AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON
AUGUST 22, 2005
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 (Primary Standard Employer
of Incorporation Industrial Classification Identification No.)
or Organization) Code Number)
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.
Hodgson Russ 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. [_]
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CALCULATION OF REGISTRATION FEE
- --------------------------------------------------------------------------------------------------------------------
Proposed Maximum Proposed Maximum
Title of Each Class of Amount to be Offering Price Aggregate Offering Amount of
Securities to be Registered Registered Per Share (1) Price (1) Registration Fee
- --------------------------------------------------------------------------------------------------------------------
Class A Common Stock, 2,377,656 $0.97 $2,306,326 $272
par value $.005
- --------------------------------------------------------------------------------------------------------------------
(1) Estimated solely for purposes of calculating the registration fee in
accordance with Rule 457(c) under the Securities Act of 1933, as amended, and
reflects the average of the bid and asked prices on the OTC Bulletin Board as of
August 15, 2005.
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
shareholders selling under this prospectus 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 their offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED AUGUST 22, 2005
CDEX INC.
2,377,656 SHARES OF CLASS A COMMON STOCK
This prospectus relates to the distribution by certain shareholders of CDEX Inc.
of up to 2,377,656 shares of our Class A 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.
Our Class A common stock is traded on the OTC Bulletin Board under the symbol
"CEXI.OB." Shareholders selling under this prospectus may offer or sell our
Class A common stock from time to time in open-market or negotiated transactions
at prices they deem appropriate.
On August 15, 2005, the last reported sale price of our common stock was $.97
per share.
THESE SECURITIES ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF RISK. PLEASE REFER
TO "RISK FACTORS" BEGINNING ON PAGE 6.
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 August __, 2005.
TABLE OF CONTENTS
NUMBER
Prospectus Summary 3
Summary of the Offering 3
Summary of Consolidated Financial Information 5
Risk Factors 6
Cautionary Statement Regarding Forward-Looking Statements 11
Use of Proceeds 12
Capitalization 12
Management's Discussion and Analysis of Financial Conditions
and Plan of Operations 13
Our Business 19
Management 29
Executive Compensation 32
Selling Shareholders 36
Security Ownership Of Certain Beneficial Holders And Management 37
Market for Common Equity and Related Stockholder Matters 38
Description of Securities 38
Plan of Distribution 39
Experts 40
Legal Matters 40
Certain Transactions 40
Where You Can Find More Information 40
Financial Statements F-1
Part II
Indemnification of Directors and Officers II-1
Other Expenses if Issuance and Distribution II-2
Recent Sales of Unregistered Securities II-2
Exhibits II-9
Signatures II-11
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) validation of substances for 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).
All CDEX products are based on applying the same underlying technologies for
which we have patents pending.
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: 33,798,971 shares
Class B: 175,000 shares
CLASS A COMMON STOCK BEING
OFFERED BY SELLING SHAREHOLDERS: 2,377,656 shares
Voting Rights
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 11, 2006, the holders of shares of Class B Common Stock, most of
whom are now our executive officers, are entitled to vote as a class to elect a
majority of our directors. Until that time, holders of shares of Class A Common
Stock are entitled to vote as a class to elect the remainder of our directors.
Following December 11, 2006, holders of Class A Common Stock and Class B Common
Stock shall be entitled to one vote per share on the election of directors as
well as all other matters.
Use of Proceeds
Because we are conducting this offering on behalf of selling shareholders, 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 which will total
approximately $20,000.
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 6. 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.
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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.
Transfer Agent and Registrar for the CDEX Shares
Nevada Agency and Trust Company 50 Liberty Street, Suite 880, Reno, Nevada 89501
Trading Market
Our stock is listed on the OTC Bulletin Board under the symbol "CEXI.OB".
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.
4
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
The following table presents summary historical financial information and
certain balance sheet information for the fiscal years ended October 31, 2003
and 2004 and the six months ended April 30, 2004 and 2005. 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.
Operating Data
July 6, 2001
Six Months Ended April 30 Year Ended October 31 (inception) to
2004 2005 2003 2004 October 31, 2004
---- ---- ---- ---- ----------------
Revenue $ 4,069 $ 107,660 $ 191,964 $ 4,069 $ 271,985
Cost of revenue -- 68,458 126,701 -- 178,831
Development costs 691,706 502,578 616,967 1,358,197 2,461,560
General and administrative
expenses 515,221 778,973 609,611 1,315,757 2,413,416
Non-cash stock compensation 1,322,887 794,105 2,953,544 2,268,280 8,729,622
Other income (expense) (206,168) 675 143 (1,039,819) (1,041,090)
Net loss $ (2,731,913) $ (2,035,779) $ (4,114,716) $ (5,977,984) $(14,552,534)
Basic and diluted net loss
per common share: $ (0.12) $ (0.07) $ (0.21) $ (0.24) $ (0.75)
Basic and diluted weighted
average common
shares outstanding 23,665,442 30,248,382 19,730,922 24,541,702 19,354,158
Balance Sheet Data
October 31
2003 2004 April 30, 2005
---- ---- --------------
Current assets $434,477 $621,628 $908,205
Total assets 756,529 672,511 953,918
Current liabilities 19,137 242,348 839,026
Stockholders' equity 737,392 430,163 114,892
Working capital 415,340 379,280 69,180
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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 and contain forward-looking statements. Actual
results could differ materially from those set forth in the forward-looking
statements. See "Cautionary Statement Regarding Forward-Looking Statements"
below.
Risks Related to our Business
A history of operating losses and an accumulated deficit may affect CDEX's
ability to survive.
We have a history of operating losses and an accumulated deficit. Since our
principal activities to date have been limited to organizational activities,
research and development, product development and limited marketing and sales,
CDEX has produced only limited revenues. In addition, we have only limited
assets. As a result, we cannot be certain that CDEX will continue to 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.
CDEX has received a going concern opinion from its independent auditors that
expresses 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, 2004 containing an explanatory paragraph that expresses
uncertainty regarding our ability to continue as a going concern due to
historical negative cash flow. We cannot be certain that our business plans will
be successful or what actions may become necessary to preserve our business. Any
inability to raise capital may require us to reduce operations or could cause
our business to fail.
Our limited operating history makes our future operating results unpredictable
rendering it difficult to assess the health of our business or its likelihood of
success. The inability to assess these factors could result in a total loss of
an investor's investment in CDEX.
In the case of an established company in an ongoing market, investors may look
to past performance and financial condition to get an indication of the health
of the company or its likelihood of success. Our short operating history and the
evolving nature of the explosives detection and chemical identification markets
in which we focus make it difficult to forecast our revenues and operating
results accurately. We expect this unpredictability to continue into the future
due to the following factors:
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 could experience operating losses or even a total loss of our business
which, as a result of the foregoing factors, would be difficult to anticipate
and could thus cause a total loss of capital invested in CDEX.
The absence of a permanent, full-time chief financial officer and the types of
financial controls and procedures which will be required of public companies
leave investors in CDEX without these protections until they are remedied.
In April 2004 we retained a qualified part-time chief financial officer on a
consultancy basis, however, we have not retained a long-term chief financial
officer. The responsibilities of the principal accounting and financial officer
are currently being handled by our CEO. We have also added to our board of
directors a qualified financial expert as described in the Sarbanes-Oxley Act.
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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 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 requires 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 and adopting a testing plan. This process is in the initial stages
beginning with the review of procurement and inventory functions. We plan on
completing the documentation, testing and remediation as required during fiscal
year 2006 to be compliant under Section 404 of the Sarbanes-Oxley Act.
Lack of additional financing could prevent us from operating profitably which,
eventually, could result in a total loss of our business.
Since our inception, we have funded our operations through borrowings and
financings. Current funds available to CDEX may not be adequate for us to be
competitive in the areas in which we intend to operate, and we have no
arrangements or commitments for ongoing funding. If funding is insufficient at
any time in the future, we may not be able to grow revenue, take advantage of
business opportunities or respond to competitive pressures. The unavailability
of funding could prevent us from producing additional revenues or ever becoming
profitable. Our continued operations, as well as the successful implementation
of our business plan, may therefore depend upon our ability to raise additional
funds of approximately $2,500,000 through bank borrowings or equity or debt
financing over the next twelve months. We continue to seek prospective investors
who may provide some of this funding. However, such funding may not be available
when needed or may not be available on favorable terms. Certain family members
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. If we do not produce revenues and become
profitable, eventually, we will be unable to sustain our business.
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.
Our potential inability to protect the proprietary rights in CDEX's technologies
and intellectual property may hamper our ability to manufacture products which
would prevent us from earning revenues or becoming profitable.
Our success and ability to compete will depend in part on the protection of our
potential patents and other proprietary information. We currently have four
patent applications pending for our chemical detection technologies. We rely on
non-disclosure agreements and patent and copyright laws to protect the
intellectual property that we have developed and plan to develop. However, such
agreements and laws may provide insufficient protection. Moreover, other
companies may develop products that are similar or superior to CDEX's or may
copy or otherwise obtain and use our proprietary information without
authorization. If a third party were to violate one or more of our patents, we
may not have the resources to bring suit or otherwise protect the intellectual
property underlying the patent. In the event of such a violation or if a third
party appropriated any of our unpatented technology, such party may develop and
market products which we intend to develop and/or market. We would lose any
revenues which we would otherwise have received from the sale or licensing of
those products. This could prevent our ever making a profit on any products
based upon the misappropriated technology.
Policing unauthorized use of 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,
7
divert management attention, and/or require CDEX to enter into costly royalty or
licensing arrangements to prevent further infringement, any of which could
increase our operating expenses and thus prevent us from becoming profitable.
Our competitive position also depends upon unpatented trade secrets. Trade
secrets are difficult to protect. Our competitors may independently develop
proprietary information and techniques that are substantially equivalent to ours
or otherwise gain access to our trade secrets, such as through unauthorized or
inadvertent disclosure of our trade secrets. If this occurs, our competitors may
use our processes or techniques to develop competing products and bring them to
market ahead of us. This could prevent us from becoming profitable.
We may rely on certain intellectual property licensed from third parties, and
may be required to license additional products or services in the future, in
order to move forward with our business plan. These third party licenses may be
unavailable on acceptable terms, when needed or at all. An inability to enter
into and maintain any of these licenses could prevent us from developing or
marketing products based upon the underlying technology which could prevent us
from earning revenues on these products or from becoming profitable.
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. Although we have entered into an agreement with a third-party
manufacturing company and are using the company's services, we cannot be certain
that the terms of this agreement or any such agreement 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.
At present, we do not plan to manufacture any of our products in-house. We are
considering different possibilities for bringing products to market among them,
licensing to third parties or outsourcing manufacturing. The risks of
association with outsourced manufacturers are related to their operations,
finances and suppliers. CDEX would have little control over an outsourced
manufacturer and may suffer losses if any outside manufacturer fails to perform
its obligations to manufacture and ship the manufactured product. These
manufacturers' financial affairs may also affect our ability to obtain product
from them in a timely fashion should they fail to continue to obtain sufficient
financing during a period of incremental growth. Problems with outsourced
manufacturers could damage our relationships with our clientele and cost us
future revenues. If we are unable to contract with adequate manufacturers, and
in the absence of licensing or other means, we may be unable to market our
products. This would prevent us from earning revenues.
Lack of market acceptance may limit our ability to sell products and generate
revenues which would prevent us from earning revenues or becoming profitable.
We cannot be certain that any products which we successfully develop will ever
achieve wide market acceptance. Our products, if successfully developed, may
compete with a number of traditional products manufactured and marketed by major
technology companies, as well as new products currently under development by
such companies and others. In the explosives detection marketplace, for example,
many airports and other facilities and agencies have already invested in and
implemented systems that are based upon technology that is different from ours.
While we believe our technology is superior, we will have to demonstrate its
superiority to these potential customers in order to sell our products and
generate revenues. We may encounter similar obstacles in other application
areas. The degree of market acceptance of our products will depend on a number
of factors, including the establishment and demonstration of the efficacy of the
product candidates, their potential advantage over alternative methods and
reimbursement policies of government and third party payors. We cannot be
certain that the marketplace in general will accept and utilize any of our
products. If potential customers do not accept and purchase our products, we
will be unable to generate revenues and become profitable.
We intend to market our products in industries where technology changes rapidly,
and we will incur costs to keep our products current and innovative. Our failure
to do so could render our products obsolete, making our business unprofitable.
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We hope to market our products in industries characterized by rapid change due
to the introduction of new and emerging technologies. Critical issues concerning
the governmental or commercial use of chemical detection mechanisms, including
security, reliability, accuracy, cost, ease of use, accessibility, or potential
tax or other government regulation, may affect the relevance and functionality
of our products. Future technology or market changes may cause some of our
products to become obsolete more quickly than expected. We will need to make
research and development expenditures to create new features for our products to
enhance their effectiveness and become and remain competitive. If we are
unsuccessful in timely assimilating development changes in the various
environments, we may be unable to achieve or maintain profitability.
Potential defects and product liability could result in delays in market
acceptance, unexpected liability and costs and diminished operating results.
Technology-based products frequently contain errors or defects, especially when
first introduced or when new versions are released. Defects and errors could be
found in current versions of our products, future upgrades to current products
or newly developed and released products. These defects could result in product
liability suits, delays in market acceptance or unexpected redevelopment costs,
which could cause any profits we might otherwise have to decline. We anticipate
most of our agreements with customers will contain provisions designed to limit
our exposure to potential product liability claims. It is possible, however,
that we will be unable to negotiate such provisions with certain customers or
that these provisions, if negotiated, may not be valid as a result of federal,
state, local or foreign laws or ordinances or unfavorable judicial decisions. 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
technologies (either by purchasing other businesses or acquiring their
technological assets) which it perceives to be unexploited and develop products
based upon these technologies. We have not yet identified these specific
technologies, and some of these technologies may be outside our current field of
operations. However, we may be unable to identify any such businesses or
technologies. Expansion may involve a number of special risks, including
possible adverse effects on our operating results or 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 limit our ability to sell products and thereby our
chances of becoming profitable.
We may experience substantial competition in our efforts to locate and attract
customers for our products. We are aware of two significant competitors in the
explosives detection industry which we believe have greater experience,
resources and managerial capabilities and may be in a better position than we
are to obtain access to and attract customers. A number of larger companies
similarly may enter some or all of our target markets and directly compete with
us. In the counter-terrorism arena, it is difficult to assess our competition
due to the high level of secrecy and lack of available information with respect
to defense and homeland security contracts and contractors. We must assume that
the demand for the technology in this area has given rise to a corresponding
supply of scientists and others who are developing technology similar to, or
otherwise competitive with, ours. In the area of brand protection, many
companies may seek to develop technology in-house to protect their own brands
rather than contract with us for our technology. In the areas of medical and
pharmaceutical validation and brand protection, various existing technologies
compete with ours and already are in use in the marketplace. These include radio
frequency identification tags, tagant agents (chemical agents added to the
target substance to serve solely as identifying tags) and bar coding. If our
competitors are more successful in marketing their products, we may be unable to
achieve or maintain profitability.
9
Loss of any of our current management or inability to recruit and retain quality
personnel could adversely impact our business and prospects. Our directors and
officers exert substantial control over our business and operations.
We are dependent on our officers, i.e., Malcolm Philips Jr. and Timothy Shriver,
our Chairman of the Board and our Senior Vice President of Technical Operations,
respectively, 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. This would increase costs and prevent or reduce our
profits. To minimize the effects of such loss, we have entered into employment
contracts and non-competition agreements with our key officers and employees,
including Messrs. Philips and Shriver.
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. This
lack of experience could lead to inefficiency and slow the process of marketing
our products and prevent us from making sales or becoming profitable.
Risks Relating to the Offering and Our Common Stock
There has not been any significant prior trading market for our shares, and we
cannot be certain that one will develop or that broker/dealers will make a
market in our common stock.
Our common stock is listed on the OTC Bulletin Board. Our shares are thinly
traded with low average daily volume. This coupled with a limited number of
market makers impairs the liquidity of our common stock, not only in the number
of shares of common stock which can be bought and sold, but also through
possible delays in the timing of transactions, and lower prices for our common
stock than might otherwise prevail. This could make it difficult or impossible
for an investor to sell shares of our common stock or to obtain a desired price.
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.
10
Holders of our Class B Common Stock (the majority of which is currently held by
our executive officers) will control the election of a majority of our board of
directors until December 11, 2006.
Until December 11, 2006, the holders of shares of our Class B Common Stock are
entitled to vote as a class to elect a majority of our directors. The majority
of these shares are now held by our executive officers. Until that time, holders
of shares of Class A Common Stock are only entitled to vote as a class to elect
the remainder of our directors. Following December 11, 2006, holders of Class A
Common Stock and Class B Common Stock shall be entitled to one vote per share on
the election of directors. As a result, prior to December 11, 2006, purchasers
of the shares in this offering will be unable to elect a majority of the
directors of CDEX. Our executive officers hold the majority of the issued and
outstanding shares of Class B Common Stock.
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- 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,"
"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.
11
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. However, CDEX will bear all of the expenses of
this offering which will total approximately $20,000.
CAPITALIZATION
The following table sets forth the capitalization of CDEX at April 30, 2005. The
following table should be read in conjunction with the financial statements and
related notes thereto included elsewhere in this prospectus.
Preferred Stock - $.005 par value per share, 3,000,000
shares authorized and none outstanding $ -
Class A common stock - $.005 par value per share, 36,500,000
shares authorized and 31,441,373 outstanding 157,211
Class B common stock - $.005 par value per share, 500,000
shares authorized and 220,000 outstanding 1,100
Additional paid in capital 16,708,266
Deferred stock compensation (163,373)
Accumulated deficit (16,588,312)
------------
Total Capitalization $ 114,892
------------
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 prospectus.
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
CDEX Inc was incorporated in the State of Nevada on July 6, 2001. 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 to
continue developing and marketing those products with increasing focus on
marketing. At present, we are devoting our resources to the development and
marketing of products for two potential markets:
(i) identification of substances of concern (e.g., explosives, illegal
drugs and chemical/biological weapons); and
(ii) validation of substances for 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).
Our initial validation products were ready for distribution in the third quarter
of 2004, and additional products to identify substances of concern should be
ready for distribution in 2005, assuming adequate funding.
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 ValiMed(TM)
product line, designed to validate authenticity of prescription medications
(which is intended for use in ensuring that medication has not been
counterfeited or that the medication administered is what was prescribed). We
are expanding marketing efforts having introduced our initial products to the
field in November 2004, and supporting field test sites and third party research
projects. Our first products are focused on the prescription medication
anti-counterfeiting and validation markets, with the ValiMed(TM) Impaired
Clinician Solution being the first completed product CDEX placed in the
end-consumer marketplace, followed closely thereafter by introduction of a
quality assurance based application - also focused on healthcare - namely the
ValiMed(TM) Patient Safety Solution.
13
In the explosive detection area, the PS(3) (Personnel Security Screening System,
designed to detect trace amounts of explosive on surfaces impacted by
ultraviolet energy) is scheduled to be our first end-consumer product. 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 won proposals with those vendors or
reached any definitive licensing-type agreements with them. While potential
licensing opportunities are being 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. There
are a number of competitors in the explosive detection area that are actively
marketing products and solutions.
We anticipate further increases to our existing sales force through hiring or
channel sales partnering and budget to augment sales efforts in the healthcare
industry as well as focus on sales to the federal government. For our fiscal
year ending October 31, 2005 our marketing budget is $165,000 for external
marketing expenditures, not including such expenses as travel and personnel. 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.
RESULTS OF OPERATIONS
Six Months Ended April 30, 2005 Compared to Six Months Ended April 30, 2004.
Revenue: Revenue was $107,660 and $4,069 during the six months ended April 30,
2005 and April 30, 2004, respectively. The revenue during the first and second
fiscal quarters of 2005 was from the delivery and support of ValiMed (TM) units
to hospital pharmacy customers. The revenue during the second fiscal quarter of
2004 was from a development 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.
Cost of revenue: Cost of revenue was $68,458 and $0 during the six months ended
April 30, 2005 and April 30, 2004, respectively. The costs during the first and
second fiscal quarters of 2005 were for component parts and external
manufacturing costs of ValiMed (TM) units.
Research and development costs: Research and development costs were $502,578
during the six months ended April 30, 2005, compared with $691,706 during the
six months ended April 30, 2004. The decrease of $189,128 (or 27%) resulted from
the company reducing research and development activities to focus on the
distribution its ValiMed (TM) product.
General and administrative expenses: General and administrative expenses were
$778,973 during the six months ended April 30, 2005 compared with $515,221
during the six months ended April 30, 2004. This increase of $263,752 (or 51%)
resulted primarily from higher payroll costs and professional services expenses
including legal and accounting costs, and secondarily from sales and marketing
activities, and travel.
Non-cash stock compensation: Non-cash stock compensation expense was $794,105
during the six months ended April 30, 2005, compared with $1,322,886 during the
six months ended April 30, 2004. This decrease of $528,781 (or 40%) resulted
from the full amortization of various stock grants in 2004 and a lower average
stock price in 2005 for non-cash stock compensation compared to 2004.
Other income (expense): Other income was $675 during the six months ended April
30, 2005, compared with expense of $206,168 during the six months ended April
30, 2004. This increase resulted primarily from a higher cash balance in an
interest earning account in the first and second fiscal quarters of 2005
compared with 2004. The expense in the second fiscal quarter of 2004 was from
the amortization of financing costs associated with warrants to interest
expense.
14
Net loss was $2,035,779 during the six months ended April 30,2005, compared with
a net loss of $2,731,913 during the six months ended April 30, 2004, due to the
foregoing factors.
Year Ended October 31, 2004 Compared to Year Ended October 31, 2003.
Revenue: Revenue was $4,069 and $191,964 during the years ended October 31, 2004
and October 31, 2003, respectively. The revenue was from a development 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.
The decrease of 187,895 (or 98%) resulted from the completion in 2004 of the
development agreement with the U.S. Department of Defense.
Cost of revenue: Cost of revenue was $0 and $126,701 during the years ended
October 31, 2004 and October 31, 2003, respectively. The 2003 costs were for
staff hours and materials to support the U.S. Department of Defense agreement.
Development costs: Development costs were $1,358,197 during the year ended
October 31, 2004, compared with $616,967 during the year ended October 31, 2003.
The increase of $741,230 (or 120%) resulted from ongoing research and
development, statistical studies of equipment performance and preparation for
demonstrations and presentations.
General and administrative expenses: General and administrative expenses were
$1,315,757 during the year ended October 31, 2004 compared with $609,611 during
the year ended October 31, 2003. This increase of $706,146 (or 116%) resulted
from increased sales and marketing activities, as well as professional services.
Non-cash stock compensation: Non-cash stock compensation expense was $2,268,280
during the year ended October 31, 2004, compared with $2,953,544 during the year
ended October 31, 2003. This decrease of $685,264 (or 23%) resulted from the
full amortization of various stock grants in 2003 and a lower average stock
price in 2004 for non-cash stock compensation compared to 2003.
Other income (expense): Other income (expense) was expense of $1,039,819 during
the year ended October 31, 2004, compared with income of $143 during the year
ended October 31, 2003. This increase in expense resulted primarily from the
amortization of the discount on convertible notes payable associated with the
warrants and the conversion feature of the debentures.
Net loss was $5,977,984 during the year ended October 31,2004, compared with a
net loss of $4,114,716 during the year ended October 31, 2003, due to the
foregoing factors.
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 additional revenues.
As of April 30, 2005, we had working capital of $69,179, including $627,110 of
cash and cash equivalents. As of October 31, 2004, we had working capital of
$379,279, including $471,485 of cash and cash equivalents. We anticipate the
need to raise approximately $2,500,000 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. (For a discussion of the development status of
each of our products, see "Business - Products.")
In December 2003, we issued 83,335 shares of our common stock to accredited
investors at $1.50 per share. In January 2004, we executed Subscription
Agreements for additional funding in the aggregate amount of $55,000 from two of
our existing investors. CDEX has received $25,000 of this investment; the
investor of the $30,000 balance has indefinitely delayed fulfillment of the
obligation, and CDEX has returned the Class A Common stock to our treasury.
15
The spouse of the Chief Executive Officer purchased convertible notes of CDEX
paying interest at 9% as follows: two in the amount of $20,000 on October 1,
2001 and November 14, 2001, respectively; one in the amount of $15,000 on July
8, 2003; one in the amount of $100,000 on March 11, 2004, and; one in the amount
of $62,000 in February 2005. The $20,000 notes were redeemed at face value for
cash in August 2002, the $15,000 note was redeemed at face value for cash in
September 2003, the $100,000 was redeemed at face value for cash in April 2004,
and the $62,000 note was redeemed at face value for cash in March 2005.
From March through August 2, 2004, we received funding in the amount of
$1,709,750 from the sale of convertible promissory notes to some of our existing
investors and one new investor. The notes are convertible into CDEX common stock
at a price of $0.75 per share, and all of these investors have elected to
convert after purchasing the note. Each note was issued with warrants to
purchase shares of CDEX common stock equal to the number of shares of common
stock issuable on conversion of the note. The warrants have either been
exercised as noted below or the exercise date has expired.
In October 2004, we received funding in the amount of $496,100 from the sale of
convertible promissory notes to some of our existing investors and two new
investors. The notes are convertible into CDEX common stock, and these investors
have elected to convert shortly after purchasing the notes to 1,698,668 shares
of Class A common stock.
During the six months ended April 30, 2005, the Company received $89,000 in
funding from the sale of convertible promissory notes. The notes are convertible
into CDEX common stock at a price of approximately $0.30 per share or a total of
296,667 shares of common stock, and all of these investors elected to convert
after purchasing the note.
During the six months ended April 30, 2005, the Company received $640,500 in
funding from the sale of 790,750 shares of common stock, at an average price of
approximately $0.81 per share.
During the six months ended April 30, 2005, the Company received $714,000 in
funding from the exercise of warrants into 961,338 shares of common stock, at an
average price of approximately $.75 per share.
Subsequent to April 30, 2005, the Company issued 616,616 shares of common stock
for $493,000 in funding and 229,002 shares of common stock from the exercise of
warrants for $188,750 in funding.
We have received limited revenues from operations to date and are actively
negotiating with potential partners 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. However, we cannot be certain whether or when
we will receive such revenues. We have received $76,803 in customer payments
during the six months ended April 30, 2005.
We had a net increase in cash and cash equivalents of $155,625 and $733,325
16
during the six months ended April 30, 2005 and 2004, respectively. We used net
cash of $1,285,767 and $806,559 in operating activities during the six months
ended April 30, 2005 and 2004, respectively, and capitalized $2,108 and $9,837
in property and equipment during the six months ended April 30, 2005 and 2004,
respectively. We received proceeds in the amount of $1,443,500 and $1,560,501
from the sale of convertible notes and shares of common stock to accredited
investors during the six months ended April 30, 2005 and 2004, respectively.
We used net cash of $2,205,265 and $1,239159 in operating activities during the
years ended October 31, 2004 and 2003, respectively, and capitalized $24,524 and
$98,850 in property and equipment during the years ended October 31, 2004 and
2003, respectively. We received proceeds in the amount of $2,358,351 and
$1,400,500 from the sale of convertible notes and restricted shares of common
stock to accredited investors during the years ended October 31, 2004 and 2003,
respectively.
Off-Balance Sheet Arrangements
CDEX has not participated in any off balance sheet financing or other
arrangements.
Critical Accounting Policies
The discussion and analysis of our financial condition and results of operations
are based on our financial statements, 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.
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 two to seven years. Depreciation expense was
$89,974 and $8,379 for the 6 months ended April 30, 2004 and 2005, respectively.
Depreciation expense was $84,982, $297,437 and $465,830 for the years ended
October 31, 2003 and 2004, and for the period from July 6, 2001 (inception) to
October 31, 2004, 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.
17
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.
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.
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. We have awarded some of the common
shares in advance of when the service is performed although these shares are
subject to forfeiture in the event of non-performance. These amounts are shown
as deferred compensation in the accompanying balance sheet. We have also paid
performance bonuses in awards of common stock.
18
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 and marketing of products for two
distinct markets:
(i) identification of substances of concern (e.g., explosives, illegal
drugs and chemical/biological weapons); and
(ii) validation of substances for 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 Technology
Our chemical detection products are based upon the use of fluorescence
technology. In systems using our proprietary technologies, an energy source
(e.g., x-ray or ultraviolet) is directed toward the target area. The energy
source focused on the target area fluoresces, or causes excitation of electrons
in, the target. The resulting electron decay within the target substance causes
emission of characteristic photons that form chemical signatures that can be
captured and using algorithms compared to those in the CDEX database to provide
"real-time" identification/validation of the target substances.
Using information gathered from controlled laboratory measurements to establish
a database, CDEX proprietary software matches a signature or "fingerprint" of a
substance being tested to items in that database for identification. CDEX has
developed and extensively tested several first generation systems for detection
of substances. The systems have common platforms or chassis and components with
primary differences lying in the energy source (e.g., x-ray or ultraviolet), the
detection environment, the discriminating algorithms (mathematical equations
used to perform the comparisons of target substances with those in the database)
and supporting software. CDEX's software performs analysis by using the
signature of a targeted substance gathered during operation of the product,
then, after normalizing the signature to reduce background clutter, comparing
that chemical signature with signatures in the CDEX database to validate the
target within user defined standard deviations. The analysis software is
designed to alert the operator if a particular substance of interest is
identified, or if the chemical signature of the target substance is outside the
standard deviations.
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, in luggage or trace amounts on surfaces).
CDEX's initial products, including a narcotic validation unit we market as the
ValiMed(TM) Impaired Clinician Solution, and the ValiMed(TM) Patient Safety
Solution, were placed in initial customer sites in November and December 2004
for preventing drug diversion and enabling quality assurance in the distribution
and control of prescription medication. Other CDEX products use the same base
technological platforms to validate the authenticity of target substances based
on their chemical signature for brand protection and detection of counterfeits
for a potentially wide variety of products. CDEX is also completing development
of products for identification of substances of concern, namely concealed
explosives or chemical and/or biological agents for sales to the homeland
security market. We expect products in this line to be available in 2005-2006.
19
Following is a discussion of products in our two main product categories:
Anti-Counterfeiting, Brand Protection and Quality Assurance Products
- --------------------------------------------------------------------
For the pharmaceutical and healthcare industries, we unveiled our initial
products at an industry trade show in June 2004 under the name ValiMed(TM). The
name ValiMed(TM) accurately represents our product's functionality with a more
recognizable name for those markets. Applying the CDEX technology, our
ValiMed(TM) products provide additional assurance that medical narcotics have
not been diverted, medication has not been counterfeited 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 that rely primarily on "tagging" a package or pill to
identify counterfeit medication only by the absence of these taggants. Our
technology directly validates the medication by the unique composite spectra of
the constituent fluoresced ingredients. CDEX anticipates that since our initial
products do not come in direct contact with patients, they will not require full
FDA review and approval. We realize that some subsequent products will likely
require FDA review.
Products in this category are in various stages of development or refinement and
include:
o VALIMED(TM) COUNTERFEIT MEDICATION SOLUTION: A portable solution that
identifies counterfeit medication by analyzing the composite chemical signatures
of subject medications against the authentic signature contained in the unit's
database to determine authenticity. Users scan medication to detect counterfeits
before they enter inventory or reach the consumer.
o VALIMED(TM) IMPAIRED CLINICIAN SOLUTION: The Impaired Clinician Solution
validates that the concentration of a narcotic designated for disposal is within
user defined bans, and prints a report that includes the amount, concentration,
date and time stamp, therefore greatly reducing the potential for narcotics to
be diverted from the clinical environment illegally.
o VALIMED(TM) PATIENT SAFETY SOLUTION: Validates medications that are combined
in intravenous drip systems, most commonly for patients with cancer or HIV-AIDS.
The product can be installed as a standalone unit, or directly into the pump
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 Patient Safety Solution 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.
The same approach is being applied in the area of brand protection, e.g., 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.
Products for 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. Products in this category are in various stages of development or
refinement and include the following:
o PERSONNEL SECURITY SCREENING SYSTEM (PS(3)): A man-mobile system with a
handheld, ultraviolet-based scanning device to detect trace amounts of explosive
(and potentially drug residues) on areas impacted by the ultraviolet 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.
20
o ACCESS SECURITY SCREENING SYSTEM (AS(3)): Portal unit that screens individuals
for explosive residue on areas impacted by ultraviolet. 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 ultraviolet 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 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.
Product Status and Development
CDEX is marketing some of its completed products and is in the process of
developing other products for different markets and customers, Except as noted
below, all our products are "in development", meaning we have not yet completed
software engineering or design and engineering of hardware nor selected final
components.
During the fiscal years ended October 31, 2004 and 2003, we spent approximately
$1,064,000 and $791,000, respectively, on research and development cash
expenditures. For the first six months of fiscal 2005, we have spent $494,000 on
research and development.
We have outsourced certain engineering and manufacturing tasks and will continue
this practice. Accordingly, we have entered into Master Services Agreements with
several engineering/manufacturing organizations. The agreements generally
provide for the contractors to provide services to CDEX from time to time which
are to be set forth more specifically in "statements of work" to be executed by
each party. Such services may include, without limitation (i) non-recurring
engineering services such as product design, creation and modification of bills
of materials, engineering drawing packages, work instructions, manufacturing
specifications, fabrication documents and drawings, and survey documents, (ii)
prototyping services such as the development and testing of product prototypes;
and (iii) other related design and manufacturing services as needed. Payments
for services performed are on a time and materials basis (paid monthly) or on a
fixed price basis (paid upon successful completion of each milestone) all as set
forth in the statement of work pertaining to the particular services.
All of our potential products utilize the same basic technological platforms
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.
21
Because our potential products utilize the same base technologies, the final
engineering achievement of the first product will be applied to other products
in development using the same energy source to fluoresce the target. Development
of prototypes is ongoing. All development has primarily utilized common, off the
shelf components for applications.
We have yet to finalize 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.
The following is a list each of our products set forth above and the status of
its development:
o Counterfeit Medication Solution: Development is complete, production units
are available for distribution.
o Impaired Clinician: Development is complete, and production units are
available for distribution.
o Patient Safety Solution and Regulatory Compliance Solution: Development in
some application areas is complete and production units are available for
distribution.
o PS(3): Development of a first generation prototype is complete. Release of the
product is pending refinement, manufacturer-ready engineering, and software
modification.
o MS(3): Development is ongoing; assuming adequate funding, we anticipate a
production prototype within twelve months We have not completed software
development or a first generation prototype.
o AS(3): Development is ongoing; assuming adequate funding, we have not
completed software development or a first generation prototype; we anticipate a
prototype within twelve months.
o FS(3): Development is ongoing; assuming adequate funding, we have not
completed software development a first generation prototype; we anticipate a
prototype within twelve months.
o Distilled Spirits Counterfeit Detection Unit: Development is complete for a
first generation prototype. Further development awaits funding.
Other potential applications using our technologies include products to detect
chemical or biological agents. On May 8, 2003, we entered into an agreement with
22
the United States Department of Defense. Under this agreement, we performed a
study of the feasibility of the CDEX technology to support identification of
chemical/biological agents. The total consideration paid to CDEX under the
agreement is $196,483.
Industry and Competition
In addition to airport security, 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. 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. Employing the marketing program outlined under "Sales and
Marketing" below, we intend to target as many of these market elements as we can
given our available resources.
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.
The same 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. CDEX offers a low priced, easily integrated solution
to help provide this multi-layered approach to security.
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 potentially 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.
23
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.
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. The FDA website quotes 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.
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, Virginia reported 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.
We may experience substantial competition in our efforts to locate and attract
customers for our products. We are aware of at least two significant competitors
in the explosives detection industry which we believe have greater experience,
resources and managerial capabilities and may be in a better position than we
are to obtain access to and attract customers. General Electric Co. recently
announced its acquisition of one of these two competitors, InVision Technologies
Inc. which could increase our competitive pressure. A number of larger companies
similarly may enter our target markets and directly compete with us in some or
all of them. In the counter-terrorism arena, it is difficult to assess our
competition due to the high level of secrecy and lack of available information
with respect to defense and homeland security contracts and contractors. We must
assume that the demand for the technology in this area has given rise to a
corresponding supply of scientists and others who are developing technology
similar to, or otherwise competitive with, ours. In the area of brand
protection, many companies may seek to develop technology in-house to protect
their own brands rather than contract with us for our technology. In the areas
of medical and pharmaceutical validation and brand protection, various existing
technologies compete with ours and already are in use in the marketplace. These
include radio frequency identification tags, tagant agents (chemical agents
added to the target substance to serve solely as identifying tags) and bar
coding.
24
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. CDEX has to date not entered into any formal or
definitive strategic marketing or distribution agreements for any of our
products. 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.
Products for Identification of Substances of Concern
- ----------------------------------------------------
CDEX has developed technologies to deliver 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 detection system
that should improve flow rates and detection rates, and provide "clear"
confirmation easier and even more definitive.
25
CDEX 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 has discussions from time to time with
several such potential partners although we have not yet entered into any formal
agreement.
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.
Validation Products for Anti-Counterfeiting, Brand Protection and Quality
- -------------------------------------------------------------------------
Assurance
- ---------
Marketing activities have generated a number of prospective partnerships in the
healthcare industry, both for field-testing with major medical institutions, and
for 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 healthcare markets with CDEX technology. For the
pharmaceutical and healthcare industries, CDEX has introduced a new name for our
product line, ValiMed, at an industry trade show in June 2004. More information
on the medical products using CDEX's technology can be found on www.Valimed.com.
26
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. 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.
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;
2. "Methods and Apparatus for Molecular Species Detection, Inspection and
Classification Using Ultraviolet Fluorescence," Application No. 10/717,921;
3. " System and Methods For the Detection and Identification of Chemical
Substances," Application No. 10/784,889; and
4. "Process for Replacing Nursing Co-Signature for Narcotic Waste with
Centralized Validation of Waste in Pharmacy."
We have also filed corresponding international applications for each of these
items.
Our competitive position also depends upon unpatented trade secrets. Trade
secrets are difficult to protect. Our competitors may independently develop
proprietary information and techniques that are substantially equivalent to ours
or otherwise gain access to our trade secrets, such as through unauthorized or
inadvertent disclosure of our trade secrets.
Government Regulation
The products developed may be subject to various governmental regulations and
controls, including that associated with security products in airports, handling
of explosive materials and related to x-ray energy. The storage and handling of
certain explosive material is subject to licensure. With regard to handling such
explosive material, we retain the services of a licensed contractor to
transport/store explosive material for testing. Following such testing, the
contractor returns the explosive material to a licensed storage facility. It is
possible that government agencies may develop additional regulations that impact
our initial and future products.
The U.S. Food and Drug Administration (FDA) has jurisdiction to regulate
computer products and software as medical devices if they are intended for use
in the diagnosis, cure, mitigation, treatment or prevention of disease. We have
preliminarily determined that our initial products are not medical devices.
However, further investigation or a change in FDA policy could subject us to
regulation. Noncompliance with applicable FDA requirements can result in such
things as fines, injunctions, and suspension of production.
27
Except as specifically mentioned above, we are not currently aware of any other
federal, state or local laws that would have a significant adverse impact on
development and distribution of our initial products. However, various federal,
state or local agencies may propose new legislation pertaining to the use of
potentially dangerous materials, to the discharge of materials into the
environment, to the manufacturing or marketing of chemical validation products
(or designation of one or more of our chemical validation products as medical
devices) and/or otherwise potentially relating to the our business which may
require us to allocate a portion of our operating budget to ensure full
compliance with such regulations.
Legal Proceedings
CDEX is not currently involved in any legal proceedings nor do we have knowledge
of any threatened litigation.
Properties
The Company leases office and laboratory space in Arizona. The lease expires
April 30, 2009 and has non-cancelable lease payments into 2006. The lease
provides for monthly rent of approximately $2,845 with 3% annual escalations. In
addition, the Company has entered into a short-term lease (from June to December
2005) for additional space at a rate of $650 per month.
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 until December 2004 were $175 per month for conference room use
for meetings in the Washington DC area, phone answering services and certain
mail services. The Company entered into a six-month lease with Source Office
Suites in January 2005 for dedicated office space at cost of approximately
$1,100 per month. The facility provides space on an as needed basis on flexible
terms. CDEX anticipates opening, in a phased manner, 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. This lease has been renewed
through Dec. 31, 2005 at a rate of $1,200 per month.
Employees
We employ a staff of sixteen employees. Two of these employees are executives,
three are in marketing and sales, ten in operations and research and development
activities and one in administration. We also retain part time or as-needed
consultants at any given time to provide expertise in the areas of medicine,
marketing and sales, fundraising, explosives, pharmaceuticals, finance and
administration. 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 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.
28
MANAGEMENT
The following table sets forth information regarding our executive officers and
directors:
NAME AGE POSITION
- ---- --- --------
Malcolm H. Philips Jr. 59 CEO/President/Chairman of the Board of
Directors
Timothy Shriver 54 Sr. Vice President of Technical
Operations and Director
George Dials 60 Director
Dr. BD Liaw 67 Director
John A Knubel 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, a Delaware
limited liability company providing consulting services where, as a consultant,
he served as Chief Operating Officer and President of CDEX, Inc., a Delaware
corporation. DMR currently provides no technical or management services to CDEX;
CDEX (Delaware) was formed in December 2000 to purchase technology from Loch
Harris, Inc. (which technology is now owned by us) and was dissolved in March of
2001 before it began the business for which it was organized and before any
shares were issued. Consequently, Mr. Philips never had any ownership interest
in CDEX (Delaware). From 1978 to February 2001, Mr. Philips practiced law with
the same group of attorneys although with various firms. In September 1990,
through a merger of several law firms, he became a partner in Winston & Strawn,
one of the largest law firms in the United States, where, until February 2001,
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 US
Military Academy located at West Point (1967) and a Master of Engineering Degree
from Iowa State University (1971).
Timothy Shriver has served as our Senior Vice President of Technical Operations
since July 2001. From 1999 until 2001 Mr. Shriver provided outside consulting
services to Ontario Hydro-Generation and CAMOCO, a large uranium mining and
processing company. Mr. Shriver's consulting focused on overall business
practices with particular emphasis on the implementation of quality assurance
programs and evaluation of management capabilities and practices. 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.
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 in 1973 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.
29
Dr. Liaw has served as a director of CDEX since October 2001. Since January
2003, he has also served as Managing Director - Energy Services for Dynamic
Resolutions LLC, performing consulting services to international utilities in
Asia. Dynamic Resolutions is not affiliated with CDEX. Mr. Liaw and Mr. Philips
are sole members in 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 bringing 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.
John A. Knubel has a thirty-year record of experience in both government and
business. He served as the Chief Financial Officer of a cabinet level department
and has experience in the private sector in banking, insurance, mutual funds,
and other financial services. Since April 1997, Mr. Knubel has provided
management and financial consulting services through his consulting company,
Analytical Insights and Solutions. These assignments have covered a variety of
clients and types of services in both part time and temporary full time
engagements to clients such as Virginia Tech University, The Oracle Corporation,
The Kansas Healthcare System, The Air Transportation Stabilization Board as
Chief Administrative Officer, National Center for Education and the Economy, as
Chief Financial Officer, Nye, Parnell and Emerson Capital Management, Inc. as
Chief Operating Officer; and Gilkison Patterson Investment Advisors. From August
1995 to April 1997, he served as the U.S. Department of Housing and Urban
Development Chief Financial Officer. Prior to that he served as a senior advisor
to the Director of Automated Systems of the Federal Thrift Investment Board, and
to the Chief Financial Officer of the Nuclear Regulatory Commission. A Rhodes
Scholar, Mr. Knubel holds a Master of Arts in Politics, Philosophy and Economics
(First Class Honors Degree, College Prize for Academic Excellence) from Oxford
University, Oxford, England (1966), and a Bachelor of Science in Mathematics,
with Distinction, Class of 1897 Award for Leadership, US Naval Academy (1962).
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 engineering firms. He has served as our Principal Scientist
30
since July 2001. From July 2001 until January 2003, Dr. Poteet was a member, and
served as Principal Scientist, of Dynamic Management Resolutions LLC, providing
scientific, management and engineering services. Dynamic Management Resolutions
was a consulting company that provided technical and management services on a
contract basis to CDEX and CDEX Delaware. From May 1999 to July 2001, Dr. Poteet
served as President/Principal Scientist for CP Systems, Inc., a private company
that, at that time, built large observatory-class telescopes and. marketed and
distributed recreational global positioning units. At CP Systems, Dr. Poteet
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. Nanometrology
measures displacements at the nanometer level via a small laser diode, optics
and electronics. Applications include the semiconductor industry for measuring
wafers during manufacturing, and very small mirror displacements required for
astronomy. Dr. Poteet's role as Vice President for CP Systems was making
corporate decisions regarding new business opportunities to pursue, proposal and
contract priorities, contract negotiation (both business and science aspects),
and program management for contract fulfillment, including schedule reporting
budget tracking. During the time Dr. Poteet was with CP Systems, it occasionally
provided materials to CDEX for a fee. There is currently no affiliation or
ongoing relationship between CP Systems and CDEX.
From 1971 to May 1999, Dr. Poteet served as Vice President/Principal Scientist
for System Specialists, Inc., 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. From May 1999 to July 2001, Dr. Poteet's served as Vice President
for CP Systems, where tasks included corporate decision making on new business
opportunities to pursue, proposal and contract priorities, contract negotiation
(both business and science aspects), and program management for contract
fulfillment, including schedule reporting budget tracking.
Dr. Poteet's role as Vice President for CP System Specialists included corporate
decision making on new business opportunities, proposal and contract priorities,
contract negotiation (both business and science aspects), and program management
for contract fulfillment, including schedule reporting budget tracking.
Dr. Poteet, together with Malcolm Philips and Tim Shriver, 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.
31
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, 2004 $96,000 -- $204,000 (2) -- --
CEO, Chairman of the 2003 $96,000 -- $206,046 (2) -- --
Board of Directors(1) Class B 2002 $67,500 100,000 $259,500 (2) -- --
Class B
- ------------------------------------------------------------------------------------------------------------------------------
Timothy D. Shriver, 2004 $96,000 -- $156,000 (3) -- --
Sr. VP Technical 2003 $96,000 -- $155,789 (3) -- --
Operations 2002 $75,000 60,000 $167,497 (3) -- --
Class A;
40,000
Class B
- ------------------------------------------------------------------------------------------------------------------------------
Michael Mergenthaler 2004 $96,000 -- $129,000 (4) -- --
Former VP Business Operations 2003 $96,000 -- $128,161 (4) -- --
2002 $75,000 50,000 $138,480 (4) -- --
Class A;
25,000
Class B (4)
- ------------------------------------------------------------------------------------------------------------------------------
(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 have been paid instead in the form of cash and shares of
common stock. Effective January 1, 2005, Mr. Mergenthaler has resigned as Vice
President of Business Operations and is no longer with the company.
(2) Mr. Philips' unpaid cash compensation from inception until October 31, 2004
totaled $769,546, for which he received a total of 1,351,856 shares of Class A
Common Stock.
(3) Mr. Shriver's unpaid cash compensation from inception until October 31, 2004
totaled $562,618, for which he received a total of 983,413 shares of Class A
Common Stock.
(4) Mr. Mergenthaler's unpaid cash compensation from inception until October 31,
2004 totaled $448,101, for which he received a total of 774,322 shares of Class
A Common Stock. Upon the effectiveness of his resignation on January 1, 2005,
CDEX exchanged the Class B Common Stock held by Mr. Mergenthaler for an equal
number of shares of Class A Common Stock.
32
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 2004 $96,000 -- $114,000(2) -- --
2003 $96,000 -- $123,705(2) -- --
2002 $75,000 40,000 $170,540(2) -- --
Class A
20,000 140,000 --
- ------------------------------------------------------------------------------------------------------------------------------
(1) Pursuant to the terms of his Employment Agreement and based upon CDEX's
financial condition, Dr. Poteet has foregone a portion of his stated salary, and
instead is compensated in the form of cash and shares of common stock.
(2) Dr. Poteet's unpaid cash compensation from inception until October 31, 2004
totaled $489,615, for which he received a total of 839,865 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 for any individual
option holder 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 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.
33
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.
However, the board of directors in its discretion may shorten or eliminate the
restrictions. Generally, unless otherwise provided by the board of directors
with respect to a particular grant of restricted stock, holders of restricted
stock have the right to vote and receive dividends on their shares, including
shares not yet vested. Also, unless otherwise so provided, any unvested shares
are deemed forfeited by the grantee upon termination of such grantee's service
with CDEX.
2003 Stock Incentive Plan
On July 1, 2003, our shareholders adopted the 2003 Stock Incentive Plan, which
has substantially the same terms as the 2002 Stock Incentive Plan. We have
reserved 10,000,000 shares in the aggregate for issuance under both the 2002 and
2003 plans, including 3,000,000 available for the Board of Directors to allocate
to the Incentive Plan at their discretion as approved by the Shareholders at our
June 2004 Annual Meeting.
To date, we have issued 8,554,168 shares of common stock under the plans to
certain of our officers, directors, consultants and employees, which are subject
to forfeiture in accordance with the vesting schedules set forth in the granting
agreements. No options are currently outstanding under the plans.
We have issued shares of restricted stock to our Directors as compensation for
their board services. We have also issued shares of restricted stock to John
Knubel, Director, for consulting services rendered separately from his board
capacity.
Employment Agreements
Effective January 1, 2002, we entered into employment agreements with each of
our executive officers. The agreements with Malcolm Philips and Timothy Shriver
each continue for an indefinite period unless terminated by CDEX for "cause," or
by the employee for "good reason" (as such terms are defined in the agreements),
or upon two weeks prior written notice by either party to the other. The
agreements provide for salaries based on annual amounts of $300,000 for Mr.
Philips and $250,000 for Mr. Shriver, which are subject to review on an annual
basis. The salary shall be payable in equal monthly installments, unless
otherwise required by applicable state law and, based on CDEX's economic
posture, may 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 Mr.
Shriver and $3,000 for Mr. Philips. CDEX has availed itself of this option for
the past three fiscal years as reflected under "Compensation of Executive
Officers." Each of these agreements provides for the forfeiture of restricted
stock granted to the employee in the event of the employee's termination before
the stock is fully vested. Under the agreements, each employee is entitled to a
severance package in the event of termination by CDEX other than for "cause" or
by the employee for "good reason." In each case, "good reason" includes a change
in management of CDEX.
34
All of these employment agreements were amended on January 1, 2003 to
(a) increase the intended minimum monthly cash payment to the employee to
$8,000,
(b) permit CDEX to pay the entire salary in common stock if paying cash is not
in the best interest of the Company and
(c) 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 granted employee.
Effective January 1, 2003, we entered into an Employment Agreement with Dr. Wade
Poteet. Except for Dr. Poteet's compensation, this agreement provides for
substantially the same general terms and conditions as the employment agreements
set forth above with an annual base salary of $210,000. 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.
35
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 Shares Beneficially
Prior To Offering Number Owned After Offering
-------------------------------- of Shares ----------------------------
Name Number Percent Offered Number Percent
- ---------------------------------------------------------------------------------------------------------------------------
August, Nathan B. 23,157 * 23,157 0 -
August, Robert W. 29,475 * 29,475 0 -
Brumfield, Jeffrey 2,373,072 7.0% 1,061,405 1,311,667 3.9%
Dobbs, Peter A. 354,854 1.0% 40,000 314,854 *
Griffith, Max Howard & Nadel 129,032 * 129,032 0 -
Guimond, Dawn M. 224,750 * 28,750 196,000 *
Kyban Limited Partnership(1) 233,334 * 133,334 100,000 *
Lowell, Ben(2) 40,000 * 10,000 30,000 *
Lowell, Jeff 30,000 * 6,667 23,333 *
Maina, Peter R 266,259 * 53,334 212,925 *
McGarry, J. Michael 100,221 * 33,334 66,887 *
Murphy, Mary Rae 25,000 * 25,000 0 -
Newby, Scott 266,668 * 266,668 0 -
Paul, Randy 66,667 * 66,667 0 -
Pienta, Stan 316,668 * 33,334 283,334 *
Pitts, Michael 99,532 * 48,000 51,532 *
Prain, William(3) 46,053 * 21,053 25,000 *
Schierlinger, Kurt A. 75,342 * 25,000 50,342 *
Shanala JAP Investment 200,001 * 66,667 133,334 *
Sky, Rick 242,186 * 61,112 181,074 *
Stassi, Mari 26,667 * 26,667 0 -
Thompson, Greg 150,743 * 39,000 111,743 *
TRS Enterprise LLC 66,666 * 66,666 0 -
Wren, Frank 185,000 * 83,334 101,666 *
------------------------------------------------------------------------------------
Totals 5,571,347 16.5% 2,377,656 3,193,691 9.4%
====================================================================================
*Less than one percent.
(1) Kyban Limited Partnership is controlled by Joseph L. Motta.
(2) A portion of Mr. Lowell's shares are held jointly with his wife Maxine.
(3) A portion of Mr. Prain's shares are held jointly with his wife Judith.
36
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 (1) POSITION TITLE OF CLASS OWNERSHIP OF CLASS
- --------------------------------------------------------------------------------------------------------------------------------
Malcolm H. Philips Director; Executive Officer Class A Common 2,196,000(2)(4) 6.50%
Class B Common 100,000(5) 57.14%
- --------------------------------------------------------------------------------------------------------------------------------
George Dials Director Class A Common 180,000(3)(4) 0.53%
Class B Common -
- --------------------------------------------------------------------------------------------------------------------------------
Dr. BD Liaw Director Class A Common 175,000(3)(4) 0.52%
Class B Common -
- --------------------------------------------------------------------------------------------------------------------------------
John A Knubel Director Class A Common 85,000(3)(4) 0.25%
Class B Common -
- --------------------------------------------------------------------------------------------------------------------------------
Timothy Shriver Director; Executive Officer Class A Common 1,277,658(4) 3.78%
Class B Common 40,000(5) 22.86%
- --------------------------------------------------------------------------------------------------------------------------------
Dr. Wade Poteet Significant Employee Class A Common 1,034,396(4) 3.06%
Class B Common 20,000(5) 11.43%
- --------------------------------------------------------------------------------------------------------------------------------
Shares of all named executives, Class A Common 4,948,054(3) 14.64%
significant employees and Class B Common 160,000(5)(4) 91.43%
directors as a group (6 persons)
- --------------------------------------------------------------------------------------------------------------------------------
Adam Dieter Beneficial Owner Class A Common 2,056,597 6.10%
Class B Common -
- --------------------------------------------------------------------------------------------------------------------------------
(1) The address for each of the listed persons is c/o CDEX Inc., 1700 Rockville
Pike, Suite 400, Rockville, Maryland 20852.
(2) Includes shares transferred by gift to family members of Mr. Philips, a
family limited partnership and FGW LLC, a limited liability company over which
Mr. Philips holds at least 50% voting control. FGW, LLC, as designee of Mr.
Malcolm Philips Jr., has received 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. FGW, LLC is
a Delaware limited liability company of which Mr. Philips is the sole member.
(3) 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. Mr. Knubel, as a director, was provided 20,000
shares of common stock under terms of director's Services Agreement with CDEX
dated July 1, 2004.
(4) The stock initially granted to each of the above-named directors, executive
officers and key employee are subject to a vesting schedule and became or become
fully vested on the following dates: Mr. Philips, Mr. Shriver, Mr. Poteet --July
24, 2004; Mr. Dials--August 2, 2005; Dr. Liaw--September 30, 2005; Mr.
Knubel--July 1, 2006. 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 unvested shares at
termination be forfeited.
37
(5) 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. By virtue of their Class B common share ownership, these individuals,
acting as a group, currently control the election of our board of directors and
other affairs of CDEX.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our stock began trading on the OTC Bulletin Board on April 14, 2005 under the
symbol "CEXI.OB." Our common stock previously traded, to a limited extent, on
the over-the-counter gray market and the Pink Sheets under the symbol "CEXI.PK."
The following table sets forth information regarding the high and low closing
price per share for our common stock on the OTC Bulletin Board as reported by
Commodity Systems Inc. on Yahoo.com (TM). Such prices do not necessarily reflect
actual transactions and do not include retail mark-ups, mark-downs or
commissions.
Quarter Ended High Low
- ------------- ---- ---
April 30, 2005 $ 1.63 $ 1.23
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. On January 6, 2005, the
board of directors voted to transfer 3,000,000 preferred shares to Class A
Common Stock, thus increasing the number of authorized Class A shares to
36,500,000 and reducing the number of preferred shares to 3,000,000. 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 11, 2006, the holders of shares of Class B Common Stock are, as a
class, entitled to vote to elect a majority of our directors. Currently, our
executive officers hold a majority of the Class B common share. 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 August 16, 2005, there were approximately 1,400
record holders of Class A Common Stock and 33,799,971 shares of Class A Common
Stock outstanding. However, a large number (over 37,000) of our shareholders
hold their shares in "street name" with brokerage accounts and, therefore, do
not appear on the shareholder list maintained by our transfer agent.
Substantially all of these are shareholders of Loch Harris, Inc., a Nevada
corporation, who received their shares as a result of a settlement of a
shareholders' derivative suit against the board of directors of Loch Harris. The
settlement required the distribution of shares of CDEX common stock held by Loch
Harris to its shareholders, pro rata, based upon the number of Loch Harris
shares held by each such shareholder.
Transfer Agent
The Nevada Agency and Trust Company, 50 Liberty Street, Suite 880, Reno Nevada
89501, acts as CDEX's transfer agent and registrar.
38
PLAN OF DISTRIBUTION
Presently, our stock is listed on the Over The Counter Bulletin Board where our
shares trade at market price. Shareholders selling under this prospectus may
offer or sell our common stock from time to time in open-market or negotiated
transactions at prices they deem appropriate. 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
- - 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 any fees and disbursements of counsel
to the selling shareholders, which we estimate to be approximately $260,000 in
the aggregate. We have agreed to indemnify certain of the selling shareholders
against certain losses, claims, damages and liabilities, including liabilities
under the Securities Act.
39
EXPERTS
Aronson & Company, independent auditors, have audited our financial statements
as of and for the years ended October 31, 2004 and 2003 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 Hutchison & Steffen, LLC, Las Vegas, Nevada.
CERTAIN TRANSACTIONS
The Company previously leased space and 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 $106,846,
$5,760 and $978,820 for the years ended October 31, 2003 and 2004, and from the
period July 6, 2001 (inception) to October 31, 2004, respectively.
The spouse of the Chief Executive Officer purchased convertible notes of CDEX
paying interest at 9% as follows: two in the amount of $20,000 on October 1,
2001 and November 14, 2001, respectively; one in the amount of $15,000 on July
8, 2003; one in the amount of $100,000 on March 11, 2004, and; one in the amount
of $62,000 in February 2005. The $20,000 notes were redeemed at face value for
cash in August 2002, the $15,000 note was redeemed at face value for cash in
September 2003, the $100,000 was redeemed at face value for cash in April 2004,
and the $62,000 note was redeemed at face value for cash in March 2005.
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.
40
CDEX, Inc.
Index to Audited Financial Statements
Years Ended October 31, 2004 and 2003
- --------------------------------------------------------------------------------
Page
Report of Independent Registered Public Accounting Firm.................. F2
Audited Financial Statements
- ----------------------------
Balance Sheet ....................................................... F3
Statements of Operations............................................... F4
Statements of Stockholders' Equity (Deficit)..................... F5 - F12
Statements of Cash Flows........................................ F13 - F14
Notes to Financial Statements................................... F15 - F24
F-1
Report of Independent Registered Public Accounting Firm
Board of Directors
CDEX Inc.
Rockville, Maryland
We have audited the accompanying Balance Sheet of CDEX Inc. (a Development Stage
Company) as of October 31, 2004, and the related Statements of Operations,
Stockholders' Equity (Deficit) and Cash Flows for the period July 6, 2001
(inception) to October 31, 2004 and the years ended October 31, 2003 and 2004.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the 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,
2004, and the results of its operations and its cash flows for the period from
July 6, 2001 (inception) to October 31, 2004 and the years ended October 31,
2003 and 2004 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 in excess of $14,500,000
during the period July 6, 2001 (inception) through October 31, 2004, 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.
ARONSON & COMPANY
Rockville, Maryland
December 10, 2004
F-2
CDEX Inc.
(A Development Stage Company)
Balance Sheet as of October 31, 2004
Assets
Current assets
Cash and cash equivalents $ 471,485
Inventory 146,149
Prepaid expenses 3,994
------------
Total current assets 621,628
Property and equipment
Laboratory and computer equipment 601,168
Furniture and fixtures 1,666
Building improvements 1,265
------------
Total property and equipment 604,099
Less: Accumulated depreciation (554,615)
------------
Net property and equipment 49,484
Other assets 1,399
------------
Total Assets $ 672,511
============
Liabilities and Stockholders' Equity
Current Liabilities
Accounts payable and accrued expenses $ 234,280
Deferred rent 8,068
------------
Total Current Liabilties 242,348
Total Liabilities 242,348
Commitments and Contingencies
Stockholders' Equity
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 29,092,618 outstanding 145,468
Class B common stock - $.005 par value per share, 500,000
shares authorized and 220,000 outstanding 1,100
Additional paid in capital 14,997,386
Deferred stock compensation (161,257)
Deficit accumulated during development stage (14,552,534)
------------
Total Stockholders' Equity 430,163
------------
Total Liabilities and Stockholders' Equity $ 672,511
============
The accompanying Notes to Financial Statements are an integral part of these financial statements
F-3
CDEX Inc.
(A Development Stage Company)
Statements of Operations
July 6, 2001
Year Ended October 31 (inception) to
2003 2004 October 31, 2004
---- ---- ----------------
Revenue $ 191,964 $ 4,069 $ 271,985
Cost of Revenue 126,701 -- 178,831
------------ ------------ ------------
Gross Profit 65,263 4,069 93,154
Operating Expenses
Development costs 616,967 1,358,197 2,461,560
General and administrative expenses 609,611 1,315,757 2,413,416
Non-cash stock compensation 2,953,544 2,268,280 8,729,622
------------ ------------ ------------
Total Operating Expenses 4,180,122 4,942,234 13,604,598
Loss From Operations (4,114,859) (4,938,165) (13,511,444)
Other Income (Expense)
Interest income 418 1,714 3,936
Related party interest expense (249) (666) (4,130)
Interest expense (26) (1,040,867) (1,040,896)
------------ ------------ ------------
Total Other Income (Expense) 143 (1,039,819) (1,041,090)
------------ ------------ ------------
Net Loss $ (4,114,716) $ (5,977,984) $(14,552,534)
============ ============ ============
Basic and diluted net loss
per common share: $ (0.21) $ (0.24) $ (0.75)
Basic and diluted weighted average
common shares oustanding 19,730,922 24,541,702 19,354,158
The accompanying Notes to Financial Statements are an integral part of these financial statements
F-4
CDEX Inc.
(A Development Stage Company)
Statement of Changes in Stockholders' Equity (Deficit)
Shares Shares
of Class of Class Dollar Class A Class B
A Common B Common Amount Common Common
Date Stock Stock per Share Stock 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 07/23/01 2,600,000 - 0.03 13,000 -
Common stock issued pursuant to consulting agreement 07/24/01 1,440,000 - 2.50 7,200 -
Common stock issued pursuant to consulting agreement 08/03/01 371,000 - 2.50 1,855 -
Common stock issued to Loch Harris, Inc. related
to the transfer of assets into the Company 08/04/01 11,265,000 - 0.03 56,325 -
Common stock issued pursuant to consulting agreement 09/19/01 60,000 - 2.50 300 -
Common stock issued pursuant to consulting agreement 10/01/01 35,000 - 2.50 175 -
Common stock issued pursuant to consulting agreement 10/15/01 2,000 - 2.50 10 -
Amortization of deferred compensation expense - - - - -
Net loss - - - - -
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, October 31, 2001 15,773,000 - $ 78,865 $ -
- -----------------------------------------------------------------------------------------------------------------------------------
Conversion of note payable into common stock 11/21/01 50,000 - $ 2.50 $ 250 $ -
Conversion of note payable into common stock 12/19/01 58,000 - 2.00 290 -
Conversion of note payable into common stock 02/25/02 26,667 - 1.50 133 -
Stock received due to adjustment to transfer agreement 03/01/02 (200,000) - 0.29 (1,000) -
Sale of common stock for cash 03/12/02 10,000 - 2.50 50 -
Sale of common stock for cash 04/12/02 25,000 - 2.00 125 -
Sale of common stock for cash 05/23/02 65,000 - 2.00 325 -
Sale of common stock for cash 05/23/02 50,000 - 2.00 250 -
Sale of common stock for cash 06/18/02 50,000 - 2.00 250 -
Sale of common stock for cash 06/28/02 50,000 - 2.00 250 -
Sale of common stock for cash 07/15/02 30,000 - 2.50 150 -
Sale of common stock for cash 08/23/02 30,770 - 3.25 154 -
Sale of common stock for cash 10/02/02 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 $ -
- -----------------------------------------------------------------------------------------------------------------------------------
Sale of common stock for cash 11/26/02 100,000 - $ 0.50 $ 500 $ -
Sale of common stock for cash 12/05/02 150,000 - 0.50 750 -
Sale of common stock for cash 12/09/02 50,000 - 0.50 250 -
Sale of common stock for cash 12/10/02 50,000 - 0.50 250 -
Common stock issued for settlement of accrued compensation 12/11/02 58,155 - 0.75 291 -
Common stock issued for settlement of accrued compensation 12/11/02 1,718,228 - 0.75 8,591 -
Common stock issued pursuant to consulting agreements 12/30/02 5,000 - 0.81 25 -
Common stock awarded to employees and consultants 12/30/02 155,000 - 0.82 775 -
Common stock awarded to employees and consultants 12/30/02 160,000 - 0.82 800 -
Common stock awarded to employees and consultants 12/30/02 - 220,000 0.81 - 1,100
Sale of common stock for cash 01/07/03 80,000 - 0.50 400 -
Sale of common stock for cash 01/15/03 150,000 - 0.50 750 -
Common stock awarded to employees and consultants 01/20/03 20,000 - 0.82 100 -
Common stock forfeited by employee 02/17/03 (30,000) - (2.62) (150) -
Sale of common stock for cash 03/20/03 200,000 - 1.00 1,000 -
Common stock issued for settlement of accrued compensation 03/31/03 534,266 - 0.75 2,672 -
Sale of common stock for cash 04/21/03 35,000 - 1.00 175 -
Sale of common stock for cash 04/21/03 50,000 - 1.00 250 -
Sale of common stock for cash 04/30/03 50,000 - 1.00 250 -
Common stock awarded to employees and consultants 05/01/03 40,000 - 0.82 200 -
Common stock awarded to employees and consultants 05/26/03 25,000 - 0.82 125 -
Common stock issued pursuant to consulting agreements 06/15/03 5,000 - 0.81 25 -
Sale of common stock for cash 06/19/03 27,000 - 1.00 135 -
Common stock issued pursuant to consulting agreements 06/20/03 5,000 - 0.81 25 -
The accompanying Notes to Financial Statements are an integral part of these financial statements
F-5
CDEX Inc.
(A Development Stage Company)
Statement of Changes in Stockholders' Equity (Deficit) (Continued)
Shares Shares
of Class of Class Dollar Class A Class B
A Common B Common Amount Common Common
Date Stock Stock per Share Stock Stock
- ------------------------------------------------------------------------------------------------------------------------------------
Common stock issued pursuant to consulting agreements 06/20/03 5,000 - $ 0.81 $ 25.00 $ -
Common stock issued for settlement of accrued compensation 07/01/03 492,693 - 0.81 2,463 -
Sale of common stock for cash 07/15/03 15,000 - 1.00 75 -
Sale of common stock for cash 07/17/03 25,000 - 1.00 125 -
Sale of common stock for cash 07/24/03 25,000 - 1.00 125 -
Sale of common stock for cash 07/28/03 25,000 - 1.00 125 -
Sale of common stock for cash 07/31/03 400,000 - 0.85 2,000 -
Sale of common stock for cash 08/06/03 10,000 - 1.00 50 -
Sale of common stock for cash 08/06/03 25,000 - 1.00 125 -
Sale of common stock for cash 08/06/03 45,000 - 1.00 225 -
Sale of common stock for cash 08/08/03 10,000 - 1.00 50 -
Sale of common stock for cash 08/19/03 25,000 - 1.00 125 -
Sale of common stock for cash 08/25/03 25,000 - 1.00 125 -
Sale of common stock for cash 09/02/03 5,000 - 1.00 25 -
Sale of common stock for cash 09/02/03 5,000 - 1.00 25 -
Sale of common stock for cash 09/02/03 40,000 - 1.00 200 -
Sale of common stock for cash 09/02/03 5,000 - 1.00 25 -
Sale of common stock for cash 09/02/03 25,000 - 1.00 125 -
Sale of common stock for cash 09/02/03 5,000 - 1.00 25 -
Sale of common stock for cash 09/15/03 5,000 - 1.00 25 -
Sale of common stock for cash 09/15/03 1,000 - 1.00 5 -
Common stock issued for settlement of accrued compensation 09/20/03 1,936,783 - 0.81 9,684 -
Common stock issued pursuant to consulting agreements 10/01/03 35,000 - 1.00 175 -
Common stock issued pursuant to consulting agreements 10/01/03 40,000 - 0.81 200 -
Common stock issued pursuant to consulting agreements 10/01/03 45,000 - 0.81 225 -
Sale of common stock for cash 10/09/03 25,000 - 1.00 125 -
Common stock issued pursuant to consulting agreements 10/25/03 25,000 - 0.81 125 -
Sale of common stock for cash 10/27/03 15,000 - 1.50 75 -
Sale of common stock for cash 10/29/03 6,667 - 1.50 33 -
Sale of common stock for cash 10/30/03 5,000 - 1.00 25 -
Common stock issued pursuant to consulting agreements 10/31/03 10,000 - 0.81 50 -
Sale of common stock for cash 10/31/03 25,000 - 1.00 125 -
Common stock issued for settlement of accrued compensation 10/31/03 82,276 - 0.81 412 -
Remeasurement of compensation expense - - - - -
Amortization of deferred compensation expense - - - - -
Net loss - - - - -
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, October 31, 2003 23,175,505 220,000 $115,878 $ 1,100
- ------------------------------------------------------------------------------------------------------------------------------------
Payment for common stock subscribed
Sale of common stock for cash 12/08/03 33,334 - $ 1.50 $ 166.67 -
Sale of common stock for cash 12/19/03 33,334 - 1.50 167 -
Sale of common stock for cash 12/19/03 16,667 - 1.50 83 -
Common stock forfeited by employee 12/22/03 (14,308) - - (71) -
Common stock issued pursuant to consulting agreement 12/22/03 150,000 - 1.41 750 -
Sale of common stock for cash 01/28/04 20,000 - 1.25 100 -
Shares issued for deferred compensation 01/28/04 100,000 - 1.41 500 -
Common stock issued pursuant to consulting agreement 03/11/04 20,000 - 0.75 100 -
Warrant issued in connection with convertible debt 03/30/04 - - - - -
Warrant issued in connection with convertible debt 04/01/04 - - - - -
Warrant issued in connection with convertible debt 04/01/04 - - - - -
Conversion of debentures into common stock 04/02/04 33,334 - 0.75 167 -
Warrant issued in connection with convertible debt 04/02/04 - - - - -
Warrant issued in connection with convertible debt 04/12/04 - - - - -
Conversion of debentures into common stock 04/14/04 48,000 - 0.75 240 -
Conversion of debentures into common stock 04/14/04 53,333 - 0.75 267 -
Conversion of debentures into common stock 04/15/04 233,334 - 0.75 1,167 -
Warrant issued in connection with convertible debt 04/15/04 - - - - -
The accompanying Notes to Financial Statements are an integral part of these financial statements
F-6
CDEX Inc.
(A Development Stage Company)
Statement of Changes in Stockholders' Equity (Deficit) (Continued)
Shares Shares
of Class of Class Dollar Class A Class B
A Common B Common Amount Common Common
Date Stock Stock per Share Stock Stock
- ------------------------------------------------------------------------------------------------------------------------------------
Warrant issued in connection with convertible debt 04/22/04 - - - - -
Warrant issued in connection with convertible debt 04/22/04 - - - - -
Warrant issued in connection with convertible debt 04/28/04 - - - - -
Shares issued for deferred compensation 05/01/04 5,000 - 0.75 25 -
Conversion of debentures into common stock 05/05/04 333,334 - 0.75 1,667 -
Conversion of debentures into common stock 05/10/04 39,000 - 0.75 195 -
Warrant issued in connection with convertible debt 05/10/04 - - - - -
Conversion of debentures into common stock 05/10/04 6,667 - 0.75 34 -
Warrant issued in connection with convertible debt 05/10/04 - - - - -
Conversion of debentures into common stock 05/15/04 10,000 - 0.75 50 -
Warrant issued in connection with convertible debt 05/15/04 - - - - -
Common stock forfeited by consultant 05/24/04 (50,000) - 0.75 (250) -
Conversion of debentures into common stock 06/01/04 16,000 - 0.75 80 -
Conversion of debentures into common stock 06/01/04 33,334 - 0.75 167 -
Conversion of debentures into common stock 06/01/04 66,667 - 0.75 334 -
Warrant issued in connection with convertible debt 06/01/04 - - - - -
Conversion of debentures into common stock 06/05/04 40,000 - 0.75 200 -
Warrant issued in connection with convertible debt 06/05/04 - - - - -
Shares issued for deferred compensation 06/12/04 10,000 - 0.75 50 -
Conversion of debentures into common stock 06/16/04 133,334 - 0.75 667 -
Conversion of debentures into common stock 06/18/04 33,334 - 0.75 167 -
Warrant issued in connection with convertible debt 06/18/04 - - - - -
Conversion of debentures into common stock 06/18/04 26,667 - 0.75 133 -
Warrant issued in connection with convertible debt 06/18/04 - - - - -
Conversion of debentures into common stock 06/18/04 6,667 - 0.75 34 -
Warrant issued in connection with convertible debt 06/18/04 - - - - -
Conversion of debentures into common stock 06/18/04 66,667 - 0.75 334 -
Warrant issued in connection with convertible debt 06/18/04 - - - - -
Common stock issued pursuant to consulting agreement 06/28/04 65,333 - 0.75 327 -
Common stock issued pursuant to consulting agreement 06/30/04 20,000 - 0.75 100 -
Common stock issued pursuant to consulting agreement 07/01/04 30,000 - 0.75 150 -
Common stock issued pursuant to consulting agreement 07/01/04 30,000 - 0.75 150 -
Conversion of debentures into common stock 08/02/04 33,334 - 0.75 167 -
Warrant issued in connection with convertible debt 08/02/04 - - - - -
Conversion of debentures into common stock 08/02/04 66,666 - 0.75 333 -
Warrant issued in connection with convertible debt 08/02/04 - - - - -
Conversion of debentures into common stock 09/02/04 1,041,918 - 0.72 5,210 -
Conversion of debentures into common stock 10/06/04 50,000 - 0.30 250 -
Conversion of debentures into common stock 10/05/04 66,667 - 0.30 333 -
Conversion of debentures into common stock 10/21/04 50,000 - 0.30 250 -
Conversion of debentures into common stock 10/21/04 166,667 - 0.30 833 -
Conversion of debentures into common stock 10/21/04 100,000 - 0.30 500 -
Conversion of debentures into common stock 10/25/04 176,667 - 0.30 883 -
Conversion of debentures into common stock 10/28/04 100,000 - 0.30 500 -
Conversion of debentures into common stock 10/20/04 100,000 - 0.30 500 -
Conversion of debentures into common stock 10/28/04 27,000 - 0.30 135 -
Conversion of debentures into common stock 10/26/04 66,667 - 0.30 333 -
Conversion of debentures into common stock 10/29/04 711,667 - 0.28 3,558 -
Conversion of debentures into common stock 10/29/04 83,333 - 0.30 417 -
The accompanying Notes to Financial Statements are an integral part of these financial statements
F-7
CDEX Inc.
(A Development Stage Company)
Statement of Changes in Stockholders' Equity (Deficit) (Continued)
Shares Shares
of Class of Class Dollar Class A Class B
A Common B Common Amount Common Common
Date Stock Stock per Share Stock Stock
- -----------------------------------------------------------------------------------------------------------------------------------
Shares issued for deferred compensation 10/31/04 253,692 - $ 0.32 1,268 -
Shares issued for deferred compensation 10/31/04 191,513 - 0.32 958 -
Shares issued for deferred compensation 10/31/04 141,769 - 0.32 709 -
Shares issued for deferred compensation 10/31/04 160,423 - 0.32 802 -
Shares issued for deferred compensation 10/31/04 141,769 - 0.32 709 -
Shares issued for deferred compensation 10/31/04 98,244 - 0.32 491 -
Shares issued for deferred compensation 10/31/04 23,530 - 0.32 118 -
Shares issued for deferred compensation 10/31/04 129,333 - 0.32 647 -
Shares issued for deferred compensation 10/31/04 54,718 - 0.32 274 -
Shares issued for deferred compensation 10/31/04 129,333 - 0.32 647 -
Shares issued for deferred compensation 10/31/04 6,715 - 0.32 34 -
Shares issued for deferred compensation 10/31/04 3,681 - 0.32 18 -
Shares issued for deferred compensation 10/31/04 19,975 - 0.90 100 -
Shares issued for deferred compensation 10/31/04 72,800 - 0.75 364 -
Remeasurement of compensation expense - - - - -
Amortization of deferred compensation expense - - - - -
Net loss
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, October 31, 2004 29,092,618 220,000 $145,468 $ 1,100
====================================================================================================================================
The accompanying Notes to Financial Statements are an integral part of these financial statements
F-8
CDEX Inc.
(A Development Stage Company)
Statement of Changes in Stockholders' Equity (Deficit) (Continued)
Deficit
Accumulated
During the Stock
Additional Paid- Deferred Development Subscription
in Capital Compensation Stage Receivable Total
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, July 6, 2001 (inception) $ - $ - $ - $ - $ -
Common stock issued to Loch Harris, Inc. as a deposit
related to the transfer of assets into the Company 07/23/01 67,819 - - - 80,819
Common stock issued pursuant to consulting agreement 07/23/04 3,592,800 (3,600,000) - - -
Common stock issued pursuant to consulting agreement 08/03/01 925,645 (927,500) - - -
Common stock issued to Loch Harris, Inc. related -
to the transfer of assets into the Company 08/04/01 308,955 - - - 365,280
Common stock issued pursuant to consulting agreement 09/19/01 149,700 (150,000) - - -
Common stock issued pursuant to consulting agreement 10/01/01 87,325 (87,500) - - -
Common stock issued pursuant to consulting agreement 10/15/01 4,990 (5,000) - - -
Amortization of deferred compensation expense - 449,201 - - 449,201
Net loss - - (1,012,246) - (1,012,246)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, October 31, 2001 $ 5,137,234 $ (4,320,799) $(1,012,246) $ - $ (116,946)
- -----------------------------------------------------------------------------------------------------------------------------------
Conversion of note payable into common stock 11/21/01 $ 124,750 $ - $ - $ - $ 125,000
Conversion of note payable into common stock 12/19/01 115,710 - - - 116,000
Conversion of note payable into common stock 02/25/02 39,867 - - - 40,000
Stock received due to adjustment to transfer agreement 03/01/02 (56,000) - - - (57,000)
Sale of common stock for cash 03/12/02 24,950 - - - 25,000
Sale of common stock for cash 04/12/02 49,875 - - - 50,000
Sale of common stock for cash 05/23/02 129,675 - - - 130,000
Sale of common stock for cash 05/23/02 99,750 - - - 100,000
Sale of common stock for cash 06/18/02 99,750 - - - 100,000
Sale of common stock for cash 06/28/02 99,750 - - - 100,000
Sale of common stock for cash 07/15/02 74,850 - - - 75,000
Sale of common stock for cash 08/23/02 99,846 - - - 100,000
Sale of common stock for cash 10/02/02 99,750 - - - 100,000
Remeasurement of compensation expense (525,947) 525,947 - - -
Amortization of deferred compensation expense - 1,651,667 - - 1,651,667
Net loss - - (3,447,587) - (3,447,587)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, October 31, 2002 $ 5,613,810 $ (2,143,185) $(4,459,833) $ - $ (908,866)
- -----------------------------------------------------------------------------------------------------------------------------------
Sale of common stock for cash 11/26/02 $ 49,500 $ - $ - $ - $ 50,000
Sale of common stock for cash 12/05/02 74,250 - - - 75,000
Sale of common stock for cash 12/09/02 24,750 - - - 25,000
Sale of common stock for cash 12/10/02 24,750 - - - 25,000
Common stock issued for settlement of accrued compensation 12/11/02 43,325 - - - 43,616
Common stock issued for settlement of accrued compensation 12/11/02 1,281,080 - - - 1,289,671
Common stock issued pursuant to consulting agreements 12/30/02 4,025 (4,050) - - -
Common stock awarded to employees and consultants 12/30/02 125,550 - - - 126,325
Common stock awarded to employees and consultants 12/30/02 129,600 - - - 130,400
Common stock awarded to employees and consultants 12/30/02 177,100 - - - 178,200
Sale of common stock for cash 01/07/03 39,600 - - - 40,000
Sale of common stock for cash 01/15/03 74,250 - - - 75,000
Common stock awarded to employees and consultants 01/20/03 16,200 - - - 16,300
Common stock forfeited by employee 02/17/03 (78,334) 78,484 - - -
Sale of common stock for cash 03/20/03 199,000 - - - 200,000
Common stock issued for settlement of accrued compensation 03/31/03 398,030 - - - 400,702
Sale of common stock for cash 04/21/03 34,825 - - - 35,000
Sale of common stock for cash 04/21/03 49,750 - - - 50,000
Sale of common stock for cash 04/30/03 49,750 - - - 50,000
Common stock awarded to employees and consultants 05/01/03 32,400 - - - 32,600
Common stock awarded to employees and consultants 05/26/03 20,250 - - - 20,375
Common stock issued pursuant to consulting agreements 06/15/03 4,025 (4,050) - - -
Sale of common stock for cash 06/19/03 26,865 - - - 27,000
Common stock issued pursuant to consulting agreements 06/20/03 4,025 (4,050) - - -
The accompanying Notes to Financial Statements are an integral part of these financial statements
F-9
CDEX Inc.
(A Development Stage Company)
Statement of Changes in Stockholders' Equity (Deficit) (Continued)
Deficit
Accumulated
During the Stock
Additional Paid- Deferred Development Subscription
in Capital Compensation Stage Receivable Total
- -----------------------------------------------------------------------------------------------------------------------------------
Common stock issued pursuant to consulting agreements 06/20/03 $ 4,025 $ (4,050) $ - $ - $ -
Common stock issued for settlement of accrued compensation 07/01/03 396,618 - - - 399,081
Sale of common stock for cash 07/15/03 14,925 - - - 15,000
Sale of common stock for cash 07/17/03 24,875 - - - 25,000
Sale of common stock for cash 07/24/03 24,875 - - - 25,000
Sale of common stock for cash 07/28/03 24,875 - - - 25,000
Sale of common stock for cash 07/31/03 338,000 - - - 340,000
Sale of common stock for cash 08/06/03 9,950 - - - 10,000
Sale of common stock for cash 08/06/03 24,875 - - - 25,000
Sale of common stock for cash 08/06/03 44,775 - - - 45,000
Sale of common stock for cash 08/08/03 9,950 - - - 10,000
Sale of common stock for cash 08/19/03 24,875 - - - 25,000
Sale of common stock for cash 08/25/03 24,875 - - - 25,000
Sale of common stock for cash 09/02/03 4,975 - - - 5,000
Sale of common stock for cash 09/02/03 4,975 - - - 5,000
Sale of common stock for cash 09/02/03 39,800 - - - 40,000
Sale of common stock for cash 09/02/03 4,975 - - - 5,000
Sale of common stock for cash 09/02/03 24,875 - - - 25,000
Sale of common stock for cash 09/02/03 4,975 - - - 5,000
Sale of common stock for cash 09/15/03 4,975 - - - 5,000
Sale of common stock for cash 09/15/03 995 - - - 1,000
Common stock issued for settlement of accrued compensation 09/20/03 1,559,110 (1,087,812) - - 480,982
Common stock issued pursuant to consulting agreements 10/01/03 28,175 (28,350) - - -
Common stock issued pursuant to consulting agreements 10/01/03 32,200 (32,400) - - -
Common stock issued pursuant to consulting agreements 10/01/03 36,225 (36,450) - - -
Sale of common stock for cash 10/09/03 24,875 - - - 25,000
Common stock issued pursuant to consulting agreements 10/25/03 20,125 (20,250) - - -
Sale of common stock for cash 10/27/03 22,425 - - - 22,500
Sale of common stock for cash 10/29/03 9,967 - - - 10,000
Sale of common stock for cash 10/30/03 7,475 - - (2,500) 5,000
Common stock issued pursuant to consulting agreements 10/31/03 8,050 (8,100) - - -
Sale of common stock for cash 10/31/03 24,875 - - - 25,000
Common stock issued for settlement of accrued compensation 10/31/03 66,232 (24,561) - - 42,083
Remeasurement of compensation expense (497,948) 497,948 - - -
Amortization of deferred compensation expense - 1,200,139 - - 1,200,139
Net loss - - (4,114,716) - (4,114,716)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, October 31, 2003 $10,818,200 $ (1,620,737) $(8,574,549) $(2,500) $ 737,392
- -----------------------------------------------------------------------------------------------------------------------------------
Payment for common stock subscribed $ - $ - $ - $ 2,500 $ 2,500
Sale of common stock for cash 12/08/03 49,834 - - - 50,001
Sale of common stock for cash 12/19/03 49,833 - - - 50,000
Sale of common stock for cash 12/19/03 24,917 - - - 25,000
Common stock forfeited by employee 12/22/03 (18,598) 18,669 - - -
Common stock issued pursuant to consulting agreement 12/22/03 210,750 (211,500) - - -
Sale of common stock for cash 01/28/04 24,900 - - - 25,000
Shares issued for deferred compensation 01/28/04 140,500 (141,000) - - -
Common stock issued pursuant to consulting agreement 03/11/04 14,900 (15,000) - - -
Warrant issued in connection with convertible debt 03/30/04 59,200 - - - 59,200
Warrant issued in connection with convertible debt 04/01/04 14,867 - - - 14,867
Warrant issued in connection with convertible debt 04/01/04 23,893 - - - 23,893
Conversion of debentures into common stock 04/02/04 24,833 - - - 25,000
Warrant issued in connection with convertible debt 04/02/04 444,000 - - - 444,000
Warrant issued in connection with convertible debt 04/12/04 21,312 - - - 21,312
Conversion of debentures into common stock 04/14/04 35,760 - - - 36,000
Conversion of debentures into common stock 04/14/04 39,733 - - - 40,000
Conversion of debentures into common stock 04/15/04 173,833 - - - 175,000
Warrant issued in connection with convertible debt 04/15/04 103,600 - - - 103,600
The accompanying Notes to Financial Statements are an integral part of these financial statements
F-10
CDEX Inc.
(A Development Stage Company)
Statement of Changes in Stockholders' Equity (Deficit) (Continued)
Deficit
Accumulated
During the Stock
Additional Paid- Deferred Development Subscription
in Capital Compensation Stage Receivable Total
- ------------------------------------------------------------------------------------------------------------------------------------
Warrant issued in connection with convertible debt 04/22/04 $ 14,800 $ - $ - $ - $ 14,800
Warrant issued in connection with convertible debt 04/22/04 7,136 - - - 7,136
Warrant issued in connection with convertible debt 04/28/04 148,001 - - - 148,001
Shares issued for deferred compensation 05/01/04 3,725 (3,750) - - -
Conversion of debentures into common stock 05/05/04 248,334 - - - 250,001
Conversion of debentures into common stock 05/10/04 29,055 - - - 29,250
Warrant issued in connection with convertible debt 05/10/04 17,316 - - - 17,316
Conversion of debentures into common stock 05/10/04 4,966 - - - 5,000
Warrant issued in connection with convertible debt 05/10/04 2,960 - - - 2,960
Conversion of debentures into common stock 05/15/04 7,450 - - - 7,500
Warrant issued in connection with convertible debt 05/15/04 4,440 - - - 4,440
Common stock forfeited by consultant 05/24/04 (37,250) 37,500 - - -
Conversion of debentures into common stock 06/01/04 14,920 - - - 15,000
Conversion of debentures into common stock 06/01/04 24,833 - - - 25,000
Conversion of debentures into common stock 06/01/04 49,666 - - - 50,000
Warrant issued in connection with convertible debt 06/01/04 29,600 - - - 29,600
Conversion of debentures into common stock 06/05/04 29,800 - - - 30,000
Warrant issued in connection with convertible debt 06/05/04 17,760 - - - 17,760
Shares issued for deferred compensation 06/12/04 7,450 (7,500) - - -
Conversion of debentures into common stock 06/16/04 99,333 - - - 100,000
Conversion of debentures into common stock 06/18/04 24,834 - - - 25,001
Warrant issued in connection with convertible debt 06/18/04 14,800 - - - 14,800
Conversion of debentures into common stock 06/18/04 19,867 - - - 20,000
Warrant issued in connection with convertible debt 06/18/04 11,840 - - - 11,840
Conversion of debentures into common stock 06/18/04 4,966 - - - 5,000
Warrant issued in connection with convertible debt 06/18/04 2,960 - - - 2,960
Conversion of debentures into common stock 06/18/04 49,666 - - - 50,000
Warrant issued in connection with convertible debt 06/18/04 29,600 - - - 29,600
Common stock issued pursuant to consulting agreement 06/28/04 48,673 - - - 48,999
Common stock issued pursuant to consulting agreement 06/30/04 14,900 (15,000) - - -
Common stock issued pursuant to consulting agreement 07/01/04 22,350 (22,500) - - -
Common stock issued pursuant to consulting agreement 07/01/04 22,350 (22,500) - - -
Conversion of debentures into common stock 08/02/04 24,833 - - - 25,000
Warrant issued in connection with convertible debt 08/02/04 13,867 - - - 13,867
Conversion of debentures into common stock 08/02/04 49,667 - - - 50,000
Warrant issued in connection with convertible debt 08/02/04 27,733 - - - 27,733
Conversion of debentures into common stock 09/02/04 776,229 - - - 781,439
Conversion of debentures into common stock 10/06/04 14,750 - - - 15,000
Conversion of debentures into common stock 10/05/04 19,667 - - - 20,000
Conversion of debentures into common stock 10/21/04 14,750 - - - 15,000
Conversion of debentures into common stock 10/21/04 49,167 - - - 50,000
Conversion of debentures into common stock 10/21/04 29,500 - - - 30,000
Conversion of debentures into common stock 10/25/04 52,117 - - - 53,000
Conversion of debentures into common stock 10/28/04 29,500 - - - 30,000
Conversion of debentures into common stock 10/20/04 29,500 - - - 30,000
Conversion of debentures into common stock 10/28/04 7,965 - - - 8,100
Conversion of debentures into common stock 10/26/04 19,667 - - - 20,000
Conversion of debentures into common stock 10/29/04 196,442 - - - 200,000
Conversion of debentures into common stock 10/29/04 24,583 - - - 25,000
The accompanying Notes to Financial Statements are an integral part of these financial statements
F-11
CDEX Inc.
(A Development Stage Company)
Statement of Changes in Stockholders' Equity (Deficit) (Continued)
Deficit
Accumulated
During the Stock
Additional Paid- Deferred Development Subscription
in Capital Compensation Stage Receivable Total
- ------------------------------------------------------------------------------------------------------------------------------------
Shares issued for deferred compensation 10/31/04 $ 79,282 $ - $ - $ - $ 80,550
Shares issued for deferred compensation 10/31/04 59,850 - - - 60,808
Shares issued for deferred compensation 10/31/04 44,305 - - - 45,013
Shares issued for deferred compensation 10/31/04 50,134 - - - 50,936
Shares issued for deferred compensation 10/31/04 44,305 - - - 45,013
Shares issued for deferred compensation 10/31/04 30,703 - - - 31,194
Shares issued for deferred compensation 10/31/04 7,353 - - - 7,471
Shares issued for deferred compensation 10/31/04 40,418 - - - 41,065
Shares issued for deferred compensation 10/31/04 17,100 - - - 17,374
Shares issued for deferred compensation 10/31/04 40,418 - - - 41,065
Shares issued for deferred compensation 10/31/04 2,099 - - - 2,132
Shares issued for deferred compensation 10/31/04 1,150 - - - 1,169
Shares issued for deferred compensation 10/31/04 17,954 - - - 18,054
Shares issued for deferred compensation 10/31/04 54,504 - - - 54,868
Remeasurement of compensation expense (119,494) 119,494 - - -
Amortization of deferred compensation expense - 1,722,568 - - 1,722,568
Net loss - - (5,977,984) - (5,977,984)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, October 31, 2004 $14,997,386 $ (161,257) $(14,552,533) $ - $ 430,163
====================================================================================================================================
The accompanying Notes to Financial Statements are an integral part of these financial statements
F-12
CDEX Inc.
(A Development Stage Company)
Statements of Cash Flows
Year Ended July 6, 2001
October 31 (inception) to
2003 2004 October 31, 2004
---- ---- ----------------
Cash Flows from Operating Activities
Net loss $ (4,114,716) $ (5,977,984) $(14,552,534)
Adjustments to reconcile net loss to cash used by
operating activities
Depreciation 84,982 297,437 465,830
Stock compensation 2,953,544 2,268,280 8,729,622
Noncash interest 1,041,124 1,041,124
Changes in operating assets and liabilities
Inventory (146,149) (146,149)
Accounts receivable (89,937) 89,937 --
Prepaid expenses 11,148 (2,377) (3,994)
Other assets (1,256) 1,256 (1,399)
Current liabilities (82,924) 223,211 192,348
------------ ------------ ------------
Net cash used by operating activities (1,239,159) (2,205,265) (4,275,152)
Cash Flows from Investing Activities
Cash provided by transfer of assets from Loch Harris, Inc. -- -- 73,000
Purchase of property and equipment (98,851) (24,524) (146,214)
------------ ------------ ------------
Net cash used by investing activities (98,851) (24,524) (73,214)
Cash Flows from Financing Activities
Proceeds from sale of common stock 1,400,500 152,501 2,333,001
Proceeds from convertible notes payable -- 2,205,850 2,486,850
Proceeds from related party convertible notes payable 15,000 100,000 155,000
Repayment of related party convertible notes payable (15,000) (100,000) (155,000)
------------ ------------ ------------
Net cash provided by financing activities 1,400,500 2,358,351 4,819,851
------------ ------------ ------------
Net increase in cash 62,490 128,562 471,485
Cash and cash equivalents, beginning of the period 280,433 342,923 --
------------ ------------ ------------
Cash and cash equivalents, end of the period $ 342,923 $ 471,485 $ 471,485
============ ============ ============
Supplemental Cash Flow Information
Actual cash payments for interest $ 275 $ 471 $ 3,965
The accompanying Notes to Financial Statements are an integral part of these financial statements
F-13
CDEX Inc.
(A Development Stage Company)
Statements of Cash Flows
Year Ended July 6, 2001
October 31 (inception) to
2003 2004 October 31, 2004
---- ---- ----------------
Non-cash financing transactions:
Common stock subscribed
Stock subscription receivable $ 2,500 $ 2,500 $ 5,000
Common stock (13) (13) (26)
Additional paid-in capital (2,487) (2,487) (4,974)
----------- ----------- -----------
Net cash -- -- --
Conversion of notes payable into common stock
Notes payable -- 2,205,850 2,486,850
Common stock -- (20,068) (20,741)
Additional paid-in capital -- (2,185,782) (2,466,109)
----------- ----------- -----------
Net cash -- -- --
Stock compensation
Deferred stock compensation 3,838,026 263,087 8,345,166
Additional paid-in capital (3,810,089) (261,256) (8,305,858)
Common stock (27,937) (1,831) (39,308)
----------- ----------- -----------
Net cash -- -- --
Asset transfer:
Assets transferred:
Cash -- -- 73,000
Other receivables -- -- 7,000
Property and equipment -- -- 457,882
Accumulated depreciation and amortization -- -- (91,783)
----------- ----------- -----------
Total assets transferred -- -- 446,099
Liabilities assumed:
Accounts payable -- -- (57,000)
Net assets transferred (liabilities assumed) -- -- 389,099
Common stock issued for asset transfer
Common stock -- -- (68,325)
Additional paid-in capital -- -- (320,774)
----------- ----------- -----------
Net cash $ -- $ -- $ --
=========== =========== ===========
The accompanying Notes to Financial Statements are an integral part of these financial statements
F-14
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 had not yet sold any products as of
October 31, 2004. The Company sold its first product
in November 2004. All revenue through fiscal year
2004 has been in connection with development
contracts to complete testing and research.
Stock-Based Compensation: The Company follows SFAS
No. 123, Accounting for Stock-Based Compensation. In
accounting for stock options, as permitted by SFAS
No. 123, the Company will account for stock-based
compensation to employees in accordance with
Accounting Principles Board (APB) Opinion No. 25
Accounting for Stock Issued to Employees, and
accordingly recognize compensation expense for fixed
stock option grants only when the exercise price is
less than the fair value of the shares on the date of
the grant. No options have been issued. Accordingly,
no pro-forma information is provided for employee
stock option grants as if the fair value based method
defined in SFAS No. 123 had been applied.
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, 2003 and 2004.
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-15
Use of accounting estimates: The preparation of
financial statements in conformity with generally
accepted accounting principles requires management to
make estimates and assumptions that affect the
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 two to
seven years. Depreciation expense was $84,982,
$297,437 and $465,830 for the years ended October 31,
2003 and 2004, and for the period from July 6, 2001
(inception) to October 31, 2004, respectively.
Inventory: Inventory consists of component parts
carried at the lower of invoice cost (average cost
basis) or market.
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 and marketing costs: The cost of
advertising and marketing is expensed as incurred.
Advertising and marketing expense was $28,483,
$78,218 and $116,699 for the years ended October 31,
2003 and 2004, and for the period from July 6, 2001
(inception) to October 31, 2004, 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-16
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.
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
Net Loss Per Common Share: Basic net loss per share
was determined by dividing the net loss by the
weighted average number of common shares outstanding
during each year. The effect of common stock
equivalents is not considered as it would be
anti-dilutive.
2. Related party The Company previously leased space (see Note 7) and
transactions 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 $106,846, $5,760 and $978,820 for the
years ended October 31, 2003 and 2004, and from the
period July 6, 2001 (inception) to October 31, 2004,
respectively.
The spouse of the Chief Executive Officer purchased
one $15,000 convertible note in 2003 and one $100,000
convertible note in 2004 paying interest at 9%. Total
interest expense paid to this related party was $249,
$666 and $4,130 for the years ended October 31, 2003
and 2004 and the period July 6, 2001 (inception) to
October 31, 2004, respectively. The $15,000 note was
redeemed at par value for cash in September 2003, and
the $100,000 note was redeemed at par value for cash
in April 2004.
3. New accounting In May 2003, the Financial Accounting Standards Board
standards issued Statement No. 150, "Accounting for Certain
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-17
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,
2003 2004 2004
---------------------------------------------------------------------------------------
Federal income taxes at the maximum
statutory rate $ 1,399 $ 2,032 $ 4,947
State income taxes, net of Federal
tax effect 189 275 822
Difference in valuation of stock
based compensation (648) (1,548) (2,909)
Increase in valuation allowance (940) (759) (2,860)
---------------------------------------------------------------------------------------
Benefit from income taxes
$ - $ - $ -
---------------------------------------------------------------------------------------
Deferred income taxes as of October 31, 2004 were as follows:
---------------------------------------------------------------------------------------
Stock based compensation $ 896
Fixed asset basis difference 97
Accounts payable and accrued expenses deducted for
financial statement reporting purposes, but not for
income tax reporting purposes 91
Net operating loss carryforward 1,776
---------------------------------------------------------------------------------------
Deferred tax asset $ 2,860
Valuation allowance $ (2,860)
---------------------------------------------------------------------------------------
Total $ -
---------------------------------------------------------------------------------------
For income tax purposes, the Company has net
operating loss carryforwards of approximately
$4,600,000 at October 31, 2004 that, subject to
applicable limitations, may be applied against future
taxable income. If not utilized, the net operating
loss carryforwards will expire between 2022 and 2024.
5. Stock based All stock based compensation is recorded at fair
compensation value. The Company has provided restricted stock
for services grants to employees and consultants as the principal
element of 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. Fair value is determined using the
following policies:
o 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.
o For consulting agreements issued in 2003 and
2004, 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-18
o 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,
the fair value of the services is determined
based on the number of shares issued valued
at the weighted average value of the
proceeds per share received from sales of
common stock to unaffiliated purchasers
during compensation period.
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. The Company issued
additional consulting agreements in 2004 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 in 2003 and 2004 awarded some of the
common shares in advance of when the service was
performed. These amounts are shown as deferred stock
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) shares of common
stock to employees and consultants during the year
ended October 31, 2003, and 2,213,562 Class A shares
of common stock to employees and consultants during
the year ended October 31, 2004.
The Company has two separate stock plans--the 2002
and 2003 Stock Incentive Plans. Both plans provide
for the issuance of stock options and stock grants.
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 were 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. (A total of 2,666,752 shares
with a fair value of $1,388,076 were issued under
this plan during the year ended October 31, 2003 and
2,213,562 shares with a fair value of $984,462 were
issued during the year ended October 31, 2004). 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.
F-19
Restricted stock activity under the Plans is as
follows:
Balance November 1, 2003 5,587,401
Granted 2,213,562
Forfeited (68,589)
----------
Balance October 31, 2004 7,732,365
----------
Expense for the deferred compensation balance of
$161,257 at October 31, 2004 is expected to be
recognized as follows:
Compensation
Expense
-----------------------------------------------------------------------------------------
Year ending October 31, 2005 $102,426
Year ending October 31, 2006 58,084
Year ending October 31, 2007 747
-----------------------------------------------------------------------------------------
$161,257
-----------------------------------------------------------------------------------------
Total compensation expense related to stock awards
for employees and consultants was $2,953,544,
$2,268,280 and $8,729,622 for the years ended October
31, 2003 and 2004, and for the period July 6, 2001
(inception) to October 31, 2004, respectively. 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.
6. Stockholders' On December 11, 2002, the Board of Directors
equity 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.
The Company has raised capital by entering into
convertible promissory notes from inception to
October 31, 2004. Certain of the notes were held by a
related party (see Note 2) and were redeemed for
cash. The other notes were converted into shares of
Class A common stock. A summary of the notes that
were converted is as follows:
F-20
Amount of
Note Date Date Converted 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
March 2004 June 16, 2004 100,000 133,334 0.75
April 2004 April 2, 2004 25,000 33,334 0.75
April 2004 April 14, 2004 36,000 48,000 0.75
April 2004 April 14, 2004 40,000 53,333 0.75
April 2004 April 15, 2004 175,000 233,334 0.75
April 2004 May 5, 2004 250,000 333,334 0.75
April 2004 June 1, 2004 12,000 16,000 0.75
April 2004 June 1, 2004 25,000 33,334 0.75
April 2004 September 2, 2004 750,000 1,041,918 0.72
May 2004 May 10, 2004 29,250 39,000 0.75
May 2004 May 10, 2004 5,000 6,667 0.75
May 2004 May 15, 2004 7,500 10,000 0.75
June 2004 June 1, 2004 50,000 66,667 0.75
June 2004 June 5, 2004 30,000 40,000 0.75
June 2004 June 18, 2004 25,000 33,334 0.75
June 2004 June 18, 2004 20,000 26,667 0.75
June 2004 June 18, 2004 5,000 6,667 0.75
June 2004 June 18, 2004 50,000 66,667 0.75
August 2004 August 2, 2004 25,000 33,334 0.75
August 2004 August 2, 2004 50,000 66,666 0.75
October 2004 October 6, 2004 15,000 50,000 0.30
October 2004 October 5, 2004 20,000 66,667 0.30
October 2004 October 21, 2004 15,000 50,000 0.30
October 2004 October 21, 2004 50,000 166,667 0.30
October 2004 October 21, 2004 30,000 100,000 0.30
October 2004 October 25, 2004 53,000 176,667 0.30
October 2004 October 28, 2004 30,000 100,000 0.30
October 2004 October 20, 2004 30,000 100,000 0.30
October 2004 October 28, 2004 8,100 27,000 0.30
October 2004 October 26, 2004 20,000 66,667 0.30
October 2004 October 29, 2004 200,000 711,667 0.28
October 2004 October 29, 2004 25,000 83,333 0.30
----------------------------------------------------------------------------------------
Totals $2,486,850 4,154,925 $0.60
========================================================================================
F-21
A majority of the convertible promissory notes were
sold with detachable warrants. A summary of the
convertible promissory notes with detachable warrants
is as follows:
Warrant Warrant Class A Shares if
Date of Sale Proceeds Exercise Price Expiration Exercised
-----------------------------------------------------------------------------------------
March 2004 $100,000 $ 0.75 March 30, 2005 133,334
April 2004 25,000 0.75 April 6, 2005 33,333
April 2004 36,000 0.75 April 8, 2005 53,333
April 2004 40,000 0.75 April 2, 2005 1,000,000
April 2004 175,000 0.75 April 12, 2005 48,000
April 2004 250,000 0.75 April 15, 2005 233,334
April 2004 12,000 0.75 April 22, 2005 33,334
April 2004 25,000 0.75 April 22, 2005 16,000
April 2004 750,000 0.75 April 28, 2005 333,334
May 2004 29,250 0.75 May 10, 2005 39,000
May 2004 5,000 0.75 May 10, 2005 6,667
May 2004 7,500 0.75 May 15, 2005 10,000
June 2004 50,000 0.75 June 18, 2005 66,667
June 2004 30,000 0.75 July 2, 2005 40,000
June 2004 25,000 0.75 June 18, 2005 33,334
June 2004 20,000 0.75 June 18, 2005 26,667
June 2004 5,000 0.75 June 18, 2005 6,667
June 2004 50,000 0.75 June 18, 2005 66,667
August 2004 25,000 0.75 August 2, 2005 33,333
August 2004 50,000 0.75 August 2, 2005 66,667
-----------------------------------------------------------------------------------------
Totals $1,709,750 2,279,672
-----------------------------------------------------------------------------------------
The Company follows the requirements of EITF 00-27 in
recording the discount on the convertible notes
associated with both the value of the detachable
warrants and the intrinsic value of the embedded
conversion option based on the "effective conversion
price" as defined in EITF 00-27. The warrants were
valued using the Black-Scholes model with the
following assumptions: no dividend yield, warrant
life of one year, volatility of 75%, interest rate of
1.04%. As of October 31, 2004, the detachable
warrants had a relative fair market value of
$504,843, leaving $1,204,907 of debt at its relative
fair market value which is convertible into 2,279,672
shares, resulting in an effective conversion price of
$.529 per share. The intrinsic value of $.221 per
share (the difference between the effective
conversion price of $.529 and the fair value of the
common stock of $.75 per share) for 2,279,672 shares
results in a further discount for the beneficial
conversion feature of $504,843. The total debt
discount is amortized to interest expense over the
life of the notes and is fully recognized as interest
expense upon conversion. The Company recognized
$1,009,686 as interest expense for debt discount in
fiscal year 2004.
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 $6,300 for the years
ended October 31, 2003 and 2004 and the period July
6, 2001 (inception) to October 31, 2004,
respectively.
F-22
The Company leases office and laboratory space in
Arizona. The Company previously subleased this space
from Dynamic Management Resolutions, LLC (see Note 2)
until March 5, 2004, when the lease was assigned from
Dynamic Management Resolutions to the Company. The
lease expires April 30, 2009 and has non-cancelable
lease payments into 2006. The lease provides for
monthly rent of approximately $2,845 with 3% annual
escalations. Total rent expense was $17,873, $16,929
and $56,851 for the years ended October 31, 2003 and
2004, and the period July 6, 2001 (inception) to
October 31, 2004, respectively.
The future minimum lease payments required under
operating leases that have an initial non-cancelable
lease term greater than one year as of October 31,
2004 are as follows:
Year Ending
October 31, Amount
----------------------------------------------
2005 $ 17,510
2006 16,051
----------------------------------------------
Total $ 33,561
===============================================
8. Financial The Company has incurred losses since its inception
condition in excess of $14,500,000 and has had no product sales
from its inception through fiscal year 2004. 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.
The Company's ability to continue as a going concern
and meet its obligations as they come due is
dependent upon its ability to raise sufficient cash
as discussed above. The existing cash balance will
fund approximately 3 months of operations if no
additional cash is raised. The Company anticipates it
will require at least $2,500,000 to $4,000,000 over
the next twelve months to complete its research and
development and fund working capital (including the
cost of components necessary to commence production).
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. Commitments The Company has entered into employment agreements
with its four senior employees. The contracts provide
for $384,000 of cash compensation and $586,000 in
additional compensation payable in cash and/or stock
annually. The contracts also provide severance
payments if termination occurs before January 1,
2006. Maximum termination payments would be $970,000
and 5,800,000 shares of common stock if termination
occurs in 2005.
F-23
10.Subsequent events The Company has raised $292,000 since October 31,
2004 through the sale of investment units containing
convertible notes and through the sale of common
shares. All of the notes have converted to common
shares. A summary of the investments is as follows:
Amount of
Investment Date Date Converted Investment Shares Price per share
----------------------------------------------------------------------------------------
November 2004 November 5, 2004 $ 20,000 66,667 $0.30
November 2004 November 8, 2004 14,000 46,667 0.30
November 2004 November 9, 2004 25,000 83,333 0.30
November 2004 November 9, 2004 10,000 33,333 0.30
November 2004 November 12, 2004 20,000 66,667 0.30
December 2004 NA 100,000 111,150 0.90
December 2004 NA 20,000 21,300 0.94
December 2004 NA 28,000 29,500 0.95
December 2004 NA 10,000 10,600 0.94
December 2004 NA 45,000 47,500 0.95
----------------------------------------------------------------------------------------
Totals $ 292,000 516,717 $0.57
----------------------------------------------------------------------------------------
F-24
CDEX INC.
Index to Interim Financial Statements
For the Quarterly Period Ended April 30, 2005
Page
Financial Statements
Condensed Balance Sheet as of April 30, 2005..........................................................F2-2
Condensed Statements of Operations for the Three and Six Months
ended April 30, 2005 and 2004.......................................................................F2-3
Condensed Statements of Cash Flow for the Six Months ended April 30, 2005 and 2004....................F2-4
Notes to Condensed Financial Statements...............................................................F2-5,6
F2-1
FINANCIAL STATEMENTS
CDEX Inc.
Balance Sheet as of April 30, 2005
(unaudited)
Assets
Current assets
Cash and cash equivalents $ 627,110
Accounts receivable 60,857
Inventory (primarily raw materials) 217,393
Prepaid expenses 2,845
------------
Total current assets 908,205
Property and equipment
Laboratory and computer equipment 603,276
Furniture and fixtures 1,666
Building improvements 1,265
------------
Total property and equipment 606,207
Less: Accumulated depreciation (562,993)
------------
Net property and equipment 43,214
Other assets 2,499
------------
Total Assets $ 953,918
============
Liabilities and Stockholders' Equity
Current Liabilities
Accounts payable and accrued expenses $ 283,861
Deferred compensation 517,097
Deferred revenue 30,000
Deferred rent 8,068
------------
Total Current Liabilties 839,026
Commitments and Contingencies
Stockholders' Equity
Preferred Stock - $.005 par value per share, 3,000,000
shares authorized and none outstanding --
Class A common stock - $.005 par value per share, 36,500,000
shares authorized and 31,441,373 outstanding 157,211
Class B common stock - $.005 par value per share, 500,000
shares authorized and 220,000 outstanding 1,100
Additional paid in capital 16,708,266
Deferred stock compensation (163,373)
Accumulated deficit (16,588,312)
------------
Total Stockholders' Equity 114,892
------------
Total Liabilities and Stockholders' Equity $ 953,918
============
The accompanying Notes to Financial Statements are an integral part of these financial statements.
F2-2
CDEX Inc.
Statements of Operations
(unaudited)
Three Months Ended Six Months Ended
April 30 April 30
2004 2005 2004 2005
---- ---- ---- ----
Revenue $ 4,069 $ 23,860 $ 4,069 $ 107,660
Cost of Revenue -- 4,200 -- 68,458
------------ ------------ ------------ ------------
Gross Profit 4,069 19,660 4,069 39,202
Operating Expenses
Development costs 425,900 245,097 691,706 502,578
General and administrative expenses 314,853 301,227 515,221 778,973
Non-cash stock compensation 630,962 416,629 1,322,887 794,105
------------ ------------ ------------ ------------
Total Operating Expenses 1,371,715 962,953 2,529,814 2,075,656
Loss From Operations (1,367,646) (943,293) (2,525,745) (2,036,454)
Other Income (Expense)
Interest income -- 156 70 675
Interest expense (206,224) -- (206,238) --
------------ ------------ ------------ ------------
Total Other Income (Expense) (206,224) 156 (206,168) 675
------------ ------------ ------------ ------------
Net Loss $ (1,573,870) $ (943,137) $ (2,731,913) $ (2,035,779)
============ ============ ============ ============
Basic and diluted net loss
per common share: $ (0.07) $ (0.03) $ (0.12) $ (0.07)
Basic and diluted weighted average
common shares oustanding 23,805,866 30,763,565 23,665,442 30,248,382
The accompanying Notes to Financial Statements are an integral part of these financial statements.
F2-3
CDEX Inc.
Statements of Cash Flows
(unaudited)
Six Months Ended
April 30
2004 2005
---- ----
Cash Flows from Operating Activities
Net loss $ (2,731,912) $ (2,035,778)
Adjustments to reconcile net loss to cash used by
operating activities
Depreciation 85,974 8,379
Stock compensation 1,322,886 794,105
Noncash interest 205,829 --
Changes in operating assets and liabilities
Inventory -- (71,244)
Accounts receivable 85,808 (60,857)
Prepaid expenses 1,617 1,148
Other assets -- (1,100)
Current liabilities 223,239 79,580
----------- -----------
Net cash used by operating activities (806,559) (1,285,767)
Cash Flows from Investing Activities
Purchase of property and equipment (20,618) (2,108)
----------- -----------
Net cash used by investing activities (20,618) (2,108)
Cash Flows from Financing Activities
Proceeds from sale of common stock 152,501 1,354,500
Proceeds from convertible notes payable 1,408,000 89,000
Proceeds from related party convertible notes payable 100,000 62,000
Repayment of related party convertible notes payable (100,000) (62,000)
----------- -----------
Net cash provided by financing activities 1,560,501 1,443,500
----------- -----------
Net increase in cash 733,324 155,625
Cash and cash equivalents, beginning of the period 342,923 471,485
----------- -----------
Cash and cash equivalents, end of the period $ 1,076,247 $ 627,110
=========== ===========
Supplemental Cash Flow Information
Actual cash payments for interest $ 471 $ --
Conversion of convertible notes payable to common stock $ 658,000 $ 89,000
Common stock issued in non-cash transactions $ 367,500 $ 215,000
The accompanying Notes to Financial Statements are an integral part of these financial statements.
F2-4
CDEX INC.
NOTES TO THE UNAUDITED FINANCIAL STATEMENTS
APRIL 30, 2005
1. General
The financial statements included herein have been prepared, without audit,
pursuant to the regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the
United States have been condensed or omitted pursuant to such rules and
regulations. These consolidated financial statements should be read in
conjunction with the audited financial statements and notes thereto contained in
CDEX Inc.'s Audited Financial Statements for the year ended October 31, 2004.
In the opinion of CDEX Inc.'s management, the accompanying unaudited financial
statements contain all adjustments (which consist only of normal recurring
adjustments) necessary to present fairly the financial position as of April 30,
2005, results of operations for the three and six month periods ended April 30,
2005 and April 30, 2004, and cash flows for the six month periods ended April
30, 2005 and April 30, 2004. Interim results are not necessarily indicative of
results for an entire year.
2. Basis of Presentation
USE OF ACCOUNTING ESTIMATES: The preparation of financial statements in
conformity with accounting principles generally accepted in the United States
requires management to make estimates and assumptions that affect the 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.
REVENUE: Revenue recognized represents amounts earned for products and services.
Revenue is recognized at contractually agreed upon rates in the fiscal period in
which products are delivered to customers and services are performed. Revenue is
not recognized for amounts not due pending customer acceptance of the product.
DEFERRED REVENUE: Deferred revenue represents amounts invoiced but not
recognized as revenue if collectibility is uncertain.
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 Statement of
Operations as development costs.
3. Stock Based Compensation
All stock based compensation is recorded at fair value. The Company has provided
restricted stock grants to employees and consultants as a significant element of
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.
For consulting agreements issued in 2003 and 2004, 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.
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, the fair value of the
services is determined based on the number of shares issued valued at the
weighted average value of the proceeds per share received from sales of common
stock to unaffiliated purchasers during compensation period.
F2-5
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. The Company issued additional consulting
agreements in 2004 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 in 2003 and 2004 awarded some of the common shares in advance of
when the service was performed. These amounts are shown as deferred stock
compensation in shareholder's deficit in the accompanying balance sheet. The
Company has also paid performance bonuses in common stock.
During the six months ended April 30, 2005, the Company granted 300,000 Class A
shares of common stock to employees and consultants at a fair value of $.57 in
the first fiscal quarter of 2005 and $.77 per share in second fiscal quarter of
2005. The fair value was determined using the weighted average value of the
proceeds per share received from sales of common stock and convertible
promissory notes to unaffiliated purchasers during the first and second fiscal
quarters of 2005. Total compensation expense related to stock awards for
employees and consultants was $416,629 and $630,961 for the three months ended
April 30, 2005 and 2004, respectively, and $794,105 and $1,322,866 for the six
months ended April 30, 2005 and 2004, respectively.
4. Equity Transactions
During the six months ended April 30, 2005, the Company received $89,000 in
funding from the sale of convertible promissory notes. The notes are convertible
into CDEX common stock at a price of approximately $0.30 per share or a total of
296,667 shares of common stock, and all of these investors elected to convert
after purchasing the note.
During the six months ended April 30, 2005, the Company received $640,500 in
funding from the sale of 790,750 shares of common stock, at an average price of
approximately $0.81 per share.
During the six months ended April 30, 2005, the Company received $714,000 in
funding from the exercise of warrants into 961,338 shares of common stock, at an
average price of approximately $.75 per share.
5. Subsequent Events
Subsequent to April 30, 2005, the Company has issued 1,466,980 shares of common
stock to employees and consultants for deferred compensation, 616,616 shares of
common stock for $493,000 in funding, and 229,002 shares of common stock from
the exercise of warrants for $188,750 in funding.
F2-6
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 $ 272
Printing, Filing and Engraving Expenses 1,000
Accounting Fees and Expenses 5,000
Legal Fees and Expenses 10,000
Blue Sky Qualification Fees and Expenses -
Miscellaneous 3,728
--------
TOTAL $20,000
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. EXCEPT AS OTHERWISE
INDICATED, ALL SHARES ISSUED WERE OF THE COMPANY'S CLASS A COMMON STOCK.
The Company issued its 9% Convertible Promissory Notes to Ms. Kitty Philips on
October 5 on July 8, 2003, in the amount of $15,000. These notes were issued in
reliance on Section 4(2) of the Securities Act and 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:
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:
II-2
Dependable Ranch Lenders LLC 300,000
Robert Stewart 80,000
Motta Investment Co. Ltd. 100,000
Dawn Guimond 50,000
Mari Stassi 50,000
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 issued the following securities pursuant to Rule 701 under the
Securities Act:
On December 11, 2002, the Company issued 1,075,900 shares of its common stock to
the following employees and consultants as compensation for engineering,
scientific research, project management, marketing and distribution, and
executive services rendered in 2001 valued at $0.75 per share:
Harold Cauthen 99,840
Tim Shriver 201,587
Thelma Johnson 50,687
Wade Poteet 202,013
Larry Spiers 57,320
Malcolm H. Philips 292,000
Michael Mergenthaler 172,453
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 and consultants as compensation for engineering,
scientific research, project management, marketing and distribution, and
executive 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
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:
II-3
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 and consultants as compensation for engineering,
scientific research, project management, marketing and distribution, and
executive services rendered valued at $0.82 per share:
Harold Cauthen 30,000
Tim Shriver 60,000
Wade Poteet 40,000
Michael Mergenthaler 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 technical development services rendered valued at
$0.82 per share. This stock has certain forfeiture provisions based on
performance milestones as well as risk of loss if employee leaves the Company.
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 marketing and technical development services rendered valued at
$0.82 per share. These shares are subject to a risk of forfeiture by the
employee in the event that the employee leaves the Company.
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 servicing on
CDEX's Medical Advisory Board services rendered valued at $0.81 per share. These
shares are subject to a risk of forfeiture by the employee in the event that the
employee leaves the Company.
On September 20, 2003, the Company issued 1,936,783 shares of its common stock
to the following employees as compensation for engineering, scientific research,
project management, marketing and distribution, and executive services rendered
valued at $0.81 per share:
II-4
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 consultants as compensation for services rendered valued at $0.81 per
share:
BD Liaw 40,000 George E. Dials 45,000 for services rendered as Members of CDEX's
Board of Directors; Greg Smith 35,000 for financial consulting services.
These shares are subject to a risk of forfeiture by the consultant in the event
that the consultant leaves the Company.
On October 25, 2003 the Company issued 25,000 shares of its common stock to
Peter S. Dobbs for financial consulting services rendered valued at $0.81 per
share.
On October 31, 2003 the Company issued 10,000 shares of its common stock to
Randall Jeter for web page development 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 financial services rendered valued at $0.81 per share.
On March 1, 2004, 20,000 shares of common stock to Dr. Darvie Fenison for
consulting services rendered.
In March 2004 the Company issued 100,000 shares of common stock to William Blair
as compensation for marketing and product management services. In May 2004, the
Company issued 5,000 shares of common stock to Carlos Alvarez as compensation
for engineering services, and 10,000 shares of common stock to Carey Starzinger
software development services. The Company received 50,000 shares of common
stock as part of a termination of services.
In June 2004, the company issued 65,333 shares of common stock to Peter Dobbs
for consulting services rendered.
In July 2004, the Company issued 20,000 shares of common stock to John A Knubel
as compensation for Services Agreement as a director, 30,000 shares of common
stock each to Warren Peabody and Carl Andognini as compensation for Services
Agreement for engineering review services.
The following securities were issued pursuant to the exemption provided by Rule
506 under Section 4(2) of the Securities Act in private offerings to accredited
investors (or their donees) only each of whom acknowledged having 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.
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:
II-5
Aspen Creek Farms 200,000
Domin Living Trust 50,000
Motta Investment Co. 50,000
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
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 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.
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 cash valued at $1.50 per share.
The spouse of the Chief Executive Officer purchased a convertible note of CDEX,
paying interest at 9%, in the amount of $100,000 on March 11, 2004. The note was
redeemed at face value for cash in April 2004.
From March through August 2004, the Company issued convertible promissory notes
in the original principal amount of $1,709,750 to the investors listed below.
The notes are convertible into the Company's common stock at a price of $0.75
per share. Each note was issued with warrants to purchase shares of the
Company's common stock equal to the number of shares of common stock issuable on
conversion of the note. The warrants are exercisable at $0.75 per share. None of
the warrants have been exercised. $959,750 of the convertible notes have been
converted into 1,279,672 shares common stock by the investors as follows:
Number of Shares
Name Received upon Conversion
- ---- ------------------------
Motta Investment 133,334
Scott Newby 33,334
Peter R Maina 53,333
Michael Pitts 48,000
Mari Stassi 33,334
Dawn Guimond 16,000
Jeffrey Blumfield 333,334
Scott Newby 233,334
Greg Thompson 39,000
Ben Lowell 10,000
Jeff Lowell 6,667
Shanala JAP Investment Services 66,667
Randy Paul 66,667
Peter Dobbs 40,000
Stan Pienta 33,334
Rick Sky 33,334
J. Michael McGarry 33,334
Nicholas Reynolds 66,667
II-6
In January 2004, the Company sold 20,000 shares of its common stock to Peter R.
Mania at a price of $1.25 per share.
In October and November 2004, the Company issued convertible promissory notes in
the original principal amount of $496,100 to the investors listed below. The
notes were convertible into the Company's common stock at a price of $0.30 per
share. The notes have been converted into 1,698,668 shares common stock by the
investors as follows:
Number of Shares
NAME Received upon Conversion
- ---- ------------------------
Christopher Sintetos 50,000
Stan Pienta 66,667
Gary Pleggenkuhle 50,000
George and Rose Mary Connley 166,667
Donald Bosworth 100,000
Mari Stassi 176,667
Kyban Limited Partnership 100,000
Dr. Kim Smith 100,000
Bruce Gourlay and Linda H. Mackey JTTEN 27,000
Bruce Kison 66,667
Jeffrey K. Brumfield 711,667
Frank Wren 83,333
Rick Sky 66,667
Robert Stewart 46,667
Dependable 83,333
McGarry 33,333
Shanala JAP Investment Services 66,667
In December 2004, the Company issued 220,050 shares of its common stock to the
investors listed below for aggregate proceeds of $203,000:
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Number of Shares
Name Purchased
- ------ ---------
Bruce Gourlay 29,500
Joseph Cerni 21,300
Michael Parsons 10,600
Greg Thompson 47,500
Milton Datsopoulos 111,150
In December 2004, the Company issued 10,000 shares of common stock to Eric
Sredsinski for consulting services rendered.
From January 2005 to date, the Company has issued 1,091,980 shares of common
stock to employees, 235,000 shares to outside board members, and 360,000 shares
to consultants for services rendered.
From January 2005 to date, the Company has issued 2,377,296 shares of common
stock to investors for $1,823,250 in proceeds at an average price of $0.77 per
share, as follows:
August, Nathan B. 23,157
August, Robert W. 29,475
Brumfield, Jeffrey 1,061,045
Dobbs, Peter A. 40,000
Griffith, Max Howard & Nadel 129,032
Guimond, Dawn M. 28,750
Kyban Limited Partnership (J. Motta) 133,334
Lowell, Ben 10,000
Lowell, Jeff 6,667
Maina, Peter R 53,334
McGarry, J. Michael 33,334
Murphy, Mary Rae 25,000
Newby, Scott 266,668
Paul, Randy 66,667
Pienta, Stan 33,334
Pitts, Michael 48,000
Prain, William 21,053
Schierlinger, Kurt A. 25,000
Shanala JAP Investment 66,667
Sky, Rick 61,112
Stassi, Mari 26,667
Thompson, Greg 39,000
TRS Enterprise LLC 66,666
Wren, Frank 83,334
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.
Each of these investors was either an existing investor in the Company or a
business or personal associate of management or consultants retained by the
Company. The Company did not solicit investors by means of any public
announcement, advertisement, telemarketing or other means of general public
solicitation. The issuance of securities to these investors is separate and
distinct from the general solicitation to be conducted by the prospectus forming
part of this registration statement primarily because of the following factors:
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SEPARATE PLANS OF FINANCING. The private placement and the public offering stem
from two distinct plans. The Company is conducting the registration for the
public offering on behalf of selling shareholders who hold restricted shares and
who would not otherwise be able to sell their shares under Rule 144. The
Company's purpose in registering the stock on behalf of its existing
shareholders is to place these shareholders on an equal footing with those who
hold unrestricted shares of the Company's common stock, if and when a trading
market develops for the common stock, and to reward them for their loyalty to
the Company. The Company did not contemplate issuing the securities to the
aforesaid investors at the time it filed the registration statement for the
public offering. It issued and sold these securities to meet certain funding
needs that arose subsequent to filing of the registration statement.
DISTINCT GENERAL PURPOSE. As noted above, the purpose of the public offering is
organizational and is intended to reward the long-standing holders of the
Company's restricted common stock for their loyalty to the Company and to put
them on an equal footing with the holders of unrestricted shares of the
Company's common stock. Neither the Company nor its affiliates will receive any
proceeds from the public offering (although certain family members of an officer
of the Company are listed as selling shareholders in this registration
statement). The purpose of the private placement was to raise new capital for
the Company to be used for development and marketing, primarily of its Valimed
line of products, some of which the Company is now marketing as discussed in the
prospectus forming a part of this registration statement.
CONSIDERATION RECEIVED. In the private placement, the consideration to be
received for the convertible notes and warrants of the Company (and the shares
issued upon conversion of the notes or exercise of the warrants) is cash. In the
public offering, the Company will receive no consideration because it is
registering the shares on behalf of selling shareholders who will receive all of
the proceeds from the sale.
No commissions or fees were paid in connection with any of these sales.
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 (1)
3.2 By-Laws of the Company adopted July 6, 2001 (1)
4.1 Specimen certificate for shares of Company common stock (1)
4.2 2002 Stock Incentive Plan (1)
4.3 2003 Stock Incentive Plan (1)
4.4 Form of Securities Purchase Agreement (1)
5.1 Opinion of Counsel re: Legality of Shares
10.1 Business Identity Program Agreement by and between the Company and
Source Office Suites, dated as of October 17, 2001 (1)
10.2 Lease Agreement by and between the Company and
Butterfield Center Limited Partnership (assigned from Dynamic
Management Resources), as amended on March 4, 2004 (1)
10.3 Assigned Consultant Services Agreement for Dr. Wade Poteet Restated as
Employment Agreement dated January 1, 2003 and amendments (1)
10.4 Assigned Consultant Services Agreement for Malcolm Philips Restated as
Employment Agreement dated January 1, 2002 and amendments (1)
10.5 Assigned Consultant Services Agreement for Timothy Shriver Restated as
Employment Agreement dated January 1, 2002 and amendments (1)
10.6 G. Dials Services Agreement dated August 3, 2001 (1)
10.7 Dr. BD Liaw Services Agreement dated October 1, 2001 (1)
10.8 Assigned Consultant Services Agreement for Michael Mergenthaler
Restated as Employment Agreement dated January 1, 2002 (1)
10.9 Agreement by and between the Company and the Department of the Navy (1)
10.10 Form of Non-Disclosure Agreement between the Company and each
significant employee (1)
10.11 Master Engineering Services Agreement by and between the Company and
Systems 2000, Inc. (1)
10.12 Master Engineering Services Agreement by and between the Company and
Catalina Tool & Mold (1)
10.13 Form of Employment Agreement (1)
10.14 Asset Purchase Agreement, dated as of August 4, 2001, by and between
the Company and Loch Harris, Inc. (1)
23.1 Consent of Independent auditors
24 Power of Attorney (included as part of Exhibit 5.1)
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(1) Incorporated by reference to the Company's Registration Statement on Form
SB-2, as amended, effective November 29, 2004.
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 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.
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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 August 22, 2005.
CDEX INC.
By: /s/ Malcolm H. Philips
--------------------------
Name: Malcolm H. Philips
Title: CEO/President
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., as such person's
true and lawful attorney-in-fact and agent, with full powers of substitution and
re-substitution, for such person in name, place and stead, to sign in any and
all amendments (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 attorney-in-fact and
agents, and every act and thing requisite and necessary to be done, as fully to
all intents and purposes as he might or could do in person, hereby ratifying and
confirming all that such attorneys-in-fact and agents, or any of them, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 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 August 22, 2005
Malcolm H. Philips Jr. Board of Directors (Principal
Financial and Accounting Officer)
/s/ Timothy Shriver Sr. Vice President Of Technical August 22, 2005
Timothy Shriver Operations/Director
/s/ George Dials Director August 22, 2005
George Dials
/s/ Dr. BD Liaw Director August 22, 2005
Dr. BD Liaw
/s/ John A. Knubel Director August 22, 2005
John A. Knubel
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