AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 2, 2004
REGISTRATION NO. 333-
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
CDEX INC.
(Name of Small Business Issuer in Its Charter)
Nevada 3829 52-2336836
(State or Other Jurisdiction of (Primary Standard Industrial Employer Identification No.)
Incorporation Classification Code Number)
or Organization)
1700 Rockville Pike, Suite 400
Rockville, Maryland 20852
(301) 881-0080
(Address and telephone number of Principal
Executive Offices and Principal Place of Business)
Malcolm H. Philips, Jr.
1700 Rockville Pike, Suite 400
Rockville, Maryland 20852
(301) 881-0080
(Name, address and telephone number of
agent for service)
Copies to:
Jeffrey A. Rinde, Esq.
Bondy & Schloss LLP
60 East 42nd St., 37th Floor
New York, New York 10165
(212) 661-3535
Facsimile: (212) 972-1677
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this registration statement becomes effective.
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. |_|
CALCULATION OF REGISTRATION FEE
===========================================================================================================================
PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF SECURITIES AMOUNT TO BE OFFERING AGGREGATE OFFERING REGISTRATION
TO BE REGISTERED REGISTERED PRICE PER SHARE (1) PRICE (1) FEE (2)
- ---------------------------------------------------------------------------------------------------------------------------
Common Stock, par value $.005 26,667 shares (3) $1.50 $ 40,000.50
- ---------------------------------------------------------------------------------------------------------------------------
Common Stock, par value $.005 40,000 shares (4) 2.50 100,000.00
- ---------------------------------------------------------------------------------------------------------------------------
Common Stock, par value $.005 290,000 shares (5) 2.00 580,000.00
- ---------------------------------------------------------------------------------------------------------------------------
Common Stock, par value $.005 30,770 shares (6) 3.25 100,002.50
- ---------------------------------------------------------------------------------------------------------------------------
Common Stock, par value $.005 85,000 shares (7) 0.81 68,850.00
- ---------------------------------------------------------------------------------------------------------------------------
Common Stock, par value $.005 21,667 shares (8) 1.50 32,500.50
- ---------------------------------------------------------------------------------------------------------------------------
Common Stock, par value $.005 738,000 shares (9) 1.00 738,000.00
- ---------------------------------------------------------------------------------------------------------------------------
Common Stock, par value $.005 662,276 shares (10) 0.50 316,328.32
- ---------------------------------------------------------------------------------------------------------------------------
Common Stock, par value $.005 45,000 shares (11) 0.82 36,900.00
- ---------------------------------------------------------------------------------------------------------------------------
Common Stock, par value $.005 400,000 shares (12) 0.85 340,000.00
- ---------------------------------------------------------------------------------------------------------------------------
Common Stock, par value $.005 151,125 shares (13) 0.75 113,343.75
- ---------------------------------------------------------------------------------------------------------------------------
Common Stock, par value $.005 98,335 shares (14) 1.50 147,502.50
- ---------------------------------------------------------------------------------------------------------------------------
Common Stock, par value $.005 44,000 shares (15) 1.25 55,000.00
- ---------------------------------------------------------------------------------------------------------------------------
Total 2,668,428.07 $338.09
===========================================================================================================================
(1) Calculated pursuant to Rule 457. In the absence of a trading market for the
registrant's securities, the prices stated above were calculated as follows: for
shares issued for cash, the price listed is that at which such securities were
issued for cash in negotiated transactions; for shares issued for services
rendered, the price is based upon a good faith estimate of the fair market value
of the common stock (as derived from sales of such shares in negotiated
transactions).
(2) Calculated based upon Fee Rate Advisory #7 for fiscal year 2004.
(3) Represent shares issued to Robert Stewart upon conversion of a convertible
promissory note at a conversion price of $1.50 per share.
(4) Represent shares issued for cash to Robert Creighton-Roth IRA and DICUT Inc.
at a price of $2.50 per share.
(5) Represent shares issued for cash to William Prain, Dawn M. Guimond, Motta
Investment Co. Ltd., Motta Family Revocable Living Trust at a price of $2.00 per
share.
(6) Represent shares issued for cash to Dependable Ranch Lenders LLC at a price
of $3.25 per share.
(7) Represent shares issued to Greg Smith, Kelly Morgan, Jeff Kosanke, Amista
Salcido, Peter S. Dobbs and Randell Jeter for consulting services rendered
valued at $0.81 per share.
(8) Represent shares issued for cash to Gary Pleggenkuhle and Jeff Lowell at a
price of $1.50 per share.
(9) Represent shares issued for cash to several individual investors at a price
of $1.00 per share.
(10) Represent shares issued to Mari Stassi, Dawn Guimond, Motta Investment Co.
Ltd., Robert Stewart and Dependable Ranch Lenders LLC for cash, and to Thelma
Johnson for consulting services rendered valued at $0.50 per share.
(11) Represent shares issued to Steve Frankiewicz, Thelma Johnson, David
Audsley, Brandi Shriver and Timothy Shriver Jr. for consulting services rendered
valued at $0.82 per share.
(12) Represent shares issued for cash to Renka Inc. at a price of $.85 per
share.
(13) Represent shares issued to Steve Frankiewicz and Thelma Johnson for
consulting services rendered valued at $0.75 per share.
(14) Represent shares issued to John L. Theobald , William R. Lindner and Van L.
Shumway Jr. for cash, and Travis Hoffman for consulting services rendered,
valued at $1.50 per share.
(15) Represent shares issued for cash to Peter Dobbs and Peter Maina at a price
of $1.25 per share.
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until this Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
ii
The information in this prospectus is not complete and may be changed. The
selling shareholders may not sell these securities until the registration
statement filed with the Securities and Exchange Commission is effective. This
prospectus is not an offer to sell these securities and neither the selling
shareholders nor we are soliciting offers to buy these securities in any state
where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED FEBRUARY 2, 2004
CDEX Inc.
2,632,840 Shares of Common Stock
This prospectus relates to the distribution by certain shareholders of CDEX Inc.
of up to 2,632,840 shares of our common stock. CDEX is not selling any shares of
common stock in this offering and therefore will not receive any proceeds from
this offering. All costs associated with this registration will be borne by
CDEX.
Brokers or dealers effecting transactions in these shares should confirm that
the shares are registered under applicable state law or that an exemption from
registration is available.
Currently, no public market exists for CDEX common stock.
THESE SECURITIES ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF RISK.
Please refer to "Risk Factors" beginning on page 5.
No underwriter or person has been engaged to facilitate the distribution of
shares of common stock in this offering.
The Securities and Exchange Commission and state securities regulators have not
approved or disapproved of these securities, or determined if this prospectus is
truthful or complete. Any representation to the contrary is a criminal offense.
The date of this prospectus is ___________, 2004.
TABLE OF CONTENTS
NUMBER
Prospectus Summary 3
Summary of the Offering 3
Summary of Consolidated Financial Information 4
Risk Factors 5
Cautionary Statement Regarding Forward-Looking Statements 10
Use of Proceeds 11
Capitalization 12
Management's Discussion and Analysis of Financial Conditions
and Plan of Operations 13
Our Business 17
Management 26
Executive Compensation 28
Selling Shareholders 32
Security Ownership Of Certain Beneficial Holders And Management 34
Description of Securities 35
Plan of Distribution 35
Certain Transactions 36
Where You Can Find More Information 36
Financial Statements F-1
2
PROSPECTUS SUMMARY
OVERVIEW
CDEX Inc was incorporated in the State of Nevada on July 6, 2001. We are a
technology company with a current focus on developing and marketing products
using chemical detection and validation technologies. At present, we are
devoting our resources to the development of products for two distinct markets:
(i) identification of substances of concern (e.g., explosives, illegal drugs and
chemical/biological weapons); and (ii) anti-counterfeiting, brand protection and
quality assurance (e.g., validation of prescription medication; detection of
counterfeit or sub-par products for brand protection; and quality assurance
inspection of incoming raw materials and outgoing final products). Each
application area is supported by our patents pending technologies and each by
common technological platforms.
We anticipate acquiring other technologies in the future through partnering and
investment. However, unless and until such time as we acquire other technology
assets, we anticipate that almost all of our revenues, if any, will come from
our chemical detection products.
Our principal office is located at 1700 Rockville Pike, Suite 400, Rockville, MD
20852. Our telephone number is (301)881-0080.
SUMMARY OF THE OFFERING
DESCRIPTION OF SHARES OFFERED Class A Common Stock, par value
$.005 per share
COMMON STOCK OUTSTANDING Class A: 23,438,532 shares
Class B: 220,000 shares
CLASS A COMMON STOCK BEING
OFFERED BY SELLING SHAREHOLDERS 2,632,840 shares
USE OF PROCEEDS
Because we are conducting this offering on behalf of selling security holders,
they will receive all of the proceeds from the sale of their shares. We will
receive none of the proceeds from the sale of shares under this prospectus, but
we did receive consideration from the selling shareholders at the time they
purchased their shares. Although we will not receive the proceeds from the sale
of shares in this offering, we will pay all of the expenses of the offering,
including, without limitation, professional fees and printing expenses.
RISK FACTORS
An investment in our common stock involves a high degree of risk, and should be
considered only by persons who can afford the loss of their entire investment.
You should read carefully the factors discussed under Risk Factors beginning on
page 5. Several of the most significant risks of this offering include:
Limited prior operations, history of operating losses, and accumulated deficit
may affect CDEX's ability to survive.
We have a history of net losses and may continue to have them.
CDEX has received a going concern opinion from its independent auditors that
describes the uncertainty regarding its ability to continue as a going concern
due to its historical negative cash flow.
Need for additional financing may affect our operations and plan of business.
3
TRANSFER AGENT AND REGISTRAR
FOR THE CDEX SHARES Nevada Agency and Trust Company
50 Liberty Street, Suite 880, Reno, Nevada 89501
TRADING MARKET
No public trading market for our common stock currently exists. We anticipate
that our Class A Common Stock will be traded on the Over The Counter Bulletin
Board. We expect that a market maker will apply for quotation on the Over the
Counter Bulletin Board on our behalf prior to the effective date of the
offering. However, we cannot guarantee that such application will be granted or
that a trading market in our common stock will develop.
DIVIDEND POLICY
CDEX has not paid dividends in the past, nor do we anticipate paying cash
dividends at any time in the near future. Any decision to pay a dividend will be
in the sole discretion of the board of directors.
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
The following table presents summary historical financial information
for the fiscal years ended October 31, 2003 and 2002, and certain balance sheet
information. The data was taken from our financial statements appearing
elsewhere in this prospectus, and you should read the actual financial
statements for a complete presentation of this information.
=======================================================================================================================
FOR THE YEAR ENDED OCTOBER 31,
================================================================
2003 2002
=======================================================================================================================
OPERATING DATA
- -----------------------------------------------------------------------------------------------------------------------
Revenue $ 191,964 $ 75,952
- -----------------------------------------------------------------------------------------------------------------------
Development costs 2,683,756 2,608,561
- -----------------------------------------------------------------------------------------------------------------------
General and administrative expenses 1,222,271 913,565
- -----------------------------------------------------------------------------------------------------------------------
Net income (loss) (3,713,920) (3,447,587)
- -----------------------------------------------------------------------------------------------------------------------
Net (loss) per common share outstanding $(0.19) $(0.22)
- -----------------------------------------------------------------------------------------------------------------------
Weighted average number of shares of common stock
outstanding 19,730,922 15,880,794
- -----------------------------------------------------------------------------------------------------------------------
AS OF OCTOBER 31,
- -----------------------------------------------------------------------------------------------------------------------
2003 2002
- -----------------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA
- -----------------------------------------------------------------------------------------------------------------------
Current assets $ 434,477 $ 293,197
- -----------------------------------------------------------------------------------------------------------------------
Total assets 756,529 600,124
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Current liabilities 19,137 1,508,990
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Long term liabilities -- --
- -----------------------------------------------------------------------------------------------------------------------
Stockholders' equity (deficit) 737,392 (908,866)
- -----------------------------------------------------------------------------------------------------------------------
Working capital (deficit) 415,340 (1,215,793)
=======================================================================================================================
4
RISK FACTORS
You should carefully consider each of the following risk factors and all of the
other information in this prospectus. The following risks relate principally to
the offering and CDEX's business. The risk factors below contain forward-looking
statements regarding the offering and CDEX. Actual results could differ
materially from those set forth in the forward-looking statements. See
"Cautionary Statement Regarding Forward-Looking Statements" below.
RISKS RELATED TO OUR BUSINESS
LIMITED PRIOR OPERATIONS, HISTORY OF OPERATING LOSSES, AND ACCUMULATED DEFICIT
MAY AFFECT CDEX'S ABILITY TO SURVIVE.
We have had limited operations to date. Since our principal activities to date
have been limited to organizational activities, research and development,
product development and limited marketing and sales, CDEX has a very limited
record of revenue-producing operations related to the sale of its products.
Consequently, we have only a limited operating history upon which to base an
assumption that we will be able to achieve our business plans. In addition, we
have only limited assets. As a result, we cannot be certain that CDEX will
generate revenues or become profitable in the future. If we are unable to obtain
customers and generate sufficient revenues to operate profitably, our business
will not succeed. Accordingly, CDEX's prospects must be considered in light of
the risks, expenses and difficulties frequently encountered in connection with
the establishment of a new business in a highly competitive industry
characterized by new product introductions.
WE HAVE A HISTORY OF NET LOSSES AND MAY CONTINUE TO HAVE THEM.
CDEX has incurred recurring operating losses and will need additional financing
to continue as a going concern. We have been and continue to be dependent upon
outside and related party financing to develop and market our chemical detection
products, perform our business and product development activities, and provide
for ongoing working capital requirements.
CDEX'S FUTURE REVENUE AND OPERATING RESULTS ARE UNPREDICTABLE AND MAY FLUCTUATE.
Our short operating history and the rapidly changing nature of the markets in
which we focus make it difficult to forecast our revenues and operating results
accurately. Our operating results are unpredictable and we expect them to
fluctuate in the future due to a number of factors. These factors may include,
among others:
o the timing of sales of our products and services, particularly in light of
our minimal sales history;
o difficulty in keeping current with changing technologies;
o unexpected delays in introducing new products, new product features and
services;
o increased expenses, whether related to sales and marketing, product
development or administration;
o deferral of recognition of our revenue in accordance with applicable
accounting principles due to the time required to complete projects;
o the mix of product license and services revenue; and
o costs related to possible acquisitions of technologies or businesses.
CDEX HAS RECEIVED A GOING CONCERN OPINION FROM ITS INDEPENDENT AUDITORS THAT
DESCRIBES THE UNCERTAINTY REGARDING ITS ABILITY TO CONTINUE AS A GOING CONCERN.
We have received a report from our independent auditors for the fiscal year
ended October 31, 2003 containing an explanatory paragraph that describes the
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.
WE HAVE NOT YET RETAINED A CHIEF FINANCIAL OFFICER NOR PUT IN PLACE THE TYPES OF
FINANCIAL CONTROLS AND PROCEDURES WHICH WILL BE REQUIRED OF PUBLIC COMPANIES.
The Sarbanes-Oxley Act requires public companies to maintain disclosure controls
and procedures that are designed to ensure that information required to be
disclosed in reports filed with the SEC is recorded, processed, summarized and
reported within the time required. This includes controls and
5
procedures to ensure that such information is accumulated and communicated to
management, including the chief executive and financial officers, so as to allow
timely decisions regarding required disclosure of such information. The
Sarbanes-Oxley Act also required documentation of internal control procedures,
remediation as needed, and periodic testing of the controls. We are in the
process of reviewing our internal controls with a view toward documenting the
required controls and procedures, remediating existing deficiencies and adopting
a testing plan. This process is in the initial stages. We have no designated
chief financial officer, although we are currently considering possible
candidates to fill this position.
NEED FOR ADDITIONAL FINANCING MAY AFFECT OUR OPERATIONS AND PLAN OF BUSINESS.
Since our inception, CDEX has funded its operations through borrowings and
financings. Current funds available to CDEX will not be adequate for us to be
competitive in the areas in which we intend to operate. Our continued
operations, as well as the implementation of our business plan, will therefore
depend upon our ability to raise additional funds through bank borrowings or
equity or debt financing. We anticipate that we will need to raise approximately
$3,500,000 to $5,000,000 over the next twelve months for such purposes. We
continue to seek prospective investors who may provide some of this funding.
However, in the absence of such funding, adequate funds may not be available
when needed or may not be available on favorable terms. Our ability to continue
as a going concern is dependent on additional sources of capital and the success
of our business plan.
Certain family members of our management team have advanced funds to CDEX on an
as-needed basis although there is no definitive or legally binding arrangement
to do so. All such advances have been repaid. CDEX currently has no arrangements
or commitments for ongoing funding. We believe that our initial revenues will
primarily depend upon our ability to develop and distribute our products in a
cost-effective and efficient manner. If funding is insufficient at any time in
the future, we may not be able to take advantage of business opportunities or
respond to competitive pressures, any of which could have a negative impact on
our business, operating results and financial condition.
CDEX SHAREHOLDERS WILL EXPERIENCE SIGNIFICANT DILUTION IF WE ISSUE ADDITIONAL
EQUITY TO FUND OPERATIONS OR ACQUIRE BUSINESSES OR TECHNOLOGIES.
If working capital or future acquisitions are financed through the issuance of
equity securities, CDEX shareholders will experience significant dilution. 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 in lieu of cash.
CDEX WILL FACE MANY OF THE DIFFICULTIES THAT COMPANIES IN THE EARLY STAGE MAY
FACE.
As a result of our limited operating history, it may be difficult to assess our
growth and earnings potential. We have faced many of the difficulties that
companies in the early stages of their development in new and evolving markets
often face. These have included, among others:
o substantial delays and expenses related to testing and development of new
products;
o competition from larger and more established companies;
o lack of sufficient customers, revenues and cash flow; and
o limited financial resources.
We may continue to face these and other difficulties in the future, some of
which may be beyond our control. If we are unable to address these problems
successfully, our future growth and earnings will be negatively affected.
OUR POTENTIAL INABILITY TO PROTECT THE PROPRIETARY RIGHTS IN CDEX'S TECHNOLOGIES
MAY HAMPER OUR ABILITY TO MANUFACTURE PRODUCTS.
Our success and ability to compete will be dependent in part on the protection
of our potential patents, trademarks, trade names, service marks and other
proprietary rights. We rely on non-disclosure agreements and patent, trade
secret and copyright laws to protect the intellectual property that we have
developed and plan to develop, but such agreements and laws may provide
insufficient protection. Moreover, other companies may develop products that are
6
similar or superior to CDEX's or may copy or otherwise obtain and use our
proprietary information without authorization. In addition, certain of our
know-how and proprietary technologies may not be patentable. Policing
unauthorized use of CDEX's 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 cause
a decrease in our profits.
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.
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 have a material adverse effect on
our business, financial condition or operating results.
NO ASSURANCE OF SUCCESSFUL MANUFACTURING MAY AFFECT OUR ABILITY TO SURVIVE.
CDEX itself has no experience in manufacturing commercial quantities of
products, and our management has had limited experience in this area. We
presently have no plans for developing in-house manufacturing capability beyond
aggregating off the shelf components for our initial units into a final
assembly. Accordingly, we may depend upon securing a contract manufacturer or
other third party to manufacture certain components although, in our early
stages, we plan to do the final assembly and testing of the initial units
in-house. We cannot be certain that the terms of any such arrangement would be
favorable enough to permit our products to compete effectively in the
marketplace.
DEPENDENCE ON OUTSOURCED MANUFACTURING MAY AFFECT ABILITY TO BRING PRODUCTS TO
MARKET.
The risks of association with outsourced manufacturers are related to their
operations, finances and suppliers. CDEX 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.
THE GREATER THAN EXPECTED LENGTH OF THE PRODUCT DEVELOPMENT CYCLE MAY ADVERSELY
AFFECT OUR FUTURE REVENUES.
The length of our product development cycle has generally been greater than we
originally expected. We are likely to experience delays in future product
development. These delays could have a material adverse effect on the amount and
timing of future revenues.
NO ASSURANCE OF MARKET ACCEPTANCE MAY AFFECT ABILITY TO SELL PRODUCTS.
We cannot be certain that any products, which we successfully develop will ever
achieve 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. 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
payors. We cannot be certain that the marketplace in general will accept and
utilize any of our products.
THE RESULTS OF OUR RESEARCH AND DEVELOPMENT EFFORTS ARE UNCERTAIN, AND WE MAY BE
UNABLE TO ADAPT IN A TIMELY MANNER TO CHANGES IN THE DYNAMIC TECHNOLOGICAL
ENVIRONMENTS IN WHICH WE INTEND TO MARKET OUR PRODUCTS.
We will need to make research and development expenditures to create new uses
and new features to our products to remain competitive. The products we are
currently developing or may develop in the future may not be
7
technologically successful. If they are not technologically successful, our
resulting products may not achieve market acceptance and may not compete
effectively with products of our competitors currently in the market or
introduced in the future.
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. If we are unsuccessful in
timely assimilating development changes in the various environments in which we
intend to market our products, our future net revenues and operating results
could be adversely affected.
We hope to market our products in industries characterized by rapid change and
uncertainty relating to new and emerging technologies. Future technology or
market changes may cause some of our products to become obsolete more quickly
than expected.
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. A
successful product liability claim could damage our business, operating results
and financial condition. Prior to the actual licensing of our technologies for
use in distributed products or the entry of our products made by us into the
market, we plan to procure product liability insurance. Although we have
researched policies for such insurance, we currently have none in place, and we
cannot be certain that the amount or extent of coverage will be adequate once we
obtain it.
OUR POTENTIAL FUTURE BUSINESS AND/OR TECHNOLOGY ACQUISITIONS MAY BE
UNPREDICTABLE AND MAY CAUSE OUR BUSINESS TO SUFFER.
CDEX intends to expand its operations through the acquisition of additional
businesses or technologies, some of which 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 balance sheet (particularly
in the event of impairment of acquired intangible 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 AFFECT OUR ABILITY TO SELL PRODUCTS.
We may experience substantial competition in our efforts to locate and attract
customers for our products. Many competitors in the industry 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 will directly compete with us in some or all markets. Such
competition could have a material adverse effect on our profitability or
viability.
OTHER EXTERNAL INDUSTRY FACTORS MAY AFFECT OUR VIABILITY.
The chemical detection and validation industries in general are speculative and
involve substantial risk. We cannot be certain that the expenditures made by
CDEX will result in a commercially profitable business. The marketability of our
products will be affected by numerous factors beyond our control. These factors
include market fluctuations, and the general state of the economy (including the
rate of inflation and local economic conditions), which can affect government
spending on security and corporate spending for anti-counterfeiting or brand
protection measures. Factors that leave less money in the hands of potential
customers will likely have an adverse effect on our business. We
8
cannot accurately predict the exact effect of these factors, but their
combination may impede our ability to receive an adequate return on invested
capital.
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 key officers, including Malcolm Philips Jr., Timothy
Shriver and Michael Mergenthaler, our Chairman of the Board, our Senior Vice
President of Technical Operations and our Vice President of Business Operations,
respectively, our directors and our key employee. 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. To minimize the effects of
such loss, we have entered into employment contracts and non-competion
agreements with our key officers and employees, including Messrs. Philips,
Shriver and Mergenthaler.
In addition, our officers and/or directors are responsible for making all
decisions with respect to our management. Except for voting rights attached to
our common or preferred stock, investors in CDEX have no control over decisions
which affect our business. Our success will depend in large measure on the skill
and judgment of our directors and officers. Accordingly, no person should invest
in our stock unless he or she is willing to entrust all aspects of CDEX's
management to our officers and directors.
POTENTIAL CONFLICTS OF INTEREST MAY AFFECT OUR MANAGEMENT'S ABILITY TO MAKE
DECISIONS IN CDEX'S BEST INTERESTS.
Our directors and executive officers have other interests to which they devote
time, either individually or through partnerships and corporations in which they
have an interest, hold an office, or serve on boards of directors, and each will
continue to do so notwithstanding the fact that their time may be required for
our business. As a result, certain conflicts of interest may arise between CDEX
and our officers and/or directors that may not be susceptible to resolution.
None of our directors or officers is affiliated with any company which directly
competes with CDEX today.
In addition, conflicts of interest may arise in the area of corporate
opportunities or potential transactions that cannot be resolved through arm's
length negotiations. Our officers and directors have a fiduciary duty to resolve
potential conflicts in the best interests of CDEX and its shareholders.
OUR MANAGEMENT LACKS EXPERIENCE IN THIS MARKET.
Although widely experienced in other industries, our current senior management
team has little experience leading the development, marketing and sales of
technology products in the chemical detection and validation marketplace.
RISKS RELATING TO THE OFFERING AND OUR COMMON STOCK
ABSENCE OF CASH DIVIDENDS MAY AFFECT INVESTMENT VALUE OF OUR STOCK.
We do not anticipate paying cash dividends on our common stock for the
foreseeable future and intend to retain any future earnings to finance the
growth of CDEX's business. Payment of dividends, if any, will depend on, among
other factors, our earnings, capital requirements and general operating and
financial condition as well as any legal limitations on the payment of dividends
out of paid-in capital.
THERE HAS NOT BEEN ANY PRIOR TRADING MARKET FOR OUR SHARES, AND WE CANNOT BE
CERTAIN THAT ONE WILL DEVELOP.
There is no current trading market for our common stock. Subsequent to the date
hereof, we anticipate that our common stock will be listed on the Over The
Counter Bulletin Board. If our common stock is not eligible for such listing, an
investor may find it difficult to dispose of, or to obtain accurate quotations
as to the market value of, our securities. Even if our common stock is listed on
the OTC Bulletin Board, we cannot be certain that our shares will be actively
traded or at what prices they will trade.
9
RISK OF LOW PRICED SECURITIES MAY AFFECT THE MARKET VALUE OF OUR STOCK.
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 CDEX's 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, CDEX's
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.
FAILURE TO MAINTAIN MARKET MAKERS MAY AFFECT VALUE OF OUR COMMON STOCK.
If CDEX is unable to maintain National Association of Securities Dealers, Inc.
member broker/dealers as market makers, the liquidity of our common stock could
be impaired, not only in the number of shares of common stock which could be
bought and sold, but also through possible delays in the timing of transactions,
and lower prices for our common stock than might otherwise prevail. Furthermore,
the lack of market makers could result in CDEX shareholders being unable to buy
or sell shares of our common stock on any secondary market. We may be unable to
maintain such market makers.
SALE OF SHARES ELIGIBLE FOR FUTURE SALE COULD ADVERSELY AFFECT THE MARKET PRICE
OF OUR COMMON STOCK.
Other than the shares offered hereby, 3,651,000 of the 23,438,532 outstanding
shares of our Class A common stock have been issued in reliance on a
registration exemption under the Securities Act of 1933, as amended. Such shares
will not be available for sale in the open market without registration except in
reliance upon Rule 144 under the Securities Act. In general, under Rule 144 a
person, or persons whose shares are aggregated, who has beneficially owned
shares acquired in a non-public transaction for at least one year, including
persons who may be deemed "affiliates" of CDEX, as defined in Rule 144, would be
entitled to sell within any three-month period a number of shares that does not
exceed the greater of 1% of the then outstanding shares of common stock, or the
average weekly reported trading volume during the four calendar weeks preceding
such sale, provided that current public information is then available. In
addition, a person who is not deemed to have been an affiliate at any time
during the three (3) months preceding a sale and who has beneficially owned the
restricted securities for the last two (2) years, is entitled to sell all such
shares without regard to the volume limitations, current public information
requirements, manner of sale provisions and notice requirements. If a
substantial number of the shares owned by these shareholders were sold under
Rule 144, the market price of our common stock could be adversely affected.
DISTRIBUTION OF SHARES OF OUR COMMON STOCK BY A SIGNIFICANT SHAREHOLDER COULD
CREATE AN OVERHANG IN THE MARKET.
Pursuant to a court order, a significant CDEX shareholder was ordered to
distribute to its shareholders and others approximately 12,000,000 shares of
CDEX common stock which it held. These shares were restricted and could not be
sold publicly by that significant shareholder. However, under the court order
and pursuant to Section 3 of the Securities Act, these shares will be freely
tradable by the individual shareholders of this significant shareholder. Thus,
in addition to the shares offered hereby, 12,000,000 shares held by the
shareholders of this significant shareholder will be eligible for public sale,
when and if a trading market develops for our shares. As a result, the prices at
which our shares trade may be lower than the price that would be expected for a
fully distributed issue.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Information included in this prospectus may contain forward-looking statements.
This information may involve known and unknown risks, uncertainties and other
factors which may cause our actual results, performance or achievements to be
materially different from the future results, performance or achievements
expressed or implied by any forward-
10
looking statements. Forward-looking statements, which involve assumptions and
describe our future plans, strategies and expectations, are generally
identifiable by use of the words "may," "will," "should," "expect,"
"anticipate," "estimate," "believe," "intend" or "project" or the negative of
these words or other variations on these words or comparable terminology.
This prospectus contains forward-looking statements, including statements
regarding, among other things, (a) our projected sales and profitability, (b)
our growth strategies, (c) anticipated trends in our industry, (d) our future
financing plans, and (e) our anticipated needs for working capital. These
statements may be found under "Management's Discussion and Analysis of Financial
Conditions and Results of Operations" and "Our Business," as well as in this
prospectus generally. Actual events or results may differ materially from those
discussed in forward-looking statements as a result of various factors,
including, without limitation, the risks outlined under "Risk Factors" and
matters described in this prospectus generally. In light of these risks and
uncertainties, there can be no assurance that the forward-looking statements
contained in this prospectus will in fact occur.
USE OF PROCEEDS
CDEX will receive no proceeds from the distribution of securities in this
offering. All proceeds will go to the selling shareholders who are offering
their shares in this prospectus.
11
CAPITALIZATION
The following table sets forth the capitalization of CDEX at October
31, 2003. The following table should be read in conjunction with the financial
statements and related notes thereto included elsewhere in this prospectus.
- --------------------------------------------------------------------------------------
Total current liabilities 19,137
- --------------------------------------------------------------------------------------
Long-term debt
- --------------------------------------------------------------------------------------
Stockholders' equity
- --------------------------------------------------------------------------------------
Preferred Stock, par value, $.005 per share: 6,000,000 shares --
authorized; none issued and outstanding
- --------------------------------------------------------------------------------------
Common Stock, Class A, par value, $.005 per share: 33,500,000 115,878
shares authorized; 23,175,505 shares issued and outstanding
- --------------------------------------------------------------------------------------
Common Stock, Class B, par value, $.005 per share: 500,000 shares 1,100
authorized; 220,000 shares issued and outstanding
- --------------------------------------------------------------------------------------
Additional paid-in capital 10,039,805
- --------------------------------------------------------------------------------------
Total capitalization 10,175,920
- --------------------------------------------------------------------------------------
12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND PLAN OF OPERATION
You should read the following discussion in conjunction with our audited
financial statements and related notes included elsewhere in this information
statement. The following discussion contains forward-looking statements. Please
see Forward-Looking Statements for a discussion of uncertainties, risks and
assumptions associated with these statements.
PLAN OF OPERATION
We are a technology development company. Our primary focus is and will continue
to be products from technologies that we develop in-house or acquire from other
sources. Our current focus is on developing and marketing products using
chemical detection and validation technologies. With regard to these
technologies, our primary activities over the next twelve months will be
developing products with increasing focus on the marketing of those products.
For technical, accounting purposes, we are currently in the development stage
and expect to continue as such for the next 12 months. At present, we are
devoting our resources to the development of products for our two potential
markets: (i) identification of substances of concern (e.g., explosives, illegal
drugs and chemical/biological weapons); and (ii) anti-counterfeiting, brand
protection and quality assurance (e.g., validation of prescription medication;
detection of counterfeit or sub-par products for brand protection; and quality
assurance inspection of incoming raw materials and outgoing final products).
We anticipate acquiring other technologies in the future through partnering and
investment. However, unless and until such time as we acquire other technology
assets, we anticipate that almost all of our revenues, if any, will come from
our chemical detection and validation products.
In the medical area, we plan on continuing our emphasis on our SafeMed product
line (which is intended for use in ensuring that medication has not been
counterfeited by substitution or dilution of the constituent ingredients or that
the medication administered is what was prescribed), by completing final
engineering and expanding marketing efforts. Until such time as final
engineering is complete on our SafeMed products, we will support field test
sites and third party research projects using pre-production model prototypes.
Our first products will focus on the prescription medication anti-counterfeiting
market, with the Counterfeit Medication Detection Unit (CMDU) being the first
completed product CDEX places in the end-consumer marketplace, followed closely
thereafter by introduction of quality assurance based applications - also
focused on healthcare - namely the NDU (Narcotics Disposal Unit) and the
Intravenous Medication Validation System (IMVS). In the explosive detection
area, the PS3 (Personnel Security Screening System, designed to detect trace
amounts of explosive on surfaces impacted by UV energy) is scheduled to be our
first end-consumer product.
We plan to increase our existing sales force by March 1, 2004 to augment sales
efforts in the healthcare industry as well as focus on sales to the federal
government. We also plan to continue attending industry trade shows and creating
private audience demonstrations with potential customers or partners. We
anticipate entering into marketing and distribution partnerships with companies
established in the healthcare market to distribute our anti-counterfeiting and
quality assurance products through reseller agreements and technology
partnerships where our validation and identification technologies will be
integrated with their medication distribution systems.
We anticipate revenue from our security market (e.g., explosive detection
equipment) to be via government development contracts, licensing agreements with
existing vendors of security equipment and explosive detection products,
followed by unit sales to end-users. We have entered into discussions with
certain security solution vendors and have submitted joint proposals with
several large companies, but have not yet obtained contracts with those vendors
or reached any definitive licensing-type agreements with them. While potential
licensing opportunities are fully explored, we will continue to prosecute
development efforts. We anticipate continuing to seek development contracts with
the U.S. government for development of future products, including those
associated with detection of chemical and biological weapons. We have elected to
defer additional work on landmine detection pending receipt of additional
resources to address some of the technical issues associated with
commercialization, e.g., increasing the footprint and speed of the unit.
13
RESULTS OF OPERATIONS
YEAR ENDED OCTOBER 31, 2003 COMPARED WITH OCTOBER 31, 2002
During the year ended October 31, 2003, we received revenue of $191,964,
representing an increase of $116,012 (or 152.7%) over $75,952 of revenue for the
year ended October 31, 2002. In fiscal 2003, these revenues were from our
agreement with the U.S. Department of Defense under which we performed a
feasibility study for detection of chemical and biological agents with our
existing technologies. In fiscal 2002, these revenues came primarily from a
sub-contract with a government contractor to conduct initial field experiments
and data gathering, in arid and temperate climates, using an early stage
production model of a landmine detection system based on CDEX's base
technologies.
During the year ended October 31, 2003, we had development costs of $2,683,756,
representing an increase of $75,195 (or 2.9%) over $2,608,561 for the year ended
October 31, 2002. These costs were for development of our base technology
platform, which was used for the fulfillment of development contracts from which
we derived the aforementioned revenues.
During the year ended October 31, 2003, we had general and administrative
expenses of $1,222,271, representing an increase of $308,706 (or 33.8%) over
$913,565 for the year ended October 31, 2002. In both years, these expenses
primarily consisted of salaries, fees for professional services, preparation and
review of contracts, and intellectual property (filing of patent applications)
as well as insurance costs. Much of these costs reflect non-cash compensation
paid in CDEX common stock, which has been expensed in our financial statements.
The foregoing resulted in a net loss of $3,713,920 for fiscal 2003 and of
$3,447,587 for fiscal 2002.
LIQUIDITY AND CAPITAL RESOURCES
To date, CDEX has incurred substantial losses, and will require financing for
working capital to meet its operating objectives. We anticipate that we will
require financing on an ongoing basis unless and until we are able to support
our operating activities with revenues.
As of October 31, 2003, we had working capital OF $415,340, $342,923 of which
consisted of cash and cash equivalents. We anticipate the need to raise
approximately $3,500,000 to $5,000,000 over the next twelve months to satisfy
our current budgetary projections, which include substantial payments for the
component parts associated with assembly of our first products. Our continued
operations, as well as the implementation of our business plan, therefore will
depend upon our ability to raise additional funds through bank borrowings,
equity or debt financing. We continue to seek prospective investors who may
provide some of this funding. In December 2003, we issued 83,335 shares of our
common stock to accredited investors at $1.50 per share. In January 2004, we
received commitments for additional funding in the aggregate amount of $55,000
from two of our existing investors and are exploring other potential funding
opportunities. Also, on January 20, 2004, we received an unconditional
subscription for 1,333,333 shares for an aggregate price of $1,000,000 from an
accredited investor. The purchase price is payable in installments, the last of
which, is due on July 2, 2004.
During the year ended October 31, 2003, we used net cash of $1,239,159 in
operating activities and invested $98,850 in property and equipment. We received
proceeds in the amount of $1,400,500 from the sale of restricted shares of
common stock to accredited investors.
We have received limited revenues from operations to date and are actively
negotiating with potential contractors who, in some cases, may either license
our technologies for use in products produced by them or, in other cases, may
purchase products produced by us. We believe we may potentially begin to
generate revenues from such licenses or product sales as early as the third
calendar quarter of 2004. However, we cannot be certain whether or when we will
receive such revenues.
CRITICAL ACCOUNTING POLICIES
The discussion and analysis of our financial condition and results of operations
are based on our financial statements,
14
which have been prepared in accordance with accounting principles generally
accepted in the United States of America (GAAP). The preparation of these
financial statements requires us to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses, and related
disclosure of contingent assets and liabilities. On an on-going basis, we
evaluate these estimates, including those related to bad debts, inventory
obsolescence, intangible assets, payroll tax obligations, and litigation. We
base our estimates on historical experience and on various other assumptions
that are believed to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying values of certain assets
and liabilities. Actual results may differ from these estimates under different
assumptions or conditions.
We have identified below certain accounting policies which we apply in the
preparation of our financial statements. We believe that the policies discussed
below are those most critical to our business operations. These policies form
the basis of our discussion throughout this section and affect our reported and
expected financial results.
REVENUE RECOGNITION: Development contract revenue represents fees earned in
connection with two development contracts that were awarded to CDEX to complete
initial testing and research on a time and material basis. Revenue from these
contracts was recognized as the testing and research was performed at
contractually agreed upon rates.
CASH AND CASH EQUIVALENTS: We maintain cash balances that may exceed federally
insured limits. We do not believe that this results in any significant credit
risk. We consider all highly liquid investments with original maturities of 90
days or less to be cash equivalents.
USE OF ACCOUNTING ESTIMATES: The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions. These estimates and assumptions affect (i) the
reported amounts of assets and liabilities, (ii) disclosure of contingent assets
and liabilities at the date of the financial statements and (iii) the reported
amounts of revenues and expenses during the periods covered by our financial
statements. Actual results could differ from those estimates.
PROPERTY AND EQUIPMENT: Property and equipment are stated at historical cost and
are depreciated using the straight line method over the estimated useful lives
of the related assets, ranging from five to seven years. Depreciation expenses
were $84,982, $66,968 and $168,392 for the years ended October 31, 2003 and
2002, and for the period from inception to October 31, 2003, respectively.
INCOME TAXES: We file our income tax returns on the cash basis of accounting,
whereby revenue is recognized when received and expenses are deducted when paid.
To the extent that items of income or expense are recognized in different
periods for income tax and financial reporting purposes, deferred income taxes
are provided to give effect to these temporary differences. Deferred tax assets
and liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of assets and
liabilities and their respective tax bases. Deferred tax assets and liabilities
are measured by applying presently enacted statutory tax rates, which are
applicable to the future years in which deferred tax assets or liabilities are
expected to be settled or realized, to the differences between the financial
statement carrying amounts and the tax bases of existing assets and liabilities.
The effect of a change in tax rates on deferred tax assets and liabilities is
recognized in operations in the period that the tax rate is enacted.
As we have never operated at a profit, no tax benefit has been reflected in the
statement of operations and a valuation allowance has been established reducing
the net carrying value of the deferred tax asset to zero.
ADVERTISING COSTS: The cost of advertising is expensed as incurred. Advertising
expense was $28,483, $9,873, and $38,481 for the years ended October 31, 2003
and 2002, and for the period from inception to October 31, 2003, respectively.
RESEARCH AND DEVELOPMENT: Total research and development costs include labor for
employees and contractors, rent, professional services, materials, lab equipment
and disposals. These costs are expensed in the accompanying Statement of
Operations which forms part of our financial statements appearing elsewhere in
this prospectus.
FAIR VALUE OF FINANCIAL INSTRUMENTS: The carrying amounts of items reflected in
current assets and current liabilities approximate their fair value due to the
short-term nature of their underlying terms.
15
RISKS, UNCERTAINTIES AND CONCENTRATIONS: Financial instruments that potentially
subject CDEX to significant concentration of credit risk consist primarily of
cash equivalents and accounts receivable. In addition, at times CDEX's cash
balances exceed federally insured amounts
All revenue reported in our financial statements was earned under two contracts,
one for development and one for testing. Accounts receivable represents a
portion of the revenue outstanding on these contracts. We provide for estimated
credit losses at the time of revenue recognition.
NET LOSS PER COMMON SHARE: Basic net loss per share was determined by dividing
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.
STOCK-BASED COMPENSATION: We have provided restricted stock grants to employees
and consultants as the principal element of their compensation. We determine
compensation expense as the fair value, at the measurement date, of the service
received or the common stock issued, whichever is more reliably determined. In
the case of employees, the measurement date is the date of grant. In the case of
outside consultants, the measurement date is the date at which their performance
is complete. This total cost is first reflected as deferred compensation in
stockholders' equity (deficit) and then amortized to compensation expense on a
straight-line basis over the period over which the services are performed. When
the fair value of the common stock is used and the measurement date is not the
date of grant, the total cost is remeasured at the end of each reporting period
based on the fair market value on that date, and the amortization is adjusted.
We have also utilized employment and consulting agreements which combine cash
and stock elements of compensation, where a fixed dollar value of stock is
awarded to settle noncash compensation. In this case, compensation cost is
determined based on the fair value of the services, which is the more reliably
determined measure. We have awarded some of the common shares in advance of when
the service is performed. These amounts are shown as deferred compensation in
the accompanying balance sheet. We have also paid performance bonuses in awards
of common stock.
16
OUR BUSINESS
GENERAL
CDEX Inc was incorporated in the State of Nevada on July 6, 2001. We are a
technology company with a current focus on developing and marketing products
using chemical detection and validation technologies. At present, we are
devoting our resources to the development of products for two distinct markets:
(i) identification of substances of concern (e.g., explosives, illegal drugs and
chemical/biological weapons); and (ii) anti-counterfeiting, brand protection and
quality assurance (e.g., validation of prescription medication; detection of
counterfeit or sub-par products for brand protection; and quality assurance
inspection of incoming raw materials and outgoing final products). Each
application area is supported by our patents pending technologies and each by
common technological platforms.
We anticipate acquiring other technologies in the future through partnering and
investment. However, unless and until such time as we acquire other technology
assets, we anticipate that almost all of our revenues, if any, will come from
our chemical detection products.
PRODUCTS
We are currently focusing our resources on developing real-time (within seconds)
chemical detection products using our proprietary patents pending technologies.
We believe products using our technologies will be able to identify substances
from close range as well as longer distances, although we have not yet
determined the exact limits of this range. Laboratory testing demonstrates the
technologies' capability in identifying and discriminating between substances
(e.g., explosives, pills or liquid medications) in a wide range of environments
(e.g., buried underground or in luggage). We know of no insurmountable design
obstacles that we will have to overcome before we can introduce our initial
suite of products to the market.
In systems using CDEX's proprietary technologies, an energy source (e.g., x-ray
or ultraviolet (UV)) is directed toward the target area. The resulting electron
decay within the target substance causes emission of characteristic photons that
form chemical spectral signatures that can be captured and compared to those in
the CDEX database to provide real-time identification/validation of the target
substances. Using algorithms that are in large measure empirically derived, CDEX
proprietary software discriminates between various clutter constituents and the
signal of interest to validate or identify the target substance. CDEX has
developed and extensively tested several first generation systems for detection
of substances. The systems all have a similar component structure with primary
differences lying in the energy source (e.g., x-ray or UV), the detection
environment, the discriminating algorithms and the supporting software.
IDENTIFICATION OF SUBSTANCES OF CONCERN
We are applying our chemical detection technologies to the development of a
suite of applications performing complementary tasks for the detection of
explosives, which include the following:
o PERSONNEL SECURITY SCREENING SYSTEM (PS(3)): A man-mobile system with a
handheld, UV-based scanning device to detect trace amounts of explosive (and
potentially drug residues) on areas impacted by the UV energy, e.g., on the
surface of clothing, shoes, luggage, parcels, skin and personal items.
o MOBILE SECURITY SCREENING SYSTEM (MS(3)): A mobile unit that employs X-ray
energy to detect explosives concealed in luggage and packages, including
detection for unattended containers.
o ACCESS SECURITY SCREENING SYSTEM (AS(3)): Portal unit that screens individuals
for explosive residue on areas impacted by the UV. The AS(3) expands the PS(3)'s
field of view by adding multiple light sources and detectors configured in a
portal walkway that examines individuals as they pass through the portal for
trace amounts of explosives (and potentially drug residues) on areas impacted by
the UV energy, e.g., on the surface of their skin, clothing and shoes.
o FIXED SECURITY SCREENING SYSTEM (FS(3)): Fuses the PS(3) and MS(3) into a
conveyor belt unit that provides a redundant approach to luggage/package
screening. The multiple detectors and sources of the FS(3) will permit the
examination of
17
luggage/packages for concealed, bulk explosives as well as for trace surface
residue in a single integration with throughput comparable to existing
multi-train systems.
Using the explosive detection platforms noted above, development is also
progressing for systems that detect other substances of concern, including
illegal drugs and chemical/biological agents. Development has progressed under
contracts with the United States Government. We continue to seek other such
contracts both alone and in combination with major companies.
ANTI-COUNTERFEITING, BRAND PROTECTION AND QUALITY ASSURANCE
CDEX products in this area use the same base technological platforms as our
detection products described above to validate the authenticity of target
substances based on their chemical signature. In the pharmaceutical and
healthcare industries, for example, this allows for verification that medication
has not been counterfeited by substitution or dilution of the constituent
ingredients or that the medication administered is what was prescribed. Scanning
the medication is non-destructive and can be done in real-time (within seconds).
CDEX technology differs from currently utilized systems which rely primarily on
"tagging" a package or pill to identify counterfeit medication only by the
absence of these taggants. CDEX technology directly validates the medication by
the unique composite spectra of the constituent fluoresced ingredients. Products
in this category are in various stages of development and include:
o SAFEMED COUNTERFEIT MEDICATION DETECTION UNIT (CMDU): The CMDU is a portable
solution that identifies counterfeit medication by analyzing the composite
chemical signatures of medications against the authentic signature contained in
the CMDU database to determine authenticity. Users scan medication to detect
counterfeits before they enter inventory or reach the consumer.
o NARCOTICS DISPOSAL UNIT (NDU): The NDU validates the concentration of a
narcotic designated for disposal, and prints a report that includes the amount,
concentration, date and time stamp, therefore greatly reducing the potential for
narcotics to leave the clinical environment illegally.
o INTRAVENOUS MEDICATION VALIDATION SYSTEM (IMVS): The IMVS validates
medications that are combined in intravenous drip systems, most commonly for
patients with cancer or HIV-AIDS. The product will be installed directly into
the machine that combines the medications into a solution and then releases them
into the intravenous drip. The devices could be designed to validate and
authenticate the individual medications entering the machine as well as the
final mixture exiting the machine before it enters the patient. The IMVS would
trigger an alarm and/or mechanically discontinue the dispensing of the
medication should it detect an unauthenticated constituent medication or an
improper ratio of medications in the combined solution.
o SAFEPHARM: SafePharm validates medication being distributed in a retail
pharmacy, as identified by the user, prior to distribution.
The same approach is being applied in the area of brand protection for distilled
spirits, where counterfeiting and dilution of product adversely impact the taste
of a popular brand or collection of taxes by a local, regional or national
taxing authority.
PRODUCT STATUS AND DEVELOPMENT
Many of our potential products utilize the same basic technological platforms.
Therefore, the final engineering achievement of the first product will be
applied to other products downsteam in development. Development of prototypes
and continued engineering is ongoing. All development has primarily utilized
common, off the shelf components for applications.
We will not be able to determine end user unit pricing until final engineering
is complete and vendor agreements are in place. We have yet to establish large
volume relationships with suppliers. However we have established relationships
with suppliers during the research and development period. We anticipate these
relationships will be expanded to address higher volume of units purchased. We
have received large volume quotes from suppliers for some components for our
products, however until additional funding is received, we will not be able to
sign any large volume agreements with these suppliers. We are not restricted in
selecting sources for components. We intend to explore outsourcing for
manufacturing as well as certain engineering tasks.
18
IDENTIFICATION OF SUBSTANCES OF CONCERN
o PS(3): Development of a first generation prototype is complete. Final release
of the product is pending refinement (in coordination with the appropriate
government agency), manufacturer-ready engineering, and software modification.
o MS(3): Development is in final stages; we have not produced a prototype.
o AS(3): Development is ongoing. We have not completed software development.
o FS(3): Development is ongoing. We have not completed software development.
On May 8, 2003, we entered into an agreement with the United States Department
of Defense. Under Phase I of the agreement, we performed a study of the
feasibility of the CDEX technology to support identification of
chemical/biological agents. We have substantially completed this phase of the
agreement. Phase 2, at the Defense Department's option, is to design and build a
prototype. We are awaiting the Defense Department's final decision to build the
prototype. The total consideration payable to CDEX under the agreement is
slightly less than $991,409, $196,483 being allocated for Phase 1 and $794,926
for Phase 2.
ANTI-COUNTERFEITING, BRAND PROTECTION AND QUALITY ASSURANCE
All of our potential products utilize the same base technologies, with a
customized database. We intend to market and deploy customized systems to
capture the chemical signature of customer's products in the database. Once a
chemical signature of an authentic product is loaded into the database, CDEX
products can validate target substances against that chemical signature.
Products for the healthcare industry focusing on validation of prescription
medication include:
o CMDU: Development is complete, and we have produced a first generation
prototype of this product. However, final release of the product is pending
completion of the database, statistical validation of the final prototype, and
manufacturer-ready engineering.
o NDU: Development is in final stages. We have produced a first generation
prototype.
o IMVS: Development is in final stages. We have not produced a prototype.
o SAFEPHARM: Development is ongoing. We have not completed software development.
INDUSTRY AND COMPETITION
In general, we envision products using our chemical detection technologies as
fulfilling two broad industry needs: (i) identification of substances of concern
(e.g., explosives, illegal drugs and chemical/biological weapons); and (ii)
anti-counterfeiting, brand protection and quality assurance (e.g., validation of
prescription medication in the distribution network and prior to administration
to patients; detection of counterfeit or sub-par products for brand protection;
and quality assurance inspection of incoming raw materials and outgoing final
products).
IDENTIFICATION OF SUBSTANCES OF CONCERN
Our research indicates that by 2010, the people-screening market will have
surpassed $9 billion in system deployment and services, up from $600 million in
2002. Sales for 2006 are expected to reach $3.5 billion. The compounded annual
growth rate during the 2003-2010 period is estimated to be approximately 47%.
(See The Homeland Security Research Corporation's - 2003-2010 PEOPLE SCREENING
WEAPONS & EXPLOSIVES DETECTION MARKET REPORT (2002), (WWW.HSRC.BIZ).)
Unfortunately, escalation of world terrorism makes it likely that this market
will continue to grow.
19
The Homeland Security Research Corporation's report covering the people
screening industry underscores the potential and need for effective detection of
weapons, explosives and weapons of mass destruction. The report also highlights
current shortcomings that may require the industry to refocus and develop
totally new products. Slow throughput rates and false alarms virtually nullify
plans to screen every - or even most - person threats. Existing systems are for
the most part heavily operator dependent, making them susceptible to human
errors. Taken together, these limitations restrict the effectiveness and
thoroughness of people screening activities. The report points out that a
possible solution is development of multiple threat portals capable of providing
cost effective detection of most, or all, current threats without adversely
affecting people traffic.
Currently, domestic sales of people screening devices are dominated by a small
number of products sold by a handful of vendors. CDEX believes our chemical
detection products will compete with these existing detection products, and,
depending on the application, may even have a competitive advantage by being
more advanced than existing tools in a number of areas, including the following:
a. improves operator safety by permitting non-intrusive inspection from a
distance without contact with the subject;
b. potentially reduces error rates by eliminating operator interpretation
of results and using audible or visual alarms;
c. detects known substances of concern by a "chemical detection" process,
not simply known shapes of detonation mechanisms or bomb components,
or ancillary evidence of devices;
d. works in virtually "real time"; and
e. is expandable as new threats are identified, providing a more timely
reduction to potential threats to public safety.
The explosives detection marketplace is potentially significant, including every
major building, transportation facility, or significant gathering place. We
believe the market is potentially lucrative 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.
ANTI-COUNTERFEITING, BRAND PROTECTION AND QUALITY ASSURANCE
According to PHARMACEUTICAL TECHNOLOGY (September 2002, pp. 16-26), a
substantial need exists for technology that distinguishes between authentic and
counterfeit products, including, for example, medications dispensed in
hospitals, pharmacies and other health care facilities. Moreover, in his October
2000 testimony to the Oversight and Investigations Hearing on Counterfeit Bulk
Drugs, U.S. Commerce Committee Chairman, Tom Bliley (R-VA), stated that "the FDA
has reviewed its records on drug imports and found that 242 foreign firms may
have shipped misbranded drugs to the United States in 1999 and have never been
inspected." Other potential users include law enforcement organizations, school
systems, large corporations and governments. These markets are global in
perspective and large in size, e.g., the U.S. law enforcement market consists of
over 20,000 local, state and federal agencies.
The U.S. Food and Drug Administration, U.S. Customs and Congress are looking for
new ways to keep the nation's medication supply chain safe from the increasing
incidents of counterfeiting. Currently, the FDA is expected to make
recommendations to the U.S. Congress addressing the counterfeit medication issue
facing U. S. consumers. It is believed that this report will act as a catalyst
to accelerate anti-counterfeit technology deployment across the industry. The
FDA (and Congress) may require anti-counterfeit solutions within the U.S. within
one year. This looming regulatory mandate is driving the demand for inexpensive,
easily deployable anti-counterfeit solutions.
Today, most of the imported prescription medications go through actual
inspection by the FDA and/or U.S. Customs, though they do not have the tools to
conduct comprehensive inspections. U.S. Customs estimates that, at best, 10% of
smuggled drugs are found by the inspection methodology. Currently, the FDA
inspects imported items side-by-side with U.S. Customs. While U.S. Customs out
number the FDA inspectors 18 to 1, only 25% of FDA inspectors inspect
medications. The FDA has stepped up its inspection intensity.
20
FDA and industry experts agree that the majority of counterfeits introduced into
the U.S. market enter through the U.S. distribution channels. No medication
inspections are made at the drug distribution channel or repackagers' locations.
The FDA is considering strategies to expand inspections beyond the point of
import into the U.S. distribution channel. (See FDA COUNTERFEIT DRUG TASK FORCE
INTERIM REPORT (October 2003 pp. 9-12).)
According to its 1999 NWDA INDUSTRY PROFILE AND HEALTHCARE FACTBOOK , the
National Wholesale Druggists' Association in Reston, VAreported that 90% of all
prescribed medications dispensed to U. S. consumers were dispensed by hospital,
retail chain and independent pharmacies. As defined by regulation, a final check
of a prescription is required by a pharmacist before a medication can be
dispensed to a patient. Unfortunately, this check is a visual check to confirm
the patient's vial or single dose of medication matches the prescription. In
addition, there are no tools available to take advantage of this final
opportunity to identify counterfeit medications. There is little inspection of
the wholesale distribution network or of the U.S. repackagers.
SALES AND MARKETING
CDEX's 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 stand alone 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).
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. We also
anticipate reaching prospective customers via strategic relationships and
traditional advertising. Planned advertising activities include trade and
industry magazines and doctor managed clinical trials where researchers are
likely to publish articles discussing the results of the trials.
We anticipate focusing on domestic markets before expanding internationally via
strategic marketing and manufacturing partnerships. We anticipate partnerships
based either on geographic boundaries or by products depending on the partner's
market specialty and market presence. We have received unsolicited contacts by
prospective partners from the Middle East, Europe, Taiwan, Vietnam, Korea,
Malaysia and China based on information on WWW.CDEX-INC.COM. These contacts were
primarily interested in explosive and drug detection, and the technology's
potential use in the electronic manufacturing industry. These contacts may never
result in revenue for, or relationships that will benefit, CDEX. CDEX has not
applied for licenses or permits to do business in any foreign country, nor for
any certification of its products.
IDENTIFICATION OF SUBSTANCES OF CONCERN
CDEX has developed technologies to deliver high performance detection products -
either as a stand-alone system or as an element in a multi-technology system.
CDEX allows for retention of investment costs of deployed screening systems by
both retro-fitting existing systems to incorporate CDEX technology, or enhancing
screening methodology by including stand-alone CDEX detection devices. This
defense-in-depth approach offers a dual or multi-technology solution that should
improve flow rates and detection rates, and provide "clear" confirmation easier
and even more definitive.
CDEX also believes a partnership strategy will help gain faster market
acceptance by working closely with large, established vendors in the market
instead of directly competing against them. CDEX is in discussions with several
such potential partners.
21
Application of our products as sensors that easily integrate with existing
systems will also potentially remove barriers to market entry and capitalize on
an industry trend to utilize multiple sources of data/intelligence from which to
build an overall threat assessment.
We have spent considerable time meeting with branches of the U.S. Government to
identify areas of application of our chemical detection technology. We have
determined, based on past experience of our employees and consultants who have
done work for the federal government, and the advice of professional services,
that one of the most cost efficient ways to market developmental technologies is
through identifying those branches of the government that have development money
available to fund private sector efforts. We plan to continue marketing to the
U.S. Government for technology development revenue by co- partnerships with
major integration firms and individually.
Our marketing efforts have captured a level of interest with certain branches
of the U.S. Government which have resulted in two contracts:
In May of 2002, CDEX was awarded a seven-month testing sub-contract with a total
value up to $75,940 for performance of initial field experiments and data
gathering, in arid and temperate climates, using an early stage production model
of a landmine detection system, and the related expenses and materials to
perform such contract.
On May 8, 2003, we entered into an agreement with the United States Department
of Defense. Under Phase I of the agreement, we performed a study of the
feasibility of the CDEX technologies to support identification of
chemical/biological agents. We have substantially completed this phase of the
agreement. Phase 2, at the Defense Department's option, is to design and build a
prototype. We are awaiting the Defense Department's final decision to build the
prototype to move forward with Phase 2. The total consideration payable to CDEX
under the agreement is slightly less than $991,409, $196,483 being allocated for
Phase 1 and $794,926 for Phase 2.
Revenues from these contracts have comprised substantially all of our revenues
during the year ended October 31, 2003. The loss of one or both of these
customers would have resulted in a reduction of our revenues during that period.
However, as indicated above, we intend to direct our future marketing efforts
toward selling or licensing products based upon our technologies in addition to
these types of development contracts.
ANTI-COUNTERFEITING, BRAND PROTECTION AND QUALITY ASSURANCE
Marketing activities have generated a number of prospective partnerships in the
healthcare industry for field-testing with major medical institutions and
product distribution by existing vendors to some of the largest hospital chains
in the United States. Such positive response reinforces our primary business
vision of marketing end units as well as utilizing partners to penetrate
existing markets with CDEX technology.
We also plan on developing and marketing products to defend high-end consumer
products where reputation and product distinction are critical components to
driving sales revenue (e.g. high price distilled spirits and cosmetics).
We will continue to explore new markets and applications for our existing and
developing technologies as a critical part of identifying partners and
opportunities for revenue generation.
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 CDEX's 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. To date, we
have filed five provisional patent applications and have converted two of these
applications to utility. Policing unauthorized use of CDEX's 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
22
attention, and/or require CDEX to enter into costly royalty or licensing
arrangements to prevent further infringement, any of which could cause a
decrease in our profits.
We currently have the following patent applications pending:
1. "System and Method for Adapting a Software Control In an Operating
Environment," Application No. 10/268,678 (non-provisional)
2. "Methods and Apparatus for Molecular Species Detection, Inspection and
Classification Using UV Fluorescence," Application No. 10/717,921
(non-provisional)
3. "System and Method Identifying Chemical Substances Using Electronic Scanning
Techniques," Application No. 60/448,864 (provisional)
4. "System and Method For the Detection and Identification of a Plurality of
Chemical Substances," Application No. 60/449,834 (provisional)
5. "Improved Method and Apparatus for Molecular Species Detection, Inspection
and Classification Using UV Fluorescence," Application No. 60/485,116
(provisional).
We have also filed corresponding international applications for items 1 and 2
above and plan to convert items 3-5 above from provisional to non-provisional
applications.
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.
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. We currently have no licenses for
the use of any of our specific products.
ASSET PURCHASE AGREEMENT
To acquire the chemical detection technologies that assist in supporting our
products, we entered into an Asset Purchase Agreement, effective as of August 4,
2001, with Loch Harris, Inc., a Nevada corporation, and Chem Tech, Inc., a
subsidiary of Loch, jointly and severally, as the selling party. (In this
discussion, we refer to both companies collectively as "Loch.") Pursuant to the
Asset Purchase Agreement, among other things, CDEX acquired Loch's chemical
detection technologies, nanometrology and related assets, including research and
development, technical processes and intellectual property rights, in exchange
for shares of CDEX's common stock.
The Asset Purchase Agreement was amended as of March 1, 2002 by an Agreement
Regarding Assumption of Liability pursuant to which, among other things, we
assumed certain obligations of Loch and released Loch from certain obligations
under the Asset Purchase Agreement and, in consideration thereof, Loch
transferred back to CDEX 200,000 of the CDEX shares held by Loch. These
obligations included certain out of pocket expenses and professional fees and
expenses for legal and accounting services. As a result of the amendment, the
net consideration paid by CDEX under the Asset Purchase Agreement for the
purchased assets was 13,865,000 shares of our common stock after giving effect
to a subsequent 1 for 5 reverse split of such common stock.
The Asset Purchase Agreement required that 1,665,000 of such shares be
delivered, at the direction of Loch, to certain persons and entities in
discharge of certain loans and other obligations of Loch so as to release all
liens and other claims of rights encumbering the assets purchased. Distributees
of these shares included Mark E. Baker, who received 500,000 shares, and Coto,
LLC, as designee of Rodney A. Boone, who received 320,000 shares. Both of
Messrs. Boone and Baker were principals of Loch. Simultaneously with the closing
under the Asset Purchase Agreement, CDEX also entered into now terminated
Service Agreements with each of Messrs. Boone and Baker pursuant to which we
engaged them to assist in the transition of the purchased assets from Loch to
CDEX. As compensation under these
23
agreements, Baker received 100,000 shares, and Boone 150,000 shares, of CDEX
common stock. Both agreements have now been terminated.
All shares issued to Loch under the Asset Purchase Agreement were issued as
"restricted shares." The Asset Purchase Agreement required that Loch distribute
9,600,000 of these shares to its shareholders as soon as practical. Loch
completed this distribution in October 2003 upon the order of the District Court
in Travis County, Texas in settlement of a litigation brought by Loch's
shareholders against its officers and directors. The settlement order also
required Loch to distribute additional CDEX shares it received from the asset
sale, and shares issued to Messrs. Boone and Baker were also ordered surrendered
to Loch's treasury and, eventually, distributed as well. Most of these
additional shares were transferred to third parties (primarily attorneys and
other professionals) for services in connection with the litigation. All of the
shares distributed pursuant to the order are subject to the exemption provided
by Section 3(a)(10) of the Securities Act of 1933, as amended. Accordingly,
these shares are now freely tradable.
Since purchasing the technologies, CDEX scientists and engineers have developed
these technologies in a number of areas, including process improvements,
refinements in optics and energy sources, software design and engineering.
GOVERNMENT REGULATION
We anticipate being subject to various federal, state and foreign laws and
regulations pertaining to the use of potentially dangerous materials, to the
discharge of materials into the environment and/or otherwise relating to the
protection of the environment which may require us to allocate a portion of its
operating budget for use in ensuring its full compliance with such regulations.
We anticipate being able to comply in all material respects with laws and
regulations governing the fire safety industry, and that such laws will not have
a material effect on our operations. However, various federal and state agencies
may propose new legislation that may adversely affect our business, financial
condition and results of operations. We are not currently aware of any other
federal, state or local environmental laws that would have significant adverse
impact on its operations.
LEGAL PROCEEDINGS
CDEX is not currently involved in any legal proceedings nor do we have knowledge
of any threatened litigation.
PROPERTIES
CDEX subleases laboratory space from Dynamic Management Resolutions which leases
from Butterfield Center Limited Partnership at 4565 South Palo Verde, Suite 213,
Tucson, AZ. The terms of this sublease are approximately $.80 per square foot
per month ($1,350 per month) on a yearly basis. This facility consists of 1,800
square feet, and we believe it currently is suitable as our main research and
development facility, as well as for certain administrative offices. We expect
to move to a larger facility of less than 4,000 square feet prior to June 1,
2004 at approximately the same rate per square foot.
Most of our administrative offices are located in Rockville, Maryland where we
lease facilities from Source Office Suites. The terms of our lease agreement for
these facilities are $175 per month for conference room use for meetings in the
Washington DC area, phone answering services and certain mail services. The
facility provides space on an as needed basis on a month-to-month agreement.
CDEX anticipates opening an east coast facility to house certain technical
development functions as well as administrative offices. These activities will
mostly be related to supporting deployed systems and modifying existing systems
for later versions.
EMPLOYEES
We employ a full-time staff of nine employees and two consultants, and a
part-time staff of one bookkeeper and two lab technicians. We also retain seven
or eight consultants at any given time to provide expertise in the areas of
medicine, marketing, fundraising, explosives, pharmaceuticals and
administration. Of our full-time employees, three are executives, two are in
marketing, and the rest perform research and development activities. Of our two
full-time consultants, one serves as Software Engineer, and one as Director of
Finance. In addition to these core personnel, we hire additional consultants
from time to time. We believe our employees and consultants appreciate the
start-up nature of our business, and have contractually agreed to accept a
combination of stock and cash as compensation as long as
24
needed by CDEX. (See Executive Compensation appearing elsewhere in this
prospectus). Our employees currently are not represented by a collective
bargaining agreement, and we believe that our relations with our employees and
consultants are good.
25
MANAGEMENT
The following table sets forth information regarding our executive officers and
directors:
NAME AGE POSITION
- ---- --- --------
Malcolm H. Philips Jr 58 CEO/President/Chairman of the Board of
Directors
Timothy Shriver 53 Sr. Vice President of Technical Operations
Michael Mergenthaler 39 Vice President of Business Operations
George Dials 58 Director
Dr. BD Liaw 66 Director
The following is a summary of the business experience of each of our
executive officers and directors:
Malcolm Philips has been our Chief Executive Officer, President and
Chairman since CDEX's inception in July 2001. In the three months prior to his
joining CDEX, Mr. Philips was employed by Dynamic Management Resolutions LLC,
for which he served as a consultant and as Chief Operating Officer and President
of CDEX, Inc., a Delaware corporation and predecessor to certain aspects of our
business, which was thereafter dissolved. From 1978 to February 2001, Mr.
Philips practiced law, most recently as a partner at Winston & Strawn, one of
the largest law firms in the United States where he was, among other things, a
strategic advisor to senior executives of major corporations. In addition to his
J.D. from Georgetown University Law School (1978), Mr. Philips has a B.S. Degree
with a focus in engineering from West Point (1967) and a Masters in Nuclear
Engineering from Iowa State University (1971).
Timothy Shriver has served as our Senior Vice President of Technical
Operations since July 2001. From 1997 to 1999, Mr. Shriver served as Director of
Performance Assurance for Ontario Hydro-Generation (OPG), where he developed and
managed the implementation of the overall Quality Program at OPG's three CANDU
sites and OPG auxiliary sites supporting the Nuclear Program (at that time, the
largest in North America). His activities also included responsibility for the
development and implementation of an integrated Corrective Action Program, a
performance based Audit and Assessment program and the development of a process
oriented Quality Assurance Manual including the establishment and maintenance of
the required interface with the federal regulator to obtain approval. Between
OPG and CDEX, Mr. Shriver consulted for other utilities' quality assurance
programs.
Michael Mergenthaler has served as our Vice President of Business
Operations since December 2002. From July 2001 to December 2002, he served as
our Director of Business Development. Mr. Mergenthaler has a background in the
telecommunications industry, with experience in hard-wire, wireless and
satellite networks. From December 1999 to February 2001, Mr. Mergenthaler served
as Director of Planning and Scheduling for CAIS Internet, where, using third
party contractors, he managed deployment of high-speed internet LANS to the
hospitality industry and multi-family dwellings to allow access to CAIS's
high-speed network via its web portal. From June 1997 to December 1999, Mr.
Mergenthaler was Manager, Business Operations for Orbcomm Global where he
managed fielding/deployment of a back office billing and provisioning system to
partners/licensees of a global satellite network provider. Licensees ranged from
start-up companies to the largest telecommunications companies in the world. Mr.
Mergenthaler is related through marriage to Mr. Philips.
Mr. Dials has been a director of CDEX since July 2001. Mr. Dials is
currently the Chief Operating Officer of Waste Control Specialists, a chemical
waste repository. From July 2002 until May 2003, Mr. Dials was President and CEO
of LES, LLC a company seeking a license to build a nuclear fuel enrichment
facility. From February 2001 to June 2002, Mr. Dials served as Senior Vice
President of Consulting Services for Science and Engineering Associates
responsible for its Consulting Services line of business, where he provided
executive level direction in corporate mergers and acquisitions in the
consulting area. Mr. Dials managed the engineering, and scientific studies of
Yucca Mountain as a potential geologic repository for spent nuclear fuel and
high-level radioactive waste. Responsibilities include scheduling and cost
performance, technical and administrative performance, strategic operations plan
development, and resource allocation for a $250 million project. Mr. Dials
received a B.S. in Engineering in 1967 from West Point and Masters Degrees in
Political Science and Nuclear Engineering from the Massachusetts Institute of
Technology. He served in the U.S. Army for 10 years, and was awarded the Silver
Star and Bronze Star for Valor.
26
Dr. Liaw has served as a director of CDEX since October 2001. Since
January 2003, he has also served as Managing Director - Energy of Dynamic
Resolutions LLC. From July 1995 to October 2002, he served as an Advisor and
from September 1996 to March 2001, as an Executive Director, to Taiwan Power
Co., an electrical utility. Dr. Liaw served for over 20 years at the U.S.
Nuclear Regulatory Commission and its predecessor agency, the Atomic Energy
Commission. His work related to the high-level nuclear waste repository and
low-level waste projects. In 1986 and 1987, he was invited by China and Taiwan,
respectively, to visit Mainland China and Taiwan to assist in establishing their
nuclear safety regulatory programs. In 1985 thru 1990, Dr. Liaw managed the
NRC's regulatory oversight of the Tennessee Valley Authority's (TVA) nuclear
program, and was instrumental in bring TVA's nuclear program back to full
regulatory compliance. Dr. Liaw represented the NRC in many meetings,
conferences and symposiums in the United States and around the world on a wide
range of issues. In 1994, Dr. Liaw accepted an invitation from the government of
Taiwan to visit and help resolve some legislators' concerns regarding energy
issues facing the country. Subsequently in 1995, Dr. Liaw accepted a request to
return to Taiwan as an advisor to the Ministry of Economic Affairs. Dr. Liaw
also served in a number of positions over the past six years, including as an
advisor to the Industrial Technology Research Institute.
SIGNIFICANT EMPLOYEE
In addition to our executive officers and directors, Dr. Wade Poteet is a
significant employee of CDEX. The following sets forth certain information
regarding Dr. Poteet's background and experience:
Dr. Poteet received his Ph. D. in 1970 in Experimental Solid State Physics from
Virginia Polytechnic Institute (VPI) (Thesis topic: Nuclear Quadrupole Resonance
in Superconductors). His M.S. in Physics is also from VPI, in 1968 (Thesis
topic: Nuclear Magnetic Resonance in Superconductors). He has focused his
research in the area of advanced instrumentation in optics, electro-optics and
detection technology.
For the past 30 years, Dr. Poteet has held Senior Management positions in small
entrepreneurial-based engineering firms. The most recent is CP Systems, Inc. as
President/Principal Scientist where he directed contract research in remote
sensing in the x-ray and ultraviolet regions, including landmine, anti-terrorist
and drug detection programs, and provided research and development for
nanometrology technologies.
Prior to CP Systems, Dr. Poteet was with System Specialists, Inc. as Vice
President/Principal Scientist, where he directed all research and development,
including NASA airborne projects and advanced instruments for commercial and
government programs. These programs include SDIO (Brilliant Eyes, "IRX"), Air
Force Focal Plane Array programs, and programs involving commercial infrared
cameras. Dr. Poteet designed and constructed a color Schlieren
proof-of-principle experiment for use in microgravity fluid flow research. The
system was successfully flown aboard the NASA KC-135 low gravity simulation
aircraft and is now in Phase 2 instrument development. Dr. Poteet designed,
developed, and constructed ultralow-noise preamplifiers with cooled electronics
for a family of infrared detectors and focal plane arrays. He also provided
design services to commercial firms for re-imaging optics in the visible and
infrared regions, including cryogenic design and analysis and complete system
evaluation.
Dr. Poteet, together with Malcolm Philips, Tim Shriver and Michael Mergenthaler,
are full time resources to CDEX. Dr. Poteet's role is one of research and to
associate the results of that research into potential applications and products;
Mr. Philips oversees all of our operations; Mr. Shriver is responsible for all
development of technologies and products; Mr. Mergenthaler focuses on
distribution of those products.
27
EXECUTIVE COMPENSATION
COMPENSATION OF EXECUTIVE OFFICERS
The following table sets forth information regarding the remuneration of our
executive officers:
==============================================================================================================================
LONG TERM COMPENSATION
- ------------------------------------------------------------------------------------------------------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
- ------------------------------------------------------------------------------------------------------------------------------
RESTRICTED
NAME AND PRINCIPAL CASH OTHER ANNUAL STOCK ALL OTHER
POSITION YEAR SALARY(1) BONUS COMPENSATION AWARDS COMPENSATION
- ------------------------------------------------------------------------------------------------------------------------------
Malcolm Philips, 2003 $96,000 -- $206,046 (2) -- --
CEO, Chairman of the
Board of 2002 $67,500 100,000 $259,500 -- --
Directors(1) Class B
2001 $0 -- $100,000 690,000
shares of --
common stock
- ------------------------------------------------------------------------------------------------------------------------------
Timothy D. Shriver, 2003 $96,000 -- $155,789 (3) -- --
Sr. VP Technical
Operations -- --
2002 $75,000 60,000 $167,497
Class A;
40,000
Class B
2001 $0 -- $83,332 210,000 --
shares of
common stock
- ------------------------------------------------------------------------------------------------------------------------------
Michael Mergenthaler 2003 $96,000 -- $128,161 (4) -- --
VP Business Operations --
2002 $75,000 50,000 $138,480 --
Class A;
25,000
Class B
2001 $22,500 -- $52,460 120,000 --
shares of
common stock
- ------------------------------------------------------------------------------------------------------------------------------
(1) Prior to January 1, 2002, Messrs. Philips, Shriver and Mergenthaler worked
for CDEX on a consulting basis through Dynamic Management Resolutions LLC
pursuant to consulting agreements which were on substantially similar terms to
those of their current employment agreements. Pursuant to the terms of their
Executive Services Agreements and based upon CDEX's financial condition, Messrs.
Philips, Shriver and Mergenthaler have each foregone all or a portion of his
stated salary, and is paid instead in the form of cash and shares of common
stock. All share amounts are subject to a vesting schedule with a risk of
forfeiture in the event the employee does not remain with CDEX for the required
amount of time.
(2) Mr. Philips' unpaid cash compensation from inception until October 31, 2003
totaled $565,546, for which he received a total of 826,687 shares of Class A
Common stock.
28
(3) Mr. Shriver's unpaid cash compensation from inception until October 31, 2003
totaled $406,618, for which he received a total of 586,962 shares of Class A
Common stock.
(4) Mr. Mergenthaler's unpaid cash compensation from inception until October 31,
2003 totaled $319,101, for which he received a total of 480,845 shares of Class
A Common stock
REMUNERATION OF KEY EMPLOYEES WHO ARE HIGHLY COMPENSATED
In addition to our executive officers and directors, we have one employee
whose contribution is uniquely important to our business and is highly
compensated. Dr. Wade Poteet is compensated in the following amounts:
===========================================================================================================================
LONG TERM COMPENSATION
- ---------------------------------------------------------------------------------------------------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
- ---------------------------------------------------------------------------------------------------------------------------
RESTRICTED
NAME AND PRINCIPAL OTHER ANNUAL STOCK ALL OTHER
POSITION YEAR SALARY(1) BONUS COMPENSATION AWARDS COMPENSATION
- ---------------------------------------------------------------------------------------------------------------------------
Dr. Wade Poteet 2003 $96,000 -- $123,705 (2) -- --
2002 $75,000 40,000 $170,540 -- --
Class A
20,000 140,000 --
2001 $22,500 Class B $81,370 shares of
-- common stock
- ---------------------------------------------------------------------------------------------------------------------------
(1) Pursuant to the terms of his Employment Agreement and based upon CDEX's
financial condition Dr. Poteet has foregone all or a portion of his stated
salary, and instead is compensated in the form of cash and in shares of common
stock. All share amounts are subject to a vesting schedule with a risk of
forfeiture in the event the employee does not remain with CDEX for the required
amount of time.
(2) Dr. Poteet's unpaid cash compensation from inception until October 31, 2003
totaled $375,615, for which he received a total of 546,388 shares of Class A
Common stock.
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 the 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, they may only be issued to employees of CDEX or any
subsidiary of CDEX, and must have an exercise price of no 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 during any calendar
year. Also, incentive stock options 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 the employment
(other than for cause) of a grantee of options under this plan, the grantee
shall have 60 days following such termination, or one year if such termination
results from the
29
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 the
rate of 20% per year for each of the first five years from the grant date.
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.
During the year ended October 31, 2003, we issued 2,920,649 shares of restricted
common stock under this plan, to certain of our officers, directors and
employees, which is subject to forfeiture in accordance with the vesting
schedules set forth in the granting agreements. No options are currently
outstanding under this plan. Shares issued pursuant to the plan, whether
underlying options or as restricted stock, generally may not be sold or
transferred without the grantee first offering CDEX a right of first refusal to
purchase the shares sought to be sold.
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. We have
reserved 7,000,000 shares in the aggregate for issuance under both the 2002 and
2003 plans.
We have issued restricted stock under this plan to certain of our officers,
directors and employees which is subject to forfeiture in accordance with the
vesting schedules set forth in the granting agreements. During the year ended
October 31, 2003, we issued 2,666,752 shares of restricted common stock under
this plan. No options are currently outstanding under this plan.
EMPLOYMENT AGREEMENTS
Effective January 1, 2002, we entered into employment agreements with each of
our executive officers. The agreements with Malcolm Philips, Michael
Mergenthaler and Timothy Shriver all continue for an indefinite period unless
terminated by CDEX for "cause," or by the employee for "good reason" (as such
terms are defined in the agreements), or upon two weeks prior written notice by
either party to the other. The agreements provide for salaries based on annual
amounts of $300,000 for Mr. Philips, $210,000 for Mr. Mergenthaler and $250,000
for Mr. Shriver, which are subject to review on an annual basis. The salary
shall be payable in equal monthly installments, unless otherwise required by
applicable state law and based on CDEX's economic posture could be paid in cash
and/or stock, at CDEX's option. Each agreement provides for a minimum monthly
cash payment to the employee of $7,500 for Messrs. Shriver and Mergenthaler and
$3,000 for Philips. CDEX has availed itself of this option for the past three
fiscal years as reflected under "Compensation of Executive Officers." Each of
these agreements provides for the forfeiture of restricted stock granted to the
employee in the event of the employee's termination before the stock is fully
vested. Under the agreements, each employee is entitled to a severance package
in the event of termination by CDEX other than for "cause" or by the employee
for "good reason." In each case, "good reason" includes a change in management
of CDEX.
All of these employment agreements were amended on January 1, 2003 to (a)
increase the minimum monthly cash payment to the employee to $8,000 and (b)
adjust the severance provisions to reflect that (i) if termination occurred
before January 1, 2004, payment of an amount equal to three years of the then
current annual salary and CDEX common stock equal to three times the amount of
initial stock grant provided to the employee when he started his employment;
(ii) if termination occurs after January 1, 2004 but before January 1, 2005,
payment of an amount equal to two years of the then current annual salary and
CDEX common stock equal to two times the amount of initial stock granted to the
employee; or (iii) if termination occurs on or after January 1, 2005 but before
January 1, 2006, payment of an amount equal to the then current annual salary
and CDEX common stock equal to the amount of initial stock
30
granted employee.
Effective January 1, 2003, we entered into an Employment Agreement with Dr. Wade
Poteet. This agreement with Dr. Poteet provides for substantially the same
general terms and conditions as the employment agreements set forth above with
an annual base salary of $210,000 with a minimum monthly cash payment of $8,000.
The agreement is generally consistent with the agreements of all employees,
providing a compensation package of cash and stock, along with an initial stock
grant with forfeiture provisions should the employee resign from CDEX prior to a
certain date. Dr. Poteet's Employment Agreement, as with that of other
employees, also contains provisions relating to potential additional
compensation should there be a change in control of CDEX.
31
SELLING SHAREHOLDERS
The following list of selling shareholders includes (1) the number of
shares of common stock currently owned by each selling shareholder, (2) the
number and percentage of shares being offered for resale hereby by each selling
shareholder, and (3) the number and percentage of shares of common stock to be
held by each selling shareholder after the completion of this offering. The
registration of the shares does not necessarily mean that the selling
shareholders will sell all or any of the shares.
- -----------------------------------------------------------------------------------------------------------------------------------
SHARES BENEFICIALLY OWNED PRIOR NUMBER OF SHARES BENEFICIALLY OWNED
NAME TO OFFERING SHARES OFFERED AFTER OFFERING
- -----------------------------------------------------------------------------------------------------------------------------------
NUMBER PERCENT NUMBER PERCENT
- -----------------------------------------------------------------------------------------------------------------------------------
Shawn Aquiar 5,000 * 5,000 0 --
- -----------------------------------------------------------------------------------------------------------------------------------
Aspen Creek Farms, LLC 200,000 * 200,000 0 --
- -----------------------------------------------------------------------------------------------------------------------------------
David Audsley 5,000 * 5,000 0 --
- -----------------------------------------------------------------------------------------------------------------------------------
** 10,000 * 10,000 0 --
- -----------------------------------------------------------------------------------------------------------------------------------
Dependable Ranch Lenders LLC(2) 330,770 1.47% 330,770 0 --
- -----------------------------------------------------------------------------------------------------------------------------------
DICUT Inc. 30,000 * 30,000 0 --
- -----------------------------------------------------------------------------------------------------------------------------------
Irene Dobbs 25,000 * 25,000 0 --
- -----------------------------------------------------------------------------------------------------------------------------------
Peter Dobbs 74,000 * 50,000 0 --
- -----------------------------------------------------------------------------------------------------------------------------------
** 50,000 * 50,000 0 --
- -----------------------------------------------------------------------------------------------------------------------------------
John C. Fisher 25,000 * 25,000 0 --
- -----------------------------------------------------------------------------------------------------------------------------------
Steve Frankiewicz 78,155 * 78,155 0 --
- -----------------------------------------------------------------------------------------------------------------------------------
Bruce Gourlay and Linda H
Mackey 25,000 * 25,000 0 --
- -----------------------------------------------------------------------------------------------------------------------------------
** 180,000 * 180,000 0 --
- -----------------------------------------------------------------------------------------------------------------------------------
Travis Hoffman 15,000 * 15,000 0 --
- -----------------------------------------------------------------------------------------------------------------------------------
Randell Jeter 10,000 * 10,000 0 --
- -----------------------------------------------------------------------------------------------------------------------------------
Thelma Johnson 185,246 * 185,246 0 --
- -----------------------------------------------------------------------------------------------------------------------------------
** 35,000 * 35,000 0 --
- -----------------------------------------------------------------------------------------------------------------------------------
Jeff Kosanke 5,000 * 5,000 0 --
- -----------------------------------------------------------------------------------------------------------------------------------
William R. Lindner 33,334 * 33,334 0 --
- -----------------------------------------------------------------------------------------------------------------------------------
Ben Lowell(1) 20,000 * 20,000 0 --
- -----------------------------------------------------------------------------------------------------------------------------------
** 1,000 * 1,000 0 --
- -----------------------------------------------------------------------------------------------------------------------------------
Jeff Lowell 16,667 * 16,667 0 --
- -----------------------------------------------------------------------------------------------------------------------------------
Peter R. Mania 65,000 * 45,000 0 --
- -----------------------------------------------------------------------------------------------------------------------------------
Kelly Morgan 5,000 * 5,000 0 --
- -----------------------------------------------------------------------------------------------------------------------------------
Motta Family Revocable
Living Trust 50,000 * 50,000 0 --
- -----------------------------------------------------------------------------------------------------------------------------------
Motta Investment Co. Ltd. 250,000 1.1% 250,000 0 --
- -----------------------------------------------------------------------------------------------------------------------------------
Scott Newby 25,000 * 25,000 0 --
- -----------------------------------------------------------------------------------------------------------------------------------
Gary M . Pleggenkuhle 40,000 * 40,000 0 --
- -----------------------------------------------------------------------------------------------------------------------------------
** 25,000 * 25,000 0 --
- -----------------------------------------------------------------------------------------------------------------------------------
Patrick Purgatorio 25,000 * 25,000 0 --
- -----------------------------------------------------------------------------------------------------------------------------------
Renka, Inc. 400,000 1.7% 400,000 0 --
- -----------------------------------------------------------------------------------------------------------------------------------
** 5,000 * 5,000 0 --
- -----------------------------------------------------------------------------------------------------------------------------------
Brandi Shriver 5,000 * 5,000 0 --
- -----------------------------------------------------------------------------------------------------------------------------------
Timothy Shriver Jr 5,000 * 5,000 0 --
- -----------------------------------------------------------------------------------------------------------------------------------
** 16,667 * 16,667 0 --
- -----------------------------------------------------------------------------------------------------------------------------------
Christopher Sintetos 25,000 * 25,000 0 --
- -----------------------------------------------------------------------------------------------------------------------------------
Gregory K. Smith(2) 35,000 * 35,000 0 --
- -----------------------------------------------------------------------------------------------------------------------------------
Mari Stassi 77,000 * 77,000 0 --
- -----------------------------------------------------------------------------------------------------------------------------------
32
- -----------------------------------------------------------------------------------------------------------------------------------
John W. Steele 25,000 * 25,000 0 --
- -----------------------------------------------------------------------------------------------------------------------------------
Brytan Stevens(3) 5,000 * 5,000 0 --
- -----------------------------------------------------------------------------------------------------------------------------------
Charlene Stevens 5,000 * 5,000 0 --
- -----------------------------------------------------------------------------------------------------------------------------------
Charles Stevens 40,000 * 40,000 0 --
- -----------------------------------------------------------------------------------------------------------------------------------
Charlotte Stevens(3) 5,000 * 5,000 0 --
- -----------------------------------------------------------------------------------------------------------------------------------
Robert Stewart 106,667 * 106,667 0 --
- -----------------------------------------------------------------------------------------------------------------------------------
** 33,334 * 33,334 0 --
- -----------------------------------------------------------------------------------------------------------------------------------
*Less than one percent.
**To be completed by amendment.
(1) Includes 10,000 shares held jointly with Mr. Lowell's wife, Maxine Lowell.
(2) Gregory K. Smith controls Dependable Ranch Lenders.
(3) Charlotte Stevens is the mother of Brytan Stevens.
33
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL HOLDERS AND MANAGEMENT
The following table sets forth the stock ownership of: (i) each person
known by us, as of the date of this prospectus, to be the beneficial owner of
five percent (5%) or more of our common stock, (ii) each executive officer and
director, individually, and (iii) our executive officers and directors as a
group. Each person has sole voting and investment power with respect to the
shares shown, unless otherwise indicated.
- ---------------------------------------------------------------------------------------------------------------------------------
NAME AND ADDRESS OF AMOUNT OF BENEFICIAL PERCENT
BENEFICIAL OWNER POSITION TITLE OF CLASS OWNERSHIP OF CLASS
- ---------------------------------------------------------------------------------------------------------------------------------
Malcolm H. Philips Director; Executive Officer Class A Common 1,860,069(1)(3) 7.8%
Class B Common 100,000(4) 46.0%
- ---------------------------------------------------------------------------------------------------------------------------------
George Dials Director Class A Common 95,000(2)(3) 0.41%
Class B Common
- ---------------------------------------------------------------------------------------------------------------------------------
Dr. BD Liaw Director Class A Common 90,000(2)(3) 0.38%
Class B Common
- ---------------------------------------------------------------------------------------------------------------------------------
Timothy Shriver Executive Officer Class A Common 1,086,145(3) 4.57%
Class B Common 40,000(4) 18.2%
- ---------------------------------------------------------------------------------------------------------------------------------
Michael Mergenthaler Executive Officer Class A Common 829,882 3.55%
Class B Common 25,000(4) 11.4%
- ---------------------------------------------------------------------------------------------------------------------------------
Dr. Wade Poteet Significant Employee Class A Common 892,627(3) 3.78%
Class B Common 20,000(4) 9.1%
- ---------------------------------------------------------------------------------------------------------------------------------
Shares of all executives, Class A Common 4,771,951(1),(2),(3) 20.4%
significant employees and
directors as a group (6 persons) Class B Common 185,000 84.1%
- ---------------------------------------------------------------------------------------------------------------------------------
(1) FGW, LLC, as designee of Mr. Malcolm Philips Jr., was provided 690,000
shares under the terms of Mr. Philip's Executive Services Agreement with CDEX
pursuant to which, among other things, Mr. Philips serves as our President,
Chairman of the Board and CEO.
(2) Each of Mr. George Dials and Dr. BD Liaw, as a director, was provided shares
of common stock under the terms of such director's Services Agreement with CDEX
as well as a stock bonus in 2002.
(3) Share amounts for Messrs. Philips, Shriver and Poteet include 57,860, 16,556
and 7,356 shares of common stock, respectively, which they (alone or together
with their respective affiliates) have a right to acquire in exchange for shares
of Loch Harris, Inc. as part of a settlement agreement. The stock initially
granted to each of the above-named
34
directors, executive officers and key employee are subject to a vesting schedule
and become fully vested on the following dates: Mr. Philips, Mr. Shriver, Mr.
Mergenthaler and Mr. Poteet --July 24, 2004; Mr. Dials--August 2, 2005; Dr.
Liaw--September 30, 2005. Upon termination of employment/provision of service,
CDEX has the option to purchase any vested shares of the employee/service
provider at fair market value. CDEX has the option to require that any nonvested
shares at termination be forfeited.
(4) Until December 11, 2006, holders of shares of Class B Common Stock are
entitled to elect a majority of the members of CDEX's board of directors, while
the holders of the Class A Common Stock have the right to elect the remainder of
the directors. Thereafter, holders of Class A and Class B shares will be
entitled to one vote per share on any matter submitted to holders of common
stock.
DESCRIPTION OF SECURITIES
Pursuant to CDEX's Articles of Incorporation, as amended, we are authorized to
issue 33,500,000 shares of Class A Common Stock, par value $0.005 per share,
500,000 shares of Class B Common Stock, par value $0.005 per share and 6,000,000
shares of Preferred Stock, par value $0.005 per share. Below is a description of
CDEX's outstanding shares of Class A Common Stock shares of which are being
offered in this prospectus.
CLASS A COMMON STOCK
Each holder of our Class A Common Stock is entitled to one vote for each share
held of record on all matters including the election of directors. However,
until December 31, 2006, the holders of shares of Class B Common Stock are, as a
class, entitled to vote to elect a majority of our directors. Until that time,
holders of shares of Class A Common Stock are, as a class, entitled to vote to
elect the remainder of our directors. Following that, holders of Class A Common
Stock and Class B Common Stock shall be entitled to one vote per share on the
election of directors. Holders of our Class A Common Stock have no preemptive,
subscription, conversion, or redemption rights. Upon liquidation, dissolution or
winding-up, the holders of Class A Common Stock are entitled to receive our net
assets pro rata subject to the rights and preferences of any other shareholder,
including preferred shareholders. Each holder of Class A Common Stock is
entitled to receive ratably any dividends declared by our board of directors out
of funds legally available for the payment of dividends. We have not paid any
dividends on our Common Stock and do not contemplate doing so in the foreseeable
future. We anticipate that any earnings generated from operations will be used
to finance our growth. As of January 21, 2004, there were 1,100 record holders
of Class A Common Stock and 23,438,532 shares of Class A Common Stock
outstanding.
TRANSFER AGENT
The Nevada Agency and Trust Company, 50 Liberty Street, Suite 880, Reno Nevada
89501, acts as CDEX's transfer agent and registrar.
PLAN OF DISTRIBUTION
The selling shareholders and any of their pledgees, assignees and
successors-in-interest may, from time to time, sell any or all of their shares
of common stock on any stock exchange, market or trading facility on which the
shares are traded or in private transactions. These sales may be at fixed or
negotiated prices. The selling shareholders may use any one or more of the
following methods when selling shares:
- ordinary brokerage transactions and transactions in which the
broker-dealer solicits purchasers;
- block trades in which the broker-dealer will attempt to sell the
shares as agent but may position and resell a portion of the block as
principal to facilitate the transaction;
- purchases by a broker-dealer as principal and resale by the
broker-dealer for its account;
- an exchange distribution in accordance with the rules of the
applicable exchange;
- privately negotiated transactions;
- short sales;
- broker-dealers may agree with the selling shareholders to sell a
specified number of such shares at a stipulated price per share;
- a combination of any such methods of sale; and
35
- any other method permitted pursuant to applicable law.
The selling shareholders may also sell shares under Rule 144 under the
Securities Act of 1933, as amended, if available, rather than under this
Prospectus.
The selling shareholders may also engage in short sales against the box, puts
and calls and other transactions in our securities or derivatives of our
securities and may sell or deliver shares in connection with these trades.
The selling shareholders may pledge their shares to their brokers under the
margin provisions of customer agreements. If a selling shareholder defaults on a
margin loan, the broker may, from time to time, offer and sell the pledged
shares.
Broker-dealers engaged by the selling shareholders may arrange for other
brokers-dealers to participate in sales. Broker-dealers may receive commissions
or discounts from the selling shareholders (or, if any broker-dealer acts as
agent for the purchaser of shares, from the purchaser) in amounts to be
negotiated. The selling shareholders do not expect these commissions and
discounts to exceed what is customary in the types of transactions involved.
The selling shareholders and any broker-dealers or agents that are involved in
selling the shares may be deemed to be "underwriters" within the meaning of the
Securities Act in connection with such sales. In such event, any commissions
received by such broker-dealers or agents and any profit on the resale of the
shares purchased by them may be deemed to be underwriting commissions or
discounts under the Securities Act.
We are required to pay all fees and expenses incident to the registration of the
shares being registered herein, including fees and disbursements of counsel to
the selling shareholders. We have agreed to indemnify certain of the selling
shareholders against certain losses, claims, damages and liabilities, including
liabilities under the Securities Act.
EXPERTS
Aronson & Company, independent auditors, have audited our financial
statements as of and for the years ended October 31, 2003 and 2002 as set forth
in their report and included in this prospectus. The financial statements are
included in reliance on such reports given upon the authority of Aronson &
Company as experts in accounting and auditing.
LEGAL MATTERS
The validity of the issuance of the shares of common stock offered hereby
and certain other legal matters in connection therewith have been passed upon
for us by Bondy & Schloss LLP, New York, New York.
CERTAIN TRANSACTIONS
We currently lease space from and have purchased consulting and other supplies
and services from Dynamic Management Resolutions, LLC. Each of our executive
officers were members of Dynamic. CDEX paid Dynamic $653,752 and $106,846 in
fees for engineering services rendered during the years ended October 31, 2002
and 2003, respectively, and a total of $973,060 for the period from CDEX's
inception through October 31, 2003. These fees have been recorded as
compensation expense in our financial statements, and the agreements under which
they were performed have been converted to employment agreements with the
executive officers.
WHERE YOU CAN FIND MORE INFORMATION
CDEX has filed with the Securities and Exchange Commission the Registration
Statement on Form SB-2 under the Securities Act, with respect to the shares of
CDEX common stock offered hereby. This document does not contain all of the
information set forth in the Registration Statement and the exhibits and
schedules thereto, to which reference is hereby made. Statements made in this
document as to the contents of any contract, agreement or other document
referred to herein are not necessarily complete. The Registration Statement and
the exhibits thereto filed by CDEX with the Commission may be inspected and
copied at the public reference facilities maintained by the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549. Copies of such information can be
obtained by mail from the Public Reference Branch of the Securities and Exchange
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed
rates. The Commission maintains a website that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission. The address of the Commission's website is
HTTP://WWW.SEC.GOV. CDEX is required to comply with the reporting requirements
of the Exchange Act and to file with the Commission reports, proxy statements
and other information as required by the Exchange Act. Additionally, CDEX is
required to provide annual reports containing audited financial statements to
its stockholders in connection with its annual meetings of stockholders. These
reports, proxy statements and other information will be available to be
inspected and copied at the public reference facilities of the Commission or
obtained by mail or over the Internet from the Commission, as described above.
36
CDEX INC.
TABLE OF CONTENTS
================================================================================
PAGE
INDEPENDENT AUDITOR'S REPORT F-1
AUDITED FINANCIAL STATEMENTS
Balance Sheets F2
Statements of Operations F3
Statements of Stockholders' Equity (Deficit) F4 - F8
Statements of Cash Flows F9
Notes to Financial Statements F10 - F17
INDEPENDENT AUDITOR'S REPORT
Board of Directors
CDEX INC.
Rockville, Maryland
We have audited the accompanying Balance Sheets of CDEX INC. (a Development
Stage Company) as of October 31, 2002 and 2003, and the related Statements of
Operations, Stockholders' Equity (Deficit) and Cash Flows for the period July 6,
2001 (inception) to October 31, 2003 and the years ended October 31, 2002 and
2003. 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 auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. 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,
2002 and 2003, and the results of its operations and its cash flows for the
period from July 6, 2001 (inception) to October 31, 2003 and the years ended
October 31, 2002 and 2003 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 8 to the
financial statements, the Company incurred a net loss of approximately
$8,174,000 during the period July 6, 2001 (inception) through October 31, 2003,
has insufficient working capital to sustain its operations over the next year
and has no committed borrowing arrangements. These conditions raise substantial
doubt about its ability to continue as a going concern. Management's plans
regarding those matters also are described in Note 8. These financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
/s/ Aronson & Company
- ---------------------
ARONSON & COMPANY
Rockville, Maryland
December 31, 2003
(except with respect to the matter discussed
in Note 9, as to which the date is January 20, 2004)
-F-1-
CDEX INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
======================================================================================================
2002 2003
- ------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 280,432 $ 342,923
Accounts receivable - 89,937
Prepaid expenses and other 12,765 1,617
- ------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 293,197 434,477
- ------------------------------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT, AT COST
Laboratory and computer equipment 478,731 576,644
Furniture and fixtures 947 1,666
Building Improvements 1,047 1,265
- ------------------------------------------------------------------------------------------------------
TOTAL PROPERTY AND EQUIPMENT 480,725 579,575
Less: Accumulated depreciation (175,197) (260,178)
- ------------------------------------------------------------------------------------------------------
NET PROPERTY AND EQUIPMENT 305,528 319,397
- ------------------------------------------------------------------------------------------------------
OTHER ASSETS
Other assets 1,399 2,655
- ------------------------------------------------------------------------------------------------------
Total other assets 1,399 2,655
- ------------------------------------------------------------------------------------------------------
Total assets $ 600,124 $ 756,529
======================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 102,060 $ 19,137
Accrued compensation 1,406,930 -
- ------------------------------------------------------------------------------------------------------
Total liabilities 1,508,990 19,137
- ------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred stock - $.005 par value per share, 6,000,000
shares authorized and none outstanding - -
Class A common stock - $.005 par value per share, 33,500,000
shares authorized and 16,068,437 and 23,175,505 shares issued and
outstanding as of October 31, 2002 and 2003, respectively 80,342 115,878
Class B common stock - $.005 par value per share, 500,000
shares authorized and 220,000 shares issued and outstanding - 1,100
Additional paid in capital 5,613,810 10,039,805
Deferred stock compensation (2,143,185) (1,243,138)
Deficit accumulated during the development stage (4,459,833) (8,173,753)
- ------------------------------------------------------------------------------------------------------
SUBTOTAL (908,866) 739,892
Less: Stock subscription receivable - (2,500)
- ------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) (908,866) 737,392
- ------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 600,124 $ 756,529
- ------------------------------------------------------------------------------------------------------
The accompanying Notes to Financial Statements are an integral part of these
financial statements.
-F-2-
CDEX INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
============================================================================================================
July 6, 2001
Year Ended October 31, (Inception) to
2002 2003 October 31, 2003
- ------------------------------------------------------------------------------------------------------------
DEVELOPMENT CONTRACT REVENUE $ 75,952 $ 191,964 $ 267,916
- ------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Development costs 2,608,561 2,683,756 5,524,576
General and administrative expenses 913,565 1,222,271 2,915,824
- ------------------------------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 3,522,126 3,906,027 8,440,400
- ------------------------------------------------------------------------------------------------------------
LOSS FROM OPERATIONS (3,446,174) (3,714,063) (8,172,484)
- ------------------------------------------------------------------------------------------------------------
OTHER INCOME (EXPENSE)
Interest income 1,806 418 2,225
Related party interest expense (3,215) (249) (3,215)
Interest expense (4) (26) (30)
- ------------------------------------------------------------------------------------------------------------
TOTAL (1,413) 143 (1,020)
- ------------------------------------------------------------------------------------------------------------
LOSS BEFORE BENEFIT FROM INCOME TAXES (3,447,587) (3,713,920) (8,173,504)
BENEFIT FROM INCOME TAXES - - -
- ------------------------------------------------------------------------------------------------------------
NET LOSS $(3,447,587) $(3,713,920) $ (8,173,504)
BASIC AND DILUTED NET LOSS PER COMMON SHARE:
Basic and diluted net loss per common share $ (0.22) $ (0.19) $ (0.48)
- ------------------------------------------------------------------------------------------------------------
Basic and diluted weighted average common
shares used to compute net loss per share 15,880,794 19,730,922 17,033,668
- ------------------------------------------------------------------------------------------------------------
The accompanying Notes to Financial Statements are an integral part of these
financial statements.
-F-3-
CDEX INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
================================================================================
Shares of Shares of
Class A Class B Dollar Class A
Common Common Amount Common
Date Stock Stock per Share Stock
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, JULY 6, 2001 (INCEPTION) - - $ - $ -
Common stock issued to Loch Harris, Inc. as a deposit
related to the transfer of assets into the Company July 23, 2001 2,600,000 - 0.03 13,000
Common stock issued pursuant to consulting
agreements for services July 24, 2001 1,440,000 - 2.50 7,200
Common stock issued pursuant to consulting
agreements for services August 3, 2001 371,000 - 2.50 1,855
Common stock issued to Loch Harris, Inc. related
to the transfer of assets into the Company August 4, 2001 11,265,000 - 0.03 56,325
Common stock issued pursuant to consulting
agreements for services September 19, 2001 60,000 - 2.50 300
Common stock issued pursuant to consulting
agreements for services October 1, 2001 35,000 - 2.50 175
Common stock issued pursuant to consulting
agreements for services October 15, 2001 2,000 - 2.50 10
Amortization of deferred compensation expense - - - -
NET LOSS - - - -
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, OCTOBER 31, 2001 15,773,000 $ 78,865
- ------------------------------------------------------------------------------------------------------------------------------------
Deficit
Accumulated
Class B Additional During the Stock
Common Paid in Deferred Development Subscription
Stock Capital Compensation Stage Receivable Total
- --------------------------------------------------------------------------------------
$ - $ - $ - $ - $ - $ -
- 67,819 - - - 80,819
- 3,592,800 (3,600,000) - - -
- 925,645 (927,500) - - -
- 308,955 - - - 365,280
- 149,700 (150,000) - - -
- 87,325 (87,500) - - -
- 4,990 (5,000) - - -
- - 449,201 - - 449,201
- - - (1,012,246) - (1,012,246)
- ---------------------------------------------------------------------------------------
$ - $ 5,137,234 $(4,320,799) $ (1,012,246) $ - $ (116,946)
- ---------------------------------------------------------------------------------------
The accompanying Notes to Financial Statements are an integral part of these
financial statements.
-F-4-
CDEX INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
================================================================================
Shares of Shares of
Class A Class B Dollar Class A
Common Common Amount Common
Date Stock Stock per Share Stock
- -----------------------------------------------------------------------------------------------------------------------------------
Conversion of note payable into common stock November 21, 2001 50,000 - $ 2.50 $ 250
Conversion of note payable into common stock December 19, 2001 58,000 - 2.00 290
Conversion of note payable into common stock February 25, 2002 26,667 - 1.50 133
Stock received due to adjustment to transfer agreement March 1, 2002 (200,000) - 0.29 (1,000)
Sale of common stock for cash March 12, 2002 10,000 - 2.50 50
Sale of common stock for cash April 12, 2002 25,000 - 2.00 125
Sale of common stock for cash May 23, 2002 65,000 - 2.00 325
Sale of common stock for cash May 23, 2002 50,000 - 2.00 250
Sale of common stock for cash June 18, 2002 50,000 - 2.00 250
Sale of common stock for cash June 28, 2002 50,000 - 2.00 250
Sale of common stock for cash July 15, 2002 30,000 - 2.50 150
Sale of common stock for cash August 23, 2002 30,770 - 3.25 154
Sale of common stock for cash October 2, 2002 50,000 - 2.00 250
Remeasurement of compensation expense - - - -
Amortization of deferred compensation expense - - - -
NET LOSS - - - -
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE, OCTOBER 31, 2002 16,068,437 $ 80,342
- -----------------------------------------------------------------------------------------------------------------------------------
Deficit
Accumulated
Class B Additional During the Stock
Common Paid in Deferred Development Subscription
Stock Capital Compensation Stage Receivable Total
- -----------------------------------------------------------------------------------------
$ - $ 124,750 - - - $ 125,000
- 115,710 - - - 116,000
- 39,867 - - - 40,000
- (56,000) - - - (57,000)
- 24,950 - - - 25,000
- 49,875 - - - 50,000
- 129,675 - - - 130,000
- 99,750 - - - 100,000
- 99,750 - - - 100,000
- 99,750 - - - 100,000
- 74,850 - - - 75,000
- 99,846 - - - 100,000
- 99,750 - - - 100,000
- (525,947) 525,947 - - -
- - 1,651,667 - - 1,651,667
- - - (3,447,587) - (3,447,587)
- ------------------------------------------------------------------------------------------
$ - $ 5,613,810 $ (2,143,185) $ (4,459,833) $ - $ (908,866)
- ------------------------------------------------------------------------------------------
The accompanying Notes to Financial Statements are an integral part of these
financial statements.
-F-5-
CDEX INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
================================================================================
Shares of Shares of
Class A Class B Dollar Class A
Common Common Amount Common
Date Stock Stock per Share Stock
- -----------------------------------------------------------------------------------------------------------------------------------
Sale of common stock for cash November 26, 2002 100,000 - $ 0.50 $ 500
Sale of common stock for cash December 5, 2002 150,000 - 0.50 750
Sale of common stock for cash December 9, 2002 50,000 - 0.50 250
Sale of common stock for cash December 10, 2002 50,000 - 0.50 250
Common stock issued for settlement of accrued compensation December 11, 2002 58,155 - 0.75 291
Common stock issued for settlement of accrued compensation December 11, 2002 1,718,228 - 0.75 8,591
Common stock issued pursuant to consulting agreements December 30, 2002 5,000 - 0.81 25
Common stock awarded to employees and consultants December 30, 2002 155,000 - 0.82 775
Common stock awarded to employees and consultants December 30, 2002 160,000 - 0.82 800
Common stock awarded to employees and consultants December 30, 2002 - 220,000 0.81 -
Sale of common stock for cash January 7, 2003 80,000 - 0.50 400
Sale of common stock for cash January 15, 2003 150,000 - 0.50 750
Common stock awarded to employees and consultants January 20, 2003 20,000 - 0.82 100
Common stock forfeited by employee February 17, 2003 (30,000) - (2.62) (150)
Sale of common stock for cash March 20, 2003 200,000 - 1.00 1,000
Common stock issued for settlement of accrued compensation March 31, 2003 534,266 - 0.75 2,672
Sale of common stock for cash April 21, 2003 35,000 - 1.00 175
Sale of common stock for cash April 21, 2003 50,000 - 1.00 250
Sale of common stock for cash April 30, 2003 50,000 - 1.00 250
Common stock awarded to employees and consultants May 1, 2003 40,000 - 0.82 200
Common stock awarded to employees and consultants May 26, 2003 25,000 - 0.82 125
Deficit
Accumulated
Class B Additional During the Stock
Common Paid in Deferred Development Subscription
Stock Capital Compensation Stage Receivable Total
- -----------------------------------------------------------------------------------------
$ - $ 49,500 $ - $ - $ - $ 50,000
- 74,250 - - - 75,000
- 24,750 - - - 25,000
- 24,750 - - - 25,000
- 43,325 - - - 43,616
- 1,281,080 - - - 1,289,671
- 4,025 (4,050) - - -
- 125,550 - - - 126,325
- 129,600 - - - 130,400
1,100 177,100 - - - 178,200
- 39,600 - - - 40,000
- 74,250 - - - 75,000
- 16,200 - - - 16,300
- (78,334) 78,484 - - -
- 199,000 - - - 200,000
- 398,030 - - - 400,702
- 34,825 - - - 35,000
- 49,750 - - - 50,000
- 49,750 - - - 50,000
- 32,400 - - - 32,600
- 20,250 - - - 20,375
The accompanying Notes to Financial Statements are an integral part of these
financial statements.
-F-6-
CDEX INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
================================================================================
Shares of Shares of
Class A Class B Dollar Class A
Common Common Amount Common
Date Stock Stock per Share Stock
- -----------------------------------------------------------------------------------------------------------------------------------
Common stock issued pursuant to consulting agreements June 15, 2003 5,000 - $ 0.81 $ 25
Sale of common stock for cash June 19, 2003 27,000 - 1.00 135
Common stock issued pursuant to consulting agreements June 20, 2003 5,000 - 0.81 25
Common stock issued pursuant to consulting agreements June 20, 2003 5,000 - 0.81 25
Common stock issued for settlement of accrued compensation July 1, 2003 492,693 - 0.50 2,463
Sale of common stock for cash July 15, 2003 15,000 - 1.00 75
Sale of common stock for cash July 17, 2003 25,000 - 1.00 125
Sale of common stock for cash July 24, 2003 25,000 - 1.00 125
Sale of common stock for cash July 28, 2003 25,000 - 1.00 125
Sale of common stock for cash July 31, 2003 400,000 - 0.85 2,000
Sale of common stock for cash August 6, 2003 10,000 - 1.00 50
Sale of common stock for cash August 6, 2003 25,000 - 1.00 125
Sale of common stock for cash August 6, 2003 45,000 - 1.00 225
Sale of common stock for cash August 8, 2003 10,000 - 1.00 50
Sale of common stock for cash August 19, 2003 25,000 - 1.00 125
Sale of common stock for cash August 25, 2003 25,000 - 1.00 125
Sale of common stock for cash September 2, 2003 5,000 - 1.00 25
Sale of common stock for cash September 2, 2003 5,000 - 1.00 25
Sale of common stock for cash September 2, 2003 40,000 - 1.00 200
Sale of common stock for cash September 2, 2003 5,000 - 1.00 25
Sale of common stock for cash September 2, 2003 25,000 - 1.00 125
Sale of common stock for cash September 2, 2003 5,000 - 1.00 25
Sale of common stock for cash September 15, 2003 5,000 - 1.00 25
Sale of common stock for cash September 15, 2003 1,000 - 1.00 5
Common stock issued for settlement of accrued compensa September 20, 2003 1,936,783 - 0.50 9,684
Deficit
Accumulated
Class B Additional During the Stock
Common Paid in Deferred Development Subscription
Stock Capital Compensation Stage Receivable Total
- -----------------------------------------------------------------------------------------
$ - $ 4,025 $ (4,050) $ - $ - $ -
- 26,865 - - - 27,000
- 4,025 (4,050) - - -
- 4,025 (4,050) - - -
- 244,132 - - - 246,595
- 14,925 - - - 15,000
- 24,875 - - - 25,000
- 24,875 - - - 25,000
- 24,875 - - - 25,000
- 338,000 - - - 340,000
- 9,950 - - - 10,000
- 24,875 - - - 25,000
- 44,775 - - - 45,000
- 9,950 - - - 10,000
- 24,875 - - - 25,000
- 24,875 - - - 25,000
- 4,975 - - - 5,000
- 4,975 - - - 5,000
- 39,800 - - - 40,000
- 4,975 - - - 5,000
- 24,875 - - - 25,000
- 4,975 - - - 5,000
- 4,975 - - - 5,000
- 995 - - - 1,000
- 958,706 (671,488) - - 296,902
The accompanying Notes to Financial Statements are an integral part of these
financial statements.
-F-7-
CDEX INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
================================================================================
Shares of Shares of
Class A Class B Dollar Class A
Common Common Amount Common
Date Stock Stock per Share Stock
- -----------------------------------------------------------------------------------------------------------------------------------
Common stock issued pursuant to consulting agreements October 1, 2003 35,000 - $ 1.00 $ 175
Common stock issued pursuant to consulting agreements October 1, 2003 40,000 - 0.81 200
Common stock issued pursuant to consulting agreements October 1, 2003 45,000 - 0.81 225
Sale of common stock for cash October 9, 2003 25,000 - 1.00 125
Common stock issued pursuant to consulting agreements October 25, 2003 25,000 - 0.81 125
Sale of common stock for cash October 27, 2003 15,000 - 1.50 75
Sale of common stock for cash October 29, 2003 6,667 - 1.50 33
Sale of common stock for cash October 30, 2003 5,000 - 1.00 25
Common stock issued pursuant to consulting agreements October 31, 2003 10,000 - 0.81 50
Sale of common stock for cash October 31, 2003 25,000 - 1.00 125
Common stock issued for settlement of accrued compensation October 31, 2003 82,276 - 0.50 412
Remeasurement of compensation expense - - - -
Amortization of deferred compensation expense - - - -
NET LOSS - - - -
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE, OCTOBER 31, 2003 23,175,505 220,000 $ 115,878
- -----------------------------------------------------------------------------------------------------------------------------------
Deficit
Accumulated
Class B Additional During the Stock
Common Paid in Deferred Development Subscription
Stock Capital Compensation Stage Receivable Total
- -------------------------------------------------------------------------------------------
$ - $ 28,175 $ (28,350) $ - $ - $ -
- 32,200 (32,400) - - -
- 36,225 (36,450) - - -
- 24,875 - - - 25,000
- 20,125 (20,250) - - -
- 22,425 - - - 22,500
- 9,967 - - - 10,000
- 7,475 - - (2,500) 5,000
- 8,050 (8,100) - - -
- 24,875 - - - 25,000
- 40,727 (15,162) - - 25,977
- (497,948) 497,948 - - -
- - 1,152,015 - - 1,152,015
- - - (3,713,920) - (3,713,920)
- ------------------------------------------------------------------------------------------
$ 1,100 $ 10,039,805 $ (1,243,138) $ (8,173,753) $ (2,500) $ 737,392
- ------------------------------------------------------------------------------------------
The accompanying Notes to Financial Statements are an integral part of these
financial statements.
-F-8-
CDEX INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
================================================================================
July 6, 2001
Year Ended October 31, (Inception) to
2002 2003 October 31, 2003
- ---------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(3,447,587) $(3,713,920) $(8,173,753)
ADJUSTMENTS TO RECONCILE NET LOSS
TO NET CASH USED BY OPERATING ACTIVITIES
Depreciation 66,968 84,982 168,392
Stock compensation 2,669,655 2,552,748 6,060,546
CHANGE IN ASSETS AND LIABILITIES NET OF -
ASSETS TRANSFERRED FROM LOCH HARRIS, INC -
(INCREASE) DECREASE IN -
Accounts receivable - (89,937) (89,937)
Prepaid expenses (5,265) 11,148 (1,617)
Other assets (1,399) (1,256) (2,655)
DECREASE IN -
Accounts payable (41,232) (82,924) (30,863)
- ---------------------------------------------------------------------------------------------------------------------
NET CASH USED BY OPERATING ACTIVITIES (758,860) (1,239,159) (2,069,887)
- ---------------------------------------------------------------------------------------------------------------------
CASH FLOWS PROVIDED BY INVESTING ACTIVITIES
Cash provided from transfer of assets from Loch Harris, Inc. - - 73,000
Purchases of property and equipment (21,161) (98,850) (121,690)
- ---------------------------------------------------------------------------------------------------------------------
NET CASH USED BY INVESTING ACTIVITIES (21,161) (98,850) (48,690)
- ---------------------------------------------------------------------------------------------------------------------
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES
Proceeds from the sale of common stock 780,000 1,400,500 2,180,500
Proceeds from convertible notes payable 281,000 - 281,000
Proceeds from related party convertible notes payable 20,000 15,000 55,000
Repayment of related party convertible notes payable (40,000) (15,000) (55,000)
- ---------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,041,000 1,400,500 2,461,500
- ---------------------------------------------------------------------------------------------------------------------
NET INCREASE IN CASH 260,979 62,491 342,923
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 19,453 280,432 -
- ---------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 280,432 $ 342,923 $ 342,923
- ---------------------------------------------------------------------------------------------------------------------
Supplemental cash flow information
Actual cash payments for interest: $ 3,219 $ 275 $ 3,494
NON-CASH FINANCING TRANSACTIONS:
Common stock subscribed
Stock subscription receivable $ 2,500 $ 2,500
Common stock (13) (13)
Additional paid-in capital (2,487) (2,487)
- ---------------------------------------------------------------------------------------------------------------------
NET CASH - -
- ---------------------------------------------------------------------------------------------------------------------
Conversion of notes payable into common stock
Notes payable 281,000 281,000
Common stock (673) (673)
Additional paid-in capital (280,327) (280,327)
- ---------------------------------------------------------------------------------------------------------------------
NET CASH - -
- ---------------------------------------------------------------------------------------------------------------------
Stock compensation
Deferred stock compensation (525,947) 3,059,631 7,303,684
Additional paid in capital 525,947 (3,031,694) (7,266,207)
Common stock - (27,937) (37,477)
- ---------------------------------------------------------------------------------------------------------------------
NET CASH - - -
- ---------------------------------------------------------------------------------------------------------------------
ASSET TRANSFER
Assets transferred:
Cash 73,000
Other receivables 7,000
Property and equipment 457,882
Accumulated depreciation and amortization (91,783)
- ---------------------------------------------------------------------------------------------------------------------
446,099
LIABILITIES ASSUMED:
Accounts payable (57,000) (57,000)
- ---------------------------------------------------------------------------------------------------------------------
NET ASSETS TRANSFERRED (LIABILITIES ASSUMED) (57,000) 389,099
- ---------------------------------------------------------------------------------------------------------------------
COMMON STOCK ISSUED FOR ASSET TRANSFER
Common stock 1,000 (68,325)
Additional paid-in capital 56,000 (320,774)
- ---------------------------------------------------------------------------------------------------------------------
NET CASH $ - $ -
- ---------------------------------------------------------------------------------------------------------------------
The accompanying Notes to Financial Statements are an integral part of these
financial statements.
-F-9-
CDEX INC.
NOTES TO FINANCIAL STATEMENTS
=============================================================================
1. ORGANIZATION AND BASIS OF PRESENTATION: CDEX Inc. (the Company),
SIGNIFICANT incorporated under the laws of the State of Nevada on
ACCOUNTING July 6, 2001 (inception), began operations in July
POLICIES 2001 by acquiring the assets listed below along with
chemical detection technology, nanometrology,
technical processes and intellectual property rights
from Loch Harris, Inc. in exchange for 13,865,000
shares of Class A common stock. The transaction is
considered a reorganization of affiliated entities
and hence the assets acquired are valued at the
historical cost of the transferor. As the intangible
assets had no historical cost basis on the books of
the transferor, they are carried at a zero cost value
on the Company's books. Tangible assets acquired
were:
Cash $ 73,000
Other receivables 7,000
Property and equipment, net 366,099
On March 1, 2002, 200,000 shares issued as described
above were returned to the Company in exchange for
its payment of $57,000 of liabilities of the
transferor related to legal and professional services
performed.
DEVELOPMENT STAGE COMPANY: From inception, the
Company has devoted substantially all of its efforts
to establishing a new business in chemical detection
technology and has not yet developed or sold any
products. The assets acquired from the transferor
have not provided any product sales for any entity.
All revenue has been in connection with development
contracts to complete testing and research.
REVENUE RECOGNITION: Development contract revenue
represents fees earned in connection with two
development contracts that were awarded to the
Company to complete initial testing and research on a
time and material basis. Revenue from these contracts
was recognized as the testing and research was
performed at contractually agreed upon billing rates.
YEAR END: The Company previously had a year end of
March 31. The Company elected to change that year end
to October 31 and has presented its financial
statements on a full year basis for the years ended
October 31, 2002 and 2003.
COMMON STOCK: All Class A common stock amounts have
been adjusted to reflect the 1 for 5 reverse stock
split declared by the board of directors on December
11, 2002.
CASH AND CASH EQUIVALENTS: The Company maintains cash
balances that may exceed Federally insured limits.
The Company does not believe that this results in any
significant credit risk. The Company considers all
highly liquid investments with original maturities of
90 days or less to be cash equivalents.
-F-10-
CDEX INC.
NOTES TO FINANCIAL STATEMENTS
=============================================================================
1. ORGANIZATION AND USE OF ACCOUNTING ESTIMATES: The preparation of
SIGNIFICANT financial statements in conformity with generally
ACCOUNTING accepted accounting principles requires management to
POLICIES make estimates and assumptions that affect the
(CONTINUED) reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at
the date of the financial statements and the reported
amounts of revenues and expenses during the reporting
period. Actual results could differ from those
estimates.
PROPERTY AND EQUIPMENT: Property and equipment are
stated at historical cost and are depreciated using
the straight-line method over the estimated useful
lives of the related assets, ranging from five to
seven years. Depreciation expense was $66,968,
$84,982, and $168,392 for the years ended October 31,
2002 and 2003, and for the period from inception to
October 31, 2003, respectively.
INCOME TAXES: The Company files its income tax
returns on the cash basis of accounting, whereby
revenue is recognized when received and expenses are
deducted when paid. To the extent that items of
income or expense are recognized in different periods
for income tax and financial reporting purposes,
deferred income taxes are provided to give effect to
these temporary differences. Deferred tax assets and
liabilities are recognized for the future tax
consequences attributable to differences between the
financial statement carrying amounts of assets and
liabilities and their respective tax bases. Deferred
tax assets and liabilities are measured by applying
presently enacted statutory tax rates, which are
applicable to the future years in which deferred tax
assets or liabilities are expected to be settled or
realized, to the differences between the financial
statement carrying amounts and the tax bases of
existing assets and liabilities. The effect of a
change in tax rates on deferred tax assets and
liabilities is recognized in operations in the period
that the tax rate is enacted.
As the Company has not yet achieved profitable
operations, no tax benefit has been reflected in the
statement of operations and a valuation allowance has
been established reducing the net carrying value of
the deferred tax asset to zero.
ADVERTISING COSTS: The cost of advertising is
expensed as incurred. Advertising expense was $9,873,
$28,483, and $38,481 for the years ended October 31,
2002 and 2003, and for the period from inception to
October 31, 2003, respectively.
RESEARCH AND DEVELOPMENT: Total research and
development costs include labor for employees and
contractors, rent, professional services, materials,
lab equipment and disposals. These costs are expensed
on the accompanying Statements of Operations as
development costs.
-F-11-
CDEX INC.
NOTES TO FINANCIAL STATEMENTS
=============================================================================
1. ORGANIZATION AND FAIR VALUE OF FINANCIAL INSTRUMENTS: The carrying
SIGNIFICANT amounts of items reflected in current assets and
ACCOUNTING current liabilities approximate their fair value due
POLICIES to the short-term nature of their underlying terms.
(CONTINUED)
RISKS, UNCERTAINTIES AND CONCENTRATIONS: Financial
instruments that potentially subject the Company to
significant concentration of credit risk consist
primarily of cash equivalents and accounts
receivable. In addition, at times the Company's cash
balances exceed federally insured amounts
All revenue was earned under two development
contracts. Accounts receivable represents a portion
of the revenue outstanding on these contracts. The
Company provides for estimated credit losses at the
time of revenue recognition.
NET LOSS PER COMMON SHARE: Basic net loss per share
was determined by dividing 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.
2. RELATED PARTY The Company currently leases space from (see Note 7)
TRANSACTIONS and has purchased consulting and other supplies and
services from Dynamic Management Resolutions, LLC
(DMR). The owners of DMR are the executive officers
and key employees and consultants of the Company.
Total expenses of the Company related to services
provided by DMR were $653,752, $106,846, and $973,060
for the years ended October 31, 2002 and 2003,
respectively, and from the period July 6, 2001
(inception) to October 31, 2003.
The spouse of the Chief Executive Officer purchased
two $20,000 convertible notes of the Company, and one
$15,000 convertible note, paying interest at 9%.
Total interest expense paid to this related party was
$3,215, $249, and $3,464 for the years ended October
31, 2002 and 2003 and the period July 6, 2001
(inception) to October 31, 2003, respectively. The
$20,000 notes were redeemed at par value for cash in
August, 2002, and the $15,000 note was redeemed at
par value for cash in September, 2003.
3. NEW In May 2003, the Financial Accounting Standards Board
ACCOUNTING issued Statement No. 150, "Accounting for Certain
STANDARDS Financial Instruments with Characteristics of both
Liabilities and Equity". This statement affects the
classification, measurement and disclosure
requirements of certain freestanding financial
instruments, including mandatorily redeemable shares.
SFAS No. 150 is effective for all financial
instruments entered into or modified after May 31,
2003. This pronouncement is not expected to have a
material impact on the Company's financial position
or results of operations.
-F-12-
CDEX INC.
NOTES TO FINANCIAL STATEMENTS
=============================================================================
4. INCOME TAXES The benefit from income taxes reflected in the
accompanying financial statements, all of which is
deferred, varies from the amounts which would have
been computed using statutory rates as follows
(000's):
Year Ended October 31, Inception to
---------------------------------- October 31,
2002 2003 2003
-------------------------------------------------------------------------------------------
Federal income taxes at the maximum $ 1,172 $ 1,263 $ 2,779
statutory rate
State income taxes, net of Federal
tax effect 160 173 531
Difference in valuation of stock
based compensation (561) (496) (1,209)
Increase in valuation allowance (771) (940) (2,101)
-------------------------------------------------------------------------------------------
BENEFIT FROM INCOME TAXES $ -- $ -- $ --
-------------------------------------------------------------------------------------------
Deferred income taxes were as follows:
As of October 31,
----------------------------------
2002 2003
-------------------------------------------------------------------------------------------
Prepaid expenses deducted for income tax reporting $ 5,000 $ 1,000
purposes, but not for financial statement reporting
purposes
Accounts payable and accrued expenses deducted for
financial statement reporting purposes, but not for
income tax reporting purposes (798,000) (1,229,000)
Net operating loss carryforward (368,000) (873,000)
-------------------------------------------------------------------------------------------
Deferred tax asset $(1,161,000) $(2,101,000)
Valuation allowance $ 1,161,000 $ 2,101,000
-------------------------------------------------------------------------------------------
TOTAL $ -- $ --
-------------------------------------------------------------------------------------------
For income tax purposes, the Company has a net
operating loss carryforward of approximately
$1,500,000 at March 31, 2003 (the Company's latest
tax reporting year end) that, subject to applicable
limitations, may be applied against future taxable
income. If not utilized, the net operating loss
carryforward will expire between March 31, 2022 and
March 31, 2023.
-F-13-
CDEX INC.
NOTES TO FINANCIAL STATEMENTS
=============================================================================
5. STOCK BASED The Company has provided restricted stock grants to
COMPENSATION FOR employees and consultants as the principal element of
SERVICES their compensation. The Company determines
compensation expense as the fair value, at the
measurement date, of the service received or the
common stock issued, whichever is more reliably
determinable. In the case of employees, the
measurement date is the date of grant. In the case of
outside consultants, the measurement date is the date
at which their performance is complete. This total
cost is first reflected as deferred compensation in
stockholders' equity (deficit) and then amortized to
compensation expense on a straight-line basis over
the period over which the services are performed.
When the fair value of the common stock is used and
the measurement date is not the date of grant, the
total cost is remeasured at the end of each reporting
period based on the fair market value on that date,
and the amortization is adjusted.
In the case of the consulting agreements issued at
the Company's inception, the fair value of the common
stock, which was awarded in advance of the
performance of the services, was used to value the
compensation cost. The fair value was determined to
be $2.50 per share based on the stock price implicit
in convertible notes sold to an unaffiliated
purchaser. The Company issued additional consulting
agreements in 2003 which were also accounted for
using the fair value of the common stock to value the
compensation cost. The compensation cost is
remeasured at the fair value as of the end of each
reporting period and the deferred compensation
account is adjusted.
The Company has also utilized employment and
consulting agreements which combine cash and stock
elements of compensation, where a fixed dollar value
of stock is awarded to settle noncash compensation.
In this case, compensation cost is determined based
on the fair value of the services, which is the more
reliably determined measure. The Company has awarded
some of the common shares in advance of when the
service is performed. These amounts are shown as
deferred compensation in the accompanying balance
sheet. The Company has also paid performance bonuses
in common stock.
The Company granted 5,587,401 (5,367,401 Class A
shares and 220,000 Class B shares), and 7,495,401
(7,275,401 Class A shares and 220,000 Class B shares)
shares of common stock to employees and consultants
during the year ended October 31, 2003, and during
the period from July 6, 2001 (inception) to October
31, 2003. The fair value per share of common stock
was $2.50, $2.15, and $.81, as of October 31, 2001,
2002 and 2003. The fair value was determined using
the weighted average value of the proceeds per share
received from sales of common stock to unaffiliated
purchasers during that year.
-F-14-
CDEX INC.
NOTES TO FINANCIAL STATEMENTS
=============================================================================
5. STOCK BASED The Company has two separate stock plans--the 2002
COMPENSATION FOR and 2003 Stock Incentive Plans. Both plans provide
SERVICES for the issuance of stock options and stock grants.
CONTINUED The 2002 Plan permits the issue of up to 3,250,000
shares (2,920,649 shares with a fair value of
$2,255,489 have been issued during the year ended
October 31, 2003) through June 30, 2008. The 2003
Plan permits the issue of up to 7,000,000 shares
(after subtracting any shares issued under the 2002
Plan) through June 30, 2013. (2,666,752 shares with a
fair value of $695,024 have been issued under this
plan during the year ended October 31, 2003). The
2003 Plan also provides for specific numbers of
shares to be awarded upon the achievement of defined
scientific and sales-related milestones. No options
to acquire shares have been issued under either plan.
Total compensation expense related to stock awards
for employees and consultants was $2,669,655,
$2,552,748, and $6,060,546 for the years ended
October 31, 2002 and 2003, and for the period July 6,
2001 (inception) to October 31, 2003. Upon
termination, the Company has the option to purchase
any vested shares from the employees at fair market
value. Shares granted to employees and consultants
generally vest over periods of 8 months to 3 years.
At October 31, 2002, accrued compensation related to
these agreements of $1,406,930 is included in the
accompanying Balance Sheet as accrued compensation.
6. STOCKHOLDERS' EQUITY On December 11, 2002, the Board of Directors
authorized a 1 for 5 reverse stock split of Class A
Common Stock. All share amounts have been adjusted to
reflect the split retroactively. The holders of
shares of Class B Common Stock shall, as a class, be
entitled to vote to elect a majority of the members
of the Company's Board of Directors through December
11, 2006. Holders of shares of Class A Common Stock
shall, as a class, be entitled to vote to elect the
remainder of the members of the Company's Board of
Directors through December 11, 2006. Following that,
holders of Class A Common Stock and Class B Common
Stock shall be entitled to one vote per share on
matters relating to the election of the Company's
Board of Directors. Holders of Class A Common Stock
and Class B Common Stock shall be entitled to one
vote per share on all other matters to be voted upon
by the stockholders of the Company.
During the period from inception through October 31,
2003, the Company entered into six convertible
promissory notes. During the period, a holder of
three notes exercised the options to convert the
notes into Class A common stock. The other three
notes were held by a related party (see Note 2) and
were redeemed for cash. A summary of the notes that
were converted is as follows:
NOTE DATE DATE CONVERTED AMOUNT OF NOTE SHARES PRICE PER SHARE
-------------------------------------------------------------------------------------------
November 2001 November 21, 2001 $ 125,000 50,000 $2.50
December 2001 December 19, 2001 116,000 58,000 2.00
February 2002 February 25, 2002 40,000 26,667 1.50
-------------------------------------------------------------------------------------------
TOTALS $ 281,000 134,667 $2.09
===========================================================================================
-F-15-
CDEX INC.
NOTES TO FINANCIAL STATEMENTS
=============================================================================
7. LEASES The Company is obligated under a month-to-month
lease, as lessee, for office space in Maryland. The
lease provides for monthly rent of $175. Total rent
expense was $2,100, $2,100, and $4,200 for the years
ended October 31, 2002 and 2003 and the period July
6, 2001 (inception) to October 31, 2003.
The Company leases office and laboratory space under
a sublease from Dynamic Management Resolutions, LLC
(see Note 2) expiring July 31, 2004. The lease
provides for monthly rent of $1,350. Total rent
expense was $16,585, $17,873, and $39,922 for the
years ended October 31, 2002 and 2003, and the period
July 6, 2001 (inception) to October 31, 2003.
The future minimum lease payments required under
operating leases that have an initial noncancelable
lease term as of October 31, 2003 are as follows:
Year Ending
October 31, Amount
-----------------------------------------------------
2004 $ 12,150
-----------------------------------------------------
8. FINANCIAL The Company has incurred losses since its inception
CONDITION of approximately $8,174,000 and has had no product
sales since its inception. As explained in Note 1,
the Company has been in the development stage since
its inception, which has included product
development, raising capital, and putting in place a
management team.
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. In addition, the Company intends to
continue its policy of paying significant portions of
compensation with its common stock. 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.
-F-16-
CDEX INC.
NOTES TO FINANCIAL STATEMENTS
=============================================================================
8. FINANCIAL The Company's ability to continue as a going concern
CONDITION and meet its obligations as they come due is
(CONTINUED) dependent upon its ability to raise sufficient cash
as discussed above. The existing cash balance will
fund approximately 3 months of operations if no
additional cash is raised. The Company anticipates it
will require at least $3,500,000 to $5,000,000 over
the next twelve months to complete the research,
development (including the cost of components
necessary to commence production) and other steps
needed to achieve commercially viable product sales.
The Company also anticipates it will need to maintain
the 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 noncurrent assets may be
substantially less than the balances reflected in the
financial statements and the Company may be unable to
pay its creditors.
9. SUBSEQUENT EVENT The Company has issued 292,335 shares of Class A
common stock since October 31, 2003, as shown below:
Cash
Number of Purpose Proceeds
Date Shares ----------------------------------------
December 19, 2003 33,334 Sale for cash $ 50,000
December 19, 2003 16,667 Sale for cash 25,000
December 22, 2003 150,000 Compensation --
December 22, 2003 15,000 Compensation --
December 22, 2003 33,334 Sale for cash 50,000
January 12, 2004 24,000 Sale for cash 30,000
January 12, 2004 20,000 Sale for cash 25,000
-------------------------------------------------------------------------------------------
292, 335 $ 180,000
===========================================================================================
On January 20, 2004, the Company completed an
agreement with an investor to sell 1,333,333 shares
of Class A Common Stock for $1,000,000.
-F-17-
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Nevada corporation law provides that:
1. a corporation may indemnify any person who was or is a party or is threatened
to be made a party to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative, except an
action by or in the right of the corporation, by reason of the fact that he is
or was a director, officer, employee or agent of the corporation, or is or was
serving at the request of the corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise, against expenses, including attorneys' fees, judgments, fines and
amounts paid in settlement actually and reasonably incurred by him in connection
with the action, suit or proceeding if he acted in good faith and in a manner
which he reasonably believed to be in or not opposed to the best interests of
the corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful;
2. a corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action or
suit by or in the right of the corporation to procure a judgment in its favor by
reason of the fact that he is or was a director, officer, employee or agent of
the corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against expenses, including amounts paid in
settlement and attorneys' fees actually and reasonably incurred by him in
connection with the defense or settlement of the action or suit if he acted in
good faith and in a manner which he reasonably believed to be in or not opposed
to the best interests of the corporation. Indemnification may not be made for
any claim, issue or matter as to which such a person has been adjudged by a
court of competent jurisdiction, after exhaustion of all appeals therefrom, to
be liable to the corporation or for amounts paid in settlement to the
corporation, unless and only to the extent that the court in which the action or
suit was brought or other court of competent jurisdiction determines upon
application that in view of all the circumstances of the case, the person is
fairly and reasonably entitled to indemnity for such expenses as the court deems
proper; and
3. to the extent that a director, officer, employee or agent of a corporation
has been successful on the merits or otherwise in defense of any action, suit or
proceeding, or in defense of any claim, issue or matter therein, the corporation
shall indemnify him against expenses, including attorneys' fees, actually and
reasonably incurred by him in connection with the defense.
We may make any discretionary indemnification only as authorized in the specific
case upon a determination that indemnification of the director, officer,
employee or agent is proper in the circumstances.
The determination must be made:
- - by our stockholders;
- - by our board of directors by majority vote of a quorum consisting of directors
who were not parties to the action, suit or proceeding;
- - if a majority vote of a quorum consisting of directors who were not parties to
the action, suit or proceeding so orders, by independent legal counsel in a
written opinion;
- - if a quorum consisting of directors who were not parties to the action, suit
or proceeding cannot be obtained, by independent legal counsel in a written
opinion; or
- - by court order.
Our Articles of Incorporation provide for indemnification of agents of the
Company through bylaw provisions, agreements with such agents or other persons,
vote of stockholders or disinterested directors or otherwise, in excess of the
indemnification and advancement otherwise permitted under, and subject only to
the limits imposed by, Nevada law. Our Articles of Incorporation further provide
that we may purchase and maintain insurance against any liability asserted
against an indemnified party.
II-1
However, insofar as indemnification for liabilities arising under the
Securities Act of 1933, as amended (the "Securities Act"), may be permitted to
directors, officers and controlling persons of the Company pursuant to the
foregoing provisions, or otherwise, the Company has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Company of expenses incurred or paid
by a director, officer or controlling person of the Company in the successful
defense of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being registered, the
Company will, unless in the opinion of its counsel the matter has been settled
by controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth estimated expenses expected to be incurred in
connection with the issuance and distribution of the securities being
registered. CDEX will pay all expenses in connection with this offering.
Securities and Exchange Commission Registration Fee $388.09
Printing, Filing and Engraving Expenses $ *
Accounting Fees and Expenses $ *
Legal Fees and Expenses $ *
Blue Sky Qualification Fees and Expenses $ *
Miscellaneous $ *
-----
TOTAL *
*To be completed by amendment.
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
NOTE: ON DECEMBER 11, 2002, CDEX EFFECTED A 1-FOR-5 REVERSE SPLIT OF ITS COMMON
STOCK. SHARE AMOUNTS SET FORTH BELOW FOR SECURITIES ISSUED PRIOR TO THAT DATE
HAVE BEEN ADJUSTED TO REFLECT THIS REVERSE STOCK SPLIT.
The following equity securities of the Company were sold during period
commencing on July 6, 2001, the date of incorporation of the Company, to May 31,
2002, without registration, under the limited offering exemption from
registration under the Securities Act provided in Rule 504 under Regulation D
for aggregate consideration valued at approximately $535,540:
On July 23, 2001, the Company issued 2,600,000 shares of common stock as an
earnest money deposit under an Asset Purchase Agreement with Loch Harris. Such
shares were valued at $.03 per share and were intended to be distributed to the
shareholders of Loch Harris upon their registration.
On July 24, 2001 the Company issued FGW LLC, as designee of Malcolm H. Philips,
690,000 shares and Timothy D. Shriver, 210,000 shares of common stock for
services as executives of Company at an agreed valuation of $2.50 per share.
On July 24, 2001, the Company entered into a Consultant Services Agreement with
Dynamic Management Resolutions, a Delaware LLC and certain consultants pursuant
to which the Company engaged the consultants to perform certain consulting
services and as compensation agreed to issue the following shares of common
stock to the named parties, at an agreed valuation of $2.50 per share:
PARTY NO. OF SHARES ISSUED
----- --------------------
Dynamic Resolutions 40,000
Dr. Wade Poteet 140,000
Michael Mergenthaler 120,000
II-2
Larry Spiers 120,000
Harold Cauthen 120,000
Pursuant to each of the Services Agreement made by the Company with George Dials
on August 3, 2001 and the Services Agreement made by the Company with Dr. BD
Liaw on October 1, 2001, the Company agreed to issue 35,000 shares to such
individual for said individual's services on the Company's Board of Directors.
During the period August, 2001--October, 2001 the Company issued an aggregate of
148,000 shares of its common stock to certain individuals as compensation for
performance of certain part-time services such as web services, financial
services and general administrative work for the Company, valued at $2.50 per
share, as follows:
PARTY NO. OF SHARES ISSUED
----- --------------------
Thelma Johnson 15,000
Bruce Ruckel 15,000
Jay Garrett 15,000
Randy Jeter 15,000
Elizabeth Birk 6,000
Frank Jackovac 20,000
D. Audsley 2,000
Steve Frankiewicz 60,000
On August 3, 2001 the Company agreed to issue to Boone and Baker 150,000 and
100,000 shares, respectively, of its common stock for consulting services under
Service Agreements valued at $2.50 per share.
On August 4, 2001, at the closing of the Purchase Agreement, the Company issued
pursuant thereto and in exchange for assets purchased, the balance of 9,600,000
shares of common stock to Loch (reflecting the balance due on the
12,200,000-share purchase price, 2,600,000 shares of which were issued on July
23 as reflected above), and an additional 1,665,000 shares of common stock on
behalf of Loch to discharge certain loans and other obligations to the following
persons and entities:
PARTY NO. OF SHARES ISSUED
----- --------------------
Baker 500,000
Boone (as Coto LLC) 320,000
Coldwater Capital 780,000
Frank Jakovac 65,000
200,000 of such shares were subsequently returned to the Company pursuant to an
amendment to the agreement under which the assets were purchased.
In each of the foregoing transactions, neither the Company nor any person acting
on its behalf sold the securities by any form of general solicitation or general
advertising. The Company exercised reasonable care to assure that no purchaser
of a security was an "underwriter" within the meaning of section 2(11) of the
Securities Act and placed a restrictive legend on the sold securities. The
Company gave each purchaser the opportunity to ask questions and receive answers
concerning the terms and conditions of the offering and to obtain any additional
information which the Company possessed or could acquire without unreasonable
effort or expense.
The Company issued its 9% Convertible Promissory Notes to Ms. Kitty Philips on
October 5 and November 14, 2001, each in the amount of $20,000, and on July 8,
2003, in the amount of $15,000. These notes have been paid in full.
The following equity securities of the Company were issued and/or sold during
the period November, 2001 to November 31, 2003, without registration, under the
private offering safe-harbor provision of Rule 506 of Regulation D for
transactions not involving any public offering under the meaning of Section 4(2)
of the Securities Act:
In the period from November 2001 until February 2002, the Company issued three
Promissory Notes to Robert Stewart in an aggregate original principal amount of
$281,000, which notes were convertible into an aggregate of
II-3
134,667 shares of common stock of the Company. Mr. Stewart has converted all
three of such notes into shares of Company common stock.
On March 12, 2002 the Company sold 10,000 shares of its common stock to Robert
Creighton for $25,000.
In April, 2002 the Company sold 25,000 shares of its common stock to William
Prain for $50,000. Under Mr. Prain's Stock Purchase Agreement, Mr. Prain has the
right to purchase an additional 25,000 shares on the same conditions as the
originally purchased 25,000 shares.
On May 23, 2002, the Company sold 65,000 shares of its common stock to Dawn M.
Guimond for $130,000. Under Ms. Guimond's Stock Purchase Agreement, Ms. Guimond
has the right to purchase an additional 65,000 shares at the same price and
otherwise on the same conditions as the originally purchased 65,000 shares.
On May 23, 2002, the Company sold 50,000 shares of its common stock to Motta
Investment Co., LTD for $100,000. Under the Motta Investment Stock Purchase
Agreement, Motta Investment has the right to purchase an additional 50,000
shares at $2.00 per share and otherwise on the same conditions as the originally
purchased 50,000 shares.
In June 2002, the Company sold 50,000 shares of its common stock to each of
Motta Family Revocable Living Trust and Dawn Guimond at a price of $2.00 per
share.
On July 15, 2002, the Company sold 1,200 shares of its common stock to DICUT
Inc. at a price of $2.50 per share.
On August 23, 2002, the Company sold 30,770 shares of its common stock to
Dependable Ranch Lenders LLC at a price of $3.25 per share.
On October 2, 2002, the Company sold 50,000 shares of its common stock to Motta
Investment Co. Ltd. at a price of $2.00 per share.
In November 2002 through January 2003, the Company sold 580,000 shares of its
common stock to the following investors at a price of $0.50 per share:
Dependable Ranch Lenders LLC 300,000
Robert Stewart 80,000
Motta Investment Co. Ltd. 100,000
Dawn Guimond 50,000
Mari Stassi 50,000
On December 11, 2002, the Company issued 1,075,900 shares of its common stock to
the following employees as compensation for services rendered in 2001 valued at
$0.75 per share:
Harold Cauthen 99,840
Tim Shriver 201,587
Thelma Johnson 202,013
Wade Poteet 292,000
Larry Spiers 172,453
Malcolm H. Philips 50,687
Michael Mergenthaler 57,320
These shares are subject to a risk of forfeiture in the event that an employee
leaves the Company.
On December 11, 2002, the Company issued 700,483 shares of its common stock to
the following employees as compensation for services rendered in 2002 valued at
$0.75 per share:
Harold Cauthen 62,467
Tim Shriver 106,664
Thelma Johnson 42,283
Wade Poteet 122,308
II-4
Larry Spiers 63,273
Malcolm H. Philips 165,333
Michael Mergenthaler 80,000
Steven Frankiewicz 58,155
These shares are subject to a risk of forfeiture by the employee in the event
that the employee leaves the Company.
On December 30, 2002, the Company issued 220,000 shares of its Class B common
stock to the following employees as compensation for services rendered valued at
$0.81 per share:
Harold Cauthen 15,000
Tim Shriver 40,000
Wade Poteet 20,000
Malcolm H. Philips 100,000
Michael Mergenthaler 25,000
Larry Spiers 20,000
These shares are subject to a risk of forfeiture by the employee in the event
that the employee leaves the Company.
On December 30, 2002, the Company issued 320,000 shares of its common stock to
the following employees as compensation for services rendered valued at $0.82
per share:
Harold Cauthen 30,000
Tim Shriver 60,000
Wade Poteet 40,000
Michael Mergenthaler 50,000
Larry Spiers 45,000
Steve Frankiewicz 20,000
Chung Sing Orr 10,000
Thelma Johnson 10,000
George E. Dials 15,000
Dr. Boen Dar Liaw 15,000
David Audsley 5,000
Brandi Shriver 5,000
Timothy Shriver Jr. 5,000
These shares are subject to a risk of forfeiture by the employee in the event
that the employee leaves the Company.
In January 2003, the Company issued 20,000 shares of its common stock to Larry
Marsteller as compensation for services rendered valued at $0.82 per share.
From March through October 2003, the Company issued an aggregate of 738,000
shares of its common stock to the following investors at a price of $1.00 per
share:
Aspen Creek Farms 200,000
Domin Living Trust 50,000
Motta Investment Co. 50,000
II-5
LTD
Pete Maina 45,000
Bruce Kison 35,000
Mari Stassi 27,000
Gary Pleggenkuhle 25,000
Dawn M. Guimond 15,000
Ben Lowell 10,000
Jeff Lowell 10,000
Bruce Gourlay and
Linda H. Mackey 25,000
Irene J. Dobbs 25,000
John William Steele 25,000
John C Fisher 25,000
Charlie Stevens 40,000
Charlotte Stevens 5,000
Patrick Purgatorio 25,000
Shawn Aquiar 5,000
Charleen Stevens 5,000
Brytan Stevens 5,000
Ben and Maxine Lowell 5,000
Douglas Lowell 1,000
Peter S Dobbs 25,000
Christopher Sintetos 25,000
Scott Newby 25,000
Ben and Maxine Lowell 5,000
In May 2003, the Company issued 25,000 shares of its common stock to Joseph S.
Dellinger and 40,000 shares of its common stock to Larry Marsteller as
compensation for services rendered valued at $0.82 per share.
In June 2003, the Company issued 5,000 shares of its common stock to each of
Amista Salcido, Jeff Kosanke and Kelly Morgan as compensation for services
rendered valued at $0.81 per share.
On July 31, 2003, the Company issued 400,000 shares of its common stock to Renka
Inc. at a price of $0.85 per share.
On September 20, 2003, the Company issued 1,936,783 shares of its common stock
to the following employees as compensation for services rendered valued at $0.50
per share:
II-6
Larry Marsteller 209,600
Malcolm H. Philips 411,138
Tim Shriver 310,369
Michael Mergenthaler 259,984
Wade Poteet 229,754
Harold Cauthen 159,215
Larry Spiers 229,754
Chung Sing Orr 38,292
Joseph S. Dellinger 88,677
These shares are subject to a risk of forfeiture by the employee in the event
that the employee leaves the Company.
On October 1, 2003, the Company issued 120,000 shares of its common stock to the
following employees as compensation for services rendered valued at $0.81 per
share:
BD Liaw 40,000
George E. Dials 45,000
Greg Smith 35,000
These shares are subject to a risk of forfeiture by the employee in the event
that the employee leaves the Company.
On October 25, 2003 the Company issued 25,000 shares of its common stock to
Peter S. Dobbs for services rendered valued at $0.81 per share.
On October 27 and 29, 2003 the Company sold 21,667 shares of its common stock,
15,000 to Gary Pleggenkuhl and 6,667 to Jeff Lowell at a price of $1.50 per
share.
On October 31, 2003 the Company issued 10,000 shares of its common stock to
Randall Jeter for services rendered valued at $0.81 per share.
On October 31, 2003 the Company issued 82,267 shares of its common stock to
Thelma Johnson for services rendered valued at $0.50 per share.
In December 2003, the Company sold 33,334 shares of its common stock to each of
John L. Theobald and William R. Linder and 16,667 shares of its common stock to
Van L. Shumway Jr. all for services rendered valued at $1.50 per share.
In January 2004, the Company sold 24,000 shares of its common stock to Peter S.
Dobbs and 20,000 shares of its common stock to Peter R. Mania at a price of
$1.25 per share.
On January 20, 2004, the Company sold 1,333,333 shares of its common stock to
the Lion Share Group, Ltd. at a price of $0.75 per share. The price is payable
in installments, the last of which is due on July 2, 2004.
No commissions or fees were paid in connection with any of these sales.
All of the above sales were undertaken pursuant to the limited offering
exemption from registration under the Securities Act provided in Rule 506 under
Regulation D, the safe-harbor for private offerings allowed without registration
under Section 4(2) of the Securities Act, to accredited investors only, each of
whom acknowledged having
II-7
had the opportunity to ask questions of and receive answers from representatives
of the Company concerning the terms and conditions of the offering, and to
obtain any additional information or documents relative to the Company, its
business and an investment, as said purchaser deemed necessary.
Neither the Company nor any person acting on its behalf sold the securities by
any form of general solicitation or general advertising.
ITEM 27. EXHIBITS
3.1 Amended and Restates Articles of Incorporation of the Company filed
January 2, 2004, together with Certificate of Designation of Rights,
Preferences and Privileges
3.2 By-Laws of the Company adopted July 6, 2001.
4.1 Specimen certificate for shares of Company common stock*
4.2 2002 Stock Incentive Plan
4.3 2003 Stock Incentive Plan
4.4 Form of Restricted Stock Agreement*
5.1 Opinion of Counsel re: Legality of Shares
10.1 Lease Agreement by and between the Company and Dynamic Management
Resources, dated as of June 29, 2001.*
10.2 Lease Agreement by and between the Company and Source Office Suites,
dated as of October 17, 2001.*
10.3 Assigned Consultant Services Agreement for Dr. Wade Poteet Restated as
Employment Agreement dated January 1, 2003 and amendments
10.4 Assigned Consultant Services Agreement for Malcolm Philips Restated as
Employment Agreement dated January 1, 2002 and amendments
10.5 Assigned Consultant Services Agreement for Timothy Shriver Restated as
Employment Agreement dated January 1, 2002 and amendments
10.6 G. Dials Services Agreement dated August 3, 2001*
10.7 Dr. BD Liaw Services Agreement dated October 1, 2001*
10.8 Assigned Consultant Services Agreement for Michael Mergenthaler
Restated as Employment Agreement dated January 1, 2002
10.9 Pending determination of confidential treatment issue.
10.10 Pending determination of confidential treatment issue.
10.11 Form of Non-Disclosure Agreement between the Company and each
significant employee.*
23.1 Consent of Independent auditors.
24 Power of Attorney (contained on signature page)
* To be filed by amendment.
ITEM 28. UNDERTAKINGS
The undersigned registrant hereby undertakes:
(1) To file, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by Sections 10(a)(3) of the Securities Act;
(ii) Reflect in the prospectus any facts or events arising after the effective
date of the Registration Statement (or the most recent post-effective amendment
thereof) which, individually or in the aggregate, represent a fundamental change
in the information set forth in the Registration Statement. Notwithstanding the
foregoing, any increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated maximum
offering range may be reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume
and price represent no more than 20 percent change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee" table in the
effective Registration Statement;
(iii) Include any additional or changed material information on the plan of
distribution;
(2) That, for the purpose of determining any liability under the Securities Act,
each such post-effective amendment
II-8
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any of
the securities that remain unsold at the end of the offering.
Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to directors, officers and controlling persons of the small
business issuer pursuant to the foregoing provisions, or otherwise, the small
business issuer has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the small business issuer of expenses incurred or paid by a director, officer or
controlling person of the small business issuer in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the small business
issuer will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
II-9
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, as amended,
the registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form SB-2 and authorized this registration
statement to be signed on our behalf by the undersigned, on January 31, 2004.
CDEX, INC.
By: /s/ Malcolm H. Philips
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Name: Malcolm H. Philips
Title:
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each director and officer whose
signature appears below constitutes and appoints Malcolm H. Philips Jr. and
Michael Mergenthaler or either of them, as such person's true and lawful
attorneys-in-fact and agents, with full powers of substitution and
re-substitution, for such person in name, place and stead, to sign in any and
all amendments (including post-effective amendments) to this Registration
Statement on Form SB-2, in any and all capacities, and to file the same, with
all exhibits thereto and all other documents in connection therewith, with the
Securities and Exchange Commission, granting unto such attorneys-in-fact and
agents, and every act and thing requisite and necessary to be done, as fully to
all intents and purposes as he might or could do in person, hereby ratifying and
confirming all that such attorneys-in-fact and agents, or any of them, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed by the following persons in the capacities and on the
dates stated.
NAME TITLE DATE
- ---- ----- ----
/s/ Malcolm H. Philips CEO/President/Chairman of the Board of Directors January 31, 2004
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Malcolm H. Philips Jr
/s/ Timothy Shriver Sr. Vice President of Technical Operations January 31, 2004
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Timothy Shriver
/s/ Michael Mergenthaler Vice President of Business Operations January 31, 2004
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Michael Mergenthaler
/s/ George Dials Director January 31, 2004
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George Dials
/s/ Dr. BD Liaw Director January 31, 2004
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Dr. BD Liaw
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