognized at the time of performance. Service maintenance
revenues are recognized ratably over the term of the agreement.
Deferred
revenue represents amounts invoiced or received but not recognized as revenue if
the above revenue recognition terms are not met.
15
Inventory
Inventory
is valued at the lower of actual cost based on a first-in, first-out basis or
market. Inventory includes the cost of component raw materials and
manufacturing.
Stock-Based
Compensation
We
typically determined stock-based compensation expense based on the fair value of
awards at the measurement date. In the case of employees, the measurement date
is the date of grant. In the case of outside consultants, the measurement date
is typically the date at which their performance is complete. When the
measurement date is not the date of grant, the total cost is typically
re-measured at the end of each reporting period based on the fair market value
on that date. Expense related to share-based payments is recognized over the
period during which services are provided.
Recently
Issued Accounting Pronouncements
In
January 2010, the Financial Accounting Standards Board (“FASB”) issued
Accounting Standards Update (“ASU”) No. 2010-06, “Fair Value Measurements and
Disclosures” (“ASU 2010-06”). ASU 2010-06 requires new disclosures
for (i) transfers of assets and liabilities in and out of levels one and two
fair value measurements, including a description of the reasons for such
transfers and (ii) additional information in the reconciliation for fair value
measurements using significant unobservable inputs (level three). This guidance
also clarifies existing disclosure requirements including (i) the level of
disaggregation used when providing fair value measurement disclosures for each
class of assets and liabilities and (ii) the requirement to provide disclosures
about the valuation techniques and inputs used to measure fair value for both
recurring and nonrecurring fair value measurements for level two and three
assets and liabilities. ASU 2010-06 is effective for interim and
annual reporting periods beginning after December 15, 2009, except for the
disclosures about activity for level three fair value measurements, which is
effective for fiscal years beginning after December 15, 2010. We do
not anticipate that the adoption of this guidance will have a material impact on
our financial position and results of operations.
In June
2009, the FASB issued guidance for determining the primary beneficiary of a
variable interest entity (“VIE”). In December 2009, the FASB issued
ASU 2009-17, “Improvements to Financial Reporting by Enterprises Involved with
Variable Interest Entities” (“ASU 2009-17”). ASU 2009-17 provides
amendments to ASC 810 to reflect the revised guidance. The amendments in ASU
2009-17 replace the quantitative-based risks and rewards calculation for
determining which reporting entity, if any, has a controlling financial interest
in a VIE with an approach focused on identifying which reporting entity has the
power to direct the activities of a VIE that most significantly impact the
entity’s economic performance and (i) the obligation to absorb losses of the
entity or (ii) the right to receive benefits from the entity. The amendments in
ASU 2009-17 also require additional disclosures about a reporting entity’s
involvement with a VIE. ASU 2009-17 is effective for annual reporting periods
beginning after November 15, 2009. We do not anticipate that the adoption of
this guidance will have a material impact on our financial position and results
of operations.
In June
2009, the FASB issued guidance that seeks to improve the relevance and
comparability of the information that a reporting entity provides in its
financial statements about a transfer of financial assets; the effects of a
transfer on its financial position, financial performance and cash flows; and a
transferor’s continuing involvement, if any, in transferred financial assets.
Specifically, this guidance eliminates the concept of a qualifying
special-purpose entity, creates more stringent conditions for reporting a
transfer of a portion of a financial asset as a sale, clarifies other
sale-accounting criteria, and changes the initial measurement of a transferor’s
interest in transferred financial assets. This guidance is effective for annual
reporting periods beginning after November 15, 2009. We do not
anticipate that the adoption of this guidance will have a material impact on our
financial position and results of operations.
In
April 2008, the FASB issued guidance for determining the useful life of
intangible assets, which amends previous guidance relative to the factors that
should be considered in developing renewal or extension assumptions used to
determine the useful life of a recognized intangible asset. The intent of this
guidance is to improve the consistency between the useful life of a recognized
intangible assets and the period of expected cash flows used to measure the fair
value of the asset upon its acquisition and other applicable accounting
literature. This guidance is effective for financial statements issued for
fiscal years beginning on or after December 15, 2008, and must be applied
prospectively to intangible assets acquired after the effective date. We do not
anticipate that the adoption of this guidance will have a material impact on our
financial position and results of operations.
16
In
June 2008, the FASB ratified guidance related to determining whether an
instrument (or embedded feature) is indexed to an entity’s own stock.
Equity-linked instruments (or embedded features) that otherwise meet the
definition of a derivative are not accounted for as derivatives if certain
criteria are met, one of which being the instrument (or embedded feature) must
be indexed to the entity’s stock. This guidance assists companies in determining
whether equity-linked instruments (or embedded features), such as warrants to
purchase our stock, are considered indexed to our stock. This guidance is
effective for financial statements issued for fiscal years beginning after
December 15, 2008, and interim periods within those fiscal years, which for
us will be our fiscal year beginning November 1, 2009. Upon adoption, a
cumulative effect adjustment is recorded based on amounts that would have been
recognized if this guidance had been applied from the issuance date of the
affected instruments. Early adoption is not permitted for reporting entities
that have previously established a different accounting policy for determining
whether an instrument is indexed to an entity’s own stock.
As of
October 31, 2009, we have warrants outstanding for the purchase of 2,717,391
shares of our Class A common stock that may no longer be afforded equity
treatment upon our adoption of this guidance on November 1, 2009. These warrants
have an exercise price of $0.15 per share, expire in June, 2013 and have
exercise price reset features. The aggregate fair value of these warrants, based
on the Black-Scholes option pricing model, was $52,734 as of October 31, 2009.
We are currently evaluating the impact this guidance will have on our financial
position and results of operations.
ITEM
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not
applicable.
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
All
financial statements and supplementary data that are required by this Item are
listed in Part IV, Item 15 of this annual report and are presented beginning on
Page F-1.
ITEM
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
There
were no changes in or disagreements with accountants on accounting and financial
disclosure.
ITEM
9A. CONTROLS AND PROCEDURES
Management's
Report on Internal Control over Financial Reporting
Our
Company's management is responsible for establishing and maintaining adequate
internal control over financial reporting (as defined in Rules 13a-15(f) and
15d-15(f) of the Exchange Act) for our Company. Our Company's internal control
over financial reporting is designed to provide reasonable assurance, not
absolute assurance, regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles in the United States of America.
Internal control over financial reporting includes those policies and procedures
that: (i) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of our Company's
assets; (ii) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles in the United States of America, and
that our Company's receipts and expenditures are being made only in accordance
with authorizations of our management and directors; and (iii) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of our assets that could have a material effect
on the financial statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Projections of any evaluation of effectiveness
to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
17
As
required by Rule 13a-15(c) promulgated under the Exchange Act, our management,
with the participation of our Chief Executive Officer ("CEO") and Chief
Financial Officer ("CFO"), evaluated the effectiveness of our internal control
over financial reporting as of October 31, 2009. Management's assessment took
into consideration the size and complexity of the company and was based on
criteria set forth by the Committee of Sponsoring Organizations of the Treadway
Commission in Internal Control over Financial Reporting - Guidance for Smaller
Public Companies. In performing the assessment, managememnt concluded that our
internal control over financial reporting was not effective based on criteria
set forth by the COSO. The following material weaknesses were identified in our
internal control over financial reporting at October 31, 2009: We are unable to
maintain the proper segregation of various accounting and finance duties because
of our small size and limited resources. At risk areas include cash receipts and
payments, processing of journal entries and account reconciliations. We intend
to remediate these material weaknesses during fiscal year 2010. Concerning the
material weakness relating to the segregation of duties, we are re-examining our
procedures to include compensating controls to minimize the risk associated with
having limited resources.
Notwithstanding
these material weaknesses, we believe that our financial condition, results of
operations and cash flows presented in this annual report are fairly presented
in all material respects. We base our conclusion on our ability to substantiate,
with a high degree of confidence, the small number of significant general ledger
accounts that comprise our financial statements.
This
annual report does not include an attestation report of the Company's
independent registered public accounting firm regarding internal control over
financial reporting. Management's report was not subject to attestation by the
Company's independent registered public accounting firm pursuant to temporary
rules of the Securities and Exchange Commission that permit the Company to
provide only management's report in this annual report.
Evaluation
of disclosure controls and procedures
Disclosure
controls are controls and procedures that are designed to ensure that
information required to be disclosed in our reports filed under the Securities
Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and
reported, within the time periods specified in the SEC's rules and forms.
Disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed by a
company in the reports that it files or submits under the Exchange Act is
accumulated and communicated to the company's management, including its
principal executive and principal financial officers, or persons performing
similar functions, as appropriate to allow timely decisions regarding required
disclosure. Our management carried out an evaluation under the supervision and
with the participation of our CEO and CFO, of the effectiveness of the design
and operation of our disclosure controls and procedures pursuant to Rules
13a-15(e) and 15d-15(e) under the Exchange Act. Based upon that evaluation, the
Company's CEO and CFO have concluded that the Company's disclosure controls and
procedures were effective at the reasonable assurance level as of October 31,
2009.
Changes
in Internal Controls Over Financial Reporting
During
the year ended October 31, 2009 we made the following changes in internal
control over financial reporting: With the reduction in staff, only one
individual was responsible for the recording and reconciliation of entries into
the Company’s book of records.
However, weekly cash analysis statements were monitored by several unrelated
individuals to provide additional oversight.
ITEM
9B. OTHER INFORMATION
18
ITEM
10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The
following table sets forth information regarding our executive officers and
directors as of March 1, 2010:
NAME
|
AGE
|
POSITION
|
SINCE
|
|||
Malcolm
H. Philips, Jr.
|
64
|
Chief
Executive Officer and Director
|
June
11, 2007
|
|||
Gregory
Firmbach
|
60
|
President
and Director
|
February
10, 2010
|
|||
Stephen
McCommon
|
60
|
Chief
Financial Officer and
|
November
11, 2008
|
|||
Vice
President of Finance
|
||||||
Carmen
J. Conicelli, Jr.
|
57
|
Chariman
of the Board of Directors
|
February
18, 2010
|
|||
George
Dials
|
64
|
Director
|
July
2001
|
|||
Donald
W. Strickland
|
60
|
Director
|
February
3, 2006
|
The
following is a summary of the business experience of each of our executive
officers and directors:
Malcolm H. Philips Jr. has
been our Chief Executive Officer and a Member of the Board of Directors since
June 11, 2007. Mr. Philips has overall responsibility for directing the
Company's activities. Mr. Philips was the founding President, CEO and Chairman
of the Board of CDEX and served in those positions from July 2001 until he left
the Company in early 2006. During his earlier tenure with CDEX, Mr. Philips
guided the Company during its formation, technology acquisitions and
development, transition to a public company and initial commercialization of its
existing product lines. Prior to his work with CDEX, Mr. Philips served as an
attorney for 23 years (ultimately as a senior partner with Winston and Strawn,
one of the largest law firms in the United States), an energy consultant for
four years and an army officer for eight years (serving in various stations
including Vietnam and various positions including OIC of the SM-1 Nuclear Power
Plant). Mr. Philips has a BS in engineering from the United States Military
Academy (1967), a Master of Engineering in Nuclear Engineering from Iowa State
University (1971) and a Juris Doctor from Georgetown University Law Center
(1978). Mr. Philips was a Professional Engineer (Texas) and has received various
awards in the military including the Bronze Star, Nuclear Plant Engineer
Certification, Nuclear Plant OIC Certification and Airborne/Ranger
Certifications.
Gregory Firmbach was
appointed to the position of our President on February 10, 2010 and Director on
February 11, 2010. Mr. Firmbach has been our Senior Vice President of Sales
since June 2009 and Mr. Firmbach joined CDEX in September 2008 as head of the
Medication Safety Division's sales force for the Eastern Territory. Mr. Firmbach
has served for over 25 years in senior sales and marketing positions in the
healthcare industry. He has led divisions and companies (both public and
private) in all aspects of successful development, launch and expansion of both
software and hardware products related to the healthcare industry. He has won
numerous awards for excellence in sales and marketing. Mr. Firmbach also served
in aviation related leadership positions for over 25 years as a United States
Naval Officer on Active and Reserve duty.
19
Stephen McCommon has served
as our Chief Financial Officer since November 2008. Prior to joining CDEX, from
December 2007 to November 2008, Mr. McCommon was president of TMC Financial
Services, LLC a financial consulting company. Mr. McCommon was the Vice
President of Finance and Chief Accounting Officer at Applied Energetics, Inc.
from March 2005 to December 2007 and was the Accounting Manager at Applied
Energetics from July 2004 to March 2005. Mr. McCommon has over 26 years
experience in financial reporting and internal auditing for publicly held
companies with additional experience in accounting systems conversions and
regulatory compliance. From March 2003 to July 2004, Mr. McCommon was an
independent accounting consultant for various companies. He was the Controller
of Molecular Diagnostics, Inc., a multi-national medical technology products
company, from February 2002 to March 2003 and he was the Corporate Controller of
Heartland Technology, Inc. a hardware technology company from November 1999 to
November 2001. Mr. McCommon obtained a Bachelor of Science degree in Accounting
from Arizona State University, is a Certified Public Accountant in Arizona and a
member of the American Institute of Certified Public Accountants.
Carmen J. Conicelli, Jr. was
appointed to the position of Chairman of the Board on February 18, 2010 and had
been serving as a Director since October 9, 2007. Mr. Conicelli also is the
Chairman of our Audit Committee. He has served in senior management positions in
a number of companies over the past 34 years, with a primary focus in national
and international (Europe, Japan, Latin America and Asia) financial planning and
management. He has directed financial operations involving SEC compliance and
reporting, internal control and audit, strategic planning, financial systems
control, and mergers/acquisitions/consolidations in a number of industries
including precision optical manufacturing and distribution, cable and
telecommunications, manufacturing and software development. Mr. Conicelli has
served in public company accounting and since 2004 has served as Chief Financial
Officer of Edmund Optics, Inc. From 2003 to 2004, Mr. Conicelli served as a
Senior Financial Consultant to VWR International. He has a Bachelor of Science
Degree in Business Administration (Accounting Major) from Drexel University
(1974) with extensive postgraduate training and is a Certified Public
Accountant.
George Dials has been a
director of CDEX since July 2001. Mr. Dials is the Chairman of our Executive
Compensation Committee. Currently Mr. Dials is serving as Executive Vice
President of Babcock & Wilcox Technical Services Group, Inc., responsible
for developing and operating business initiatives in the nuclear fuel cycle.
During 2006 to 2008, Mr. Dials served as President and Chief Executive Officer
of Y-12 National Security Complex in Oak Ridge, Tennessee. From April 2003 until
February 2006, Mr. Dials was the Chief Operating Officer of Waste Control
Specialists, a chemical waste repository. From July 2002 until May 2003, Mr.
Dials was President and CEO of LES, LLC a company seeking a license to build a
nuclear fuel enrichment facility. From February 2001 to June 2002, Mr. Dials
served as Senior Vice President of Consulting Services for Science and
Engineering Associates responsible for its Consulting Services line of business,
where he provided executive level direction in corporate mergers and
acquisitions in the consulting area. Mr. Dials managed the engineering, and
scientific studies of Yucca Mountain as a potential geologic repository for
spent nuclear fuel and high-level radioactive waste. Responsibilities include
scheduling and cost performance, technical and administrative performance,
strategic operations plan development
and resource allocation for a $250 million project. Mr. Dials received a B.S. in
Engineering in 1967 from West Point and Masters Degrees in Political Science and
Nuclear Engineering from the Massachusetts Institute of Technology. He served in
the U.S. Army for ten years, and was awarded the Silver Star and Bronze Star for
Valor.
Donald W. Strickland was
appointed to serve as a Director on February 3, 2006. Mr. Strickland is the
Chairman of our Governance and Nomination Committee and a member of our Audit
Committee. He comes to CDEX from a 30-year career in successfully developing
businesses internationally for both large public companies and technology
startups. He has held executive positions at Eastman Kodak Company and Apple
Computer, including heading product development, manufacturing and sales. In
1996 he became CEO of PictureWorks Technology, a technology start up, which he
sold for $200 million in 2000 to IPIX Corporation, a public company traded on
the NASDAQ exchange. Thereafter, he served as President and CEO of IPIX through
2004, during which time he led the company through a major restructuring,
focusing on the security markets and taking the company to profitability. He
currently consults with European companies developing global markets and is a
frequent lecturer at academic and business forums. Mr. Strickland holds a
bachelor's degree in physics from Virginia Tech, a master's degree in physics
from the University of Notre Dame, a master's degree in optics from the
University of Rochester, a master's degree in management from the Stanford
University and a law degree from George Washington University.
20
Section
16(A) Beneficial Ownership Reporting Compliance
Section
16(a) of the Securities Exchange Act of 1934 requires certain officers and
directors of CDEX, and any persons who own more than ten-percent of the common
stock outstanding to file forms reporting their initial beneficial ownership of
shares and subsequent changes in that ownership with the SEC and the NASDAQ
Global Market. Officers and directors of CDEX, and greater than ten-percent
beneficial owners are also required to furnish us with copies of all such
Section 16(a) forms they file. Based solely on a review of the copies of the
forms furnished to us, we believe that during the fiscal year ended October 31,
2009 all section 16(a) filing requirements were met except that Malcolm H.
Philips, Jr., Timothy D. Shriver and Stephen McCommon, were late filing Form
4.
Code
of Ethics
CDEX has
adopted a Code of Business Conduct and Ethics that applies to all of our
employees and directors, including our principal executive officer, principal
financial officer and principal accounting officer. Our Code of Business Conduct
and Ethics covers all areas of professional conduct including, but not limited
to, conflicts of interest, disclosure obligations, insider trading, confidential
information, as well as compliance with all laws, rules and regulations
applicable to our business.
Upon
request made to us in writing at the following address, our Code of Ethics and
Business Conduct will be provided without charge:
CDEX
Inc.
4555
South Palo Verde Road, Suite 123
Tucson,
AZ 85714
Audit
Committee
The Audit
Committee of the Board of Directors is comprised of Messrs. Conicelli and
Strickland. The Audit Committee makes recommendations concerning the engagement
of independent public accountants, reviews with the independent public
accountants the scope and results of the audit engagement, approves professional
services provided by the independent public accountants, reviews the
independence of the independent public accountants, considers the range of audit
and non-audit fees and reviews the adequacy of our internal accounting controls.
In addition, our Board of Directors has determined that Mr. Conicelli is an
"audit committee financial expert" as defined under Item 407(d) of Regulation
S-K of the SEC. Refer to his summary of the business experience above for Mr.
Conicelli's qualifications.
21
ITEM
11. EXECUTIVE COMPENSATION
The
following table discloses for the periods presented the compensation for the
persons who served as our Chief Executive Officer and our two most highly
compensated other executive officers (not including the Chief Executive Officer)
or significant employee whose total individual compensation exceeded $100,000
for the fiscal years October 31, 2009 and 2008 (the "Named Executives"):
Summary
Compensation Table
Name
and Principal Position
|
Fiscal
Year |
Salary
(1)
|
Option
Awards
(2)
|
Total
|
||||||||||||
Malcolm
H. Philips, Jr.
|
2009
|
$ | 141,231 | (4) | $ | 9,506 | $ | 150,737 | ||||||||
President
and Chief Executive
|
2008
|
$ | 231,461 | $ | 754 | $ | 232,215 | |||||||||
Officer
and Chairman of the Board
|
||||||||||||||||
of
Directors
|
||||||||||||||||
Timothy
D. Shriver(3)
|
2009
|
$ | 128,690 | (5) | $ | 9,506 | $ | 138,196 | ||||||||
Chief
Operating Officer and Director
|
2008
|
$ | 201,769 | $ | 754 | $ | 202,523 | |||||||||
Stephen
McCommon
|
2009
|
$ | 78,732 | (6) | $ | 13,922 | $ | 92,654 | ||||||||
Chief
Financial Officer
|
|
(1)
|
During
fiscal years 2009 and 2008, Messrs. Philips and Shriver and during fiscal
2009, Mr. McCommon deferred a portion of their cash salary. See discussion
under Employment Agreements below for greater detail on the terms of
employment including compensation.
|
|
(2)
|
The
amounts included in the "Option Awards" column represent the non-cash
stock-based compensation cost on options granted recognized by the Company
in the fiscal years 2009 and 2008 related to stock option awards, computed
in accordance with FASB ASC Topic 718. For a discussion of valuation
assumptions, see Notes 2 and 8to our 2009 Financial
Statements.
|
|
(3)
|
On
February 11, 2010, Mr. Shriver stepped down as a Director and as our Chief
Operating Officer. Mr. Shriver continues with the Company as our Senior
Manager of Technical Operations.
|
|
(4)
|
During
fiscal years 2009 and 2008, Mr. Philips deferred $141,231 and $85,384 of
his salary, respectively. In February 2009, Mr. Philips stepped down as
our Chairman of the Board of Directors and
President.
|
|
(5)
|
During
fiscal year 2009, Mr. Shriver deferred $76,197 of his
salary.
|
|
(6)
|
During
fiscal year 2009, Mr. McCommon deferred $28,782 of his
salary.
|
Employment
Agreements
The Company entered into
employment agreements with Messrs. Philips and Shriver effective January 1,
2002. The agreements each continue for an indefinite period unless terminated by
CDEX for "cause," or by the employee for "good reason" (as such terms are
defined in the agreements), or upon two weeks prior written notice by either
party to the other. The agreements provide for salaries based on annual amounts
of $300,000 for Mr. Philips and $250,000 for Mr. Shriver, which are subject to
review on an annual basis. The salary shall be payable in equal monthly
installments, unless otherwise required by applicable state law and, based on
our economic posture, may be paid in cash and/or stock, at our option. Each
agreement provides for a minimum monthly cash payment to the employee of $7,500
for Mr. Shriver and $3,000 for Mr. Philips. CDEX has availed itself of this
option for the past three fiscal years as reflected under "Compensation of
Executive Officers." Each of these agreements provides for the forfeiture of
restricted stock granted to the employee in the event of the employee's
termination before the stock is fully vested. Under the agreements, each
employee is entitled to a severance package in the event of termination by CDEX
other than for "cause" or by the employee for "good reason."
22
The
agreements with Messrs. Philips and Shriver were amended on January 1, 2003 to
increase the intended minimum monthly cash payment to the employee to $8,000,
and permit CDEX to pay the entire salary in common stock if paying cash is not
in the best interest of the Company.
Effective
June 11, 2007, the Company entered into an employment agreement with Mr. Philips
whereby Mr. Philips became the CEO and President. The agreement provides for an
annual salary of $180,000. The agreement provides for an award of 350,000 stock
options with an exercise price as the fair market value of the shares on June
11, 2007. These options vested on June 11, 2008 and terminate five years after
the grant date. Effective February 1, 2008, the Board of directors increased Mr.
Philips' annual salary to $240,000. Effective June 1, 2009, Mr. Philips amended
his employment agreement such that in Mr. Philips’ sole discretion he has
elected to take no salary until economic conditions warrant. Effective February
10, 2010, the Company entered into a contract with Mr. Philips where Mr. Philips
resigned as an employee and will be engaged as a consultant of the Company to
continue in his role as the Company’s CEO until the Company finds a
replacement.
Effective
January 11, 2006, the Company entered into an amendment to the employment
agreement of Mr. Shriver. The amendment to Mr. Shriver's employment agreement
provides for an annual cash salary of $180,000 as well as options which vest 1/3
on January 1, 2007, and 1/24th of the remainder on the first day of each month
thereafter for the following two years, as long as he is providing to the
Company substantial services pursuant to a contract with the Company at the time
of vesting. The Company cancelled all options granted to Mr. Shriver in 2006. On
July 17, 2007, the Company granted to Mr. Shriver 200,000 options with an
exercise price at the fair market value of the stock at the time of the grant,
with 50% vesting immediately and 25% vesting in both 12 and 24 months. Effective
February 1, 2008, Mr. Shriver’s employment agreement was amended to increase Mr.
Shriver's annual salary to $200,000 and added that if Mr. Shriver’s employment
was terminated for other than “cause” or if Mr. Shriver resigns for “good
reason” before February 18, 2010 his severance would be twice his annual
salary.
Effective
February 10, 2010, Mr. Shriver stepped down as the Company’s COO and board
member and accepted the position of Senior Manager of Technical
Operations.
The
Company entered into an employment agreement with Mr. McCommon effective
November 11, 2008 as the Company’s Chief Financial Officer with an annual
compensation of $105,000. The agreement is in effect for one year, or until
terminated, and is automatically renewable on October 31 of each year unless
terminated in writing by either party upon a 30 days written notice prior to
October 31. In accordance with the agreement, the Company granted to Mr.
McCommon 100,000 options with an exercise price equal to the fair market value
at the time of grant, with 50% vesting in one year and the remaining 50% vesting
in two years following such grant. Effective June 1, 2009, Mr.
McCommon’s employment agreement was amended to reduce his salary to $4,166.67
per month until, in his sole discretion, economic conditions warrant the return
to the pre-June 1, 2009 compensation level.
23
Outstanding
Equity Awards at Fiscal Year-End
The
following table discloses unexercised options held by the Named Executives at
October 31, 2009
Option
Awards
|
||||||||||||||
NAME
|
Number
of
Securities Underlying Unexercised Options Exercisable (#) |
Number
of
Securities Underlying Unexercised Options Unexercisable (#) |
Option
Exercise
Price ($) |
Option
Expiration Date |
||||||||||
Malcolm
H. Philips, Jr.
|
100,000 | - | 0.15 |
07/17/2010
|
||||||||||
350,000 | - | 0.22 |
06/11/2012
|
|||||||||||
- | 150,000 | (1) | 0.09 |
08/01/2014
|
||||||||||
Timothy
D. Shriver
|
200,000 | - | 0.15 |
07/17/2010
|
||||||||||
- | 150,000 | (1) | 0.09 |
08/01/2014
|
||||||||||
Stephen
McCommon
|
50,000 | 50,000 | 0.15 |
11/11/2013
|
||||||||||
- | 150,000 | (1) | 0.09 |
08/01/2014
|
|
(1)
|
Performance
Options: Pursuant to an employee option incentive program covering all
employees, the Board granted options based on the Company’s performance.
40% of the bonus options would vest when the Company has positive cash
flow from operations for one fiscal quarter and the remaining 60% of the
bonus would vest when the Company has positive operating cash flow for two
quarters. If the Company does not accomplish both milestones by July 31,
2010, any unvested part of the bonus options will
lapse.
|
Stock
Incentive Plans
2002
Stock Incentive Plan
On May
27, 2002, our Board of Directors adopted the 2002 Stock Incentive Plan, under
which stock options and restricted stock may be granted to such of our officers,
directors, employees or other persons providing services to CDEX as our Board of
Directors, or a committee designated by them for this purpose, selects. The plan
was approved by our stockholders on July 1, 2002.
Stock
options granted under this plan may be nonqualified stock options or incentive
stock options, as provided in the plan. Incentive stock options are to be issued
in accordance with Section 422 of the Internal Revenue Code of 1986, as amended.
As such, incentive stock options may only be issued to employees of CDEX or any
subsidiary of CDEX, must have an exercise price of no less than the fair market
value of the common stock on the date of the grant; provided, however, that in
the event the grantee is a ten percent stockholder, the exercise price shall not
be less than 110% of fair market value of the common stock on the date of the
grant. The aggregate fair market value of the underlying shares cannot exceed
$100,000 for any individual option holder during any calendar year. Incentive
stock options granted to a ten percent stockholder must expire no later than
five years from the date of grant. Non-incentive options are not subject to the
restrictions contained in Section 422, except that pursuant to the plan, such
options cannot be exercisable at less than 85% of fair market value and must
expire no later than ten years from the date of grant. The options are
non-transferable and may not be assigned except that non-incentive options may,
in certain cases be assigned to family members of the grantee.
24
Upon
termination of employment (other than for cause) of an employee grantee of
options under this plan, the grantee shall have 60 days following such
termination, or one year if such termination results from the grantee's death or
disability (as defined in the plan), to exercise the vested portion of any
option. Holders of options under the plan have no voting or other rights of
shareholders except and to the extent that they exercise their options and are
issued the underlying shares. Options under the plan may be exercised by the
issuance of a promissory note from the grantee, or on a cashless basis by the
grantee surrendering a portion of the shares issuable thereunder, as payment of
the exercise price in lieu of cash.
Restricted
stock granted under this plan may be issued subject to any restrictions set by
our Board of Directors in its discretion except that the vesting restrictions
for restricted stock granted to individuals who are not officers, directors or
consultants of CDEX shall lapse no less rapidly than at a rate of 20% per year
for each of the first five years from the grant date. However, the Board of
Directors in its discretion may shorten or eliminate the restrictions.
Generally, unless otherwise provided by the Board of Directors with respect to a
particular grant of restricted stock, holders of restricted stock have the right
to vote and receive dividends on their shares, including shares not yet vested.
Also, unless otherwise so provided, any unvested shares are deemed forfeited by
the grantee upon termination of such grantee's service with CDEX.
2003
Stock Incentive Plan
On July
1, 2003, our shareholders adopted the 2003 Stock Incentive Plan, which has
substantially the same terms as the 2002 Stock Incentive Plan. At the annual
meeting of stockholders held on June 30, 2004, the shareholders authorized
10,000,000 shares in the aggregate for issuance under both the 2002 and 2003
plans, including 3,000,000 available for the Board of Directors to allocate at
their discretion. At the annual meeting of the stockholders held on March 17,
2006, the shareholders approved an amendment to the 2003 Stock Incentive Plan
increasing the number of Class A common stock available for issuance by an
additional 3,500,000 shares. This amendment increased the aggregate number of
shares available for issuance under both the 2002 and 2003 Stock Incentive Plans
to 13,500,000. The 2003 Stock Incentive Plan provides for a pro rata increase in
the number of shares permitted to be granted or issued for an increase in the
authorized shares approved by the shareholders. At a special shareholders'
meeting held on January 9, 2007, the shareholders approved an increase in the
number of authorized shares from 50.2 million to 100 million. This shareholder
action resulted in an automatic increase in the number of shares permitted to be
issued or granted under the 2003 Stock Incentive Plan to approximately 26.9
million. At the annual meeting of shareholders on April 9, 2008, the
shareholders approved to limit the number of shares issuable under the Company's
Stock Incentive Plans to 25% of the authorized shares of the Company. This
action resulted in limiting the number of shares issuable under the plans to
25,000,000.
The
following table discloses our director compensation for the fiscal year ended
October 31, 2009:
Name
|
Option
Awards
(1)
|
||||
Carmen
J. Conicelli, Jr.
|
$ | 16,517 | (2) | ||
George
Dials
|
18,926 | (3) | |||
Donald
W. Strickland
|
18,926 | (4) |
|
(1)
|
The
amounts included in the "Option Awards" column represent the non-cash
stock-based compensation cost on options recognized by the Company in the
fiscal year 2009 related to stock option awards, computed in accordance
with FASB ASC Topic 718. For a discussion of valuation assumptions, see
Notes 2 and 8 to our 2009 Financial
Statements.
|
|
(2)
|
Mr.
Conicelli has options to purchase 315,000 shares of Class A common stock
outstanding.
|
|
(3)
|
Mr.
Dials has options to purchase 360,000 shares of Class A common stock
outstanding.
|
|
(4)
|
Mr.
Strickland has options to purchase 400,000 shares of Class A common stock
outstanding.
|
25
ITEM
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
The
following table sets forth information regarding the beneficial ownership of the
Company's Class A common stock, based on information provided by the persons
named below in publicly available filings, as of January 26, 2010:
|
·
|
each
of the our directors and executive
officers;
|
|
·
|
all
directors and executive officers of ours as a group; and each person who
is known by us to beneficially own more than five percent of the
outstanding shares of our Common
Stock.
|
Unless
otherwise indicated, the address of each beneficial owner is care of CDEX Inc.,
4555 South Palo Verde Road, Suite 123, Tucson, Arizona 85714. Unless otherwise
indicated, the Company believes that all persons named in the following table
have sole voting and investment power with respect to all shares of common stock
that they beneficially own.
For
purposes of this table, a person is deemed to be the beneficial owner of the
securities if that person has the right to acquire such securities within 60
days of March 2, 2010 upon the exercise of options or warrants or the conversion
of notes. In determining the percentage ownership of the persons in the table
below, we assumed in each case that the person exercised all options and
warrants and converted all notes which are currently held by that person and
which are exercisable/convertible within such 60 day period, but that options
and warrants and convertible notes held by all other persons were not exercised
or converted, and based the percentage ownership on 65,239,634 shares
outstanding on March 2, 2010.
Name
And Address Of Beneficial
Owner
|
Position
|
Amount
Of
Beneficial
Ownership
|
Percent
Of
Class
(1)
|
||||||||
Malcolm
H. Philips, Jr.
|
Executive
Officer and Director
|
10,945,739 | (2) | 15.07 | % | ||||||
Gemini
Master Fund, Ltd
|
Investor
|
10,014,313 | (3) | 13.31 | % | ||||||
Mr.
Jeffery K. Brumfield
|
Investor
|
6,493,185 | (4) | 9.95 | % | ||||||
George
Dials
|
Director
|
949,880 | (5) | 1.4 | % | ||||||
Carmen
J. Conicelli
|
Director
|
632,865 | (6) | * | |||||||
Donald
W. Strickland
|
Director
|
619,086 | (7) | * | |||||||
Gregory
Firmbach
|
Executive
Officer and Director
|
50,000 | (8) | * | |||||||
Stephen
McCommon
|
Executive
Officer
|
50,000 | (8) | * | |||||||
Shares
of all named executives and
|
|||||||||||
directors
as a group (6 persons)
|
13,247,570 | ||||||||||
*
Less than 1%
|
26
(1)
|
Computed
based upon the total number of shares of Class A common stock, shares of
common stock underlying options and shares of common stock underlying
warrants held by that person that are exercisable within 60 days of March
2, 2010.
|
(2)
|
Represents
3,571,842 shares of Class A common stock held by entities in which Mr.
Philips has a controlling interest, 964,502 warrants exercisable within 60
days of March 2, 2010 held by entities in which Mr. Philips has a
controlling interest, 450,000 options exercisable within 60 days of March
2, 2010 and 5,959,395 shares underlying convertible notes held by entities
in which Mr. Philips has a controlling interest convertible within 60 days
of March 2, 2010.
|
(3)
|
Represents
5,000,000 warrants exercisable within 60 days of March 2, 2010 and
5,014,313 shares underlying convertible notes convertible within 60 days
of March 2, 2010.
|
(4)
|
Based
on information known by the Company, this represents 6,493,185 shares of
Class A common stock.
|
(5)
|
Represents
467,034 shares of Class A common stock, 220,000 options exercisable within
60 days of March 2, 2010, 211,255 warrants exercisable within 60 days of
March 2, 2010 and 51,591 shares underlying convertible notes convertible
within 60 days of March 2, 2010.
|
(6)
|
Represents
304,750 shares of Class A common stock, 225,000 options exercisable within
60 days of March 2, 2010 and 103,115 shares underlying convertible notes
convertible within 60 days of March 2,
2010.
|
(7)
|
Represents
179,543 shares of Class A common stock, 179,543 warrants exercisable
within 60 days of March 2, 2010 and 260,000 options exercisable within 60
days of March 2, 2010.
|
(8)
|
Represents
50,000 options exercisable within 60 days of March 2,
2010.
|
ITEM
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
During fiscal 2009, we issued several
of convertible notes payable to related parties, which are summarized as
follows:
|
·
|
During
the three months ended January 31, 2009, the Company received $87,700 in
proceeds under a number of 10.0%, 12 month convertible notes payable with
an entity controlled by our CEO. These notes are convertible at any time
on terms given to Gemini Master Fund or the best terms given to an
investor during the twelve months following the loan date, including
warrants. However, the note holder shall receive the lowest price that
does not cause a decrease in the conversion price or exercise price of the
Gemini Convertible Note or Common Stock Purchase
Warrant.
|
|
·
|
During
the three months ended April 30, 2009, the Company received $10,050 in
proceeds under a 10.0%, 12 month convertible note payable with an entity
controlled by our CEO. These notes are convertible and into
stock and warrants with terms similar to those
above.
|
Subsequent
to October 31, 2009, we received the following funds under convertible notes
payable agreements with related parties:
|
·
|
During
December 2009, the Company received $24,700 in proceeds under 12.0%, 24
month convertible notes payable with an entity controlled our CEO and an
additional $10,100 in proceeds under similar convertible notes payable
with other Directors.
|
|
·
|
In
January 2010, the Company received $25,100 in proceeds under similar
convertible notes payable with an entity controlled by our CEO and an
additional $5,050 in proceeds from another Director. These convertible
notes are convertible at the option of the note holders into common stock
and warrants. The price for the stock and warrants in the conversion of
these notes will be equal to the corresponding conversion price provided
to Gemini, in the Gemini/ CDEX 12% Senior Convertible Note or Common Stock
Purchase Warrant, both originally issued on June 25, 2008, or the best
terms given to any investor during the 12 months following the note date.
However, the note holders shall only receive the best terms that do not
result in a resetting of conversion or warrant prices or a penalty
associated with the Gemini note.
|
27
|
·
|
During
February 2010, the Company entered into a Securities Purchase Agreement
with its largest creditor, Gemini, and with three other investors
including an entity controlled by our CEO. Included in the agreement is
the restructuring of the June 25, 2008 Senior Convertible Note held by
Gemini where $1,151,100 of outstanding principal and accrued interest was
capitalized into a new note bearing interest at 10% and convertible into
Class A common stock at the rate of $0.05 per share for the first $800,000
of principal converted, and $0.08 per share for converted balances in
excess of $800,000. The note matures on February 1, 2012, but has
accelerated payment provisions and a contingent security interest, if
certain financial milestones are not met. Additionally because of
the restructuring, the common Stock Purchase Warrant issued on June 25,
2008 to Gemini was adjusted. Included in the restructuring was a $200,000
cash infusion from an entity controlled by our CEO, for which the Company
issued a note similar to that issued to Gemini. Additionally,
as a part of this restructuring, $247,115 of principal and accrued
interest of existing Convertible Notes Payables held by an entity
controlled by our CEO were consolidated and converted into a new
convertible note similar to that issued to
Gemini.
|
|
·
|
During
March 2010, the Company, as a part of the February restructuring,
converted $15,462 of principal and accrued interest of existing
Convertible Notes Payables held by two directors into new notes similar to
that issued to Gemini.
|
During
fiscal 2009, the Company was a party to the following transactions with related
parties that affected our stockholders’ equity:
|
·
|
During
the three months ended April 30, 2009, we sold 250,000 shares of
restricted Class A common stock to a director for $25,000, or $0.10 per
share and a warrant for the purchase of 125,000 shares of restricted Class
A common stock with an exercise price of $0.20 per
share.
|
|
·
|
During
the three months ended April 30, 2009, Gemini converted a portion of its
note payable and accrued interest in the amount of $100,000 into 1,000,000
Class A Common Shares, or approximately $0.10 per
share.
|
|
·
|
During
the three months ended April 30, 2009, an entity controlled our CEO
converted two notes payable and accrued interest in the amount of $28,603
into 238,359 Class A Common Shares, or $0.12 per share, and a warrant for
the purchase of 238,359 shares of restricted Class A common stock, with an
exercise price of $0.24 per share.
|
|
·
|
During
the three months ended January 31, 2009, an entity controlled our CEO
converted a note payable and accrued interest in the amount of $10,726
into 89,381 Class A Common Shares, or $0.12 per share and a warrant for
the purchase of 89,381 shares of restricted Class A common stock, with an
exercise price of $0.24 per share.
|
Subsequent
to October 31, 2009, we were a party to the following transactions with related
parties that affected our stockholders’ equity:
|
·
|
During
January 2010, Gemini converted a portion of its note payable and accrued
interest in the amount of $50,000 into 1,000,000 Class A Common Shares, or
approximately $0.05 per share.
|
28
ITEM
14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The
following is a summary of fees billed to us by S.E. Clark and Co., our
independent registered public accounting firm, for professional services
rendered for the fiscal years ended October 31, 2009 and 2008:
Description
|
2009
|
2008
|
||||||
Audit
fees
|
$ | 36,721 | $ | 46,206 | ||||
Other
services
|
675 | 400 | ||||||
Total
|
$ | 37,396 | $ | 46,606 |
Pre-Approval
Policies and Procedures
The Audit
Committee approves all audit services, audit-related services, tax services and
other services provided by our auditors. Any services provided by our auditors
that are not specifically included within the scope of the audit must be
pre-approved by the Audit Committee in advance of any engagement. Under the
Sarbanes-Oxley Act of 2002, audit committees are permitted to approve certain
fees for audit-related services, tax services and other services, pursuant to a
de minimis exception prior to the completion of an audit engagement. In fiscal
2009 and 2008, none of the fees paid to S.E. Clark and Co. were approved
pursuant to the de minimis exception.
29
ITEM
15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
Consolidated
Financial Statements
(1)
Financial Statements
|
·
|
Report
of Independent Registered Public Accounting
Firm
|
|
·
|
Balance
Sheets
|
|
·
|
Statements
of Operations
|
|
·
|
Statement
of Changes in Stockholders’ Deficit
|
|
·
|
Statements
of Cash Flows
|
|
·
|
Notes
to Financial Statements
|
(2) Financial Statement
Schedules
Schedule
II — Valuation and Qualifying Accounts schedule has been omitted as the required
information is included in the Notes to Financial Statements included with this
annual report.
All other
schedules have been omitted because they are not applicable.
(3) Exhibits
Amended and Restates Articles of Incorporation of the Company filed
January
2, 2004, together with Certificate of Designation of Rights, Preferences
and Privileges (incorporated by reference to the Registrant's
Registration Statement on Form SB-2, as filed with the Securities
and Exchange Commission on February 2, 2004).
|
||
3.2
|
By-Laws of the Company adopted July 6, 2001 (incorporated by reference
to the Registrant's Registration Statement on Form SB-2, as
filed with the Securities and Exchange Commission on February 2,
2004).
|
|
3.3
|
Amended and Restated By-laws of the Registrant (incorporated by
reference
to the comparable exhibit filed with the Registrant's form 8
-K filed with the SEC on December 4, 2007).
|
|
4.1
|
Specimen certificate for shares of Company common stock (incorporated
by reference to Amendment No. 2 to the Registrant's Registration
Statement on Form SB-2, as filed with the Securities and
Exchange Commission on June 21, 2004).
|
|
4.2
|
2002 Stock Incentive Plan (Privileges (incorporated by reference to
the
Registrant's Registration Statement on Form SB-2, as filed with
the
Securities and Exchange Commission on February 2,
2004).
|
30
4.3
|
2003 Stock Incentive Plan (Privileges (incorporated by reference to
the
Registrant's Registration Statement on Form SB-2, as filed with
the
Securities and Exchange Commission on February 2,
2004).
|
|
4.4
|
Form of Securities Purchase Agreement (incorporated by reference to
Amendment
No. 2 to the Registrant's Registration Statement on Form SB-2,
as filed with the Securities and Exchange Commission on June 21,
2004).
|
|
10.1
|
Employment Agreement dated June 11, 2007 between the Registrant and
Malcolm
H. Philips, Jr. (incorporated by reference to the comparable exhibit
filed with the Registrant's form 8-K filed with the SEC on June
15, 2007).
|
|
10.2
|
Employment Agreement effective November 11, 2008 between the Registrant
and Stephen McCommon (incorporated by reference to the comparable
exhibit filed with the Registrant's form 8-K filed with the
SEC on October 23, 20088).
|
|
10.3
|
Form of Securities Purchase Agreement with Gemini Master Fund, Ltd.
dated
June 25, 2008 (incorporated by reference to the comparable exhibit
filed with the Registrant's form 8-K filed with the SEC on June
30, 2008).
|
|
10.4
|
Form of 12% Senior Convertible Note with Gemini Master Fund, Ltd.
dated
June 25, 2008 (incorporated by reference to the comparable exhibit
filed with the Registrant's form 8-K filed with the SEC on June
30, 2008).
|
|
10.5
|
Form of Common Stock Purchase Warrant Agreement with Gemini Master
Fund,
Ltd. dated June 25, 2008 (incorporated by reference to the comparable
exhibit filed with the Registrant's form 8-K filed with the
SEC on June 30, 2008)
|
|
10.6
|
Form of Waiver and Amendment with Gemini Master Fund, Ltd. dated
December
18, 2008 (incorporated by reference to the comparable
exhibit filed with the Registrant's form 10-KSB/A filed with the
SEC on March 13, 2009).
|
|
10.7
|
Form
of Second Waiver and Amendment with Gemini Master Fund,
Ltd. Dated
February 10, 2009 (incorporated by reference to the comparable
exhibit filed with the Registrant's form 10-KSB/A filed
with the
SEC on March 13, 2009).
|
|
10.8
|
Form
of Third Waiver and Amendment with Gemini Master Fund,
Ltd. Dated
February 10, 2009 (incorporated by reference to the comparable
exhibit filed with the Registrant's form 8-K filed with the
SEC on May 5, 2009).
|
|
10.9
|
Form
of Fourth Waiver and Amendment with Gemini Master Fund,
Ltd. Dated February
10, 2009 (incorporated by reference to the comparable
exhibit filed with the Registrant's form 8-K filed with the
SEC on June 9, 2009).
|
|
10.10
|
Form of Fifth Waiver and Amendment with Gemini Master Fund,
Ltd. Dated
February 10, 2009 (incorporated by reference to the comparable
exhibit filed with the Registrant's form 8-K filed with the
SEC on October 27, 2009).
|
31
31.1
|
Certification of Chief Executive Officer (filed
herewith).
|
|
31.2
|
Certification of Chief Financial Officer (filed
herewith).
|
|
32.1
|
Section 1350 Certification of Chief Executive Officer
(filed herewith).
|
|
32.2
|
Section 1350 Certification of Chief Financial Officer
(filed herewith).
|
32
Signatures
In
accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the
registrant caused this annual report to be signed on its behalf by the
undersigned, thereunto duly authorized, on March 19, 2010.
CDEX
Inc.
/s/ MALCOLM H. PHILIPS
|
||
Malcolm
H. Philips
|
||
Chief
Executive Officer and
|
||
Member
of the Board of Directors
|
Power
of Attorney
KNOW ALL
MEN BY THESE PRESENTS, that each director and officer whose signature appears
below constitutes and appoints Malcolm H. Philips, as such person's true and
lawful attorney-in-fact and agent, with full powers of substitution and
re-substitution, for such person in name, place and stead, to sign in any and
all amendments to this annual report on Form 10-K, in any and all capacities,
and to file the same, with all exhibits thereto and all other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
such attorney-in-fact and agents, and every act and thing requisite and
necessary to be done, as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming all that such attorneys-in-fact
and agents, or any of them, may lawfully do or cause to be done by virtue
hereof.
Pursuant
to the requirements of the Securities Act of 1934, this annual report has been
signed by the following persons in the capacities and on March 19,
2010.
Signature
|
Title
|
Date
|
|||
/s/ |
MALCOLM H. PHILIPS
|
Chief
Executive Officer and Director
|
March
19, 2010
|
||
Malcolm H. Philips
|
|||||
/s/ |
GREGORY FIRMBACH
|
President
and Director
|
March
19, 2010
|
||
Gregory Firmbach
|
|||||
/s/ |
STEPHEN A. MCCOMMON
|
Chief
Financial Officer and
|
March
19, 2010
|
||
Stephen A. McCommon
|
Vice
President of Finance
|
||||
/s/ |
CARMEN J. CONICELLI
|
Chairman
of the Board of Directors
|
March
19, 2010
|
||
Carmen J. Conicelli
|
|||||
/s/ |
GEORGE DIALS
|
Director
|
March
19, 2010
|
||
George
Dials
|
|||||
/s/ |
DONALD W. STRICKLAND
|
Director
|
March
19, 2010
|
||
Donald W. Strickland
|
33
INDEX
TO FINANCIAL STATEMENTS
Report
of Independent Registered Public Accounting Firm
|
F-2
|
|
Balance
Sheets
|
F-3
|
|
Statements
of Operations
|
F-4
|
|
Statement
of Changes in Stockholders' Deficit
|
F-5
|
|
Statements
of Cash Flows
|
F-6
|
|
Notes
to Financial Statements
|
F-7
|
F-1
S.E.Clark
& Company, P.C.
Registered
Firm: Public Company Accounting Oversight Board
Report of Independent
Registered Public Accounting Firm
Board of
Directors
and
Stockholders
CDEX
Inc.
Tucson,
Arizona
We have
audited the accompanying balance sheets of CDEX Inc. (the “Company”) as of
October 31, 2009 and 2008 and the related statements of operations, changes in
stockholders’ deficit, and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the Company’s
internal control over financial reporting. Accordingly, we express no
such opinion. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our
opinion the financial statements referred to above present fairly, in all
material respects, the financial position of CDEX Inc. as of October 31, 2009
and 2008 and the results of its operations and its cash flows for the years then
ended in conformity with accounting principles generally accepted in the United
States of America.
The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern. As discussed in Note 13 to the financial
statements, the accumulation of losses and shortage of capital raise substantial
doubt about its ability to continue as a going concern. Management's plans
concerning these matters are also described in Note 13 The financial
statements do not include any adjustments relating to the recoverability and
classification of asset carrying amounts or the amount and classification of
liabilities that might result should the Company be unable to continue as a
going concern.
/s/
S.E.Clark & Company, P.C.
Tucson,
Arizona
March 15,
2010
744 N. Country Club Road,
Tucson, AZ 85716 (520) 323-7774, Fax (520) 323-8174,
seclarkcpa@aol.com
F-2
CDEX
INC.
BALANCE
SHEETS
AS
OF OCTOBER 31,
2009
|
2008
|
|||||||
Assets
|
||||||||
Current
assets:
|
||||||||
Cash
|
$ | 7,769 | $ | 26,373 | ||||
Accounts
receivable - net
|
72,760 | 220,688 | ||||||
Inventory
- net
|
270,114 | 298,287 | ||||||
Prepaid
expenses
|
66,719 | 100,078 | ||||||
Total
current assets
|
417,362 | 645,426 | ||||||
Property
and equipment, net
|
45,839 | 50,595 | ||||||
Patents,
net
|
79,059 | 88,851 | ||||||
Other
assets
|
38,238 | 90,661 | ||||||
Total
assets
|
$ | 580,498 | $ | 875,533 | ||||
Liabilities
and stockholders' deficit
|
||||||||
Current
liabilities:
|
||||||||
Accounts
payable and accrued expenses
|
$ | 1,827,547 | $ | 1,394,727 | ||||
Current
portion of notes payable and accrued interest
|
1,297,456 | 614,231 | ||||||
Advance
payments
|
30,177 | 21,576 | ||||||
Deferred
revenue
|
- | 119,575 | ||||||
Total
current liabilities
|
3,155,180 | 2,150,109 | ||||||
Long-term
notes payable and accrued interest,
|
||||||||
net
of unamortized debt discount
|
235,203 | 369,456 | ||||||
Total
liabilities
|
3,390,383 | 2,519,565 | ||||||
Commitments
and contingencies
|
||||||||
Stockholders'
deficit
|
||||||||
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 6,675 outstanding at
|
||||||||
October 31, 2009 and 2008
|
33 | 33 | ||||||
Class A common stock - $.005 par value per share,
100,000,000
|
||||||||
shares authorized and 64,239,634 outstanding at October
31,
|
||||||||
2009 and 59,247,991 outstanding at October 31, 2008
|
321,202 | 296,244 | ||||||
Additional
paid in capital
|
26,511,356 | 25,851,967 | ||||||
Accumulated
deficit
|
(29,642,476 | ) | (27,792,276 | ) | ||||
Total
stockholders' deficit
|
(2,809,885 | ) | (1,644,032 | ) | ||||
Total
liabilities and stockholders' deficit
|
$ | 580,498 | $ | 875,533 |
The
accompanying notes are an integral part of these Financial
Statements.
F-3
CDEX
INC.
STATEMENTS
OF OPERATIONS
FOR
THE YEARS ENDED OCTOBER 31,
2009
|
2008
|
|||||||
Revenue
|
$ | 480,439 | $ | 835,764 | ||||
Cost
of revenue
|
105,671 | 220,316 | ||||||
Gross
profit
|
374,768 | 615,448 | ||||||
Operating
expenses:
|
||||||||
Selling,
general and administrative
|
1,326,852 | 1,598,969 | ||||||
Research
and development
|
310,499 | 943,416 | ||||||
Total
operating expenses
|
1,637,351 | 2,542,385 | ||||||
Loss
from operations
|
(1,262,583 | ) | (1,926,937 | ) | ||||
Other
income (expense)
|
||||||||
Interest
income
|
- | 3,807 | ||||||
Interest
expense
|
(587,617 | ) | (211,042 | ) | ||||
Total
other expense
|
(587,617 | ) | (207,235 | ) | ||||
Net
loss
|
$ | (1,850,200 | ) | $ | (2,134,172 | ) | ||
Basic
and diluted net loss
|
||||||||
per
common share:
|
$ | (0.03 | ) | $ | (0.04 | ) | ||
Basic
and diluted weighted average
|
||||||||
common
shares outstanding
|
62,757,343 | 55,867,102 |
The
accompanying notes are an integral part of these Financial
Statements.
F-4
CDEX
INC.
STATEMENT
OF CHANGES IN STOCKHOLDERS’ DEFICIT
Additional
|
||||||||||||||||||||||||||||
Series
A Preferred Stock
|
Class
A Common Stock
|
Paid-in
|
Accumulated
|
|||||||||||||||||||||||||
Shares
|
Amount
|
Shares
|
Amount
|
Capital
|
Deficit
|
Total
|
||||||||||||||||||||||
Balance,
October 31, 2007
|
6,675 | $ | 33 | 51,569,407 | $ | 257,852 | $ | 23,928,584 | $ | (25,658,104 | ) | $ | (1,471,635 | ) | ||||||||||||||
Sale
of common stock for cash
|
- | - | 825,928 | 4,130 | 264,390 | - | 268,520 | |||||||||||||||||||||
Exercise
of warrants
|
- | - | 3,953,846 | 19,769 | 679,036 | - | 698,805 | |||||||||||||||||||||
Exercise
of stock options
|
- | - | 210,000 | 1,049 | 30,900 | - | 31,949 | |||||||||||||||||||||
Conversion
of notes payable
|
- | - | 1,688,310 | 8,442 | 193,687 | - | 202,129 | |||||||||||||||||||||
Shares
issued for compensation
|
- | - | 1,000,500 | 5,003 | 299,573 | - | 304,576 | |||||||||||||||||||||
Stock-based
compensation
|
- | - | - | - | 103,540 | - | 103,540 | |||||||||||||||||||||
Fair
value of warrant
|
||||||||||||||||||||||||||||
and
convertible debt
|
- | - | - | - | 352,258 | - | 352,258 | |||||||||||||||||||||
Net
loss
|
- | - | - | - | - | (2,134,172 | ) | (2,134,172 | ) | |||||||||||||||||||
Balance,
October 31, 2008
|
6,675 | 33 | 59,247,991 | 296,245 | 25,851,968 | (27,792,276 | ) | (1,644,030 | ) | |||||||||||||||||||
Sale
of common stock for cash
|
- | - | 2,400,000 | 12,000 | 238,000 | - | 250,000 | |||||||||||||||||||||
Conversion
of notes payable
|
- | - | 2,561,643 | 12,807 | 196,689 | - | 209,496 | |||||||||||||||||||||
Stock-based
compensation
|
- | - | - | - | 143,135 | - | 143,135 | |||||||||||||||||||||
Fair
value adjustment of warrant
|
- | - | - | - | 78,868 | - | 78,868 | |||||||||||||||||||||
Stock
issued for settlement on account
|
- | - | 30,000 | 150 | 2,696 | - | 2,846 | |||||||||||||||||||||
Net
loss
|
- | - | - | - | - | (1,850,200 | ) | (1,850,200 | ) | |||||||||||||||||||
Balance,
October 31, 2009
|
6,675 | $ | 33 | 64,239,634 | $ | 321,202 | $ | 26,511,356 | $ | (29,642,476 | ) | $ | (2,809,885 | ) |
The
accompanying notes are an integral part of these Financial
Statements.
F-5
CDEX
INC.
STATEMENTS
OF CASH FLOWS
FOR
THE YEARS ENDED OCTOBER 31,
2009
|
2008
|
|||||||
Cash
flows from operating activities:
|
||||||||
Net
loss
|
$ | (1,850,200 | ) | $ | (2,134,172 | ) | ||
Adjustments
to reconcile net loss to cash used by
|
||||||||
operating activities: | ||||||||
Depreciation
and amortization
|
41,709 | 29,243 | ||||||
Stock-based
compensation
|
143,135 | 408,115 | ||||||
Provision
for doubtful accounts
|
35,081 | - | ||||||
Noncash
interest expense
|
587,616 | 210,558 | ||||||
Changes
in operating assets and liabilities:
|
||||||||
Accounts
receivable
|
115,693 | (151,764 | ) | |||||
Inventory
|
1,012 | (208,197 | ) | |||||
Prepaid
expenses and other assets
|
- | 5,142 | ||||||
Current
liabilities
|
307,550 | (80,197 | ) | |||||
Net
cash used by operating activities
|
(618,404 | ) | (1,921,272 | ) | ||||
Cash
flows from investing activities:
|
||||||||
Purchase
of and deposit for property and equipment
|
- | (21,443 | ) | |||||
Net
cash used by investing activities
|
- | (21,443 | ) | |||||
Cash
flows from financing activities:
|
||||||||
Proceeds
from sale of common stock and warrants
|
250,000 | 999,274 | ||||||
Proceeds
from issuance of convertible notes payable
|
349,800 | 942,430 | ||||||
Net
cash provided by financing activities
|
599,800 | 1,941,704 | ||||||
Net
decrease in cash
|
(18,604 | ) | (1,011 | ) | ||||
Cash,
beginning of the period
|
26,373 | 27,384 | ||||||
Cash,
end of the period
|
$ | 7,769 | $ | 26,373 | ||||
Supplemental
cash flow information:
|
||||||||
Cash
payments for interest
|
$ | - | $ | 425 | ||||
Cash
payments for taxes
|
- | - | ||||||
Conversion
of notes payable and accrued interest
|
||||||||
to
common stock
|
209,496 | 202,129 | ||||||
Transfer
from inventory to fixed assets
|
27,161 | 47,245 |
The
accompanying notes are an integral part of these Financial
Statements.
F-6
NOTES
TO FINANCIAL STATEMENTS
FOR
THE YEARS ENDED OCTOBER 31, 2009 AND 2008
1.
Organization of Business and Basis of Presentation
CDEX Inc.
(“CDEX”, “we”, “us”, “our” or the “Company”) is a technology development company
that is currently applying its patented and patents pending chemical detection
technologies to develop products in the healthcare, security and brand
protection markets. CDEX was incorporated in the State of Nevada on July 6, 2001
and maintains its corporate offices and research and development laboratories in
Tucson, Arizona.
Currently,
CDEX is focused in three distinct markets:
|
1.
|
Healthcare
- Validation of medications, training and quality assurance (e.g.,
validation of prescription and compounded medications to provide for
patient safety, training of medical staff regarding compounding practices,
and detection of the diversion of narcotics and controlled
substances);
|
|
2.
|
Security
and Public Safety - Identification of substances of concern (e.g.,
explosives, illegal drugs and the detection of counterfeit drugs and
medications to assist in the protection of the nation's drug supply);
and
|
|
3.
|
Brand
Protection - Detection of counterfeit or sub-par products for brand
protection (e.g., inspection of incoming raw materials, outgoing final
products and products in the distribution
channel).
|
All
current CDEX product development is 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 our revenues will
come from products developed from our current suite of patents and patents
pending technologies, or through licensing arrangements with companies with
related intellectual property.
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States 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 valuation assumptions used in
recognizing stock-based compensation expense. Certain reclassifications have
been made to prior period financial statement amounts to conform to the current
presentation. Subsequent events have been evaluated through the date these
financial statements were issued, which was March 19, 2010.
F-7
2.
Summary of Significant Accounting Policies
Revenue
Recognition
Sales
revenues are recognized when persuasive evidence of an agreement with the
customer exists, products are shipped and installation, if necessary, completed,
title passes pursuant to the terms of the agreement with the customer, the
amount due from the customer is fixed or determinable, collectibility is
reasonably assured and there are no significant future performance obligations.
Service revenues are recognized at the time of performance. Service maintenance
revenues are typically recognized ratably over the term of the
agreement.
Deferred
revenue represents amounts invoiced or received but not recognized as revenue if
the above revenue recognition terms are not met.
Allowance
for Doubtful Accounts
We
maintain an allowance for doubtful accounts based on the expected collectability
of our accounts receivable. We perform credit evaluations of significant
customers and establish an allowance for doubtful accounts based on the aging of
receivables, payment performance factors, historical trends and other
information. In general, we reserve a portion of those receivables outstanding
more than 90 days and 100% of those outstanding more than 120 days. We evaluate
and revise our reserve on a monthly basis based on a review of specific accounts
outstanding and our history of uncollectible accounts. The changes to the
allowance for doubtful accounts for the years ended October 31, 2009 and 2008
are as follows:
Year Ended October 31, | ||||||||
2009
|
2008
|
|||||||
Balance,
beginning of the year
|
$ | - | $ | - | ||||
Provisions,
net of recoveries
|
35,081 | - | ||||||
Bad
debts charged to reserves
|
(981 | ) | - | |||||
Balance,
end of the year
|
$ | 34,100 | $ | - |
Inventory
Inventory
is valued at the lower of actual cost based on a first-in, first-out basis, or
market. Inventory includes the cost of component raw materials and
manufacturing. Due to the nature of our inventory, we analyze inventory on an
item-by-item basis for obsolescence. The changes to obsolescence reserve for the
years ended October 31, 2009 and 2008 are as follows:
Year Ended October 31, | ||||||||
2009
|
2008
|
|||||||
Balance,
beginning of the year
|
$ | 8,918 | $ | - | ||||
Provisions,
net of recoveries
|
- | 8,918 | ||||||
Inventory
obsolescence adjustments
|
(80 | ) | - | |||||
Balance,
end of the year
|
$ | 8,838 | $ | 8,918 |
F-8
Property
and Equipment
Property
and equipment are recorded at historical cost and are depreciated using the
straight-line method over the estimated useful lives of the related assets,
which range from two to seven years. Depreciation expense was $31,917 and
$23,487 for the years ended October 31, 2009 and 2008,
respectively.
Advertising
Costs
Advertising
costs are expensed as incurred. Advertising expense was $27,396 and $67,925 for
the years ended October 31, 2009 and 2008, respectively.
Research
and Development Costs
Research
and development costs include compensation for employees and contractors, rent,
professional services, materials, lab equipment and disposals.
Share-Based
Payments
Stock-based
compensation costs are recognized as a component of selling, general and
administrative expense in the Statements of Operations. Compensation expense for
share-based payment arrangements with our employees is based on the grant date
fair value of awards. We apply the Black-Scholes option pricing model to
determine the fair value of stock options and apply judgment in estimating key
assumptions that are important elements in the model and in expense recognition,
such as the expected stock-price volatility, expected stock option life,
expected dividends and expected forfeiture rates. Restricted stock units with
performance based vesting provisions are expensed based on our estimate of
achieving the specific performance criteria on a straight-line basis over the
requisite service period. We perform periodic reviews of the progress of actual
achievement against the performance criteria in order to reassess the likely
vesting scenario and, when applicable, realign the expense associated with that
outcome.
For
share-based payments to non-employee consultants, the fair value of the
share-based consideration issued is typically used to measure the transaction,
as management believes this to be a more reliable measure of fair value than the
services received. We apply the Black-Scholes option pricing model to determine
the fair value of stock options or warrants that are granted. Consideration for
services rendered by non-employee consultants is generally measured at the fair
value of the Company's common stock or stock options on the date that
performance is complete.
Patents
The
Company capitalizes the costs of obtaining patents when patents are granted.
Patents are amortized over their useful lives, which is generally ten
years. Amortization expense relative to patents was $9,792 and $5,756
for fiscal 2009 and 2008, respectively.
Income
Taxes
Deferred
tax assets and liabilities are recognized currently for the future tax
consequences attributable to the temporary differences between the financial
statement carrying amounts of assets and liabilities and their respective tax
basis. Deferred tax assets and liabilities are measured using enacted tax rates
in effect for the year in which those temporary differences are expected to be
recovered or settled. A valuation allowance is recorded to reduce the carrying
amounts of deferred tax assets if it is more likely that such assets will not be
realized. We consider all available evidence, both positive and negative, to
determine whether, based on the weight of that evidence, a valuation allowance
is needed for some portion or all of a net deferred tax asset. Judgment is used
in considering the relative impact of negative and positive evidence. In
arriving at these judgments, the weight given to the potential effect of
negative and positive evidence is commensurate with the extent to which it can
be objectively verified. We record a valuation allowance to reduce our deferred
tax assets and review the amount of such allowance annually. When we determine
certain deferred tax assets are more likely than not to be utilized, we will
reduce our valuation allowance accordingly.
F-9
NOTES
TO FINANCIAL STATEMENTS (CONTINUED)
FOR
THE YEARS ENDED OCTOBER 31, 2009 AND 2008
As of
October 31, 2009 and 2008, we did not recognize any assets or liabilities
relative to uncertain tax positions, nor do we anticipate any significant
unrecognized tax benefits will be recorded during the next 12
months. Any interest or penalties related to unrecognized tax
benefits is recognized in income tax expense. Since there are no unrecognized
tax benefits as a result of tax positions taken, there are no accrued penalties
or interest. We are subject to tax audits for our U.S. federal and certain state
tax returns for tax years 2006 to 2008. Tax audits by their very nature are
often complex and can require several years to complete.
Fair
Value Measurements
The
carrying amounts of items reflected in current assets and current liabilities,
as well as notes payable, approximate their fair value due to the short-term
nature of their underlying terms.
Concentrations
For
fiscal 2009 and 2008, our revenues consisted of transactions with 38 and 32
customers, respectively. Six of our customers in fiscal 2009 and 2008
represented more than 5% of total sales.
At times,
the Company maintains cash balances that exceed federally insured limits. The
Company does not believe that this results in any significant credit
risk.
Net
Loss Per Common Share
Basic net
loss per share was determined by dividing the net loss by the weighted average
number of common shares outstanding during each year. The effect of common stock
equivalents is not considered as it would be anti-dilutive.
Recently
Issued Accounting Pronouncements
In
January 2010, the Financial Accounting Standards Board (“FASB”) issued
Accounting Standards Update (“ASU”) No. 2010-06, “Fair Value Measurements and
Disclosures” (“ASU 2010-06”). ASU 2010-06 requires new disclosures
for (i) transfers of assets and liabilities in and out of levels one and two
fair value measurements, including a description of the reasons for such
transfers and (ii) additional information in the reconciliation for fair value
measurements using significant unobservable inputs (level three). This guidance
also clarifies existing disclosure requirements including (i) the level of
disaggregation used when providing fair value measurement disclosures for each
class of assets and liabilities and (ii) the requirement to provide disclosures
about the valuation techniques and inputs used to measure fair value for both
recurring and nonrecurring fair value measurements for level two and three
assets and liabilities. ASU 2010-06 is effective for interim and
annual reporting periods beginning after December 15, 2009, except for the
disclosures about activity for level three fair value measurements, which is
effective for fiscal years beginning after December 15, 2010. We do
not anticipate that the adoption of this guidance will have a material impact on
our financial position and results of operations.
In June
2009, the FASB issued guidance for determining the primary beneficiary of a
variable interest entity (“VIE”). In December 2009, the FASB issued
ASU 2009-17, “Improvements to Financial Reporting by Enterprises Involved with
Variable Interest Entities” (“ASU 2009-17”). ASU 2009-17 provides
amendments to ASC 810 to reflect the revised guidance. The amendments in ASU
2009-17 replace the quantitative-based risks and rewards calculation for
determining which reporting entity, if any, has a controlling financial interest
in a VIE with an approach focused on identifying which reporting entity has the
power to direct the activities of a VIE that most significantly impact the
entity’s economic performance and (i) the obligation to absorb losses of the
entity or (ii) the right to receive benefits from the entity. The amendments in
ASU 2009-17 also require additional disclosures about a reporting entity’s
involvement with a VIE. ASU 2009-17 is effective for annual reporting periods
beginning after November 15, 2009. We do not anticipate that the adoption of
this guidance will have a material impact on our financial position and results
of operations.
F-10
In June
2009, the FASB issued guidance that seeks to improve the relevance and
comparability of the information that a reporting entity provides in its
financial statements about a transfer of financial assets; the effects of a
transfer on its financial position, financial performance and cash flows; and a
transferor’s continuing involvement, if any, in transferred financial assets.
Specifically, this guidance eliminates the concept of a qualifying
special-purpose entity, creates more stringent conditions for reporting a
transfer of a portion of a financial asset as a sale, clarifies other
sale-accounting criteria, and changes the initial measurement of a transferor’s
interest in transferred financial assets. This guidance is effective for annual
reporting periods beginning after November 15, 2009. We do not
anticipate that the adoption of this guidance will have a material impact on our
financial position and results of operations.
In
April 2008, the FASB issued guidance for determining the useful life of
intangible assets, which amends previous guidance relative to the factors that
should be considered in developing renewal or extension assumptions used to
determine the useful life of a recognized intangible asset. The intent of this
guidance is to improve the consistency between the useful life of a recognized
intangible assets and the period of expected cash flows used to measure the fair
value of the asset upon its acquisition and other applicable accounting
literature. This guidance is effective for financial statements issued for
fiscal years beginning on or after December 15, 2008, and must be applied
prospectively to intangible assets acquired after the effective date. We do not
anticipate that the adoption of this guidance will have a material impact on our
financial position and results of operations.
In
June 2008, the FASB ratified guidance related to determining whether an
instrument (or embedded feature) is indexed to an entity’s own stock.
Equity-linked instruments (or embedded features) that otherwise meet the
definition of a derivative are not accounted for as derivatives if certain
criteria are met, one of which being the instrument (or embedded feature) must
be indexed to the entity’s stock. This guidance assists companies in determining
whether equity-linked instruments (or embedded features), such as warrants to
purchase our stock, are considered indexed to our stock. This guidance is
effective for financial statements issued for fiscal years beginning after
December 15, 2008, and interim periods within those fiscal years, which for
us will be our fiscal year beginning November 1, 2009. Upon adoption, a
cumulative effect adjustment is recorded based on amounts that would have been
recognized if this guidance had been applied from the issuance date of the
affected instruments. Early adoption is not permitted for reporting entities
that have previously established a different accounting policy for determining
whether an instrument is indexed to an entity’s own stock.
As of
October 31, 2009, we have warrants outstanding for the purchase of 2,717,391
shares of our Class A common stock that may no longer be afforded equity
treatment upon our adoption of this guidance on November 1, 2009. These warrants
have an exercise price of $0.15 per share, expire in June, 2013 and have
exercise price reset features. The aggregate fair value of these warrants, based
on the Black-Scholes option pricing model, was $52,734 as of October 31, 2009.
We are currently evaluating the impact this guidance will have on our financial
position and results of operations.
3.
Inventory
2009
|
2008
|
|||||||
Raw
materials
|
$ | 152,586 | $ | 150,670 | ||||
Finished
goods
|
126,366 | 156,535 | ||||||
Subtotal
|
278,952 | 307,205 | ||||||
Obsolescence
reserve
|
(8,838 | ) | (8,918 | ) | ||||
Total
inventory
|
$ | 270,114 | $ | 298,287 |
F-11
4.
Property and Equipment
2009
|
2008
|
|||||||
Furniture,
fixtures and leasehold improvements
|
$ | 2,931 | $ | 2,931 | ||||
Equipment
|
659,700 | 648,395 | ||||||
Leased
equipment
|
63,101 | 47,245 | ||||||
725,732 | 698,571 | |||||||
Less:
Accumulated depreciation
|
(679,893 | ) | (647,976 | ) | ||||
Property
and equipment - net
|
$ | 45,839 | $ | 50,595 |
5.
Patents
Patents
consisted of the following at October 31, 2009 and 2008:
2009
|
2008
|
|||||||
Patents
|
$ | 100,000 | $ | 100,000 | ||||
Less:
Accumulated amortization
|
(20,941 | ) | (11,149 | ) | ||||
Patents
- net
|
$ | 79,059 | $ | 88,851 |
Future
amortization expense for our patents for the next five fiscal years is as
follows:
Fiscal
Years Ending October 31,
|
Amount
|
|||
2010
|
$ | 9,792 | ||
2011
|
9,792 | |||
2012
|
9,792 | |||
2013
|
9,792 | |||
2014
|
9,792 |
6.
Accounts Payable and Accrued Expenses
Accounts
payable and accrued expenses consisted of the following at October 31, 2009 and
2008:
2009
|
2008
|
|||||||
Legal
fees
|
$ | 581,777 | $ | 567,157 | ||||
Deferred
compensation
|
589,259 | 127,614 | ||||||
Accounts
payable and other accrued expenses
|
384,473 | 465,556 | ||||||
Accrued
payable to a distributor
|
272,038 | 234,400 | ||||||
$ | 1,827,547 | $ | 1,394,727 |
F-12
7.
Income Taxes
The
benefit from income taxes reflected in the accompanying financial statements,
all of which is deferred, varies from the amounts that would have been computed
using statutory rates as follows:
Year Ended October 31, | ||||||||
2009
|
2008
|
|||||||
Federal
income taxes at the maximum
statutory rate
|
$ | 646,068 | $ | 725,618 | ||||
State
income taxes, net of federal
tax effect
|
87,409 | 98,172 | ||||||
Permanent
differences
|
8,741 | 7,249 | ||||||
Increase
in valuation allowance
|
(742,218 | ) | (831,039 | ) | ||||
Benefit
from income taxes
|
$ | - | $ | - |
2009
|
2008
|
|||||||
Stock-based
compensation
|
$ | 235,353 | $ | 180,103 | ||||
Fixed
asset basis difference
|
46,112 | 24,916 | ||||||
Receivables
excluded from income for income
|
||||||||
tax
reporting purposes
|
28,085 | 85,185 | ||||||
Accounts
payable and accrued expenses deducted
for financial
|
||||||||
statement
purposes, but not for income tax reporting
|
477,993 | 444,122 | ||||||
Net
operating loss carryforwards
|
5,854,715 | 5,149,232 | ||||||
Deferred
tax asset
|
6,642,258 | 5,883,558 | ||||||
Valuation
allowance
|
(6,642,258 | ) | (5,883,558 | ) | ||||
Total
|
$ | - | $ | - |
For
income tax purposes, the Company has net operating loss carryforwards of
approximately $15.2 million at October 31, 2009 that, subject to applicable
limitations, may be applied against future taxable income. If not utilized, the
net operating loss carryforwards will expire between 2022 and 2026.
8.
Share-Based Payments
Stock
Options and Stock Grants
The
Company has a 2002 Stock Incentive Plan and a 2003 Stock Incentive Plan (the
“Plans”). The Plans provide for the issuance of stock options and stock grants.
The 2002 Stock Incentive Plan permits the issuance of up to 3,500,000 shares
through December 31, 2011. The 2003 Stock Incentive Plan permits the issuance of
up to 25,000,000 shares through December 28, 2011, after subtracting any shares
issued under the 2002 Plan. The 2003 Plan also provides for specific numbers of
shares to be awarded upon the achievement of defined performance based
milestones. As of October 31, 2009, there are 10,463,207 shares available for
grant from the Plans.
During
the year ended October 31, 2009, the Company granted stock options for the
purchase of 3,650,000 Class A Common Shares with an aggregate grant date fair
value of $290,287. During the year ended October 31, 2008, the Company granted
3,435,000 stock options with an aggregate grant date fair value of $375,972. We
have a practice of issuing new stock to satisfy the exercises of stock options.
Stock options were granted with an exercise price equal to the market price of
the stock at the date of grant. Options granted were exercisable pursuant to
vesting schedules from immediate to four years.
F-13
CDEX
INC.
NOTES
TO FINANCIAL STATEMENTS (CONTINUED)
FOR
THE YEARS ENDED OCTOBER 31, 2009 AND 2008
Weighted
|
||||||||||||||||
Weighted
|
Average
|
|||||||||||||||
Number
of
|
Average
|
Remaining
|
Aggregate
|
|||||||||||||
Shares
|
Exercise
|
Contractual
|
Intrinsic
|
|||||||||||||
Issuable
|
Price
|
Term
(Years)
|
Value
|
|||||||||||||
Outstanding
at October 31, 2008
|
5,260,000 | $ | 0.17 | 3.26 | $ | 309,450 | ||||||||||
Options
Granted
|
3,650,000 | 0.10 | ||||||||||||||
Options
Cancelled/Forfeited
|
(4,306,250 | ) | 0.15 | |||||||||||||
Options
Expired
|
(150,000 | ) | 0.17 | |||||||||||||
Outstanding
at October 31, 2009
|
4,453,750 | 0.18 | ||||||||||||||
Options
vested or expected to vest
|
||||||||||||||||
at
October 31, 2009
|
4,453,750 | 0.18 | 4.18 | $ | 538,438 | |||||||||||
Exercisable
at October 31, 2009
|
2,357,500 | 0.20 | 2.05 | $ | 332,688 |
Total
compensation expense related to stock awards for employees and consultants was
$143,135 and $103,540 for the years ended October 31, 2009 and 2008,
respectively. Upon termination, the Company has the option to purchase any
vested shares from the employees at fair market value. As of October 31, 2009,
there were 715,000 options outstanding that were held by external
consultants.
The fair
value of option awards was estimated using the Black-Scholes option pricing
model with the following assumptions and weighted average fair values:
For the Year Ended October 31, | |||||
2009
|
2008
|
||||
Weighted
average grant date fair value
|
$0.08
|
$0.11
|
|||
Expected
volatility
|
75%
|
75%
|
|||
Expected
dividends
|
0%
|
0%
|
|||
Expected
term (years)
|
1.0
- 3.25
|
1.0
- 3.5
|
|||
Risk
free rate
|
0.51%
- 4.19%
|
0.49%
- 2.80%
|
Warrants
The
following summarizes activity for fiscal 2009 for outstanding warrants to
purchase our common stock:
Weighted
|
||||||||
Number
of
|
Average
|
|||||||
Shares
|
Exercise
|
|||||||
Issuable
|
Price
|
|||||||
Outstanding
at October 31, 2008
|
15,533,617 | $ | 0.24 | |||||
Issued
|
1,527,741 | 0.21 | ||||||
Expired
|
(7,963,336 | ) | 0.24 | |||||
Forfeited
|
(2,363,636 | ) | 0.22 | |||||
Outstanding
at October 31, 2009
|
6,734,386 | 0.24 |
F-14
9.
Notes Payable
Our notes
payable consisted of the following at October 31, 2009 and 2008:
2009
|
2008
|
|||||||
Gemini
Master Fund, Ltd.12% convertible note with warrants,
|
||||||||
net
of discount of $84,749 and $321,339 as of October 31, 2009
|
||||||||
and
2008, respectively
|
$ | 1,078,313 | $ | 798,495 | ||||
Note
payable to an entity controlled by our CEO - interest at 9% to
10%,
|
||||||||
convertible
with warrants
|
191,485 | 116,042 | ||||||
Tangiers
Capital, LLC, 9.9% convertible note
|
- | 69,150 | ||||||
Note
payable to Pemco LLC - interest at 12%, convertible with
warrants
|
63,041 | - | ||||||
12%
notes convertible into stock and warrants
|
199,820 | - | ||||||
Total
Notes Payable
|
1,532,659 | 983,687 | ||||||
Less:
Current portion
|
1,297,456 | 614,231 | ||||||
Long-term
portion
|
$ | 235,203 | $ | 369,456 |
As of
October 31, 2009 and 2008, we had outstanding convertible notes payable due to
Gemini Master Fund, Ltd. (“Gemini”). These notes are unsecured, were
originally issued in June 2008, are convertible into shares of our Series A
Common Stock at a rate of $0.30 per share and bear interest at a rate of 12.0%
per annum. These notes have monthly redemptions commencing after six months from
the date of issue, which are based on a 24 month amortization period, with the
final payment due June 25, 2010. In connection with this note issuance, we also
issued 2,717,391 warrants to Gemini that are exercisable for $0.375 per share
for five years from the date of issuance. The note and the warrants contain
anti-dilution clauses whereby, (subject to the exceptions contained in those
instruments) if the Company issues equity securities or securities convertible
into equity at a price below the respective conversion price of the note or
exercise price of the warrant, such conversion and exercise prices shall be
adjusted downward to equal the price of the new securities.
The
Company has determined the Gemini convertible debenture contains a beneficial
conversion feature. The estimated fair value of the detachable warrants of
$359,782 has been determined using the Black-Scholes option pricing model with
the following assumptions: (i) stock price volatility of 75%; (ii) risk free
interest rate of 4.21%; (iii) dividend yield of 0%; and (iv) a term of two
years. The original face amount of the convertible note of $1,086,957 was
proportionately allocated to the note and the warrants in the amount of $785,107
and $301,850, respectively. The convertible note proportionate allocated value
of $785,107 was then further allocated between the note and the beneficial
conversion feature. The fair value of the beneficial conversion feature was
determined to be $144,928 and the remaining value of $640,179 was allocated to
the convertible note. The combined total value of the warrant and beneficial
conversion feature of $446,778 has been accounted for as a debt discount that is
being amortized and treated as interest expense over the term of the convertible
debenture under the effective interest method.
As of
October 31, 2008, we had outstanding convertible notes payable due to Tangiers
Capital, LLC (“Tangiers”). These notes were due April 8, 2010 and
bore interest at a rate of 9.9% per annum. As described in Note 10,
during fiscal 2009, these notes were converted to shares of our Series A Common
Stock.
As of
October 31, 2009 and 2008, we have several convertible notes payable due to both
related parties and outside investors that bear interests at rates of 9.0% to
12.0% per annum. These notes are unsecured and are due 12 to 24
months from the date of issuance.
F-15
During
fiscal 2009, we issued several of these convertible notes payable, which are
summarized as follows:
|
·
|
During
the three months ended January 31, 2009, the Company received $87,700 in
proceeds under a number of 10.0%, 12 month convertible notes payable with
an entity controlled by our CEO. These notes are convertible at any time
on terms given to Gemini Master Fund or the best terms given to an
investor during the twelve months following the loan date, including
warrants. However, the note holder shall receive the lowest price that
does not cause a decrease in the conversion price or exercise price of the
Gemini Convertible Note or Common Stock Purchase
Warrant.
|
|
·
|
During
the three months ended January 31, 2009, the Company received $25,100 in
proceeds under a 12.0%, 12 month convertible note payable with an existing
investor. These notes are convertible and into stock and warrants with
terms similar to those above.
|
|
·
|
During
the three months ended April 30, 2009, the Company received $10,050 in
proceeds under a 10.0%, 12 month convertible note payable with an entity
controlled by our CEO. These notes are convertible and into
stock and warrants with terms similar to those
above.
|
|
·
|
During
the three months ended April 30, 2009, the Company received $25,100 in
proceeds under a 12.0%, 12 month convertible note payable with an existing
investor. These notes are convertible into stock and warrants with terms
similar to those above.
|
|
·
|
During
the three months ended July 31, 2009, the Company received $105,600 in
proceeds under 12.0%, 24 month convertible notes with existing
shareholders. These notes are convertible and into stock and warrants with
terms similar to those above.
|
|
·
|
During
the three months ended October 31, 2009, the Company received $96,250 in
proceeds under 12.0%, 24 month convertible notes with existing
shareholders. These notes are convertible and into stock and warrants with
terms similar to those above.
|
During
the fiscal year ended October 31, 2008, an entity controlled by our CEO loaned
the Company $75,150. The notes pay interest at the rate of 10% per year, are
convertible into common stock and warrants and are payable upon demand or
matures twelve months from the date of the loan. In addition, the Company issued
to this same entity, 1,259,167 shares of Class A common stock and an equal
number of two year warrants as payment of four notes payable and accrued
interest in the amount of $151,000 or $0.12 share. The warrants have an exercise
price of $0.24 per share.
The
following table provides information relative to the contractual maturities of
our outstanding notes payable as of October 31, 2009:
Fiscal
Years Ending October 31,
|
Amount
|
|||
2010
|
$ | 1,352,699 | ||
2011
|
235,203 | |||
Subtotal
|
1,587,902 | |||
Discount
|
(55,243 | ) | ||
$ | 1,532,659 |
F-16
Subsequent
to October 31, 2009, we received the following funds under convertible notes
payable agreements:
|
·
|
During
December 2009, the Company received $24,700 in proceeds under 12.0%, 24
month convertible notes payable with an entity controlled our CEO and an
additional $10,100 in proceeds under similar convertible notes payable
with other Directors. In January 2010, the Company received $25,100 in
proceeds under similar convertible notes payable with an entity controlled
by our CEO and an additional $5,050 in proceeds from another Director.
These convertible notes are convertible at the option of the note holders
into common stock and warrants. The price for the stock and warrants in
the conversion of these notes will be equal to the corresponding
conversion price provided to Gemini, in the Gemini/ CDEX 12% Senior
Convertible Note or Common Stock Purchase Warrant, both originally issued
on June 25, 2008, or the best terms given to any investor during the 12
months following the note date. However, the note holders shall only
receive the best terms that do not result in a resetting of conversion or
warrant prices or a penalty associated with the Gemini
note.
|
|
·
|
During
February 2010, the Company entered into a Securities Purchase Agreement
with its largest creditor, Gemini, and with three other investors
including an entity controlled by our CEO. Included in the agreement is
the restructuring of the June 25, 2008 Senior Convertible Note held by
Gemini where $1,151,100 of outstanding principal and accrued interest was
capitalized into a new note bearing interest at 10% and convertible into
Class A common stock at the rate of $0.05 per share for the first $800,000
of principal converted, and $0.08 per share for converted balances in
excess of $800,000. The note matures on February 1, 2012, but has
accelerated payment provisions and a contingent security interest, if
certain financial milestones are not met. Additionally because of
the restructuring, the common Stock Purchase Warrant issued on June 25,
2008 to Gemini was adjusted. Included in the restructuring was a $450,000
cash infusion consisting of $200,000 from an entity controlled by our CEO
and $250,000 from two other investors, for which the Company issued notes
similar to that issued to Gemini. Additionally, as a part of
this restructuring, $247,115 of principal and accrued interest of existing
Convertible Notes Payables held by an entity controlled by our CEO were
consolidated and converted into a new convertible note similar to that
issued to Gemini.
|
|
·
|
During
March 2010, the Company, as a part of the February restructuring,
converted $132,989 and $15,462 of principal and accrued interest of
existing Convertible Notes Payables held by two investors and two
directors, respectively, into new notes similar to that issued to
Gemini.
|
10.
Stockholders’ Equity
During
fiscal 2009, the Company was a party to the following transactions that affected
our stockholders’ equity:
|
·
|
The
Company granted 30,000 restricted Class A common shares at $0.095 per
share to settle an outstanding balance of
$2,846.
|
|
·
|
We
sold 1,650,000 shares of restricted Class A common stock to seven
investors for $175,000, or approximately $0.11 per share, and warrants for
the purchase of 825,000 shares of restricted Class A common stock with an
average exercise price of approximately $0.21 per
share.
|
|
·
|
We
sold 250,000 shares of restricted Class A common stock to a director for
$25,000, or $0.10 per share and a warrant for the purchase of 125,000
shares of restricted Class A common stock with an exercise price of $0.20
per share.
|
|
·
|
We
sold to a new investor, Pemco LLC, 500,000 shares of restricted Class A
common stock for $50,000, or $0.10 per share and a warrant for the
purchase of 250,000 shares of restricted Class A common stock, with an
exercise price of $0.20.
|
F-17
|
·
|
During
the three months ended April 30, 2009, Tangiers Capital, LLC converted its
2008 note payable and accrued interest in the amount of $20,170 into
413,909 Class A common shares, or approximately $0.05 per share based on a
Variable Rate Transaction formula. During the three months ended January
31, 2009, Tangiers Capital, LLC converted principal portions of its note
payable amount of $50,000 into 819,994 Class A common shares, or
approximately $0.06 per share.
|
|
·
|
During
the three months ended April 30, 2009, Gemini converted a portion of its
note payable and accrued interest in the amount of $100,000 into 1,000,000
Class A common shares, or approximately $0.10 per
share.
|
|
·
|
During
the three months ended April 30, 2009, an entity controlled our CEO
converted two notes payable and accrued interest in the amount of $28,603
into 238,359 Class A common shares, or $0.12 per share, and a warrant for
the purchase of 238,359 shares of restricted Class A common stock, with an
exercise price of $0.24 per share. During the three months ended January
31, 2009, an entity controlled our CEO converted a note payable and
accrued interest in the amount of $10,726 into 89,381 Class A common
shares, or $0.12 per share and a warrant for the purchase of 89,381 shares
of restricted Class A common stock, with an exercise price of $0.24 per
share.
|
During
the fiscal year ended October 31, 2008, the Company sold to several investors
825,928 shares of restricted Class A common stock for $268,520, or $0.33 per
share. Several investors exercised 3,953,847 warrants for an aggregate amount of
$698,805, or $0.18 per share. The Company granted 1,000,500 restricted Class A
common shares to five consultants at prices of $0.30 per share and $0.33 per
share as part of negotiated settlement agreements. Various notes payable in the
aggregate amount of $67,692 were converted into 568,004 Class A common shares,
or $0.12 per share and an equal number of two year warrants. The warrants have
an exercise price of $0.24 per share. Several individuals exercised 210,000
stock options for an aggregate amount of $31,950, or $0.15 per share. An entity
controlled by our CEO converted notes payable of $102,541 into 854,507 shares of
Class A common shares, or $0.12 per share and an equal number of two year
warrants with an exercise price of $0.24. Two directors converted notes payable
of $31,896 into 265,798 shares of Class A common shares, or $0.12 per share and
an equal number of two year warrants with an exercise price of
$0.24.
Subsequent
to October 31, 2009 and during January 2010, Gemini converted a portion of its
note payable and accrued interest in the amount of $50,000 into 1,000,000 Class
A common shares, or approximately $0.05 per share.
11.
Commitments and Contingencies
Operating
Leases
The
Company leases approximately 3,000 square feet of office and laboratory space in
Tucson, Arizona on a month-to-month basis. Monthly rent as of October 31, 2009
is approximately $2,600. Total rent expense was approximately $49,000 and
$66,000 for the years ended October 31, 2009 and 2008,
respectively.
Litigation
We may
from time to time be involved in legal proceedings arising from the normal
course of business. In June 2008, a lawsuit was filed by Hutchinson &
Steffen in a Nevada District Court, Clark County, against the Company, alleging,
among other things, breach of contract. On July 2, 2008, Hutchinson &
Steffen and the Company entered into a settlement agreement, staying the legal
proceedings pending completion of the terms of the settlement agreement. As of
the date of this report, we have not received notice of any other legal
proceedings regarding Hutchinson & Steffen.
On July
20, 2009, a former employee filed a complaint with the Attorney General of
Arizona that CDEX discriminated against that employee because he did not attend
a bible study held by some employees. As no amount of potential loss is both
probable and estimable, no accrual has been made in the financial statements as
of October 31, 2009 and October 31, 2008. In the opinion of management, this
claim is without merit and the Company will be successful in its defense of this
complaint.
F-18
In July
2009, two employees filed claims in the Pima County Justice Court for payment of
their deferred wages totaling approximately $9,000. CDEX had accrued a provision
for possible settlement of these claims in the financial statements as of
October 31, 2009. The court ruled that the Pima County Justice Court was not the
correct venue for the case because the employment contracts for these employees
specified that all disputes would be determined in accordance with the rules of
the American Arbitration Association. CDEX has not received any further actions
regarding these claims.
In August
2009, four former employees and one former contractor filed demands for
arbitration with the American Arbitration Association related to deferred wages
of approximately $89,000 and other issues. Management disputes the amount of the
claim and has accrued a provision for possible settlement of this dispute in the
financial statements as of October 31, 2009. We intend to vigorously defend the
case.
Due to
the lack of liquidity, the Company is in arrears on a substantial number of its
financial obligations. To date, most creditors have been willing to renegotiate
the obligations as they become due or forestall any recourse they may have to
collect their debts. However, should any of these creditors pursue recourse, the
Company may not be able to continue as a going concern.
12.
Selected Quarterly Financial Data (Unaudited)
The following table summarizes the unaudited quarterly
results of operations as reported for fiscal 2009 and 2008:
Fiscal
Year Ended October 31, 2009
|
||||||||||||||||
First
|
Second
|
Third
|
Fourth
|
|||||||||||||
Quarter
|
Quarter
|
Quarter
|
Quarter
|
|||||||||||||
Revenue
|
$ | 157,469 | $ | 95,918 | $ | 44,388 | $ | 182,664 | ||||||||
Gross
profit
|
114,902 | 79,457 | 31,478 | 148,931 | ||||||||||||
Loss
from operations
|
(560,222 | ) | (446,355 | ) | (227,523 | ) | (28,483 | ) | ||||||||
Net
loss
|
(702,689 | ) | (588,091 | ) | (392,964 | ) | (166,456 | ) | ||||||||
Basic
and diluted net
|
||||||||||||||||
loss
per common share
|
(0.01 | ) | (0.01 | ) | (0.01 | ) | - | |||||||||
Basic
and diluted weighted
|
||||||||||||||||
average
common
|
||||||||||||||||
shares
outstanding
|
59,658,324 | 62,936,781 | 63,209,634 | 64,224,634 |
Fiscal
Year Ended October 31, 2008
|
||||||||||||||||
First
|
Second
|
Third
|
Fourth
|
|||||||||||||
Quarter
|
Quarter
|
Quarter
|
Quarter
|
|||||||||||||
Revenue
|
$ | 183,096 | $ | 220,377 | $ | 151,887 | $ | 280,404 | ||||||||
Gross
profit
|
145,365 | 180,135 | 107,922 | 182,026 | ||||||||||||
Loss
from operations
|
(452,852 | ) | (453,444 | ) | (587,920 | ) | (432,721 | ) | ||||||||
Net
loss
|
(457,387 | ) | (457,957 | ) | (631,834 | ) | (586,994 | ) | ||||||||
Basic
and diluted net
|
||||||||||||||||
loss
per common share
|
(0.01 | ) | (0.01 | ) | (0.01 | ) | (0.01 | ) | ||||||||
Basic
and diluted weighted
|
||||||||||||||||
average
common
|
||||||||||||||||
shares
outstanding
|
52,685,778 | 54,444,559 | 57,247,193 | 59,090,877 |
F-19
13.
Going Concern
The
Company has incurred losses since its inception of approximately $29.7 million
and has had limited product sales from its inception through fiscal 2009. The
Company plans to raise cash to fund its operations and pay its outstanding
obligations from credit facilities or the sale of its securities in the future.
Nonetheless, there can be no guarantee that the Company will be able to raise
cash or maintain its current workforce through any of these plans.
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. The Company's
ability to continue as a going concern and meet its obligations as they come due
is dependent upon its ability to raise sufficient cash as discussed above. The
Company's continued operations, as well as the implementation of our business
plan, will depend upon its ability to raise additional funds through bank
borrowings, equity or debt financing. The Company continues to seek prospective
investors who may provide some of this funding. The Company also anticipates it
will need to maintain its current workforce to achieve commercially viable sales
levels. There can be no guarantee that these needs will be met or that
sufficient cash will be raised to permit operations to continue. Should the
Company be unable to raise sufficient cash to continue operations at a level
necessary to achieve commercially viable sales levels, the liquidation value of
the Company's assets may be substantially less than the balances reflected in
the financial statements and the Company may be unable to pay its creditors.
There is no assurance that the Company will succeed in these fund-raising
efforts. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
During
fiscal 2009, the Company received $599,800 in funding, comprised
of:
|
·
|
$349,800
from the net proceeds from 23 notes payable. These notes bear interest
from 10% to 12% and have maturities up to two
years.
|
|
·
|
$250,000
from the sale of 2,400,000 shares of restricted Class A common stock at an
average price of approximately $0.10 per share. Investors who purchased
682,143 of these shares received warrants to purchase up to 1,200,000
shares at a weighted average exercise price of approximately $0.20 per
share for a two year period from the effective dates of the share
purchases.
|
Subsequent
to fiscal 2009 to the date of this filing, we received additional funds and
restructured our outstanding debt with Gemini. These transactions are more fully
described in Note 9.
F-20