CDEX INC.
Securities registered under Section 12(b) of the Exchange Act: None.
Class A Common stock, $.005 par value per share.
CDEX INC.
PART I |
Item 1. | Business | 1 |
Item 1A. | Risk Factors | 67 |
Item 1B. | Unresolved Staff Comments | 11 |
Item 2. | Properties | 11 |
Item 3. | Legal Proceedings | 1112 |
Item 4. | (Removed and Reserved)Mine Safety Disclosures | 1112 |
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PART II |
Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer | |
| Purchases of Equity Securities | 1213 |
Item 6. | Selected Financial Data | 1314 |
Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 14 |
Item 7A. | Quantitative and Qualitative Disclosures About Market Risk | 16 |
Item 8. | Financial Statements and Supplementary Data | |
Item 9. | Changes in and Disagreements With Accountants on Accounting and Financial Disclosure | 17 |
Item 9A. | Controls and Procedures | 17 |
Item 9B. | Other Information | 1718 |
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PART III |
Item 10. | Directors, Executive Officers and Corporate Governance | 1819 |
Item 11. | Executive Compensation | 2122 |
Item 12. | Security Ownership of Certain Beneficial Owners and Management and | |
| Related Stockholder Matters | 2327 |
Item 13. | Certain Relationships and Related Transactions, and Director Independence | 2529 |
Item 14. | Principal Accounting Fees and Services | 29 |
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PART IV |
Item 15. | Exhibits, Financial Statement Schedules | 2530 |
Signatures | 2933 |
Report of Independent Registered Public Accounting Firm | F-2 |
Balance Sheets | F-3 |
Statements of Operations | F-4 |
Statements of Stockholders' Equity | F-5 |
Statements of Cash Flows | F-6 |
Notes to Financial Statements | F-7 |
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This document contains forward-looking statements as that term is defined in the federal securities laws. Forward-looking statements can be identified by the use of words such as "expects," "plans," "may," "anticipates," "believes," "should," "intends," "estimates," and other words of similar meaning. These statements are subject to risks and uncertainties that cannot be predicted or quantified and, consequently, actual results may differ materially from those expressed or implied by such forward-looking statements. Such risks and uncertainties include, without limitation, the ability of the Company to raise capital to finance the development of its products, the effectiveness, profitability and the marketability of those products, the ability of the Company to protect its proprietary information, the establishment of an efficient corporate operating structure as the Company grows and, other risks detailed from time-to-time in our filings with the Securities and Exchange Commission. The Company undertakes no obligation to publicly update any forward-looking statements.
ITEM 1. BUSINESS
General
CDEX Inc. (“CDEX,” “we,” “us,” “our” or the “Company”) is a technology development company incorporated in the State of Nevada on July 6, 2001 with a corporate office and research and development facility in Tucson, Arizona. Our Class A common stock is currently being traded on the OTCBB under the symbol "CDEX.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).
The Company is also exploring unique opportunities in select marketsmarket verticals where its proprietary technology may provide low cost/ realtimereal time 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.interest in the data base.
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.interest contained in the database. 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-timenear-real-time (within seconds) chemical detection products using proprietary, patented and patents pending technologies. Our primary focus in 20122014 was the continued development and enhancement of our ValiMed system and ID2 productsG4 System (“VG4”) for use in the medicalpharmaceutical market and sales of our ID2 products for the 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.
Healthcare Market.
ValiMed™ Medication Validation System (MVS) (“MVS”) Product Line – Consistscurrently consists of two products: Our third generation ValiMed known as the ValiMed CCT and the ValiMed G4 system (VG4).G4/5 System. Both Valimed ValiMed systems help healthcare providers ensure patient safety and control costs by reducing medication errors, utilizing our patented and patent pending process known as Enhanced Photoemission Spectroscopy (EPS).Spectroscopy. The VG4 narcotics diversion system uses a patented detection process providing a realnear-real time (within seconds), quantitative (strength/concentration) as well as qualitative (identification of an unknown)known substances) analysis of high-risk single component compounded medicationsnarcotics and treatment solutions.other controlled substances that are commonly being diverted within the hospital setting. The ValimedValiMed CCT system that is operating in numerous hospital settings around the country, provides the healthcare industry with verification of a known substance, specifically a known drug with a known strength/concentration, in a known diluent. This current system also utilizes our proprietary cuvettes in the process. Both devices 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. Both product lines provide a recurring revenue stream and address 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 2016, we anticipate the launch of the ValiMed V5 (“VG5”) our patient safety platform that provides an end-of-line analysis of high-risk single component compounded medications and treatment solutions, along with an analysis of returned narcotics and other drugs that are commonly diverted. The VG5 will help to reduce medication errors by providing a quantitative and qualitative analysis of the admixture in near real-time. In the near future, we expect the VG4our ValiMed product line to address multi component compounded mixtures,admixtures, such as total parenteral nutrition. We expect to add oncology drugs to our formulary in 2013 as well. One of the most significant improvements with the VG4 is the capability of analyzing through most containers that are currently being used in pharmaceutical settings. This provides our end users with a more streamlined application, with less labor, without any compromising of the sterility of the compounded admixtures.near future.
Security Market.
CDEX ID2™ Product Line –provides products for 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 and most recently its use in our nation’s prisons and jails. 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,Cocaine, Heroin, OxyContin and Ecstasy expected to come in the near future. We continue to explore the use 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. Each of these products would most likely be of interest to 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.
20122014 Year in Review
The past2014 was an exciting year atfor CDEX faced and overcame many challenges while pursuingits technology. Our ValiMed G4 formulary, which consists of those drugs that are most commonly diverted in the hospital setting, was completed and ready for beta testing. We also began our goal of creating a profitable commercial operation. In February three ofefforts to incorporate an additional 40 high risk drugs into the formulary that would be beneficial to the ValiMed G5 patient safety platform that is currently on pace to launch in 2016. While in beta testing, our seventeen note-holders electedValiMed G4 provided valuable information, leading us to call their respective notes, which forced senior managementconclude that the product required additional updates. From beta feedback, we began to seek protection undermake the Chapter 11. Although the process was very difficult, CDEX had overwhelming support from the majority of our creditors and new equity investors. We successfully emerged from bankruptcy in October 2012, with intellectual property rights intact, no notes payable, cash on the balance sheet, less expected equity dilution andnecessary changes to advance the ValiMed G4 very close to commercial finalization.out of beta mode and toward a final product.
ThroughoutTo aid in the year our dedicated staff continuedupgrades of the ValiMed G4, CDEX expanded its technical team to prepareinclude John P. Coates, Ph.D. as the Technical Director for Spectroscopy Products. Dr. Coates, a globally recognized spectroscopist and instrumentation expert with 40-years’ experience in the fields of applied spectroscopy and analytical method development, is charged with guiding the ongoing development of CDEX’s spectral management systems for medication analysis and validation, with specific focus on achieving optimal performance of the ValiMed G4 platformMedical Validation System product line. With Dr. Coates on our team, we worked with our OEM manufacturers to improve the specifications of the components in our system, modified some processes, expanded the capabilities of the system, and with his efforts we feel that the product is very close to its final form and ready for industry rollout. Our team was confident we would emerge from bankruptcy and continuedcommercialization in the upcoming year.
Due to develop new opportunitiesthe established growing needs for our technology. We secured a large order for our third generation ValiMed, whichtechnology and given the fact that we expect will bring us well over $400,000 dollars by the endare very close to commercialization and implementation of the second quarter of calendar year 2013. This order should also bring a steady recurring revenue stream from continued cuvette sales as the units are utilized. The interest and demand for our ValiMed G4, systemCDEX has been very good. We expectengaged Hanover International as its Capital Markets Advisor. Hanover International will maintain a proactive investor relations outreach effort, keep an open line of communication with the investment community and help guide us as we build our first unit placementsinvestment banking relationships, which could prove to be pivotal in the first quarter of calendar year 2013our quest to accomplish our business plan and are expecting multiple placements per quarter going forward. We also continueour near term growth strategies.
As for an update from our Security Markets division, we have continued to see demand insell the ID2 Meth Scanner business driven byat a slow and steady pace. With opportunities presenting themselves in New Zealand and Australia, 2015 should prove to be interesting for our Security Markets division. However, until we are able to launch the adoptionValiMed G4 system completely, we plan to handle any sales of the technology intoproduct as they are needed. We will look to more aggressively market and promote the prisonsID2 Meth Scanner’s product line after the ValiMed G4 product launch.
We were able to produce, deliver, and jails systemsprovide training to our distributor in Kuwait, for ten ValiMed CCT units. The units have been placed in their respective hospitals and will be activated following the growing awarenessinstallation of a uniform drug dispersal system in all the various housing authorities and home inspectorsclient hospitals. Accordingly, we have yet to receive any recurring supplies revenue from the sale of these units in 2013. In fiscal 2014, we began to receive revenues from the maintenance contracts for each of these machines. We expect to begin receiving recurring revenue from cuvette sales for these machines in fiscal 2015.
Regarding the ValiMed G4, we did place units in three beta sites around the country. DueThe beta sites consist of a highly acclaimed children’s hospital which is part of a large healthcare organization serving the western United States; the flagship hospital of a prestigious nationwide clinic, and a large metropolitan hospital. The three sites that were selected make up a good representation of the different types of facilities that we expect will initially be serviced by the VG4. Once the beta testing is completed, we expect to budget constraintslaunch our system soon thereafter. The next phase of development will be to begin building the patient safety formulary, and then move to developing an oncology formulary for the VG5, which we estimate a launch in 2016. There are over seven hundred institutions in the United States that administer oncology drugs, and due to the toxic nature and expense of these drugs, we expect to partner with a large teaching hospital in the Midwest to help us build the oncology library. We anticipate this endeavor will start in the fourth quarter of 2015. Our beta partners continue to be invaluable in the development of the final form and function of our ValiMed G4 system, and we are grateful for their continued support and commitment.
Demand and interest in our VG4 technology is very high, and continues to grow. Through current relationships, attendance at numerous trade shows, our web site, and word of mouth throughout the industry, we currently have contracts in place for multiple placements which include; a university hospital, teaching hospitals, general hospitals, clinics, and children’s hospitals all around the country and internationally. This approach for CDEX, of having a few select hospitals as beta site partners, has proven to be a critical step which has provided the necessary data, and details for the development of the final product. Although this step has delayed the launch of VG4 platform, it has proven to be a vital tool for an anticipated successful future launch for the VG4.
In mid-2014, CDEX was granted by the U.S. Patent and Trademark Office a Notice of Allowance for U.S. Patent application No. 13/673,270 with claims that cover methods for identifying and determining unknown substances using enhanced photoemission spectroscopy. This new patent joins previously issued U.S. patents, which comprise a platform portfolio of technologies, systems and methodologies underlying CDEX’s first commercial innovations: The ValiMed™ System, which provides real-time validation of drugs or the detection of foreign materials; the ID2™ Meth Scanner, a hand-held, battery-operated scanner for detecting all forms of methamphetamines; and the Pocket ID2™, which provides a more portable and easily concealed device for convenience and security purposes in law enforcement, we do not expect significant sales in the Pocket ID2, although we continue to get feedback fromprisons, homeland security, border patrol, port authorities indicating that it is something that law enforcement would like to have in their arsenals. As budgets improve we expect additional sales to follow.and other applicable environments.
Research and Development (“R&D”)
In 20132015, we willexpect to continue to explorethe exploration and developdevelopment of new capabilities for our ValiMed VG4 technology, such as expanding the signature libraries of detectable drugs and improving multi-component capabilities (TPN Solutions),capabilities. Additionally, we anticipate partnering with a major Midwestern university hospital to develop an oncology formulary, and possibly the detection of drugs in blood and/or urine, such as banned performance enhancing drugs, HGH, and HCG. If demand and budget allows we will also expect to begin development research in applying our technology for explosive detection.creating a portable VG4 unit, which could be utilized to service the smaller hospitals, pain centers, and convalescent hospitals, in their fight against narcotics diversion.
We have historically outsourced certain engineering and manufacturing tasks while retaining control of critical technology and willexpect to 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 fixfixed price basis, all as set forth in the statement of work pertaining to the particular services. R&D costs were $136,035approximately $181,000 for fiscal 20122014 compared to $146,718$146,000 for fiscal 2011.2013.
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. We continue to receive indications that these problems are still a real issue within the healthcare industry. This is evidenced by the numerous and steady stream of reports and articles regarding healthcare professionals and institutions either involved in diversion of narcotics, or having an adverse event due to human error. 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 chemicalexplosives 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 Protectionbrand 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 isare 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) thereofof the 1934 Act 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;14A; 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 elevate 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, 2013,21, 2015, the Company had fivethree full time employees and three part-time contractors.
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 20122014 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:
| · | the timing of sales of all of our products and services, particularly in light of our limited sales history for some of our products; |
| · | difficulty in keeping current with changing technologies; |
| · | unexpected delays in introducing new products, new product features and services; |
| · | increased costs and expenses, whether related to sales and marketing, manufacturing, product development or administration; |
| · | deferral of recognition of our revenue in accordance with applicable accounting principles due to the time required to complete projects; |
| · | the mix of product license and services revenue; and |
| · | 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, we 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 product 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,Moreover, 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, WHICH CAN ADVERSELY AFFECT THE MARKET FOR OUR COMMON STOCK COULD BE ADVERSELY AFFECTED.STOCK.
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 theour Class A 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. UNRESOLVED STAFF COMMENTS
None.
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, 2012 is2014 was approximately $1,500.$1,500. Total rent expense was approximately $19,000 and $20,000$21,000 for the years ended October 31, 20122014 and 2011,2013, respectively.
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.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
On February 10, 2012, we filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code. On September 4, 2012, the United States Bankruptcy Court for the District of Arizona, Judge James Marlar signed the Order Confirming CDEX' Chapter 11 Plan of Reorganization (“Plan”) and the Plan was effective on October 5, 2012. As a part of the Plan, the shares of common stock that were outstanding prior to the Plan becoming effective underwent a 1 for 10 reverse stock split. Prior to the going effective, the Company had 109,996,717 common shares outstanding; after the Plan became effective, the Company had 11,007,871 common shares outstanding. In fiscal year 2013, the Company issued 41,295,142 shares and warrants to purchase 39,685,549 shares under the Plan in settlement of its obligations.
Market Information
Our Class A common stock is normally traded on the OTCBBOTCQB under the symbol "CDEX.OB."CDEX." 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 beis presently 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 FINRA 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 OTCBBOTCQB for each of our last two fiscal years:
| | High | | | Low | | | High | | | Low | |
Fiscal Year Ended October 31, 2012: | | | | | | | |
Fiscal Year Ended October 31, 2014: | | | | | | | |
First quarter | | $ | 0.10 | | | $ | 0.02 | | | $ | 0.08 | | | $ | 0.01 | |
Second quarter | | | 0.06 | | | | 0.01 | | | | 0.03 | | | | 0.01 | |
Third quarter | | | 0.02 | | | | 0.01 | | | | 0.07 | | | | 0.02 | |
Fourth quarter | | | 0.51 | | | | 0.01 | | | | 0.09 | | | | 0.03 | |
Fiscal Year Ended October 31, 2011: | | | | | | | | | |
Fiscal Year Ended October 31, 2013: | | | | | | | | | |
First quarter | | $ | 0.07 | | | $ | 0.04 | | | $ | 0.22 | | | $ | 0.04 | |
Second quarter | | | 0.06 | | | | 0.04 | | | | 0.15 | | | | 0.06 | |
Third quarter | | | 0.06 | | | | 0.03 | | | | 0.15 | | | | 0.05 | |
Fourth quarter | | | 0.05 | | | | 0.02 | | | | 0.11 | | | | 0.06 | |
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.
We have paid no cash dividends on our common stock and we do not anticipate paying any cash dividends in the foreseeable future.
The following table details information regarding our existing equity compensation plans as of October 31, 2012 (the table retroactively reflects the 1 for 10 reverse stock split effective October 5, 2012):2014: