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 currently being traded on the OTCBB under the symbol "CEXI.OB." 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:
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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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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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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).
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The Company is also exploring unique opportunities in select markets verticals where its proprietary technology may provide low cost/ realtime solutions to a growing concern such as conducting urine, blood and saliva analysis for detecting illegal drugs and performance enhancement substances.
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.
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 Radio Frequency Identification (or RFID) tags, all of which can be defeated by determined counterfeiters.
Products
We are currently focusing our resources on marketing and improving real-time (within seconds) chemical detection products using proprietary, patented and patents pending technologies. Our primary focus in 2011 was the development and enhancement of our ValiMed system and ID2 products for use in the medical and security markets with our principal product lines noted below. The Company continues to explore unique opportunities where its proprietary technology may provide low cost/real time solutions to growing security or liability concerns such as conducting urine, blood and saliva analysis for detecting illegal drugs and performance enhancement substances in the work place or sporting environment.
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Healthcare Market.
ValiMed™ Medication Validation System (MVS) Product Line - The ValiMed line has been fully redesigned in 2011 with the launch of the fourth generation ValiMed (“VG4”). The ValiMed G4 drug validation system helps healthcare providers ensure patient safety and control costs by reducing medication errors. The patented detection process identifies drug strengths and volume-by-weight in real-time, validating proper dose, diluents and concentration of high-risk compounded medications and treatment solutions. The VG4 device will help healthcare facilities comply with Joint Commission on Accreditation of Healthcare Organizations compliance requirements and United States Pharmacopeia's General Chapter 797 Pharmaceutical Compounding-Sterile Preparations (“USP 797”) guidelines for compounding sterile preparations and integrate with electronic medical record platforms. 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 medications, with an emphasis on, but not limited to high risk medications; (ii) harmful counterfeit medications and (iii) diversion of hospital narcotics. In the near future, we expect this product line to address multi compounded cocktails, such as total parenteral nutrition and Oncology admixtures.
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Security Market.
CDEX ID2™ Product Line - real time detection of specified illegal drugs. This product line currently comprises two instruments. Both of the devices are hand held models that detect methamphetamine. The ID2 Meth Scanner is a device that is used for the detection of methamphetamine in the home inspection and remediation industries, as well as by housing authorities and the hotel industry. The Pocket ID2 is a pocket sized hand held device that currently detects visible and prosecutable quantities of methamphetamine, with other drugs such as cocaine, heroin, OxyContin and Ecstasy expected to come in the near future. We are currently in the early stages of applying the ValiMed technology to a table top device that is expected to be portable and able to detect trace amounts of specified illegal drugs and explosives in virtually real time. The products mentioned above will most likely be of interest by all areas of law enforcement, such as police and sheriff departments, U.S. border patrol, port authorities, the TSA, the FBI, all of the U.S. Military, and many other agencies.
2011 Year in Review
This past year at CDEX achieved many key milestones as we continued to execute our turnaround and growth strategy. We dramatically improved our financial position by decreasing our debt and operating expenses while increasing working capital and cash flow through product sales and development agreements. We also made significant progress in developing and launching new and improved products in both of our safety and healthcare divisions.
Our safety division saw the launch of our new Pocket ID2 coupled with an improved version of our ID2 Meth Scanner. We continued build awareness for our drug detection products with law enforcement agencies across North America garnering new sales from both the Pocket ID2 and the ID2 Meth scanner. The Company is currently developing the Pocket ID2 for testing of Cocaine and other illicit substances, which will further enhance and advance its capabilities in the future allowing future market diversification.
Our healthcare safety division launched an improved version of our ValiMed drug validation system with the recent launch and commercial production of our ValiMed™ G4 system. We showcased the system at several leading industry events, where national and international healthcare industry professionals where able to view the power of our technology. We believe we are the first to commercialize an affordable advanced measuring system, with a real-time solution for parenteral admixtures that will enhance and improve the quality of care that pharmacies and clinical professionals provide. The ValiMed G4 system significantly raises the bar for patient medication safety and pharmaceutical drug loss prevention. The ValiMed G4 system provides cutting edge features and benefits over existing systems available in the market. In addition to validating high-risk medications before leaving the clinical or pharmacy environment, the ValiMed G4 will also monitor and discourage the diversion of controlled substances by validating the returned or unused narcotics from patient treatment areas or surgery suites. Other applications for the ValiMed G4 system which we are currently evaluating include counterfeit medication identification, product supply chain validation and validation of drug shelf life stability. Additionally, CDEX’ technology can be applied to the analysis of blood, urine, saliva, and other bodily fluids. Preliminary data suggests that our technology provides many advantages over current diagnostics techniques, including the ability to detect lower molecular concentrations, increased sensitivity and specificity, and real-time analysis.
Overall we are very pleased with our progress as a company over the past year. We will continue to monitor our operating costs, while focusing on our sales pipeline for both divisions.
Research and Development (“R&D”)
R&D efforts were primarily directed towards continued refining and expansion of the ValiMed G4 and our ID2 product line with the enhanced ability to calibrate the Meth Scanner to detect specific levels of methamphetamine according to each individual State standard, and the creation of the Pocket ID2 for law enforcement
We have historically outsourced certain engineering and manufacturing tasks while retaining control of critical technology and will continue this practice as this allows us to focus on improving our technologies while providing the opportunity to scale quickly as we generate sales. 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. R&D costs were $146,718 for fiscal 2011 compared to $109,952 for fiscal 2010.
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 recent 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.
(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.
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.
We are subject to Regulation 14A of the Securities Exchange Act of 1934, as amended (the “1934 Act”), which regulates proxy solicitations. Section 14(a) requires all companies with securities registered pursuant to Section 12(g) thereof to comply with the rules and regulations of the Commission regarding proxy solicitations, as outlined in Regulation 14A. Matters submitted to stockholders at a special or annual meeting thereof or pursuant to a written consent will require us to provide our stockholders with the information outlined in Schedules 14A or 14C of Regulation 14; preliminary copies of this information must be submitted to the Commission at least 10 days prior to the date that definitive copies of this information are forwarded to stockholders.
We are also required to file annual reports on Form 10-K and quarterly reports on Form 10-Q with the Commission on a regular basis, and will be required to timely disclose certain events (e.g., changes in corporate control; acquisitions or dispositions of a significant amount of assets other than in the ordinary course of business; and bankruptcy) in a Current Report on Form 8-K.
We believe that these reporting obligations will increase our annual legal and accounting costs.
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.
Cost of Compliance with Environmental Laws
At this time our business activities are not subject to any environmental laws or governmental regulation nor do we anticipate that our future business activities will subject us to any environmental compliance regulations.
Employees
At January 17, 2012, the Company had five full time employees and contractors.
ITEM 1A.
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.
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 2011 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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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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difficulty in keeping current with changing technologies;
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unexpected delays in introducing new products, new product features and services;
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increased costs and expenses, whether related to sales and marketing, manufacturing, product development or administration;
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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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the mix of product license and services revenue; and
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costs related to possible acquisitions of technologies or businesses.
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.
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. 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.
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, plan to do in-house production manufacturing of our products and we currently do limited in-house assembly and primarily outsource the production manufacturing/assembly of our products. In the future, we may consider different possibilities for bringing 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.
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 may 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.
THERE MAY BE CONFLICTS OF INTEREST BETWEEN OUR MANAGEMENT AND THE COMPANY.
Conflicts of interest create the risk that management may have an incentive to act adversely to the interests of the Company. A conflict of interest may arise between the Company’s management’s personal pecuniary interest and their fiduciary duty to our stockholders.
WE DO NOT HAVE LONG-TERM AGREEMENTS WITH MANUFACTURERS AND SUPPLIERS.
We presently order our components that make up our products on a purchase order basis from manufacturers and suppliers, and we do not have long-term manufacturing agreements with any of them. The absence of long-term agreements means that, with little or no notice, our manufacturers and suppliers could refuse to manufacture some or all of our product components, reduce the number of units that they will manufacture or change the terms under which they manufacture. If our manufacturers and suppliers stop manufacturing, we may be unable to find alternative manufacturers or suppliers on a timely or cost-effective basis, if at all, which would harm our operating results. In addition, if any of our manufacturers or suppliers change the terms under which they manufacture for us, our costs could increase and our profitability would suffer.
OUR STOCK PRICE MAY BE VOLATILE.
The market price of our common stock will likely fluctuate significantly in response to the following factors, some of which are beyond our control: variations in our quarterly operating results; changes in financial estimates of our revenues and operating results by securities analysts; changes in market valuations; announcements by us of significant contracts, acquisitions, strategic partnerships, joint ventures or capital commitments; additions or departures of key personnel; future sales of our common stock; stock market price and volume fluctuations attributable to inconsistent trading volume levels of our stock; commencement of or involvement in litigation.
IF WE ARE SUBJECT TO SEC REGULATIONS RELATING TO LOW-PRICED STOCKS, THE MARKET FOR OUR COMMON STOCK COULD BE ADVERSELY AFFECTED.
The Securities and Exchange Commission has adopted regulations concerning low-priced (or “penny”) stocks. The regulations generally define “penny stock” to be any equity security that has a market price less than $5.00 per share, subject to certain exceptions. Our stock is classified as a penny stock.
The penny stock regulations require that broker-dealers, who recommend penny stocks to persons other than institutional accredited investors make a special suitability determination for the purchaser, receive the purchaser’s written agreement to the transaction prior to the sale and provide the purchaser with risk disclosure documents that identify risks associated with investing in penny stocks. Furthermore, the broker-dealer must obtain a signed and dated acknowledgment from the purchaser demonstrating that the purchaser has actually received the required risk disclosure document before effecting a transaction in penny stock. These requirements have historically resulted in reducing the level of trading activity in securities that become subject to the penny stock rules.
The additional burdens imposed upon broker-dealers by these penny stock requirements may discourage broker-dealers from effecting transactions in the common stock, which could severely limit the market liquidity of our common stock and our shareholders’ ability to sell our common stock in the secondary market.
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.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2.
ITEM 2. PROPERTIES
The Company leases approximately 3,000 square feet of office, manufacturing and laboratory space in Tucson, Arizona on a month-to-month basis. Monthly rent as of October 31, 2011 is approximately $1,500. Total rent expense was approximately $20,000 and $32,000 for the years ended October 31, 2011 and 2010, respectively.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
We may from time to time be involved in legal proceedings arising from the normal course of business. As of the date of this report, we have not received notice of any new legal proceedings.
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.
ITEM 4. REMOVED AND RESERVED
PART II
ITEM 5.
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." 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, a 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:
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.
Stockholders
As of January 17, 2012, there were approximately 1,500 holders of record of our Class A common stock. However, a large number of our shareholders hold their shares in "street name" in 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.
Securities Authorized for Issuance Under Equity Compensation Plans
The following table details information regarding our existing equity compensation plans as of October 31, 2011:
Sales of Unregistered Securities and Use of Proceeds
During the fourth quarter of fiscal year 2011, as a part of the Company’s Board of Director 2010 Compensation Plan, the Company granted 224,344 restricted Class A common shares each to its directors Robert H. Foglesong and Frank E. Wren and 199,344 restricted Class A common shares each to its directors and Brian M. Jenkins and James G. Stevenson. Additionally, as a part of the Oncology Distribution Agreement, the Company issued 230,100 unrestricted Class A common shares and 613,600 restricted Class A common shares to the holders of the Oncology Distribution agreements for the quarterly 3% required equity distribution and 8,670,000 restricted Class A common shares to the holders of the Oncology Distribution agreements on the termination of the agreements.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.
ITEM 7.
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 2011 compared to fiscal 2010:
Revenue was $516,322 and $408,774 for the fiscal years ended October 31, 2011 and 2010, respectively, an increase of $107,548 or 26%. This increase was primarily attributable to amortized income from the oncology licensing agreement, an increase in sales of our ID2 Meth Scanner and an increase in our Pay Per Use revenue, partially offset by a decrease in sales of our ValiMed product and the associated installation and training revenue.
Cost of revenue was $173,193 and $61,724 for the fiscal years ended October 31, 2011 and 2010, respectively, an increase of $111,469 or 181%. This increase was primarily attributable to the amortization of non-cash costs of our oncology licensing agreement and higher material costs of our products. Gross profit margins decreased to 67% in fiscal 2011 from 85% in fiscal 2010.
Termination of oncology agreement is the revenue earned upon the termination of the Oncology Distribution Agreement of $364,833 netted against the non-cash expense associated with the termination of $433,500.
Selling, general and administrative expense was $839,393 and $1,204,546 for the fiscal years ended October 31, 2011 and 2010, respectively, a decrease of $365,153 or 30%. This decrease primarily relates to a decrease in legal and professional expenses of approximately $293,000, which includes the 2010 accrual for the decision imposed on the Company by arbitration with four former employees and one former contractor over deferred wages, decreases in compensation of approximately $207,000, travel and marketing of $22,000, and a decrease in rent of $11,000. These decreases were partially offset by an increase in non-cash share-based compensation expenses of $180,000.
Research and development expense was $146,718 and $109,952 for the fiscal years ended October 31, 2011 and 2010, respectively, an increase of $36,766 or 33%. The increase primarily relates to an increase in employee and consultant compensation expense of approximately $24,000 and an increase in expenditures for research and development materials of approximately $14,000. These increases are reflective of our renewed focus on further development of our products
Total other expense was $845,223 and $757,609 for the fiscal years ended October 31, 2011 and 2010, respectively. This increase in fiscal 2011 was primarily the result the non-cash amortization of note payable discount due to increased note discount values in fiscal 2011 and higher interest expense fiscal 2011 compared to fiscal 2010.
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, 2011, we had negative working capital of $2,077,088 including $45,514 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 borrowings and equity or debt financings. 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 and 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.
We had a net decrease in cash of $267,330 during fiscal year ended October 31, 2011. We used net cash of $323,948 in operating activities during fiscal 2011 primarily related to our net loss of $1,556,873, a decrease of current liabilities of $429,206 and an increase in inventory of $25,378, partially offset by noncash note discount amortization of $569,911, shares issued under oncology agreement of $475,685, non-cash share-based compensation of $313,534, non-cash interest expense of $275,312 and depreciation and amortization of $38,074.
For fiscal 2011 our cash flows from investing activities consisted of the purchase of equipment for $17,368.
Net cash provided by financing activities was $73,986, for fiscal 2011, primarily from $100,000 proceeds from the issuance of a note 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 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.
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.
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 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 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 May 2011, the FASB issued ASU 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (“ASU 2011-04”). ASU 2011-04 is intended to result in convergence between GAAP and International Financial Reporting Standards (“IFRS”) requirements for measurement of and disclosures about fair value. The amendments are not expected to have a significant impact on companies applying GAAP. Key provisions of the amendment include: a prohibition on grouping financial instruments for purposes of determining fair value, except when an entity manages market and credit risks on the basis of the entity’s net exposure to the group; an extension of the prohibition against the use of a blockage factor to all fair value measurements (that prohibition currently applies only to financial instruments with quoted prices in active markets); and a requirement that for recurring Level 3 fair value measurements, entities disclose quantitative information about unobservable inputs, a description of the valuation process used and qualitative details about the sensitivity of the measurements. In addition, for items not carried at fair value but for which fair value is disclosed, entities will be required to disclose the level within the fair value hierarchy that applies to the fair value measurement disclosed. ASU 2011-04 is effective for interim and annual periods beginning after December 15, 2011. The Company will adopt these standards on February 1, 2012 and does not expect the adoption to have a material impact on its consolidated financial statements.
In September 2011, the FASB issued ASU 2011-08, Intangibles-Goodwill and Other (Topic 350), Testing Goodwill for Impairment (“ASU 2011-08”), to allow entities to use a qualitative approach to test goodwill for impairment. ASU 2011-08 permits an entity to first perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If it is concluded that this is the case, it is necessary to perform the currently prescribed two-step goodwill impairment test. Otherwise, the two-step goodwill impairment test is not required. ASU 2011-08 is effective for the Company beginning October 1, 2012, and earlier adoption is permitted. The Company is currently evaluating the impact of the pending adoption of ASU 2011-08 and does not expect the adoption to have a material impact on its consolidated financial statements on its consolidated financial statements.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.
ITEM 8.
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.
ITEM 9.
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.
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.
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, 2011. 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, management concluded that internal control over financial reporting was not effective based on criteria set forth by the COSO. The material weaknesses identified in internal control over financial reporting at October 31, 2011 included the Company’s inability to maintain the proper protection of its accounting system database records and required improvements over the Company’s oversight of processing financing transactions relative to the Company’s notes payable and equity. Concerning this material weakness, management continues to examine the Company’s procedures to include compensating controls to minimize the risk associated with having limited resources.
Notwithstanding these material weaknesses, management believes that the Company’s financial condition, results of operations and cash flows presented in this annual report are fairly presented in all material respects. Management bases its conclusion on our ability to substantiate, with a high degree of confidence, the small number of significant general ledger accounts that comprise the Company’s 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, 2011.
Changes in Internal Controls Over Financial Reporting
There has been no change in CDEX’ internal control over financial reporting for the quarter ended October 31, 2011 that materially affected, or is reasonably likely to materially affect our internal control over financial reporting.
ITEM 9B.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The following table sets forth information regarding our executive officers and directors as of January 17, 2012:
TERM OF OFFICE
All of our Directors hold office until the next annual general meeting of the stockholders or until their successors are elected and qualified. We ask our Directors to be willing to serve on the Board for a minimum of three years. Our officers are appointed by our board of Directors and hold office until their earlier death, retirement, resignation or removal.
The following is a summary of the business experience of each of our executive officers and directors:
Jeffrey K. Brumfield has been our Chairman of the Board of Directors and Chief Executive Officer since August 30, 2010.
•
Mr. Brumfield has over 30 years business development experience founding and operating multiple businesses in several industries including: real-estate development, mortgage brokerage business, commercial and residential construction and retail merchandise.
•
Mr. Brumfield has been an investor in CDEX since 2004.
•
Mr. Brumfield is an avid philanthropist and supporter of the Boys and Girls Club of America.
•
Mr. On December 29, 2010, Mr. Brumfield filed a voluntary petition in the United States Bankruptcy Court for the Southern District of California seeking relief under the provisions of Chapter 7 of Title 11 of the United States Code due to personal circumstances unrelated to the Company.
Stephen A. McCommon has served as our Chief Financial Officer since November 2008.
•
Mr. McCommon was President of TMC Financial Services, LLC, a financial consulting company, from December 2007 to November 2008.
•
Mr. McCommon was the Vice President of Finance and Chief Accounting Officer at Applied Energetics, Inc. (AERG.OB) from March 2005 to December 2007 and was the Accounting Manager at Applied Energetics from July 2004 to March 2005.
•
Mr. McCommon has over 27 years experience in financial reporting and internal auditing for publicly held companies with additional experience in accounting systems conversions and regulatory compliance.
•
Mr. McCommon obtained his 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.
Robert H. “Doc” Foglesong has been a Director of CDEX since August 30, 2010 and as the Company’s Lead Independent Director since November 12, 2010.
•
General Foglesong is the founder and has been President and Executive Director of the Appalachian Leadership and Education Foundation since 2006.
•
General Foglesong was President of Mississippi State University from 2006 to 2008.
•
General Foglesong was a four star general in the United States Air Force from 2002 to 2005 where he served in several command positions.
•
General Foglesong has a PhD in Chemical Engineering, authored numerous publications and has received many military and civilian awards.
•
General Foglesong serves as a Director for Michael Baker Corp (BKR) where he serves on the Governance committee and for Stark Aerospace Inc. (a privately held company) where he serves as Chairman of the Board.
Brian M. Jenkins was appointed to serve as a director of the Company in August 2010.
•
Mr. Jenkins initiated the RAND Corporation’s research program on international terrorism in 1972.
•
Mr. Jenkins currently serves as Senior Advisor to the President of RAND.
•
Mr. Jenkins was the Deputy Chairman of Kroll Associates, an international investigative and consulting firm from 1989 to 1998.
•
Mr. Mr. Jenkins has a BA and a Masters Degree from UCLA. He also studied at the University of Guanajuato in Mexico and in the Department of Humanities at the University of San Carlos in Guatemala where he was a Fulbright Fellow and recipient of a second fellowship from the Organization of American States.
Frank E. Wren was appointed to serve as a Director of the Company in August 2010.
•
Mr. Wren comes to the Company with a 12-year executive management tenure with the Atlanta Braves organization with five years as the Club’s Executive Vice President and General Manager
•
Mr. Wren has been in professional baseball management and executive positions span over 27 years with the Montreal Expos, the Florida Marlins, Baltimore Orioles and Atlanta Braves.
•
Mr. Wren currently serves on the board of the Foundation of Molecular Medicine, which helps fund research in Mitochondrial diseases and the Landmark Christian School in Fairburn, GA. He also co-hosts the SW Christian Care Charity Golf Tournament.
James G. Stevenson, PharmD, FASHP., was appointed to serve as a Director of the Company on December 15, 2010.
•
Dr. Stevenson has been the Chief Pharmacy Officer at the University of Michigan Health System, Professor and Associate Dean for Clinical Sciences at the University of Michigan College of Pharmacy since 1999.
•
Dr. Stevenson serves as the medication safety section editor for the Joint Commission Journal on Quality and Patient Safety.
•
From 1989 to 1991, Dr. Stevenson served as Director of Pharmacy Services at West Virginia University Hospitals and from 1991 to 1999 and was the Director of Pharmacy Services for the 8-hospital Detroit Medical Center/Wayne State University.
•
Dr. Stevenson received his BS Pharmacy and PharmD degrees from Wayne State University.
SIGNIFICANT EMPLOYEE/CONSULTANT
Wade M. Poteet, Ph.D., Chief Scientist
In addition to our executive officers and directors, Dr. Wade Poteet, our Principal Scientist, is a significant consultant of CDEX.
•
Dr. Poteet has been the Company’s Principal Scientist since July 2001.
•
Dr. Poteet received NASA certificates of recognition and a public service group award in 1986 for his work on a Spacelab 2 research program.
•
Dr. Poteet is credited with the development of numerous products and publications, as well as more than 45 referenced papers and 250 technical reports.
•
Dr. Poteet has a wide range of public research institutions and private companies experience, including Infrared Laboratories, CP Systems, Inc., E/ERG, University of Arizona, Rice University, and the National Radio Astronomy Observatory
•
Dr. Poteet received his Ph.D. (Experimental Solid State Physics), MS (Physics) and BS (physics) from Virginia Polytechnic Institute.
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, 2011 all section 16(a) filing requirements were met except that Robert H. Foglesong, Brian M. Jenkins, Frank E. Wren and Thomas K. Payne did not file Form 4s on a timely basis, they have since filed all required Section 16(a) forms and are current in their filings.
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
Committees of the Board of Directors
In 2007, the Company’s Board of Directors formed and approved Charters for its Audit Committee, Executive Compensation Committee, and Corporate Governance and Nominating Committee. . The Company is not required to maintain such committees under the rules applicable to it, because its shares are quoted on the over the counter bulletin board (“OTCBB”) and are not listed or quoted on a national securities exchange or national quotation system.
Audit Committee
The Audit Committee of the Board of Directors is comprised of Robert H. Foglesong (Chair), James G. Stevenson and Frank E. Wren. The Audit Committee reviews the Company’s 10-Ks each fiscal year and conducts periodic reviews of the Company’s financial structure. 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.
The Board has determined that we do not have an audit committee financial expert serving on the Audit Committee.
Executive Compensation Committee
Frank E. Wren (Chair), Brian M. Jenkins and James G. Stevenson are members of the Executive Compensation Committee. The committee is responsible for establishing and maintaining executive compensation practices designed to encourage company profitability and enhance long-term shareholder value.
Corporate Governance and Nominating Committee
The Corporate Governance and Nominating Committee is comprised of Jeffrey K. Brumfield (Chair), Robert H. Foglesong and Brain M. Jenkins. The Committee is responsible for establishing and maintaining corporate governance practices designed to aid the long-term success of CDEX.
ITEM 11.
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, 2011 and 2010 (the "Named Executives"):
Summary Compensation Table
(1)
Mr. Brumfield was appointed to his position of Chief Executive Officer and Chairman of the Board on August 30, 2010. During fiscal 2011, Mr. Brumfield deferred $50,000 of his salary. In December 2011, Mr. Brumfield refunded to the Company all of the 2011 salary compensation that he had been paid.
(2)
Mr. Strickland was the Company’s Chief Executive officer from April 19, 2010 to August 30, 2010.
(3)
Mr. Philips was the Company’s Chief Executive officer from June 11, 2007 to April 19, 2010.
(4)
The amounts included in the "Option Awards" column represent the aggregate grant date fair value of awards computed in accordance with FASB ASC Topic 718, Compensation - Stock Compensation (disregarding forfeiture assumptions). The fair value of each stock option award is estimated on the date of grant using the Black-Scholes option valuation. For a discussion of valuation assumptions, see Note 8 of our 2011 Financial Statements. In January 2011, as a part of his employment agreement, the Company granted Mr. Brumfield 8,000,000 stock options which will vest 1/2 on the effective date of the agreement, and the remaining 1/2 over the next six years subject to the attainment of certain performance goals. In April 2010, the Company granted 360,000 options to Mr. Strickland. Additionally, in June 2010, the Company modified all outstanding non-performance-based options to employees and active consultants to adjust the exercise prices to $0.0515 per share and to extend the life of the options to 10 years. The amounts reported for the fiscal year 2010 include the incremental fair value computed as of the modification date in accordance with FASB ASC Topic 718, with respect to the modified awards.
Employment Agreements
Effective January 21, 2011, the Company entered into an employment agreement with Mr. Brumfield. The agreement provides for an annual salary of $120,000 and the award of 8,000,000 stock options. The options are to vest ½ on the effective date of the agreement and, subject to the attainment of certain performance objectives, ½ over the next six years.
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 was engaged as a consultant of the Company to continue in his role as the Company’s CEO until the Company finds a replacement. Effective April 19, 2010 Mr. Philips resigned his positions as a Director and as the Company’s Chief Executive Officer.
Effective April 19, 2010, the Board of Directors appointed Mr. Strickland as the Company’s Chief Executive Officer. Mr. Strickland has been a Director since February 3, 2006. Mr. Strickland’s employment agreement is renewable annually and includes a salary of $60,000 per year. Additionally, Mr. Strickland received 360,000 options to purchase shares of Class A common stock which vest 1/12 each month beginning on the 19th of May 2010 as long as the agreement is in effect. The exercise price of the options was the closing stock price of CDEX on the effective date. In addition, beginning on May 19, 2011 and continuing on the 19th day of each month thereafter, the Company agrees to provide to the Mr. Strickland 30,000 options to purchase shares of Class A common stock. The exercise price of these options shall be the closing price of the stock on the day of grant. Mr. Strickland will have two years from the date of termination or five years, whichever is earlier, to exercise the options granted under his employment agreement, irrespective of his employment status. Mr. Strickland resigned his position as Director and CEO effective of August 30, 2010.
Outstanding Equity Awards at Fiscal Year-End
The following table discloses unexercised options held by the Named Executives at October 31, 2011
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.
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. At the annual meeting of stockholders held on August 18, 2011, the stockholders approved an increase in the number of authorized shares from 100 million to 300 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 up to 75 million.
Compensation of Directors
The following table discloses our director compensation for the fiscal year ended October 31, 2010:
Directors Compensation
(1)
The amounts included in the "Stock Awards" column represent the aggregate grant date fair value in fiscal 2011 related to restricted stock grants to directors, computed in accordance with FASB ASC Topic 718. For a discussion of valuation assumptions, see Note 8 to our 2011 Financial Statements.
(2)
Represents 628,966 restricted Class A common stock grants to Gen. Foglesong to vest six months from date of grant.
(3)
Represents 603,966 restricted Class A common stock grants to Mr. Jenkins to vest six months from date of grant.
(4)
Represents 648,966 restricted Class A common stock grants to Mr. Wren to vest six months from date of grant.
(5)
Represents 722,064 restricted Class A common stock grants to Mr. Stevenson to vest six months from date of grant. Of this total, 200,000 share grants represent Mr. Stevenson’s acceptance of position one-time grant.
ITEM 12.
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 17, 2012:
•
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 January 17, 2012 upon the exercise of options or warrants. 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 109,996,717 shares outstanding on January 17, 2012.
(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 January 17, 2012.
(2)
Based on information contained in a report on Schedule 13G filed with the SEC on June 9, 2011: The address of Gemini Master Fund, Ltd. (“Gemini”) is One Market Plaza, Stuart Street Tower, Suite 2700, San Francisco, CA 94105. All of the reported are owned directly by Gemini Master Fund, Ltd. Gemini Strategies, LLC is the investment manager of Gemini Master Fund, Ltd., and Steven Winters is the sole managing member of Gemini Strategies, LLC. Gemini Strategies, LLC and Steven Winters expressly disclaim any equitable or beneficial ownership of such securities. The Reporting Persons own a total of 9,182,513 shares of Common Stock, all of which are owned of record by Gemini Master Fund, Ltd. (“Gemini”). Gemini also holds (i) an aggregate of $785,237.42 in principal amount of convertible debentures (“Debentures”) issued to Gemini by the issuer which are convertible into shares of common stock at a conversion price of $0.05, and (ii) 8,000,000 shares of Common Stock issuable upon exercise of a warrant originally issued to Gemini on or about June 25, 2008 and amended on April 29, 2011 (“Warrant”). The number of shares of Common Stock into which the Debentures are convertible and the Warrant is exercisable at any point in time is limited, pursuant to the terms of such instruments, to that number of shares of Common Stock which would result in the Reporting Persons having beneficial ownership of 4.9% of the total issued and outstanding shares of Common Stock (the "Ownership Limitation"). The Reporting Persons disclaim beneficial ownership of any and all shares of Common Stock that would cause any Reporting Person's beneficial ownership to exceed the Ownership Limitation. Therefore, the Debentures and Warrant are not currently convertible or exercisable.
(3)
Based on form 5 filed on January 28, 2011 this represents 5,113,970 shares of Class A common stock and based on information from Form 8-K Current Report filed on January 31, 2011,4,000,000 options exercisable within 60 days of January 17, 2012.
(4)
Based on information known by the Company, this represents 1,262,779 shares of Class A common stock.
(5)
Based on information known by the Company, this represents 889,566 shares of Class A common stock.
(6)
Based on information known by the Company, this represents 722,064 shares of Class A common stock and 150,000 options exercisable within 60 days of January 17, 2012.
(7)
Based on information known by the Company, this represents 850,280 shares of Class A common stock.
(8)
Represents 183,333 options exercisable within 60 days of January 17, 2012 and 410,444 shares underlying convertible notes convertible within 60 days of January 17, 2012.
Changes in Control.
There are no present arrangements or pledges of the Company’s securities which may result in a change in control of the Company.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
During fiscal 2011, the Company was a party to the following transactions with related parties:
•
In May 2011, Gemini converted $480,000 principal and accrued interest of its 10% convertible notes of into 9,600,000 shares of the Company’s common stock. The notes were converted at the rate of $0.05 a share.
Director Independence
Four of our directors, Gen. Robert H. Foglesong, Mr. Brian M. Jenkins, Mr. Frank E. Wren and Dr. James G. Stevenson, are independent directors as that term is defined by the applicable rules of the SEC and the Financial Industry Regulatory Authority (“FINRA”). However, because our stock trades on the OTC Bulletin Board, we are not required to have independent directors. If we ever become a listed issuer whose securities are listed on a national securities exchange or on an automated inter-dealer quotation system of a national securities association, which has independent director requirements, we intend to comply with all applicable requirements relating to director independence.
ITEM 14.
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, 2011 and 2010:
Fees for audit services include fees associated with the annual audit of the Company and the review of our quarterly reports on Form 10-Q.
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 2011 and 2010, none of the fees paid to S.E. Clark and Co. were approved pursuant to the de minimis exception.
PART IV
ITEM 15.
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
Documents filed as exhibits to this annual report or incorporated by reference:
Signatures
Pursuant to the requirements of the Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized on January 27, 2012,
CDEX Inc.
/s/ Jeffrey K. Brumfield
Jeffrey K. Brumfield
Chairman of the Board of Directors and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on the dates indicated by the following persons on behalf of the registrant and in the capacities indicated,
Signature
Title
Date
/s/ Jeffrey K. Brumfield
Chief Executive Officer and Chairman of the
Board of Directors
January 27, 2012
Jeffrey K. Brumfield
/s/ Stephen A. McCommon
Chief Financial Officer and
January 27, 2012
Stephen A. McCommon
Vice President of Finance
/s/ Robert H. Foglesong
Director
January 25, 2012
Robert H. Foglesong
/s/ Brian M. Jenkins
Director
Brian M. Jenkins
January 25, 2012
/s/ Frank E. Wren
Director
January 26, 2012
Frank E. Wren
/s/ James G. Stevenson
Director
January 24, 2012
James G. Stevenson
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, 2011 and 2010 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, 2011 and 2010 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 14 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 14 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
January 26, 2012
744 N. Country Club Road, Tucson, AZ 85716 (520) 323-7774, Fax (520) 323-8174, seclarkcpa@aol.com
CDEX INC.
BALANCE SHEETS
AS OF OCTOBER 31,
The accompanying notes are an integral part of these Financial Statements.
CDEX INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED OCTOBER 31,
The accompanying notes are an integral part of these Financial Statements.
CDEX INC.
STATEMENT OF CHANGES IN STOCKHOLDERS’ DEFICIT
The accompanying notes are an integral part of these Financial Statements.
CDEX INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED OCTOBER 31,
The accompanying notes are an integral part of these Financial Statements.
CDEX INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED OCTOBER 31, 2011 and 2010
1. Organization of Business and Basis of Presentation
CDEX Inc. (“CDEX”, “we”, “us”, “our” or the “Company”) is a technology development company incorporated in the State of Nevada on July 6, 2001 with a corporate office and research and development facility in Tucson, Arizona. Our Class A common stock is currently being traded on the OTCBB under the symbol "CEXI.OB." 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.
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).
4.
The Company is also exploring unique opportunities in select markets verticals where its proprietary technology may provide low cost/ realtime solutions to a growing concern such as conducting urine, blood and saliva analysis for detecting illegal drugs and performance enhancement substances.
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.
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.
CDEX INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED OCTOBER 31, 2011 AND 2010
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, 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 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, 2011 and 2010 are as follows:
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, 2011 and 2010 are as follows:
CDEX INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED OCTOBER 31, 2011 AND 2010
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 $21,564 and $22,240 for the years ended October 31, 2011 and 2010, respectively.
Beneficial Conversion Features
The intrinsic value of a beneficial conversion feature inherent to a convertible note payable, which is not bifurcated and accounted for separately from the convertible note payable and may not be settled in cash upon conversion, is treated as a discount to the convertible note payable. This discount is amortized over the period from the date of issuance to the date the note is due using the effective interest method. If the note payable is retired prior to the end of its contractual term, the unamortized discount is expensed in the period of retirement to interest expense. In general, the beneficial conversion feature is measured by comparing the effective conversion price, after considering the relative fair value of detachable instruments included in the financing transaction, if any, to the fair value of the common shares at the commitment date to be received upon conversion.
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
Share-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 awards 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 $7,624 and $8,640 for fiscal 2011 and 2010, 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.
CDEX INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED OCTOBER 31, 2011 AND 2010
As of October 31, 2011 and 2010, 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 2011. 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 2011 and 2010, our revenues consisted of transactions with 32 and 25 customers, respectively. In fiscal 2011, 48% of our revenues were derived from the Oncology Distribution Agreement. Four of our customers in fiscal 2010 represented approximately 56% of total sales.
At times, the Company maintains cash balances that exceed federally insured limits. Our cash balances are maintained with financial institutions with high credit standing and accordingly, 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 May 2011, the FASB issued ASU 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (“ASU 2011-04”). ASU 2011-04 is intended to result in convergence between GAAP and International Financial Reporting Standards (“IFRS”) requirements for measurement of and disclosures about fair value. The amendments are not expected to have a significant impact on companies applying GAAP. Key provisions of the amendment include: a prohibition on grouping financial instruments for purposes of determining fair value, except when an entity manages market and credit risks on the basis of the entity’s net exposure to the group; an extension of the prohibition against the use of a blockage factor to all fair value measurements (that prohibition currently applies only to financial instruments with quoted prices in active markets); and a requirement that for recurring Level 3 fair value measurements, entities disclose quantitative information about unobservable inputs, a description of the valuation process used and qualitative details about the sensitivity of the measurements. In addition, for items not carried at fair value but for which fair value is disclosed, entities will be required to disclose the level within the fair value hierarchy that applies to the fair value measurement disclosed. ASU 2011-04 is effective for interim and annual periods beginning after December 15, 2011. The Company will adopt these standards on February 1, 2012 and does not expect the adoption to have a material impact on its consolidated financial statements.
In September 2011, the FASB issued ASU 2011-08, Intangibles-Goodwill and Other (Topic 350), Testing Goodwill for Impairment (“ASU 2011-08”), to allow entities to use a qualitative approach to test goodwill for impairment. ASU 2011-08 permits an entity to first perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If it is concluded that this is the case, it is necessary to perform the currently prescribed two-step goodwill impairment test. Otherwise, the two-step goodwill impairment test is not required. ASU 2011-08 is effective for the Company beginning October 1, 2012, and earlier adoption is permitted. The Company is currently evaluating the impact of the pending adoption of ASU 2011-08 and does not expect the adoption to have a material impact on its consolidated financial statements on its consolidated financial statements.
CDEX INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED OCTOBER 31, 2011 AND 2010
3. Inventory
Inventory consisted of the following at October 31, 2011 and 2010:
4. Property and Equipment
Property and equipment consisted of the following at October 31, 2011 and 2010:
5. Patents
Patents consisted of the following at October 31, 2011 and 2010:
Future amortization expense for our patents for the next five fiscal years is as follows:
CDEX INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED OCTOBER 31, 2011 AND 2010
6. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consisted of the following at October 31, 2011 and 2010:
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:
Deferred income taxes consisted of the following as of October 31, 2011 and 2010:
CDEX INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED OCTOBER 31, 2011 AND 2010
For income tax purposes, the Company has net operating loss carryforwards of approximately $19.3 million at October 31, 2011 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 May 27, 2012. The 2003 Stock Incentive Plan permits the issuance of up to 75,000,000 shares through July 1, 2013, 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, 2011, there are 51,529,767 shares available for grant from the Plans.
During the year ended October 31, 2011, the Company granted stock options for the purchase of 8,000,000 Class A Common Shares with an aggregate grant date fair value of $232,462. During the year ended October 31, 2010, the Company granted stock options for the purchase of 1,210,000 Class A Common Shares with an aggregate grant date fair value of $92,812. 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 six years.
During the year ended October 31, 2011, the Company awarded 2,653,962 restricted shares of Class A Common Shares to its Board of Directors. The restricted stock awards vest over six months and have an aggregate grant date fair value of $112,033. During the year ended October 31, 2010, the Company awarded 1,213,828 restricted shares of Class A Common Shares to its Board of Directors. The restricted stock awards vest over six months and have an aggregate grant date fair value of $60,968. We have a practice of issuing new stock to satisfy restricted stock grants. At December 31, 2011, there were approximately $36,000 of unrecognized compensation costs related to unvested restricted stock awards, and approximately $33,000 of unrecognized compensation costs related to unvested stock options. These costs are expected to be recognized on a weighted-average basis over periods of less than one year for both restricted stock awards for unvested stock options.
CDEX INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED OCTOBER 31, 2011 AND 2010
Stock option activity for fiscal years 2011 and 2010 under the Plans is as follows:
Total compensation expense related to stock awards for employees and consultants was $313,534 and $90,287 for the years ended October 31, 2011 and 2010, respectively. As of October 31, 2010, there were 625,000 options outstanding that were held by external consultants.
The fair value of restricted stock was estimated using the closing price of our Class A Common Stock on the date of award and fully recognized upon vesting.
The fair value of option awards was estimated using the Black-Scholes option pricing model with the following assumptions and weighted average fair values:
CDEX INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED OCTOBER 31, 2011 AND 2010
Warrants
In 2011, we issued 100,000 warrants as compensation to an outside contractor, which vest in one (1) year and are exercisable for a period of (2) three years thereafter, we issued 481,174 warrants from the conversion of our notes payable, which are exercisable for a period of seven (7) years and we amended the warrants associated with an existing debt from 5,000,000 to 8,000,000 shares of common stock. The following summarizes activity for fiscal years 2011 and 2010 for warrants to purchase our common stock:
9. Deferred Revenue
During the fourth quarter of fiscal year 2010, the Company received approximately $483,000 under our Exclusive Distribution Agreement (“Agreement”) effective August 20, 2010, with a number of signatories including PEMCO, LLC and Messrs. Peter Maina, Thomas Payne (a former Director of the Company), Robert Stewart, and Scott Newby (“the “Signatories”). The Agreement grants exclusive United States distribution rights for all products developed by CDEX for application in the field of Oncology. The Agreement was terminated in the fourth quarter of 2011 and all of the then deferred revenue under the Agreement was recognized. 8,670,000 shares of restricted Common stock, valued at $433,500 were issued to terminate the agreement. The termination is reflected net of the remaining previously unrecognized deferred revenue of $364,833 in the statement of operations. The agreement was terminated to enable the unrestricted marketing of the new G4 ValiMed unit.
CDEX INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED OCTOBER 31, 2011 AND 2010
10. Notes Payable
Our notes payable consisted of the following at October 31, 2011 and 2010:
During the three months ended January 31, 2011, Gemini Master Fund Ltd. (“Gemini”) converted $42,860 of accrued interest on their note into 857,205 shares of CDEX Class A common stock.
During the three months ended April 30, 2011, two holders of our 10% convertible notes converted approximately $528,000 of accrued interest and principal into 6,855,506 shares of CDEX Class A common stock. Also, the Company entered into a Term Note (“Note”) and a Warrant Amendment with Gemini Master Fund Ltd. (“Gemini”). The Note is for $100,000 with an interest rate of 10.5% and is convertible into CDEX common stock at the rate of $0.05 a share and is due March 1, 2012 (subject to acceleration). The Warrant Amendment modifies the Gemini’s existing warrant by increasing the number of shares under the warrant from 5,000,000 to 8,000,000 shares and reduces the exercise price from $0.08 a share to $0.05 a share. The effect of the Warrant Amendment increased the incremental relative fair value of the warrant by approximately $87,000, which the Company has recognized as a discount to the Note and will amortize over the remaining life of the Note. The Company also entered into an Amendment and Conversion Agreement with Gemini which amends the $1,151,000 February 15, 2010 note issued to Gemini by changing the conversion price to $0.05 a share and specifying certain circumstances under which Gemini will be required to convert a portion of its note.
In May 2011, Gemini converted a portion of our 10% convertible notes of $480,000 principal and accrued interest into 9,600,000 shares of the Company’s common stock. Also in May 2011, entities controlled by Malcolm H. Philips, Jr. converted approximately $317,000 principal and accrued interest of our 10% convertible notes into 4,541,645 shares of the Company’s common stock. Additionally, other holders of our notes converted approximately $598,000 principal and interest of our 10% notes into 8,012,782 shares of the Company’s common stock. The notes were converted at the rates of $0.05 to $0.08 a share. In June 2011, a holder of our notes with a principal and accrued interest balance of approximately $20,000 converted the note into 248,680 shares of the Company’s common stock at the rate $0.08 a share.
During the fiscal year ended October 31, 2011, payments totaling approximately $25,000 were made on the Company’s non-interest bearing notes.
CDEX INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED OCTOBER 31, 2011 AND 2010
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 Mr. Malcolm H. Philips, Jr., our former 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. We accounted for this as a debt extinguishment and recognized a $41,699 loss. 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 Mr. Philips 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 Mr. Philips were consolidated and exchanged for a new convertible note similar to that issued to Gemini.
The Company has determined the convertible note held by Gemini contains a beneficial conversion feature that qualifies for treatment under FASB ASC Topic 470-20. The estimated fair value of the detachable warrants of $255,452 has been determined using Black-Scholes option pricing model using the following assumptions: stock price volatility of 75%, risk free interest rate of 2.35%; dividend yield of 0% and 5 year term. The face amount of the convertible note of $1,151,100 was proportionately allocated to the note and the warrants in the amount of $942,042 and $209,058, respectively. The convertible note proportionate allocated value of $942,042 was then further allocated between the note and the beneficial conversion feature. The fair value of the beneficial conversion feature was determined to be $689,059 and the remaining value of $252,983 was allocated to the convertible note. The combined total value of the warrant and beneficial conversion feature of $898,117 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.
Additionally, the Company determined the convertible note held by an entity controlled by Mr. Philips contains a beneficial conversion features that qualifies for treatment under FASB ASC Topic 470-20. The convertible note value of $247,115 was allocated between the note and the beneficial conversion feature. The fair value of the beneficial conversion feature was determined to be $105,906 and the remaining value of $141,208 was allocated to the convertible note. The value of the beneficial conversion feature of $105,906 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.
During March 2010, the Company, as a part of the February restructuring, convertible notes payables of $200,695, $15,462 and $10,000 in principal and accrued interest held by three investors, two directors and an entity controlled by Mr. Philips, respectively, were converted into new notes similar to that issued to Gemini. Also during March 2010, $832,126 of accounts payable balances were converted into new notes similar to that issued to Gemini.
In August and September 2010, employees and former employees who are owed approximately $470,000 of deferred compensation, out of a total of $589,000, agreed to have their balances rolled into convertible notes payables similar to that issued to Gemini. This total includes $267,000 owed to Malcolm H. Philips, Jr. and $28,000 owed to our CFO. The notes will bear interest at 10% and will be convertible into Class A common stock at the rate of $0.08 per share. The notes mature on February 1, 2012, but have accelerated payment provisions and a contingent security interest, if certain financial milestones are not met.
In August 2009, four former employees and one former contractor (“Claimants”) filed demands for arbitration with the American Arbitration Association related to deferred wages of approximately $89,000 and to the ownership of certain equipment. A decision was issued by the Arbitrator which the Company received on June 11, 2010. The decision awarded the Claimants three times their deferred wages, plus attorney fees, totaling approximately $270,000. In September 2010, the Company settled with the Claimants where approximately $50,000 of the judgment was converted into two-year non-interest bearing notes, with monthly payouts, and where approximately $190,000 of the judgment was converted into 10% convertible notes due February 2012 similar to the Gemini note from the February Financing.
CDEX INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED OCTOBER 31, 2011 AND 2010
The following table provides information relative to the contractual maturities of our outstanding notes payable as of October 31, 2011:
11. Stockholders’ Equity
During the three months ended January 31, 2011 Gemini Master Fund Ltd. (“Gemini”) converted $42,860 of accrued interest on their note into 857,205 unrestricted shares of CDEX Class A common stock, or approximately $0.05 per share. Also, 260,600 shares of restricted stock awards were returned to the Company and cancelled from Thomas Payne, who had resigned from the Board. Additionally, the Company issued 50,000 shares of restricted common stock, with a grant date fair value of $2,500, to a consultant for services performed
During the three months ended April 30, 2011, two holders of our 10% convertible notes converted approximately $528,000 of accrued interest and principal into 6,855,506 shares of CDEX Class A common stock. Additionally, the Company issued 1,500,000 shares of stock, with a grant date fair value of $58,000, to an independent contractor for services performed.
In May 2011, Gemini converted a portion of our 10% convertible notes of $480,000 principal and accrued interest into 9,600,000 shares of the Company’s common stock. Also in May 2011, entities controlled by Malcolm H. Philips, Jr. converted approximately $317,000 principal and accrued interest of our 10% convertible notes into 4,541,645 shares of the Company’s common stock. Additionally, other holders of our notes converted approximately $598,000 principal and interest of our 10% notes into 8,012,782 shares of the Company’s common stock. The notes were converted at the rates of $0.05 to $0.08 a share. In June 2011, a holder of our notes with a principal and accrued interest balance of approximately $20,000 converted the note into 248,680 shares of the Company’s common stock at the rate $0.08 a share.
In September, 2011, the Company entered into an agreement to issue 8,670,000 shares of CDEX common stock, valued at $433,500, to the original investors of the Exclusive Distribution Agreement (“Agreement”) to cancel the Agreement effective September 20, 2011. The original investors are PEMCO, LLC and Messrs. Peter Maina, Robert Stewart, Milton Datsopoulos and Scott Newby. Refer to Note 9.
During the fiscal year ended October 31, 2011, as a part of the Company’s Board of Director 2010 Compensation Plan, the Company issued 2,653,962 restricted stock awards to its independent directors as compensation for their participation on the Company’s Board. These awards vest over six months.
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.
During the fourth quarter of fiscal 2010, as a part of the Company’s Board of Director 2010 Compensation Plan, the Company granted 260,600 restricted Class A common shares each to its directors Robert H. Foglesong and Thomas Payne and 246,314 restricted Class A common shares each to its directors Frank E. Wren and Brian M. Jenkins.
CDEX INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED OCTOBER 31, 2011 AND 2010
12. 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, 2010 is approximately $1,500. Total rent expense was approximately $32,000 and $49,000 for the years ended October 31, 2011 and 2010, respectively.
Litigation
We may from time to time be involved in legal proceedings arising from the normal course of business. As of the date of this report, we have not received notice of any new legal proceedings.
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.
13. Selected Quarterly Financial Data (Unaudited)
The following table summarizes the unaudited quarterly results of operations as reported for fiscal 2011 and 2010:
CDEX INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED OCTOBER 31, 2011 AND 2010
14. Going Concern
The Company has incurred losses since its inception of approximately $33.0 million and has had limited product sales from its inception through fiscal 2011. 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 2011, the Company received approximately $100,000 in funding comprised of a new 10.5% note from Gemini. The Company predominately funded its operations thru normal cash flow.
15. Subsequent Events
In December 2011, a holder of 425 shares of our Series A Preferred Stock converted their holdings into 25,374 shares of CDEX Class A Common Stock. In an effort to raise additional operating capital, in December 2011, the Company’s Chairman of the Board and CEO, Mr. Brumfield, refunded to the Company all of the 2011 salary compensation that he had been paid. Additionally, the Company is attempting to raise operating capital and is working with a number of noteholders to either extend the due date of their notes, convert their notes, or to pay off their notes at a discounted rate. It should be noted that the Company has no assurance that all noteholders will accept these terms and may be declared in default of the notes on their February 1, 2012 maturity date.