CDEX INC - FORM 10-Q - September 14, 2010

Attached files

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EX-32.2 - CDEX INC	ex32_2.htm
EX-32.1 - CDEX INC	ex32_1.htm
EX-31.2 - CDEX INC	ex31_2.htm
EX-31.1 - CDEX INC	ex31_1.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended July 31, 2010

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period From _____ to ____

Commission File Number 000-49845

CDEX INC.

(Exact Name of Registrant as Specified in Its Charter)

Nevada		52-2336836
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

4555 South Palo Verde Road, Suite 123, Tucson, Arizona		85714
(Address of Principal Executive Offices)		(Zip Code)

Registrant's Telephone Number, Including Area Code 520-745 5172

Indicate by check whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer: o Accelerated filer: o Non-accelerated filer: o Smaller reporting company: x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

On September 7, 2010, 65,239,634 shares of the registrants Class A common stock, par value $.005 per share, were outstanding.

Transitional Small Business Disclosure Format Yes o No x

CDEX, INC.
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS

Part I FINANCIAL INFORMATION

Item 1. Condensed Financial Statements

Condensed Balance Sheets as of July 31, 2010 (unaudited) and October 31, 2009			1

Condensed Statements of Operations for the three months ended July 31, 2010 and 2009			2

Condensed Statements of Operations for the nine months ended July 31, 2010 and 2009			3

Condensed Statements of Cash Flow for the three months ended July 31, 2010 and 2009			4

Condensed Statements of Cash Flow for the nine months ended July 31, 2010 and 2009			5

Notes to Condensed Financial Statements			6

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations			11

Item 4T. Controls and Procedures			14

Part II OTHER INFORMATION

ITEM 6. Exhibits			16

Signatures			17

PART I - FINANCIAL INFORMATION

ITEM 1. Condensed Financial Statements

CDEX INC.

CONDENSED BALANCE SHEETS


	July 31, 2010			October 31. 2009
	Unaudited
Assets
Current assets
Cash	$	60,178		$	7,769
Accounts receivable - net		40,993			72,760
Inventory - net		221,689			270,114
Prepaid expenses		12,923			66,719
Total current assets		335,783			417,362
Property and equipment, net		39,234			45,839
Patents, net		72,578			79,059
Other assets		43,238			38,238
Total assets	$	490,833		$	580,498

Liabilities and stockholders' deficit
Current liabilities
Accounts payable and accrued expenses	$	1,064,533		$	1,827,547
Notes payable and accrued interest		48,395			1,297,456
Advance payments		52,524			30,177

Total current liabilities		1,165,452			3,155,180
Notes payable and accrued interest, net of unamortized debt discount		2,278,164			235,203

Total liabilities		3,443,616			3,390,383

Commitments and Contingencies

Stockholders' deficit
Preferred stock - undesignated - $.005 par value per share,
350,000 shares authorized and none outstanding		-			-
Preferred stock - series A - $.005 par value per share,
150,000 shares authorized and 6,675 outstanding at
July 31, 2010 and October 31, 2009		33			33
Class A common stock - $.005 par value per share, 100,000,000
shares authorized and 65,239,634 outstanding at July 31,
2010 and 64,239,634 outstanding at October 31, 2009		326,202			321,202
Additional paid in capital		27,615,659			26,511,356
Accumulated deficit		(30,894,677	)		(29,642,476	)
Total stockholders' deficit		(2,952,783	)		(2,809,885	)
Total liabilities and stockholders' deficit	$	490,833		$	580,498

The accompanying notes are an integral part of these financial statements.

CDEX INC.

CONDENSED STATEMENTS OF OPERATIONS

(unaudited)

	For the three months ended
	July 31
	2010			2009

Revenue	$	202,381		$	44,388


Cost of revenue		16,668			12,910

Gross profit		185,713			31,478


Operating Expenses
Selling, general and administrative		508,683			229,891
Research and development		24,647			29,110
Total operating expenses		533,330			259,001

Loss from operations		(347,617	)		(227,523	)

Other expense
Interest expense		(189,697	)		(165,441	)

Total other (expense)		(189,697	)		(165,441	)

Net loss	$	(537,314	)	$	(392,964	)

Basic and diluted net loss
per common share:	$	(0.01	)	$	(0.01	)

Basic and diluted weighted average
common shares outstanding		65,239,634			64,209,634

The accompanying notes are an integral part of these financial statements.

CDEX INC.

CONDENSED STATEMENTS OF OPERATIONS

(unaudited)

	For the nine months ended
	July 31
	2010			2009

Revenue	$	332,876		$	297,775


Cost of revenue		44,599			71,938

Gross profit		288,277			225,837


Operating Expenses
Selling, general and administrative		938,547			1,160,983
Research and development		71,066			298,954
Total operating expenses		1,009,613			1,459,937

Loss from operations		(721,336	)		(1,234,100	)

Other (expense)
Interest expense		(530,865	)		(449,644	)

Total other (expense)		(530,865	)		(449,644	)

Net loss	$	(1,252,201	)	$	(1,683,744	)

Basic and diluted net loss
per common share:	$	(0.02	)	$	(0.03	)

Basic and diluted weighted average
common shares outstanding		64,961,856			62,268,246

The accompanying notes are an integral part of these financial statements.

CDEX INC.

CONDENSED STATEMENT OF CASH FLOWS

(unaudited)

	For the three months ended
	July 31
	2010			2009
Cash Flows from Operating Activities
Net loss	$	(537,314	)	$	(392,964	)
Adjustments to reconcile net loss to cash used by
operating activities
Depreciation and amortization		10,351			11,678
Noncash share based compensation		50,205			(13,568	)
Adjustment for doubtful accounts		9,200			32,081
Interest expense		187,198			165,441
Changes in operating assets and liabilities
Accounts receivable		4,115			16,690
Inventory		(4,467	)		6,893
Prepaid expenses and other assets		(2,923	)		-
Current liabilities		215,344			89,263
Net cash used by operating activities		(68,291	)		(84,486	)

Cash Flows from Investing Activities
		-			-
Net cash used by investing activities		-			-

Cash Flows from Financing Activities
Proceeds from issuance of convertible notes payable		-			105,601

Net cash provided by financing activities		-			105,601

Net increase (decrease) in cash		(68,291	)		21,115

Cash and cash equivalents, beginning of the period		128,469			1,443

Cash and cash equivalents, end of the period	$	60,178		$	22,558

Supplemental Cash Flow Information
Conversion of notes payable and accrued interest
Conversion of accounts payable to notes payable	$	832,127		$	-
Transfer from inventory to fixed assets	$	4,248		$	-
Discount on refinanced notes	$	1,004,023		$	-

The accompanying notes are an integral part of these financial statements.

CDEX INC.

CONDENSED STATEMENT OF CASH FLOWS

(unaudited)

	For the nine months ended
	July 31
	2010			2009
Cash Flows from Operating Activities
Net loss	$	(1,252,201	)	$	(1,683,744	)
Adjustments to reconcile net loss to cash used by
operating activities
Depreciation and amortization		53,006			31,681
Noncash share based compensation		55,280			120,411
Adjustment for doubtful accounts		6,875			32,081
Interest expense		500,846			449,644
Negotiated settlements on accounts payable		(31,637	)		-
Changes in operating assets and liabilities
Accounts receivable		24,892			153,788
Inventory		38,525			(11,249	)
Prepaid expenses and other assets		18,776			-
Current liabilities		123,097			400,023
Net cash used by operating activities		(462,541	)		(507,365	)

Cash Flows from Investing Activities
		-			-
Net cash used by investing activities		-			-

Cash Flows from Financing Activities
Proceeds from sale of common stock and warrants		-			250,000
Proceeds from issuance of convertible notes payable		514,950			253,550

Net cash provided by financing activities		514,950			503,550

Net increase (decrease) in cash		52,409			(3,815	)

Cash and cash equivalents, beginning of the period		7,769			26,373

Cash and cash equivalents, end of the period	$	60,178		$	22,558

Supplemental Cash Flow Information
Conversion of notes payable and accrued interest
to common stock	$	50,000		$	209,498
Conversion of accounts payable to notes payable	$	832,127		$	-
Transfer from inventory to fixed assets	$	9,900		$	15,857
Discount on refinanced notes	$	1,004,023		$	-

The accompanying notes are an integral part of these financial statements.

CDEX, Inc.

NOTES TO CONDENSED FINANCIAL STATEMENTS

JULY 31, 2010

(Unaudited)

1. Basis of Presentation

The accompanying interim unaudited condensed financial statements include the accounts of CDEX, Inc. as of July 31, 2010 (collectively, “CDEX”, “we”, “our”, “us” or the “Company”). In the opinion of management, all adjustments (which include normal recurring adjustments) necessary for a fair presentation of the results for the interim periods presented have been made. The results for the three-month and nine-month periods ended July 31, 2010, may not be indicative of the results for the entire year. The interim unaudited condensed financial statements should be read in conjunction with the company's audited financial statements contained in our Annual Report on Form 10-K. Our lack of earnings history and continued future losses could adversely affect our financial position and prevent us from fulfilling our contractual obligations, and if we are unable to generate funds or obtain funds on acceptable terms, we may not be able to continue operations.

The following unaudited condensed financial statements are presented pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and note disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to those rules and regulations, although the company believes that the disclosures made are adequate to make the information not misleading.

Use of Estimates

The preparation of financial statements in conformity with United States generally accepted accounting principles, which requires management to make estimates, judgments and assumptions that affect the amounts reported in the financial statements and accompanying notes. Management bases its assumptions on historical experiences and on various other assumptions that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. In addition, management considers the basis and methodology used in developing and selecting these estimates, the trends in and amounts of these estimates, specific matters affecting the amount of and changes in these estimates, and any other relevant matters related to these estimates, including significant issues concerning accounting principles and financial statement presentation. Such estimates and assumptions could change in the future as more information becomes known which could impact the amounts reported and disclosed herein. Significant estimates include revenue recognition, the valuation of inventory and stock-based compensation expense.

Recent Accounting Pronouncements

The Financial Accounting Standards Board (“FASB”) has issued Accounting Standards Update (“ASU”) No. 2010-12, "Accounting for Certain Tax Effects of the 2010 Health Care Reform Acts" ("ASU 2010-12"), which clarifies the effect, if any, that the different signing dates of the Patient Protection and Affordable Care Act (signed March 23, 2010) and the Health Care and Education Reconciliation Act of 2010 (signed March 30, 2010). ASU 2010-12 was effective for us upon issuance. The adoption of the standard is not expected to have a significant impact on the company’s financial statements.

The FASB has issued ASU 2010-13, “Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in Which the Underlying Equity Security Trades”. ASU 2010-13 clarifies that a share-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entity’s equity securities trades should not be considered to contain a condition that is not a market, performance, or service condition. Therefore, such an award should not be classified as a liability if it otherwise qualifies as equity. ASU 2010-13 will be effective for us beginning February 2011. The adoption of the standard is not expected to have a significant impact on the company’s financial statements.

CDEX, Inc.

NOTES TO CONDENSED FINANCIAL STATEMENTS

JULY 31, 2010

(Unaudited)

2. Accounts Receivable - Net

Accounts receivable are expected to be collected within one year. The allowance for doubtful accounts at July 31, 2010 represents an estimate for potentially uncollectible accounts receivable customers which is based upon a review of the individual accounts outstanding and the Company's prior history of uncollectible accounts receivable.

Our accounts receivables consisted of the following:

	July 31, 2010		October 31, 2009

Accounts receivable	$	53,003	$	106,860

Less: Allowance for doubtful accounts		12,010		34,100

Net accounts receivable	$	40,993	$	72,760

2. Inventory - Net

Our inventories consisted of the following:

	July 31, 2010			October 31, 2009

Raw materials	$	124,815		$	152,586

Finished goods		105,712			126,366
Subtotal		230,527			278,952
Obsolescence reserve		(8,838	)		(8,838	)

Total inventory	$	221,689		$	270,114

3. Property and equipment, net

Our property and equipment consisted of the following:

	July 31, 2010			October 31, 2009

Furniture, fixtures and leasehold improvements	$	2,931		$	2,931
Equipment		665,353			659,700
Leased equipment		67,348			63,101

Total		735,632			725,732

Less accumulated depreciation		(696,398	)		(679,893	)

Net property and equipment	$	39,234		$	45,839

CDEX, Inc.

NOTES TO CONDENSED FINANCIAL STATEMENTS

JULY 31, 2010

(Unaudited)

4. Patents, net

Our patents consisted of the following:

	July 31, 2010			October 31, 2009

Patents	$	100,000		$	100,000

Less accumulated amortization		(27,422	)		(20,941	)

Net patents	$	72,578		$	79,059

5. Accounts Payable and Accrued Expenses

Accounts payable and accrued expenses consisted of the following:

	July 31, 2010		October 31, 2009
Legal fees	$	27,801	$	581,777
Deferred compensation		589,259		589,259
Accounts payable and accrued expenses		440,913		384,473
Accrued payable to a distributor		6,560		272,038

	$	1,064,533	$	1,827,547

6. Notes Payable

There was no reportable note activity during the three months ended July 31, 2010. However, in August and September 2010, employees and former employees who are owed approximately $470,000 of deferred compensation, out of a total owed of $589,000, agreed to have their balances rolled into convertible notes payables similar to that issued to Gemini. This total includes $267,000 owed to Malcolm Philips, our former CEO, and $28,000 owed to our CFO. The notes will bear interest at 10% and will be convertible into Class A common stock at the rate of $0.08 per share. The notes mature on February 1, 2012, but have accelerated payment provisions and a contingent security interest, if certain financial milestones are not met.

During the three months ended July 31, 2009, the Company received approximately $105,000 in proceeds under convertible notes with existing shareholders. The convertible notes pay interest at 12% per year, are payable two years from date of issuance, and are convertible at the option of the note holders into common stock and warrants. The price for the stock and warrants in the conversion of these notes will be equal to the corresponding conversion price provided to Gemini, in the Gemini/ CDEX 12% Senior Convertible Note or Common Stock Purchase Warrant, both originally issued on June 25, 2008, or the best terms given to any investor during the 12 months following the note date. However, the note holders shall only receive the best terms that do not result in a resetting of conversion or warrant prices or a penalty associated with the Gemini note.

7. Share-Based Compensation

For the three months ended July 31, 2010, share-based compensation expense was approximately $50,000. Of this, $38,000 was primarily due incremental fair values of options to employees, active consultants and to directors whose exercise price was modified to a more current price of $0.05 a share and the lives of the options were redefined as ten years from date of grant for employees and five years from date of grant for active consultants and directors. For the three months ended July 31, 2009, share-based compensation expense reflected a net reversal of expenses of approximately $14,000. The net reversal of expense is primarily the result of reversing previously recognized expenses on unvested options of those individuals included in the May 2009 staff reduction. For the nine months ended July 31, 2010 and 2009, share-based compensation expense totaled $55,000 and $120,000, respectively.

CDEX, Inc.

NOTES TO CONDENSED FINANCIAL STATEMENTS

JULY 31, 2010

(Unaudited)

There were no related income tax benefits recognized because our deferred tax assets are fully offset by a valuation allowance.

During the three months ended July 31, 2010, we granted option for 800,000 shares to employees and a consultant. All options granted contain exercise prices equal to the market value of our common stock on the dates of grant. The option to the consultant for 250,000 shares vested on grant date and has a five-year term. Of the remaining 550,000 options granted, 250,000 were granted to our President and 100,000 were granted to our CFO. Both options have a ten-year term and vest 50% upon grant and 50% over the 13th to 24th months. Options to other employees totaled 200,000 shares and predominately vested 50% upon grant and 50% over the 13th to 24th months with terms ranging from two to ten years. The options granted in the third quarter of 2010 have a weighted average exercise price of $0.05 per share. A total of 1,358,000 options were cancelled or expired in the quarter with a weighted average exercise price of approximately $0.12. The large number of expired options is primarily due to performance options that did not vest because the performance milestone was not met in that the Company did not have positive operating cash flows for two quarters, and the options therefore expired.

During the three months ended July 31, 2009, we granted 1,100,000 shares underlying stock options to employees. All of these granted options represent performance options which were originally issued in the fourth quarter of 2008 and modified with new terms in the third quarter of 2009. The performance options were issued pursuant to an employee option incentive program covering all employees, based on company performance. For this modification, 40% of the performance options would vest when the Company has positive cash flow from operations for one fiscal quarter and the remaining 60% of the performance options would vest when the company has positive operating cash flow for two quarters. If the Company does not accomplish both milestones by July 31, 2010, any unvested part of the bonus options will lapse. These granted options contain exercise prices equal to the market value of our common stock on the date of the modification. The options granted in the third quarter of 2009 have a weighted average exercise price of $0.09 per share. Total cancelled/forfeited options for the quarter was approximately 2,000,000 which includes 800,000 of the modified options mentioned above and 1,200,000 additional options, all of which had a weighted average exercise price of $0.13.

We determine the fair value of share-based awards at their grant date, using a Black-Scholes Option Pricing Model applying the assumptions in the following table. For options granted in fiscal year 2010 and 2009, we use the simplified method of estimating expected terms as described in Staff Accounting Bulletin No. 107. Actual compensation, if any, ultimately realized by option recipients may differ significantly from the amount estimated using an option valuation model.

	For the three months ended July 31,
	2010	2009
Weighted average grant date fair value	$0.09	$0.08
Expected volatility	75%	75%
Expected dividends	0%	0%
Expected term (years)	1 - 5.75	1 - 3.25
Risk free rate	0.03% - 3.14%	0.51% - 4.19%

As of July 31, 2010, approximately $35,000 of total unrecognized compensation cost related to stock options is expected to be recognized over a weighted average period of .47 years.

8. Stockholders' Equity

During the three months ended July 31, 2010 and 2009, there were no transactions involving stock of the Company.

CDEX, Inc.

NOTES TO CONDENSED FINANCIAL STATEMENTS

JULY 31, 2010

(Unaudited)

9. Commitments and Contingencies

Litigation

We may from time to time be involved in legal proceedings arising from the normal course of business. In June 2008, a lawsuit was filed by Hutchinson & Steffen in a Nevada District Court, Clark County, against the Company, alleging, among other things, breach of contract. On July 2, 2008, Hutchinson & Steffen and the Company entered into a settlement agreement, staying the legal proceedings pending completion of the terms of the settlement agreement. As of the date of this report, we have not received notice of any other legal proceedings regarding Hutchinson & Steffen.

On July 20, 2009, a former employee filed a complaint with the Attorney General of Arizona that CDEX discriminated against that employee because he did not attend a bible study held by some employees. As no amount of potential loss is both probable and estimable, no accrual has been made in the financial statements as of July 31, 2010 and October 31, 2009. In the opinion of management, this claim is without merit and the Company will be successful in its defense of this complaint. In May 2010, the Company received a notice from the office of the Attorney General of Arizona that the case has been dismissed.

In August 2009, four former employees and one former contractor (“Claimants”) filed demands for arbitration with the American Arbitration Association related to deferred wages of approximately $89,000 and to the ownership of certain equipment. Management has accrued a provision for possible settlement of this dispute in the financial statements as of July 31, 2010 and October 31, 2009. A decision was issued by the Arbitrator which the Company received on June 11, 2010. The decision awarded the Claimants three times their deferred wages, plus attorney fees, totaling approximately $270,000. In September 2010, the Company settled with the Claimants where approximately $50,000 of the judgment was converted into two-year non-interest bearing notes, with monthly payouts, and where approximately $190,000 of the judgment was converted into 10% convertible notes due February 2012 similar to the Gemini note from the February Financing. Additionally, the Claimants’ attorney costs and fees were paid and the disputed equipment was returned.

Due to the lack of liquidity, the Company is in arrears on a number of its financial obligations. To date, most creditors have been willing to renegotiate the obligations as they become due or forestall any recourse they may have to collect their debts; however, we have received a demand letter from one of our creditors. Should any of these other creditors pursue recourse; the Company may not be able to continue as a going concern.

In addition, we may from time to time be involved in legal proceedings arising from the normal course of business. As of the date of this report, we have not received notice of any other legal proceedings.

10. Subsequent Events

On August 30, 2010, the we entered into an Exclusive Distribution Agreement (“Agreement”) effective August 20, 2010, with a number of signatories including PEMCO, LLC and Messrs. Peter Maina, Thomas Payne (a Director of the Company), Robert Stewart, and Scott Newby (“the “Signatories”). The Agreement grants an exclusive United States distribution rights for all products developed by CDEX for application in the field of Oncology. The term of the Agreement is five (5) years from the Effective Date of the Agreement. We are opening the financing tranche for $1.5 million, of which we have received $335,000, we will continue to raise money under this agreement. The Agreement grants the Signatories detachable three-year warrants for a total of 670,000 shares at an exercise price of $0.25.

ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operation

Our discussion and analysis of the financial condition and results of operations should be read in conjunction with the unaudited consolidated financial statements and the related disclosures included elsewhere herein and in Management’s Discussion and Analysis of Financial Condition and Results of Operations included as part of our Annual Report on Form 10-K for the fiscal year ended October 31, 2009.

Cautionary Note Regarding Forward-Looking Statements

Certain statements in this Quarterly Report on Form 10-Q constitute forward-looking statements within the meaning of the securities laws. Forward-looking statements include all statements that do not relate solely to the historical or current facts, and can be identified by the use of forward looking words such as "may", "believe", "will", "expect", "expected", "project", "anticipate", "anticipated”, “estimates", "plans", "strategy", "target", "prospects", ”should”, “intends”, “estimates” "continue" and other words of similar meaning. These forward looking statements are based on the current plans and expectations of our management and are subject to a number of uncertainties and risks that could significantly affect our current plans and expectations, as well as future results of operations and financial condition and may cause our actual results, performances or achievements to be materially different from any future results, performances or achievements expressed or implied by such forward-looking statements. Important factors that could cause our actual results to differ materially from our expectations are described as Risk Factors in our Annual Report on Form 10-K for the fiscal year ended October 31, 2009. In making these forward-looking statements, we claim the protection of the safe-harbor for forward-looking statements contained in the Private Securities Reform Act of 1995. Although we believe that the expectations reflected in such forward-looking statements are reasonable, there can be no assurance that such expectations will prove to have been correct. We do not assume any obligation to update these forward-looking statements to reflect actual results, changes in assumptions, or changes in other factors affecting such forward-looking statements.

OVERVIEW

The CDEX advantage is that substances of interest are tested at the base levels and their signatures are compared to the known signatures of the substance of interest. This provides rapid validation and authentication that the substance is genuine. CDEX technology is not centered on packaging schemes such as holograms, inks, ingredient taggants, or RFID tags, all of which can be defeated by determined counterfeiters.

Products

We are currently focusing our resources on marketing and improving real-time (within seconds) chemical detection products using proprietary, patented and patents pending technologies. Our primary area of focus in 2010 and beyond continues to be products in the medical and security markets with our principal product lines noted below:

1. Healthcare Market. ValiMed™ Medication Validation System (MVS) Product Line - Validation of substances, training and quality assurance. This product line, with stand-alone units and ancillary products providing a recurring revenue stream, is installed in a number of hospitals and addresses three problem areas in the healthcare market, human error in the compounding of high risk medications, harmful counterfeit medications and diversion of hospital narcotics.

2. Security Market. CDEX ID2™ Product Line – real time detection of specified illegal drugs. This product line contains both hand-held and table top devices that detect trace amounts of specified illegal drugs in virtually real time. Currently, the products detect methamphetamine with cocaine and heroin to be added.

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' 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' proprietary and other intellectual property rights could entail significant expense and could be difficult or impossible to do. In addition, third parties may bring claims of copyright or trademark infringement against CDEX or claim that certain of our processes or features violate a patent, that we have misappropriated their technology or formats or otherwise infringed upon their proprietary rights. Any claims of infringement, with or without merit, could be time consuming to defend, result in costly litigation, divert management 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. The Company makes business decisions regarding which inventions to patent, and in what countries.

Our competitive position also depends upon unpatented trade secrets. Trade secrets are difficult to protect. Our competitors may independently develop proprietary information and techniques that are substantially equivalent to ours or otherwise gain access to our trade secrets, such as through unauthorized or inadvertent disclosure of our trade secrets.

RESULTS OF OPERATIONS

COMPARISON OF OPERATIONS FOR THE THREE MONTHS ENDED JULY 31, 2010 AND 2009:

	2010			2009

Revenue	$	202,381		$	44,388
Cost of revenue		16,668			12,910
Selling, general and administrative		508,683			229,891
Research and development		24,647			29,110
Other expense		(189,697	)		(165,441	)


Net loss	$	(537,314	)	$	(392,964	)

REVENUE

Revenue was approximately $202,000 and $44,000 during the three months ended July 31, 2010 and 2009, respectively. The increase in revenue of $158,000 resulted primarily from a greater number of installations of ValiMed™ units and signatures in 2010 and increases in pay per use revenue, and maintenance.

COST OF REVENUE

Cost of revenue was approximately $17,000 and $13,000 during the three months ended July 31, 2010 and 2009, respectively, an increase of $4,000 which is net of a $13,000 inventory adjustment and, overall, reflects a lower cost of sales rate on our signature, pay per use and maintenance revenue lines.

SELLING, GENERAL AND ADMINISTRATIVE

Selling, general and administrative expenses were approximately $509,000 during three months ended July 31, 2010, compared with $230,000 during the three months ended July 31, 2009. The increase of approximately $279,000 resulted from increases in consulting and legal of $195,000 which includes the accrual for the judgment against the Company and payroll, non-cash share-based expense and employee benefit programs of $98,000 and travel and marketing of $13,000, offset by a decrease in bad debt expense of $23,000.

RESEARCH AND DEVELOPMENT

Research and development costs were approximately $25,000 during the three months ended July 31, 2010, compared with $29,000 during the three months ended July 31, 2009, a $4,000 reduction.

OTHER EXPENSE

Other expense for the three months ended July 31, 2010 was approximately $190,000 compared to $165,000 for the three months ended July 31, 2009. The increase in interest expense of approximately $25,000 in the first quarter of 2010 reflects primarily the increase of the amortization of discount associated with the GEMINI and other debt in the quarter.

NET LOSS

The net loss was approximately $537,000 during the three months ended July 31, 2010, compared with a net loss of $393,000 during the three months ended July 31, 2009, due to the foregoing factors.

COMPARISON OF OPERATIONS FOR THE NINE MONTHS ENDED JULY 31, 2010 AND 2009:

	2010			2009

Revenue	$	332,876		$	297,775
Cost of revenue		44,599			71,938
Selling, general and administrative		938,547			1,160,983
Research and development		71,066			298,954
Other expense		(530,865	)		(449,644	)


Net loss	$	(1,252,201	)	$	(1,683,744	)

REVENUE

Revenue was approximately $332,000 and $298,000 during the nine months ended July 31, 2010 and 2009, respectively. The increase in revenue of $35,000 resulted primarily from higher pay per use revenue, installation and training revenue, maintenance income and customer supplies offset by lower sales of our ID2 meth scanner product in 2010.

COST OF REVENUE

Cost of revenue was approximately $45,000 and $72,000 during the nine months ended July 31, 2010 and 2009, respectively, a decrease of $27,000 which includes a $13,000 inventory adjustment and reflects a significantly lower cost of sales rate from our pay per use and installation and training revenue lines.

SELLING, GENERAL AND ADMINISTRATIVE

Selling, general and administrative expenses were approximately $939,000 during nine months ended July 31, 2010, compared with $1,161,000 during the nine months ended July 31, 2009. The decrease of approximately $222,000 resulted from decreases in payroll, non-cash share-based expense and employee benefit programs of $309,000, which reflects the May 2009 staff reduction and decreases in general expenses of $71,000, and rent and office of $22,000, offset by increases in consulting and legal of $169,000 which includes the accrual for the judgment against the Company.

RESEARCH AND DEVELOPMENT

Research and development costs were approximately $71,000 during the nine months ended July 31, 2010, compared with $299,000 during the nine months ended July 31, 2009. This decrease of $228,000 resulted primarily from decreases in payroll and benefits of approximately $203,000 and expenditures for legal and consulting of $43,000, partially offset by an increase in materials of $18,000. The reductions in payroll and benefits, and expenditures for consultants reflect the May 2009 staff reduction as well as the re-allocation of our staff resources to the areas of sales, product servicing, warranty and customer support.

OTHER EXPENSE

Other expense for the nine months ended July 31, 2010 was approximately $531,000 compared to $450,000 for the nine months ended July 31, 2009. The increase in interest expense of approximately $57,000 in the first nine months of 2010 reflects primarily the increase of the amortization of discount associated with the GEMINI and other debt.

NET LOSS

The net loss was approximately $1,252,000 during the nine months ended July 31, 2010, compared with a net loss of $1,684,000 during the nine months ended July 31, 2009, due to the foregoing factors.

LIQUIDITY AND CAPITAL RESOURCES

The accompanying financial statements have been prepared assuming the Company will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. To date, CDEX has incurred substantial losses, and will require financing for operating expense, working capital and other corporate purposes. We anticipate that we will require financing on an ongoing basis unless and until we are able to support our operating activities with additional revenues.

As of July 31, 2010, we had negative working capital of approximately $2,953,000 including $60,000 of cash. We anticipate the need to raise additional capital or increase revenue over the next twelve months to satisfy our current budgetary projections. Our continued operations, as well as the implementation of our business plan, therefore will depend upon our ability to increase product sales, raise additional funds through bank borrowings, equity or debt financing. If we are not successful in raising the required additional capital, we may default in our payments to creditors and could result our filing of bankruptcy protection. The Company is actively seeking new investments from its current accredited investors as well as new accredited investors. There is no assurance that we will succeed in our fund raising efforts. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

We had a net increase in cash and cash equivalents of approximately $63,000 during the nine months ended July 31, 2010. During first nine months of fiscal 2010, we used $460,000 of cash in operating activities. This amount is comprised primarily of our net loss of $1,252,000 and our negotiated settlements on accounts payable of $32,000 offset by interest expense of $501,000, an increase of our current liabilities of $123,000, non-cash share based compensation expense of $55,000, depreciation and amortization of $53,000, reduction of inventory of $40,000, a decrease in accounts receivable of $25,000 and a decrease in prepaid expenses and other assets of $19,000. As part of our total cash use during the first nine months of fiscal 2010, we had no investing activities but we did have $515,000 provided from issuance of convertible notes payable. These notes bear interest from 10% to 12% and have maturities up to two years.

ITEM 4T. Controls and Procedures

Disclosure Controls and Procedures.

The Company’s President and Chief Executive Officer and its Vice President of Finance and Chief Financial Officer, after evaluating the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of July 31, 2010, have concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act, as amended, is recorded, processed and summarized and reported on a timely basis and is accumulated and communicated to the Company’s management, including its principal executive officers as appropriate, to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting.

In connection with their evaluation, the certifying officers identified no changes in the Company’s internal control over financial reporting during the Company’s fiscal quarter ended July 31, 2010 that materially affected or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II - OTHER INFORMATION

ITEM 6. Exhibits

31.1	Certification of Chief Executive Officer.

31.2	Certification of Chief Financial Officer.

32.1	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Executive Officer).

32.2	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Financial Officer).

SIGNATURES

In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on September 14, 2010.

CDEX INC.


By:	/s/ Jeff Brumfield
	Jeff Brumfield
	Chief Executive Officer


By:	/s/ Stephen A. McCommon
	Stephen A. McCommon
	Chief Financial Officer and
	Vice President of Finance

CDEX INC - FORM 10-Q - September 14, 2010

Attached files

CDEX INC Reports