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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, 2011

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 9, 2011, 99,615,266 shares of the registrants Class A common stock, par value $.005 per share, were outstanding.



 
 

 

CDEX, INC.
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
     
Part I FINANCIAL INFORMATION
     
Item 1.  Financial Statements
 
     
                
Balance Sheets as of July 31, 2011 (unaudited) and
  October 31, 2010
1
     
 
Statements of Operations for the three months ended
 July 31, 2011 and 2010 (unaudited)
2
     
 
Statements of Operations for the nine months ended
 July 31, 2011 and 2010 (unaudited)
3
     
 
Statements of Cash Flow for the three months ended
  July 31, 2011 and 2010 (unaudited)
4
     
 
Statements of Cash Flow for the nine months ended
  July 31, 2011 and 2010 (unaudited)
5
     
 
Notes to Financial Statements (unaudited)
6
     
Item 2. Management's Discussion and Analysis of Financial Condition and
  Results of Operations
11
  
 
Item 4. Controls and Procedures 16
 
Part II  OTHER INFORMATION
 
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
16
  
 
ITEM 5. Other Information
16
  
 
ITEM 6. Exhibits
17
  
 
Signatures
18

 
i

 

PART I - FINANCIAL INFORMATION

ITEM 1. Financial Statements
CDEX INC.
BALANCE SHEETS

   
July 31, 2011
   
October 31. 2010
 
   
Unaudited
       
Assets
           
Current assets
           
Cash
  $ 130,255     $ 312,844  
Accounts receivable - net
    37,760       22,301  
Inventory - net
    193,126       212,585  
Deferred costs - current
    15,246       10,890  
Total current assets
    376,387       558,620  
Property and equipment, net
    81,810       45,948  
Patents, net
    64,700       70,418  
Other assets
    1,397       41,673  
Total assets
  $ 524,294     $ 716,659  
                 
Liabilities and stockholders' deficit
               
Current liabilities
               
Accounts payable and accrued expenses
  $ 471,726     $ 413,285  
Notes payable and accrued interest
    1,822,267       113,449  
Deferred revenue - current
    127,518       117,426  
Total current liabilities
    2,421,511       644,160  
                 
Deferred revenue - noncurrent
    238,133       395,658  
Notes payable and accrued interest - net
    -       3,067,473  
Total liabilities
    2,659,644       4,107,291  
                 
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, 2011 and October 31, 2010
    33       33  
Class A common stock - $.005 par value per share, 100,000,000
               
 shares authorized and 99,615,206 outstanding at July 31,
               
 2011 and 66,453,462 outstanding at October 31, 2010
    498,050       332,242  
Additional paid in capital
    29,822,303       27,644,626  
Accumulated deficit
    (32,455,736 )     (31,367,533 )
Total stockholders' deficit
    (2,135,350 )     (3,390,632 )
Total liabilities and stockholders' deficit
  $ 524,294     $ 716,659  
                 
The accompanying notes are an integral part of these financial statements.
 
 
 
1

 
 
CDEX INC.
STATEMENTS OF OPERATIONS
(unaudited)

   
For the three months ended
 
   
July 31
 
   
2011
   
2010
 
             
Revenue
  $ 231,693     $ 202,381  
                 
                 
Cost of revenue
    36,842       16,668  
                 
Gross profit
    194,851       185,713  
                 
                 
Operating Expenses
               
Selling, general and administrative
    211,394       508,683  
Research and development
    28,165       24,647  
Total operating expenses
    239,559       533,330  
                 
Loss from operations
    (44,708 )     (347,617 )
                 
Other expense
               
Interest expense
    (213,184 )     (189,697 )
                 
Total other (expense)
    (213,184 )     (189,697 )
                 
Net loss
  $ (257,892 )   $ (537,314 )
                 
Basic net loss
               
per common share:
  $ (0.00 )   $ (0.01 )
                 
Basic weighted average
               
common shares outstanding
    95,291,618       65,239,634  
                 
The accompanying notes are an integral part of these financial statements.
 

 
2

 

CDEX INC.
STATEMENTS OF OPERATIONS
(unaudited)

   
For the nine months ended
 
   
July 31
 
   
2011
   
2010
 
             
Revenue
  $ 452,882     $ 332,876  
                 
                 
Cost of revenue
    135,921       44,599  
                 
Gross profit
    316,961       288,277  
                 
                 
Operating Expenses
               
Selling, general and administrative
    648,854       938,547  
Research and development
    115,418       71,066  
Total operating expenses
    764,272       1,009,613  
                 
Loss from operations
    (447,311 )     (721,336 )
                 
Other (expense)
               
Interest expense
    (640,892 )     (530,865 )
                 
Total other (expense)
    (640,892 )     (530,865 )
                 
Net loss
  $ (1,088,203 )   $ (1,252,201 )
                 
Basic and diluted net loss
               
per common share:
  $ (0.01 )   $ (0.02 )
                 
Basic and diluted weighted average
               
common shares outstanding
    77,384,033       64,961,856  
                 
The accompanying notes are an integral part of these financial statements.
 

 
3

 


CDEX INC.
STATEMENTS OF CASH FLOWS
(unaudited)

   
For the three months ended
 
   
July 31
 
   
2011
   
2010
 
Cash Flows from Operating Activities
           
Net loss
  $ (257,892 )   $ (537,314 )
Adjustments to reconcile net loss to cash used by
               
operating activities
               
Depreciation and amortization
    7,885       (19,669 )
Loan discount amortization
    154,452       30,020  
Share-based compensation
    51,718       50,205  
Noncash interest expense
    56,232       187,198  
Changes in operating assets and liabilities
               
Accounts receivable
    (12,704 )     13,315  
Inventory
    535       (4,467 )
Deferred costs and other assets
    1,073       (2,923 )
Current liabilities
    35,764       215,344  
Net cash provided (used) by operating activities
    37,063       (68,291 )
                 
Cash Flows from Investing Activities
               
Purchase of equipment
    (16,273 )     -  
Net cash used by investing activities
    (16,273 )     -  
                 
Cash Flows from Financing Activities
               
Repayment of notes payable
    (7,176 )     -  
Net cash used by financing activities
    (7,176 )     -  
                 
Net increase (decrease) in cash
    13,614       (68,291 )
                 
Cash, beginning of the period
    116,641       128,469  
                 
Cash, end of the period
  $ 130,255     $ 60,178  
                 
Supplemental Cash Flow Information
               
Conversion of notes payable and accrued interest
               
to common stock
  $ 1,414,216     $ -  
Transfer from inventory to fixed assets
  $ -     $ 4,248  
                 
The accompanying notes are an integral part of these financial statements.
 

 
4

 

CDEX INC.
STATEMENTS OF CASH FLOWS
(unaudited)

   
For the nine months ended
 
   
July 31
 
   
2011
   
2010
 
Cash Flows from Operating Activities
           
Net loss
  $ (1,088,203 )   $ (1,252,201 )
Adjustments to reconcile net loss to cash used by
               
operating activities
               
Depreciation and amortization
    22,994       22,986  
Loan discount amortization
    407,958       30,020  
Share-based compensation
    262,287       55,280  
Adjustment for doubtful accounts
    -       (2,325 )
Negotiated settlements on account payable
    -       (31,637 )
Noncash interest expense
    227,934       500,846  
Changes in operating assets and liabilities
               
Accounts receivable
    (15,459 )     34,092  
Inventory
    19,459       38,525  
Deferred costs and other assets
    5,441       18,776  
Current liabilities
    (88,992 )     123,097  
Net cash used by operating activities
    (246,581 )     (462,541 )
                 
Cash Flows from Investing Activities
               
Purchase of equipment
    (16,273 )     -  
Net cash used by investing activities
    (16,273 )     -  
                 
Cash Flows from Financing Activities
               
Proceeds from issuance of convertible notes payable
    100,000       514,950  
Repayment of notes payable
    (19,735 )     -  
Net cash provided by financing activities
    80,265       514,950  
                 
Net increase (decrease) in cash
    (182,589 )     52,409  
                 
Cash, beginning of the period
    312,844       7,769  
                 
Cash, end of the period
  $ 130,255     $ 60,178  
                 
Supplemental Cash Flow Information
               
Conversion of notes payable and accrued interest
               
to common stock
  $ 1,985,462     $ 50,000  
Warrant incremental fair value on renegotiated debt
  $ 86,850     $ -  
Warrants issued for oncology agreement
  $ 8,886     $ -  
Conversion of accounts payable to notes payable
  $ -     $ 832,127  
Transfer from inventory to fixed assets
  $ -     $ 9,900  
Discount on refinanced notes
  $ -     $ 1,004,023  
                 
The accompanying notes are an integral part of these financial statements.
 

 
5

 
 
CDEX, Inc.
NOTES TO FINANCIAL STATEMENTS
July 31, 2011
(Unaudited)
 
1. Basis of Presentation

The accompanying interim unaudited condensed financial statements include the accounts of CDEX, Inc. as of July 31, 2011 (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, 2011, 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 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

In June 2011, the Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-05, “Comprehensive Income (Topic 220)” (ASU 2011-05). This newly issued accounting standard (1) eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity; (2) requires the consecutive presentation of the statement of net income and other comprehensive income; and (3) requires an entity to present reclassification adjustments on the face of the financial statements from other comprehensive income to net income. The amendments in this ASU do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income nor do the amendments affect how earnings per share is calculated or presented. This ASU is required to be applied retrospectively and is effective for fiscal years and interim periods within those years beginning after December 15, 2011, which for CDEX means November 1, 2012. As this accounting standard only requires enhanced disclosure, the adoption of this standard will not impact our financial position or results of operations.

2.            Accounts Receivable - Net

Accounts receivable are expected to be collected within one year. The allowance for doubtful accounts at July 31, 2011 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.
 
 
6

 
CDEX, Inc.
NOTES TO FINANCIAL STATEMENTS
July 31, 2011
(Unaudited)
 
Our accounts receivables consisted of the following:
 
   
July 31, 2011
   
October 31, 2010
 
             
Accounts receivable
  $ 40,570     $ 25,111  
                 
Less: Allowance for doubtful accounts
    2,810       2,810  
                 
Net accounts receivable
  $ 37,760     $ 22,301  
                 

 
3.            Inventory - Net

Our inventories consisted of the following:

   
July 31, 2011
   
October 31, 2010
 
             
Raw materials
  $ 126,627     $ 119,958  
                 
Finished goods
    74,590       101,465  
  Subtotal
    201,217       221,423  
Obsolescence reserve
    (8,091 )     (8,838 )
                 
Total inventory
  $ 193,126     $ 212,585  
                 
 
 
4.            Property and equipment, net
 
Our property and equipment consisted of the following:

   
July 31, 2011
   
October 31, 2010
 
             
Furniture, fixtures and leasehold improvements
  $ 2,931     $ 2,931  
Equipment
    717,710       677,803  
Leased equipment
    67,348       67,348  
                 
Total
    787,989       748,082  
                 
Less accumulated depreciation
    (706,179 )     (702,134 )
                 
Net property and equipment
  $ 81,810     $ 45,948  
                 

 
7

 
CDEX, Inc.
NOTES TO FINANCIAL STATEMENTS
July 31, 2011
(Unaudited)
 
5.            Patents, net

Our patents consisted of the following:

   
July 31, 2011
   
October 31, 2010
 
             
Patents
  $ 100,000     $ 100,000  
                 
Less accumulated amortization
    (35,300 )     (29,582 )
                 
Net patents
  $ 64,700     $ 70,418  
                 


6.            Accounts Payable and Accrued Expenses

Accounts payable and accrued expenses consisted of the following:

   
July 31, 2011
   
October 31, 2010
 
Legal fees
  $ 28,249     $ 31,508  
Deferred compensation
    163,986       118,986  
Accounts payable
    262,606       252,951  
Accrued payable to a distributor
    16,885       9,840  
                 
    $ 471,726     $ 413,285  


7.            Notes Payable

In May 2011, Gemini converted a portion of our 10% convertible notes of $480,000 principal and accrued interest into 9,600,000 shares of the Company’s common stock. Also in May 2011, entities controlled by Malcolm H. Philips, Jr. converted approximately $317,000 principal and accrued interest of our 10% convertible notes into 4,541,645 shares of the Company’s common stock. Additionally, other holders of our notes converted approximately $598,000 principal and interest of our 10% notes into 8,012,782 shares of the Company’s common stock. The notes were converted at the rates of $0.05 to $0.08 a share. In June 2011, a holder of our notes with a principal and accrued interest balance of approximately $20,000 converted the note into 248,680 shares of the Company’s common stock at the rate $0.08 a share.

There was no reportable note activity during the three months ended July 31, 2010.

8.            Share-Based Compensation

For the three months ended July 31, 2011, share-based compensation expense was approximately $52,000, approximately half of which is attributable to options and half attributable to stock grants.  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 prices were 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 nine months ended July 31, 2011 and 2010, share-based compensation expense was approximately $203,000 and $55,000, respectively.  There was no related income tax benefit recognized because our deferred tax assets are fully offset by a valuation allowance.

During the three months ended July 31, 2011, no options were granted or cancelled/expired.  As compensation for their participation on the Company’s Board, the Company issued 608,284 restricted stock awards to its independent directors which will vest over six months and have an aggregate grant date fair value of approximately $24,000.
 
 
8

 
CDEX, Inc.
NOTES TO FINANCIAL STATEMENTS
July 31, 2011
(Unaudited)
 
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 years 2011 and 2010, 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 nine months ended July 31,
 
2011
 
2010
Weighted average grant date fair value
$0.03
 
$0.08
Expected volatility
75%
 
75%
Expected dividends
0%
 
0%
Expected term (years)
 3 - 4.17
 
 1 - 5.75
Risk free rate
0.05 - 2.74%
 
0.30 - 3.14%
 
During the three months ended July 31, 2011, we granted a warrant for 100,000 shares to a consultant. The warrant granted contains an exercise price equal to the market value of our common stock on the date of grant. The warrant has a three-year term and vests 12 months after grant date.  The warrant granted in the third quarter of 2011 has an exercise price of $0.04 per share and was valued at $0.0194 as its per share grant date fair value based on an expected volatility of 75%, $0.00 in expected dividends, an expected term of three years and a risk free rate of return of 0.05%. During the nine months ended July 31, 2011, options to purchase 8,000,000 shares were granted, options to purchase 700,000 shares expired, stock grants of 1,806,506 were issued, stock grants of 260,600 were forfeited and a warrant for 100,000 shares was granted.

As of July 31, 2011, there was approximately $59,000 of unrecognized compensation costs related to unvested stock options, and approximately $27,000 of unrecognized compensation costs related to unvested restricted stock awards. These costs are expected to be recognized on a weighted-average basis over periods of less than one year for both restricted stock awards for unvested stock options.

9.            Stockholders' Equity

During the three months ended January 31, 2011 Gemini Master Fund Ltd. (“Gemini”) converted $42,860 of accrued interest on their note into 857,205 unrestricted shares of CDEX Class A common stock, or approximately $0.05 per share. The Company also issued 598,098 restricted stock awards to its independent directors which will vest over six months. Also, 260,600 shares of restricted stock awards were returned to the company and cancelled from Thomas Payne, who had resigned from the Board. Additionally, the Company issued 50,000 shares of restricted common stock, with a grant date fair value of $2,500, to a consultant for services performed.

During the three months ended April 30, 2011, two holders of our 10% convertible notes converted approximately $528,000 of accrued interest and principal into 6,855,506 shares of CDEX Class A common stock.  The Company also issued 550,204 restricted stock awards to its independent directors which will vest over six months. Additionally, the Company issued 1,500,000 shares of stock, with a grant date fair value of $58,000, to an independent contractor for services performed.

In May 2011, Gemini converted a portion of our 10% convertible notes of $480,000 principal and accrued interest into 9,600,000 shares of the Company’s common stock. Also in May 2011, entities controlled by Malcolm H. Philips, Jr. converted approximately $317,000 principal and accrued interest of our 10% convertible notes into 4,541,645 shares of the Company’s common stock. Additionally, other holders of our notes converted approximately $598,000 principal and interest of our 10% notes into 8,012,782 shares of the Company’s common stock. The notes were converted at the rates of $0.05 to $0.08 a share. In June 2011, a holder of our notes with a principal and accrued interest balance of approximately $20,000 converted the note into 248,680 shares of the Company’s common stock at the rate $0.08 a share.  Additionally, during the three months ended July 31, 2011, the Company issued 608,284 restricted stock awards to its independent directors compensation for their participation on the Company’s Board. This award will vest in six months.
 
 
9

 
CDEX, Inc.
NOTES TO FINANCIAL STATEMENTS
July 31, 2011
(Unaudited)
 
During the three months ended January 31, 2010, Gemini converted a portion of its note payable and accrued interest in the amount of $50,000 into 1,000,000 Class A Common Shares, or approximately $0.05 per share.  During the three months ended April 30, 2010, there were no transactions involving stock of the Company.  And, during the three months ended July 31, 2010, there were no transactions involving stock of the Company.

10.          Deferred Revenue
 
During the quarter ended July 31, 2011, we recognized revenue of approximately $19,000 on our distribution agreement regarding all products developed for application in the field of oncology.

11.          Commitments and Contingencies

Litigation

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 and the Company is not aware of any pending claims or assessments which may have a material adverse impact on the Company’s financial position or results of operations.

12.          Subsequent Events

At the Annual Stockholder’s meeting on August 18, 2011, the stockholders ratified the proposal to amend the Company’s’ Certificate of Incorporation increasing the number of Authorized Shares of Common Stock from 100,000,000 shares to 300,000,000 shares.

Also, in August 2011, the Company received an additional $50,000 under the Oncology Exclusive Distribution Agreement.

 
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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, 2010.

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", "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, 2010.  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

CDEX Inc. is a technology development company incorporated in the State of Nevada on July 6, 2001 with a corporate office and research and development facility in Tucson, Arizona.  Our Class A common stock is currently being traded on the OTCBB under the symbol "CEXI.OB." Our long term strategic plans focus on applying our patented and patents pending chemical detection technologies to develop products in various markets including the healthcare, security and brand protection markets, as addressed below:

 
1.
Healthcare - Validation of medications, training and quality assurance (e.g., validation of prescription and compounded medications to provide for patient safety, training of medical staff regarding compounding practices and detection of the diversion of narcotics and controlled substances);

 
2.
Security and Public Safety - Identification of substances of concern (e.g., explosives, illegal drugs and the detection of counterfeit drugs and medications to assist in the protection of the nation's drug supply); and

 
3.
Brand Protection - Detection of counterfeit or sub-par products for brand protection (e.g., inspection of incoming raw materials, outgoing final products and products in the distribution channel).

Virtually all CDEX product development has been based on applying the same underlying technologies. CDEX anticipates developing and/or acquiring other technologies in the future through partnering and investment. However, unless and until such time as we acquire or develop other technology assets, all of the Company's revenues will come from products developed from our current suite of patents and patents pending technologies, or through licensing arrangements with companies with related intellectual property.

 
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Our Technology

Our research and development efforts have centered on, but are not limited to, the use of excitation energy sources and patented/patents pending processing technology for substance verification, authentication and identification. When certain substances are exposed to excitation energy the substances produce photons at specific wavelengths that form unique spectral fingerprints, which can be used as signatures to validate and authenticate the substances.

CDEX creates reference signatures of substances of interest, such as selected narcotics, explosive compounds and medicines.  CDEX software validates a substance of interest by comparing its signature against the known reference signature of the substance of interest.

The CDEX advantage is that substances of interest are tested at the base levels and their signatures are compared to the known signatures of the substance of interest. This provides rapid validation and authentication that the substance is genuine. CDEX technology is not centered on packaging schemes such as holograms, inks, ingredient taggants or 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 2011 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: (i) human error in the compounding of medications, with an emphasis on, but not limited to high risk medications and soon to address multi-compounded cocktails, such as total parenteral nutrition and Oncology admixtures, through the fourth generation of the ValiMed device which will be called the G4; (ii) harmful counterfeit medications; and (iii) diversion of hospital narcotics.

 
2.
Security Market.
CDEX ID2™ Product Line – real time detection of specified illegal drugs. This product line currently comprises two instruments. Both of the devices are hand held models that detect methamphetamine. The ID2 Meth Scanner is a device that is used for the detection of methamphetamine in the home inspection and remediation industries, as well as housing authorities and the hotel industry. The Pocket ID2 is a pocket sized hand held device that currently detects visible and prosecutable quantities of methamphetamine, with other drugs such as cocaine, heroin, OxyContin and Ecstasy expected to come in the near future.  We are currently in the early stages of applying the ValiMed technology to a table top device that is expected to be portable and able to detect trace amounts of specified illegal drugs and explosives in virtually real time.  The products mentioned above will most likely be of interest to all areas of law enforcement, such as police and sheriff departments, U.S. border patrol, port authorities, the TSA, the FBI, all of the U.S. Military, and many other agencies.

INTELLECTUAL PROPERTY RIGHTS

We rely on non-disclosure agreements, patent, trade secret and copyright laws to protect the intellectual property that we have and plan to develop, but such laws may provide insufficient protection. Moreover, other companies may develop products that are similar or superior to ours or may copy or otherwise obtain and use our proprietary information without authorization. In addition, certain of our know-how and proprietary technology may not be patentable. Policing unauthorized use of our proprietary and other intellectual property rights could entail significant expense and could be difficult or impossible to do. In addition, third parties may bring claims of copyright or trademark infringement against CDEX or claim that certain of our processes or features violate a patent, that we have misappropriated their technology or formats or otherwise infringed upon their proprietary rights. Any claims of infringement, with or without merit, could be time consuming to defend, result in costly litigation, divert management’s attention, and/or require CDEX to enter into costly royalty or licensing arrangements to prevent further infringement, any of which could adversely affect our operating results.  The Company makes business decisions regarding which inventions to patent, and in what countries.
 
 
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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, 2011 AND 2010:

   
2011
   
2010
 
             
Revenue
  $ 231,693     $ 202,381  
Cost of revenue
    36,842       16,668  
Selling, general and administrative
    211,394       508,683  
Research and development
    28,165       24,647  
Other expense
    (213,184 )     (189,697 )
                 
Net loss
  $ (257,892 )   $ (537,314 )
 
 
REVENUE

Revenue was approximately $232,000 and $202,000 during the three months ended July 31, 2011 and 2010, respectively. The increase in revenue of approximately $30,000 resulted primarily from an increase in sales of the ID2 Meth Scanner sales in 2011, an increase in revenue from Pay Per Use clients, the accrual of revenue from our Oncology Exclusive Distribution Agreement and sales of our obsolete raw materials inventory partially offset by a reduction of revenues from the sales of our ValiMed product line, a reduction of our installation and training revenues as well as ValiMed maintenance revenue.

COST OF REVENUE

Cost of revenue was approximately $37,000 and $17,000 during the three months ended July 31, 2011 and 2010, respectively, an increase of approximately $20,000 which includes an increase of approximately $12,000 costs allocated to the Oncology Exclusive Distribution Agreement.

SELLING, GENERAL AND ADMINISTRATIVE

Selling, general and administrative expenses were approximately $211,000 during the three months ended July 31, 2011, compared with $509,000 during the three months ended July 31, 2010. The decrease of approximately $298,000 resulted primarily from decreases in consulting, professional and legal expenses of $165,000, which reflects the $191,000 recognition of a judgment against the Company in 2010, and non-cash share-based expense and employee compensation of $121,000.

RESEARCH AND DEVELOPMENT

Research and development costs were approximately $28,000 during the three months ended July 31, 2011, compared with $25,000 during the three months ended July 31, 2010, an increase of approximately $3,000 which is primarily attributable to the increased focus on the further development of our Pocket ID2 Meth Scanner as well as the development of our G4 ValiMed product.
 
 
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OTHER EXPENSE

Other expense for the three months ended July 31, 2011 was approximately $213,000 compared to $190,000 for the three months ended July 31, 2010.  The increase of approximately $23,000 in the third quarter of 2011 reflects primarily the increase of the amortization of discount associated with the GEMINI and other debt in the quarter of $42,000 partially offset by a decrease in interest expense of $19,000.

NET LOSS

The net loss was approximately $258,000 during the three months ended July 31, 2011, compared with a net loss of $537,000 during the three months ended July 31, 2010, due to the foregoing factors.


COMPARISON OF OPERATIONS FOR THE NINE MONTHS ENDED JULY 31, 2011 AND 2010:

   
2011
   
2010
 
             
Revenue
  $ 452,882     $ 332,876  
Cost of revenue
    135,921       44,599  
Selling, general and administrative
    648,854       938,547  
Research and development
    115,418       71,066  
Other expense
    (640,892 )     (530,865 )
                 
Net loss
  $ (1,088,203 )   $ (1,252,201 )


REVENUE

Revenue was approximately $453,000 and $333,000 during the nine months ended July 31, 2011 and 2010, respectively. The increase in revenue of approximately $120,000 resulted primarily from increased sales of the ID2 Meth Scanner, an increase in the accrual of revenue from our Oncology Exclusive Distribution Agreement and an increase in Pay Per Use and supplies revenue, partially offset by a reduction of revenues from the sales of our ValiMed product line, a reduction of our installation and training revenues as well as ValiMed maintenance revenue.

COST OF REVENUE

Cost of revenue was approximately $136,000 and $45,000 during the nine months ended July 31, 2011 and 2010, respectively, an increase of approximately $91,000 which includes a $44,000 increase in costs of our ID2 Meth Scanner as well as a $38,000 increase in costs allocated to the Oncology Exclusive Distribution Agreement.

SELLING, GENERAL AND ADMINISTRATIVE

Selling, general and administrative expenses were approximately $649,000 during the nine months ended July 31, 2011, compared with $939,000 during the nine months ended July 31, 2010. The decrease of approximately $290,000 resulted primarily from decreases in consulting, professional and legal expenses of approximately $257,000, which reflects the $191,000 recognition of a judgment against the Company in 2010, travel and marketing of $27,000 and general operating expenses of $23,000, partially offset by a $23,000 increase in non-cash share-based expense and employee compensation.

RESEARCH AND DEVELOPMENT

Research and development costs were approximately $115,000 during the nine months ended July 31, 2011, compared with $71,000 during the nine months ended July 31, 2010, which is reflective of an increase of approximately $29,000 in compensation and $15000 in materials primarily attributable the increased focus on the further development of our Pocket ID2 Meth Scanner and the development of our G4 ValiMed product.

 
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OTHER EXPENSE

Other expense for the nine months ended July 31, 2011 was approximately $641,000 compared to $531,000 for the nine months ended July 31, 2010.  The increase in of approximately $110,000 in the first three quarters of fiscal 2011 reflects primarily the increase of the amortization of discount associated with the GEMINI and other debt in the quarter of $60,000 as well as an increase in interest expense of $50,000.

NET LOSS

The net loss was approximately $1,088,000 during the nine months ended July 31, 2011, compared with a net loss of $1,252,000 during the nine months ended July 31, 2010, 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. 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.

As of July 31, 2011, we had negative working capital of approximately $2,135,000 including $130,000 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 borrowings, equity or debt financing. If we are not successful in raising the required additional capital, we may default in our payments to creditors which could result in our filing for 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 decrease in cash of approximately $183,000 during the nine months ended July 31, 2011. During first nine months of fiscal 2011, we used $247,000 of cash in operating activities. This amount is comprised primarily of our net loss of $1,088,000 and our return of $100,000 proceeds from the Oncology Exclusive Distribution Agreement partially offset by loan discount amortization of $408,000, non-cash share based compensation expense of $262,000, interest expense of $228,000, depreciation and amortization of $23,000 and a reduction of inventory of $19,000. As part of our total cash used during the first nine months of fiscal 2011, we used $16,000 in investing activities with the purchase of equipment and financing activities provided $80,000 comprised of $100,000 in proceeds from the issuance of convertible notes payable offset by the use of $20,000 in the repayment of non-interest bearing notes.
 
 
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ITEM 4.  Controls and Procedures

Disclosure Controls and Procedures.

The Company’s Chairman 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, 2011, 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 and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting.

There were no changes in the Company’s internal control over financial reporting during the Company’s fiscal quarter ended July 31, 2011 that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II - OTHER INFORMATION

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
 
In May 2011, Gemini converted a portion of our 10% convertible notes of $480,000 principal and accrued interest into 9,600,000 shares of the Company’s common stock. Also in May 2011, entities controlled by Malcolm H. Philips, Jr. converted approximately $317,000 principal and accrued interest of our 10% convertible notes into 4,541,645 shares of the Company’s common stock. Additionally, other holders of our notes converted approximately $598,000 principal and interest of our 10% notes into 8,012,782 shares of the Company’s common stock. The notes were converted at the rates of $0.05 to $0.08 a share. In June 2011, a holder of our notes with a principal and accrued interest balance of approximately $20,000 converted the note into 248,680 shares of the Company’s common stock at the rate $0.08 a share.  The note conversions were exempt from registration in reliance on Sections 4(2)and 3(a)(9) of the Securities Act of 1933, as amended, as they were not in connection with a public offering and the conversions were an exchange of securities with existing holders exclusively. No underwriters were used in the completion of these transactions and no commission or other remuneration was paid or given.  Additionally, during the three months ended July 31, 2011, the Company issued 608,284 restricted stock awards to its independent directors as compensation for their participation on the Company’s Board. This award will vest in six months.

ITEM 4. Removed and Reserved) 

ITEM 5. Other Information

 
(a)
Not Applicable
 
 
(b)
The Company has not adopted formal procedures for the nomination by stockholders of candidates to serve on its Board of Directors.

 
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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).

101.INS     
XBRL Instance Document
   
101.SCH
XBRL Schema Document
   
101.CAL
XBRL Calculation Linkbase Document
   
101.DEF
XBRL Definition Linkbase Document
   
101.LAB
XBRL Label Linkbase Document
   
101.PRE
XBRL Presentation Linkbase Document

 
17

 

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 12, 2011.


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
 
 
 
 
 
 
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