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EX-31.1 - EXHIBIT 31.1 - CDEX INCex31_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 April 30, 2012

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 x 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 June 11, 2012, 109,996,717 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 April 30, 2012 (unaudited) and
  October 31, 2011
1
     
 
Statements of Operations for the three months ended
 April 30, 2012 and 2011 (unaudited)
2
     
 
Statements of Operations for the six months ended
 April 30, 2012 and 2011 (unaudited)
3
     
 
Statements of Cash Flow for the six months ended
  April 30, 2012 and 2011 (unaudited)
4
     
 
Notes to Financial Statements (unaudited)
5
     
ITEM 2.   Management's Discussion and Analysis of Financial Condition and
Results of Operations
11
   
 
ITEM 4. Controls and Procedures 17
     
Part II  OTHER INFORMATION
 
ITEM 5. Other Information 18
   
ITEM 6.  Exhibits 18
     
Signatures
19
 
 
ii

 
 
Note Regarding Chapter 11 Bankruptcy Filing
 
On February 10, 2012, CDEX INC. filed a voluntary petition in the United States Bankruptcy Court for the District of Arizona (the “Bankruptcy Court”) seeking relief under the provisions of Chapter 11 of the Bankruptcy Code (the “Bankruptcy Code”).  The filing, case no. 4:12-bk-02402-JMM was made by the Company (“Debtor”). As of the date of this filing, we continue to operate our businesses as debtors-in-possession (“DIP”) under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code.
 
These events create uncertainty relating to our ability to continue as a going concern. The accompanying financial statements do not reflect any adjustments relating to the recoverability of assets and classification of liabilities that might result from the outcome of these uncertainties. Our financial statements as of April 30, 2012, do not give effect to any adjustments to the carrying value of assets and liabilities that may become necessary as a consequence of the bankruptcy case.
 
Our financial statements have been prepared on a going-concern basis, which contemplates continuity of operations, realization of assets and liquidation of liabilities in the ordinary course of business. However, as a result of our bankruptcy filing, such realization of assets and liquidation of liabilities are subject to uncertainty. While operating as debtors in possession under the protection of Chapter 11 of the Bankruptcy Code, and subject to Bankruptcy Court approval or otherwise as permitted in the ordinary course of business, we may sell or otherwise dispose of assets and liquidate or settle liabilities for amounts other than those reflected in the condensed consolidated financial statements.

 
 
 
 
 
 
ii

 

PART I - FINANCIAL INFORMATION

ITEM 1. Financial Statements
CDEX INC.
BALANCE SHEETS

 
   
April 30, 2012
   
October 31. 2011
 
   
Unaudited
       
Assets
           
Current assets
           
Cash
  $ 15,673     $ 45,514  
Accounts receivable
    23,711       17,330  
Inventory - net
    200,704       218,768  
Deferred costs - current
    -       10,708  
     Total current assets
    240,088       292,320  
Property and equipment, net
    81,165       81,382  
Patents, net
    59,810       62,794  
Other assets
    1,504       1,399  
     Total assets
  $ 382,567     $ 437,895  
                 
Liabilities and stockholders' deficit
               
Liabilities not subject to compromise current liabilities:
               
Accounts payable and accrued expenses
  $ 115,908     $ 413,550  
Deferred revenue
    -       83,614  
Notes payable and accrued interest
    -       2,017,819  
     Total current liabilities
    115,908       2,514,983  
Liabilities subject to compromise:
               
Deferred revenue
    85,178          
Accounts payable and accrued expenses
    526,402       -  
Notes payable and accrued interest
    2,831,282       -  
Total liabilities subject to compromise:
    3,442,862       -  
Total liabilities
    3,558,770       2,514,983  
                 
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 6,250 outstanding at
               
April 30, 2012 and 6,675 outstanding at October 31, 2011
    31       33  
   Class A common stock - $.005 par value per share, 300,000,000
               
shares authorized and 109,996,717 outstanding at April 30,
               
2012 and 109,971,343 outstanding at October 31, 2011
    549,985       549,858  
Additional paid in capital
    30,350,433       30,297,427  
Accumulated (deficit)
    (34,076,652 )     (32,924,406 )
Total stockholders' (deficit)
    (3,176,203 )     (2,077,088 )
Total liabilities and stockholders' deficit
  $ 382,567     $ 437,895  
                 
The accompanying notes are an integral part of these financial statements.
 

 
1

 
 
CDEX INC.
STATEMENTS OF OPERATIONS
(unaudited)

    For the three months ended  
    April 30  
   
2012
   
2011
 
             
Revenue
  $ 70,164     $ 95,935  
                 
                 
Cost of revenue
    24,815       49,906  
                 
Gross profit
    45,349       46,029  
                 
                 
Operating Expenses
               
Selling, general and administrative
    159,608       167,868  
Research and development
    35,055       34,126  
Total operating expenses
    194,663       201,994  
                 
Loss from operations
    (149,314 )     (155,965 )
                 
Other expense
               
Note discount amortization
    -       (128,003 )
Interest expense
    (620,005 )     (82,051 )
Other expense
    (650 )     -  
Total other (expense)
    (620,655 )     (210,054 )
                 
Net loss
  $ (769,969 )   $ (366,019 )
                 
Basic net loss
               
per common share:
  $ (0.01 )   $ (0.01 )
                 
Basic weighted average
               
common shares outstanding
    109,996,717       69,628,099  
                 
The accompanying notes are an integral part of these financial statements.
 
 
2

 
 
CDEX INC.
STATEMENTS OF OPERATIONS
(unaudited)

    For the six months ended  
    April 30  
   
2012
   
2011
 
             
Revenue
  $ 133,829     $ 221,189  
                 
                 
Cost of revenue
    57,254       99,079  
                 
Gross profit
    76,575       122,110  
                 
                 
Operating Expenses
               
Selling, general and administrative
    341,780       437,460  
Research and development
    62,055       87,253  
Total operating expenses
    403,835       524,713  
                 
Loss from operations
    (327,260 )     (402,603 )
                 
Other (expense)
               
Note discount amortization
    (156,953 )     (256,006 )
Interest expense
    (667,383 )     (171,702 )
Other expense
    (650 )     -  
Total other (expense)
    (824,986 )     (427,708 )
                 
Net loss
  $ (1,152,246 )   $ (830,311 )
                 
Basic and diluted net loss
               
per common share:
  $ (0.01 )   $ (0.01 )
                 
Basic and diluted weighted average
               
common shares outstanding
    109,990,374       68,430,241  
                 
The accompanying notes are an integral part of these financial statements.

 
 
3

 
 
CDEX INC.
STATEMENTS OF CASH FLOWS
(unaudited)

    For the six months ended  
    April 30  
   
2012
   
2011
 
Cash Flows from Operating Activities
           
Net loss
  $ (1,152,246 )   $ (830,311 )
Adjustments to reconcile net loss to cash used by
               
operating activities
               
Depreciation and amortization
    16,424       15,109  
Loan discount amortization
    156,953       253,506  
Share-based compensation
    53,131       210,569  
Loss recognized on disposal of equipment
    296       -  
                 
Noncash interest expense
    667,383       171,702  
Changes in operating assets and liabilities
               
Accounts receivable
    (6,381 )     (2,755 )
Inventory
    18,064       18,924  
Deferred costs and other assets
    7,320       4,368  
Current liabilities
    230,324       (124,756 )
Net cash used by operating activities
    (8,732 )     (283,644 )
                 
Cash Flows from Investing Activities
               
Purchase of equipment
    (12,736 )        
Net cash used by investing activities
    (12,736 )     -  
                 
Cash Flows from Financing Activities
               
Proceeds from issuance of convertible notes payable
    -       100,000  
Repayment of notes payable
    (8,373 )     (12,559 )
Net cash used by financing activities
    (8,373 )     87,441  
                 
Net increase (decrease) in cash
    (29,841 )     (196,203 )
                 
Cash, beginning of the period
    45,514       312,844  
                 
Cash, end of the period
  $ 15,673     $ 116,641  
                 
Supplemental Cash Flow Information
               
Conversion of notes payable and accrued interest
               
to common stock
  $ -     $ 571,246  
Warrant incremental fair value on renegotiated debt
  $ -     $ 86,849  
Warrants issued for oncology agreement
  $ -     $ 8,886  
Transfer from deferred costs to fixed assets
  $ 783     $ -  
                 
The accompanying notes are an integral part of these financial statements.

 
4

 
CDEX, Inc.
NOTES TO FINANCIAL STATEMENTS
April 30, 2012
(Unaudited)


1. Basis of Presentation

On February 10, 2012, CDEX Inc. (collectively, “CDEX”, “we”, “our”, “us”, “Debtor” or the “Company”) filed a voluntary petition in the United States Bankruptcy Court for the District of Arizona (the “Bankruptcy Court”) seeking relief under the provisions of Chapter 11 of the Bankruptcy Code (the “Bankruptcy Code”).  The filing, case no. 4:12-bk-02402-JMM was made by the Company. As of the date of this filing, we continue to operate our businesses as debtors-in-possession (“DIP”) under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code.  See Notes 6 and 12 for further discussion of the bankruptcy case.
 
The accompanying interim unaudited condensed financial statements include the accounts of CDEX, Inc. as of April 30, 2012.  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 period ended April 30, 2012, 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.

Recent Developments

We have experienced net losses since our inception and, as of April 30, 2012, had an accumulated deficit of approximately $30 million.  We do not expect to have positive cash flow from operations until we have deployed a sufficient number of our ValiMed G4 drug validation systems.  As of April 30, 2012, we had approximately $10,000 in cash.
 
In our Form 10-K filed on January 30, 2012, we indicated that we would require financing on an ongoing basis unless and until we are able to support our operating activities with additional revenues.  In December 2011, we were arranging for another level of financing. The individuals offering the new financing required certain concessions from our then existing noteholders before they would release the funds to us.  All but three of the noteholders agreed to the required concessions.  The three dissenting noteholders, including Malcolm H. Philips, Jr., our former CEO, and Gregory Firmbach, our former President, declared us in default on their notes.  Because all noteholders did not agree to the concessions, the funds were not released to us.  Within the first week of February 2012, we had essentially exhausted all available cash and did not have access to other sources of cash to fund ongoing business operations.

On February 10, 2012, we filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code. As of the date of the filing of this quarterly report, we continue to operate our businesses as debtors-in-possession under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code.  Please refer to Note 11 for further discussion of the bankruptcy case.
 
There is substantial doubt as to our ability to continue as a going concern. The financial statements included herein do not include any adjustments that might result from the outcome of this uncertainty.  We have retained Eric Slocum Sparks, P.C. as a legal advisor to represent us in the bankruptcy proceedings and to assist in the evaluation of restructuring alternatives.
 
 
5

 
CDEX, Inc.
NOTES TO FINANCIAL STATEMENTS
April 30, 2012
(Unaudited)
 
The assessment of our near-term liquidity is based on important factors and assumptions which anticipate certain levels of potential risk.  While all business plans anticipate certain levels of risk, we are exposed to additional bankruptcy- and company-specific risk and uncertainties, including, but not limited to: (1) our ability to successfully fund our operating costs in the near term through debtor-in-possession (“DIP”) financing, a restructuring or other strategic alternatives and (2) successfully emerging from Chapter 11 through a restructuring plan that will lead to our being able to obtain the funds necessary for long-term operating costs.

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 Financial Accounting Standards Board (FASB) issued ASU No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income (ASU No. 2011-05), which requires entities to present reclassification adjustments included in other comprehensive income on the face of the financial statements and allows entities to present the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate consecutive statements. It also eliminates the option for entities to present components of other comprehensive income as part of the statement of changes in stockholders’ equity. It is expected that the adoption of ASU No. 2011-05 will not have a material impact on the Company’s financial statements.

In May 2011, the FASB issued ASU No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (ASU No. 2011-04).  ASU No. 2011-04 created a uniform framework for applying fair value measurement principles and clarified existing guidance in U.S. GAAP. ASU No. 2011-04 is effective for the first annual reporting period beginning after December 15, 2011 and must be applied prospectively.  It is expected that the adoption of ASU No. 2011-04 will not have a material impact on the Company’s financial statements.
2.             Inventory - Net

 Our inventories consisted of the following:

   
April 30, 2012
   
October 31, 2011
 
             
Raw materials
  $ 117,180     $ 120,409  
                 
Finished goods
    96,801       111,852  
  Subtotal
    213,981       232,261  
Obsolescence reserve
    (13,277 )     (13,493 )
                 
Total inventory
  $ 200,704     $ 218,768  
 
 
6

 
CDEX, Inc.
NOTES TO FINANCIAL STATEMENTS
April 30, 2012
(Unaudited)

3              Property and equipment, net

 Our property and equipment consisted of the following:

   
April 30, 2012
   
October 31, 2011
 
             
Furniture, fixtures and leasehold improvements
  $ 2,931     $ 2,931  
Equipment
    594,795       707,500  
Leased equipment
    70,654       70,654  
                 
Total
    668,380       781,085  
                 
Less accumulated depreciation
    (587,215 )     (699,703 )
                 
Net property and equipment
  $ 81,165     $ 81,382  

4              Patents, net

 Our patents consisted of the following:

   
April 30, 2012
   
October 31, 2011
 
             
Patents
  $ 100,000     $ 100,000  
                 
Less accumulated amortization
    (40,190 )     (37,206 )
                 
Net patents
  $ 59,810     $ 62,794  

5             Accounts Payable and Accrued Expenses

 Accounts payable and accrued expenses consisted of the following:

   
April 30, 2012
   
October 31, 2011
 
Legal fees
  $ -     $ 29,854  
Deferred compensation
    38,049       168,986  
Accounts payable
    76,909       195,925  
Accrued payable to a distributor
    950       18,785  
                 
    $ 115,908     $ 413,550  
 
6             Liabilities Subject to Compromise

During the pendency of the Chapter 11 proceedings, certain claims against the Debtor in existence before the filing of the petitions for relief under the federal bankruptcy laws are stayed while the Debtor continues business operations as Debtor-in-possession. These claims are reflected in the April 30, 2012, balance sheet as liabilities subject to compromise. Additional claims (liabilities subject to compromise) may arise after the filing date resulting from rejection of executory contracts, including leases, and from the determination by the court (or agreed to by parties in interest) of allowed claims for contingencies and other disputed amounts.

 
7

 
CDEX, Inc.
NOTES TO FINANCIAL STATEMENTS
April 30, 2012
(Unaudited)

 
7             Accounts Payable and Accrued Expenses Subject to Compromise

 Accounts payable and accrued expenses subject to compromise consisted of the following:
 
   
April 30, 2012
   
October 31, 2011
 
Legal fees
  $ 43,458     $ -  
Deferred compensation
    262,384       -  
Accounts payable
    199,875       -  
Accrued payable to a distributor
    20,685       -  
                 
    $ 526,402     $ -  
 
8.            Notes Payable

During the three months ended April 30, 2012 and 2011, payments totaling $2,093 and $6,280, respectively, were made on the company’s non-interest bearing notes.

In the event of a default on the 10% Senior Convertible Notes, the Company is required to recognize a Mandatory Default Amount (“MDA”) which is defined in the notes as the sum of (i) the greater of (A) 130% of the outstanding principal amount of the note, plus 100% of accrued and unpaid interest thereon, or (B) the outstanding principal amount of the note, plus all accrued and unpaid interest thereon, divided by the conversion price on the date the MDA is either (a) demanded (if demand or notice is required to create an event of default) or otherwise due or (b) paid in full, whichever has a lower price, multiplied by the volume weighted average price (“VWAP”) on the date the MDA is either (x) demanded or otherwise due or (y) paid in full, whichever has a higher VWAP, and (ii) all other amounts, costs, expenses and liquidated damages due in respect of the note. The financial statements as of and for the three- and six-months ended April 30, 2012 reflect the accrual of interest expense on our notes payable to February 10, 2012 as well as the accrual of the MDA for our 10% Senior Convertible Notes.

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.  Also, the Company entered into a Term Note (“Note”) and a Warrant Amendment with Gemini Master Fund Ltd. (“Gemini”). The Note is for $100,000 with an interest rate of 10.5% and is convertible into CDEX common stock at the rate of $0.05 a share and is due March 1, 2012 (subject to acceleration). The Warrant Amendment modifies the Gemini’s existing warrant by increasing the number of shares under the warrant from 5,000,000 to 8,000,000 shares and reduces the exercise price from $0.08 a share to $0.05 a share. The effect of the Warrant Amendment increased the incremental relative fair value of the warrant by approximately $87,000, which the Company has recognized as a discount to the Note and will amortize over the remaining life of the Note. The Company also entered into an Amendment and Conversion Agreement with Gemini which amends the $1,151,000 February 15, 2010 note issued to Gemini by changing the conversion price to $0.05 a share and specifying certain circumstances under which Gemini will be required to convert a portion of its note. Additionally during the quarter, payments totaling approximately $6,000 were made on the company’s non-interest bearing notes.

9.            Share-Based Compensation

For the three months ended April 30, 2012, share-based compensation expense was approximately $30,000, approximately $9,000 of which was attributable to options and $11,000 was attributable to stock grants.  For the three months ended April 30, 2011, share-based compensation expense for options was approximately $54,000.

During the three months ended April 30, 2012, 225,000 options expired.

 
8

 
CDEX, Inc.
NOTES TO FINANCIAL STATEMENTS
April 30, 2012
(Unaudited)
 
We determine the fair value of share-based awards at their grant date, using a Black-Scholes Option Pricing Model, however, no options were issued during three months ended April 30, 2012 and 2011 so the pricing assumptions in the following table are blank. For options granted in fiscal year 2011, we used 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 April 30,
 
   
2012
   
2011
 
Weighted average grant date fair value
    -       -  
Expected volatility
    -       -  
Expected dividends
    -       -  
Expected term (years)
    -       -  
Risk free rate
    -       -  

As of April 30, 2012, there was approximately $16,000 of unrecognized compensation costs related to unvested stock options. These costs are expected to be recognized on a weighted-average basis over periods of less than one year.

10.          Stockholders' Equity

During the three months ended January 31, 2012 a shareholder converted 425 shares of Preferred Stock Series A into 25,374 shares of Class A common stock.

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.

11.          Deferred Revenue

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


12.          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 and, subsequent to the end of the quarter, notices of default from three others. 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.

 
9

 
CDEX, Inc.
NOTES TO FINANCIAL STATEMENTS
April 30, 2012
(Unaudited)
 
On February 10, 2012, the Debtor filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code. As of the date of the filing of this quarterly report, the Debtor continues to operate its businesses as Debtor-In-Possession under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code.  In February 2012, prior to filing, we engaged Eric Slocum Sparks, P.C. as legal advisor.  We are continuing to aggressively pursue funding opportunities to address our operating costs in the near term, through either DIP financing or restructuring.  Additionally, we are currently financing our operations during the reorganization using cash on hand and cash generated by operations. We expect to have a hearing with the Bankruptcy Court scheduled in which we will seek court approval for a longer-term use of cash held in an escrow account.

On May 25, 2012 we filed with the Bankruptcy Court our Debtor’s First Disclosure Statement for its First Plan of Reorganization and the Debtors First Plan of Reorganization. The Court has set July 16, 2012 as the hearing date for approval of the court of these filings.

Starting on May 30, 2012, we started to receive “Administrative Expense” financing allowed for under section 364(a) of the Bankruptcy code. Thru June 11, 2012 we have received approximately $43,000 in Administrative Expense financing.

13.          Other Events

On February 13, 2012, we received a notice from FINRA (Financial Industry Regulatory Authority) that, effective with the opening of markets on February 14, 2012, our trading symbol would be changed from CEXI to CEXIQ to reflect our bankruptcy status.

Also in February 2012, Jeffrey K. Brumfield, the Company’s Chairman of the Board and CEO was granted relief buy the United States Bankruptcy Court for the Southern District of California under the provisions of Chapter 7 of Title 11 of the United States Code due to personal circumstances unrelated to the Company.

 
10

 
 
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, 2011.

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, including, but not limited to (i) the potential adverse impact of the bankruptcy case on our business, financial condition or results of operations, including our ability to maintain contracts and other customer and vendor relationships that are critical to our business and the actions and decisions of our creditors and other third parties with interests in our bankruptcy case; (ii) our ability to maintain adequate liquidity to fund our operations during the bankruptcy case and to fund a plan of reorganization and thereafter, including maintaining normal terms with our vendors and service providers during the bankruptcy case and complying with the covenants and other terms of our financing agreements; (iii) our ability to obtain court approval with respect to motions in the bankruptcy case prosecuted from time to time and to develop, prosecute, confirm and consummate one or more plans of reorganization with respect to the bankruptcy case and to consummate all of the transactions contemplated by one or more such plans of reorganization or upon which consummation of such plans may be conditioned; (iv) risks associated with third parties seeking and obtaining court approval to terminate or shorten the exclusivity period for the Company to propose and confirm one or more plans of reorganization, for the appointment of a Chapter 11 trustee or to convert the Chapter 11 bankruptcy case to Chapter 7 case; (v) those factors identified in Part II, Item 1A, “Risk Factors,” and in our other filings with the Securities and Exchange Commission as may be accessed at www.sec.gov..

The risks and uncertainties and the terms of any reorganization plan ultimately confirmed can affect the value of our various pre-petition assets, liabilities, common stock and/or other securities. No assurance can be given as to what values, if any, will be ascribed in the bankruptcy proceedings to each of these constituencies. A plan of reorganization could result in holders of our liabilities and/or securities receiving no value for their interests. Because of such possibilities, the value of these liabilities and/or securities is highly speculative and will pose substantial risks. Trading prices for the Company’s common stock may bear little or no relationship to the actual recovery, if any, by holders thereof in the bankruptcy case.  Accordingly, the Company urges extreme caution with respect to existing and future investments in its securities.

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, 2011 as updated in Part II, Item 1A in this Quarterly Report on Form 10-Q.  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.

 
11

 
 
OVERVIEW

CDEX Inc. (“CDEX,” “we,” “us,” “our” or the “Company”) is a technology development company incorporated in the State of Nevada on July 6, 2001 with a corporate office and research and development facility in Tucson, Arizona.  Our Class A common stock is currently being traded on the OTCBB under the symbol "CEXIQ.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).

 
4.
The Company is also exploring unique opportunities in select market verticals where its proprietary technology may provide low cost/ realtime solutions to a growing concern such as conducting urine, blood and saliva analysis for detecting illegal drugs and performance enhancement substances.

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

In our Form 10-K filed on January 30, 2012, we indicated that we would require financing on an ongoing basis unless and until we are able to support our operating activities with additional revenues.  In December 2011, we were arranging for another level of financing. The individuals offering the new financing required certain concessions from our then existing noteholders before they would release the funds to us.  All but three of the noteholders agreed to the required concessions.  The three dissenting noteholders, including Malcolm H. Philips, Jr., our former CEO, and Gregory Firmbach, our former President, declared us in default on their notes.  Because all noteholders did not agree to the concessions, the funds were not released to us.  Within the first week of February 2012, we had essentially exhausted all available cash and did not have access to other sources of cash to fund ongoing business operations.

On February 10, 2012, we filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code. As of the date of the filing of this quarterly report, we continue to operate our businesses as debtors-in-possession under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code.  There is substantial doubt as to our ability to continue as a going concern.  During the pendency of the bankruptcy case, investments in our securities will be highly speculative.
 
In light of current developments, the Company’s Board of Directors elected to waive its compensation for the current quarter and decided to readdress director compensation on a quarterly basis. Additionally the Company’s CEO had deferred his compensation for the fiscal year-to-date through May 31, 2012.
 
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.

 
12

 
 
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 Radio Frequency Identification (or RFID) tags, all of which can be defeated by determined counterfeiters.

Products

We are currently focusing our resources on marketing and improving real-time (within seconds) chemical detection products using proprietary, patented and patents pending technologies. Our primary focus in 2011 was the development and enhancement of our ValiMed system and ID2 products for use in the medical and security markets with our principal product lines noted below.  The Company continues to explore unique opportunities where its proprietary technology may provide low cost/real time solutions to growing security or liability concerns such as conducting urine, blood and saliva analysis for detecting illegal drugs and performance enhancement substances in the work place or sporting environment.

 
1.
Healthcare Market.
ValiMed™ Medication Validation System (MVS) Product Line - The ValiMed line has been fully redesigned in 2011 with the launch of the fourth generation ValiMed (“VG4”).  The ValiMed G4 drug validation system helps healthcare providers ensure patient safety and control costs by reducing medication errors. The patented detection process identifies drug strengths and volume-by-weight in real-time, validating proper dose, diluents and concentration of high-risk compounded medications and treatment solutions. The VG4 device will help healthcare facilities comply with Joint Commission on Accreditation of Healthcare Organizations compliance requirements and United States Pharmacopeia's General Chapter 797 Pharmaceutical Compounding—Sterile Preparations (“USP 797”) guidelines for compounding sterile preparations  and integrate with electronic medical record platforms.  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; (ii) harmful counterfeit medications and (iii) diversion of hospital narcotics.  In the near future, we expect this product line to address multi compounded cocktails, such as total parenteral nutrition and Oncology admixtures.

 
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 by 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 by 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.

 
13

 
 
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 APRIL 30, 2012 AND 2011:

   
2012
   
2011
 
             
Revenue
  $ 70,164     $ 95,935  
Cost of revenue
    24,815       49,906  
Selling, general and administrative
    159,608       167,868  
Research and development
    35,055       34,126  
Other expense
    (620,655 )     (210,054 )
                 
Net loss
  $ (769,969 )   $ (366,019 )

REVENUE

Revenue was approximately $70,000 and $96,000 during the three months ended April 30, 2012 and 2011, respectively. The decrease in revenue of approximately $26,000 resulted primarily from a decrease from the 2011 accrual of revenue from our Oncology Exclusive Distribution Agreement and a decrease in revenue from the sales of supplies and revenues from our Pay Per Use clients, partially offset by an increase of ValiMed maintenance revenue.

COST OF REVENUE

Cost of revenue was approximately $25,000 and $50,000 during the three months ended April 30, 2012 and 2011, respectively, a decrease of approximately $25,000 which includes the decrease of approximately $12,000 costs allocated to the Oncology Exclusive Distribution Agreement in 2011 as well as a decrease in materials cost of approximately $4,000.

SELLING, GENERAL AND ADMINISTRATIVE

Selling, general and administrative expenses were approximately $160,000 during the three months ended April 30, 2012, compared with $168,000 during the three months ended April 30, 2011. The decrease of approximately $8,000 resulted primarily from decreases non-cash share-based expense and employee compensation of $36,000 and marketing and travel expenses of $4,000, partially offset by an increase in consulting, professional and legal expenses of $22,000.

RESEARCH AND DEVELOPMENT

Research and development (R&D) costs were approximately $35,000 during the three months ended April 30, 2012, compared with $34,000 during the three months ended April 30, 2011, an increase of approximately $1,000 which is primarily attributable to an increases in R&D Materials of $2,000 partially offset by a decrease in R&D Compensation of $1,000.

 
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OTHER EXPENSE

Other expense for the three months ended April 30, 2012 was approximately $621,000 compared to $210,000 for the three months ended April 30, 2011.  The increase of approximately $411,000 in the second quarter of 2012 reflects primarily the accrual of approximately $520,000 of the mandatory default amount and its associated $95,000 life-to-date interest on all the 10% senior convertible notes partially offset by a decrease in interest expense of $76,000 because the filing for bankruptcy protection stopped the interest accruals on loans partially and by a decrease of $128,000 of amortization of the discount associated with the GEMINI and other debt.

NET LOSS

The net loss was approximately $770,000 during the three months ended April 30, 2012, compared with a net loss of $366,000 during the three months ended April 30, 2011, due to the foregoing factors.

RESULTS OF OPERATIONS

COMPARISON OF OPERATIONS FOR THE SIX MONTHS ENDED APRIL 30, 2012 AND 2011:

   
2012
   
2011
 
             
Revenue
  $ 133,829     $ 221,189  
Cost of revenue
    57,254       99,079  
Selling, general and administrative
    341,780       437,460  
Research and development
    62,055       87,253  
Other expense
    (824,986 )     (427,708 )
                 
Net loss
  $ (1,152,246 )   $ (830,311 )
                 

REVENUE

Revenue was approximately $134,000 and $221,000 during the six months ended April 30, 2012 and 2011, respectively. The decrease in revenue of approximately $87,000 resulted primarily from a decrease from the 2011 accrual of revenue from our Oncology Exclusive Distribution Agreement a decrease in revenue from the sales of supplies and revenues from our Pay Per Use clients and sales of the ID2 Meth Scanner sales in 2011, partially offset by an increase of ValiMed maintenance revenue.

COST OF REVENUE

Cost of revenue was approximately $57,000 and $99,000 during the six months ended April 30, 2012 and 2011, respectively, a decrease of approximately $42,000 which includes the decrease of approximately $26,000 costs allocated to the Oncology Exclusive Distribution Agreement in 2011, royalty fees of $5,000, travel expense of $3,000 and depreciation of $3,000.

SELLING, GENERAL AND ADMINISTRATIVE

Selling, general and administrative expenses were approximately $342,000 during the six months ended April 30, 2012, compared with $437,000 during the six months ended April 30, 2011. The decrease of approximately $95,000 resulted primarily from decreases in non-cash share-based expense and employee compensation of $112,000 and consulting, professional and legal expenses of $4,000, partially offset by an increase in marketing and travel expenses of $12,000.

 
15

 

RESEARCH AND DEVELOPMENT

Research and development (R&D) costs were approximately $62,000 during the six months ended April 30, 2012, compared with $87,000 during the six months ended April 30, 2011, a decrease of approximately $25,000 which is primarily attributable to decreases in R&D Compensation of $16,000 as well as R&D materials of $9,000.

OTHER EXPENSE

Other expense for the six months ended April 30, 2012 was approximately $825,000 compared to $428,000 for the six months ended April 30, 2011.  The increase of approximately $397,000 in the first six months of 2012 reflects primarily the increase reflects primarily the accrual of approximately $520,000 of the mandatory default amount and its associated $95,000 life-to-date interest on all the 10% senior convertible notes partially offset by a decrease in interest expense of $119,000 because the filing for bankruptcy protection stopped the interest accruals on loans and a decrease of $99,000 of amortization of the discount associated with the GEMINI and other debt.

NET LOSS

The net loss was approximately $1,152,000 during the six months ended April 30, 2012, compared with a net loss of $830,000 during the six months ended April 30, 2011, 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.  We have experienced net losses since our inception and, as of April 30, 2012, had an accumulated deficit of approximately $34 million.  We do not expect to have positive cash flow from operations until we have deployed a sufficient number of our ValiMed G4 drug validation systems.  As of April 30, 2012, we had approximately $16,000 in cash.
 
In our Form 10-K filed on January 30, 2012, we indicated that we would require financing on an ongoing basis unless and until we are able to support our operating activities with additional revenues.  In December 2011, we were arranging for another level of financing.  The individuals offering the new financing required certain concessions from our then existing noteholders before they would release the funds to us.  All but three of the noteholders agreed to the required concessions.  The three dissenting noteholders, including Malcolm H. Philips, Jr., our former CEO, and Gregory Firmbach, our former President, declared us in default on their notes.  Because all noteholders did not agree to the concessions, the funds were not released to us.  Within the first week of February 2012, we had essentially exhausted all available cash and did not have access to other sources of cash to fund ongoing business operations.

On February 10, 2012, we filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code. As of the date of the filing of this quarterly report, we continue to operate our businesses as debtors-in-possession under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code.
 
There is substantial doubt as to our ability to continue as a going concern. The financial statements included herein do not include any adjustments that might result from the outcome of this uncertainty.  We have retained Eric Slocum Sparks, P.C. as a legal advisor to represent us in the bankruptcy proceedings and to assist in the evaluation of restructuring alternatives.
 
The assessment of our near-term liquidity is based on important factors and assumptions which anticipate certain levels of potential risk.  While all business plans anticipate certain levels of risk, we are exposed to additional bankruptcy- and company-specific risk and uncertainties, including, but not limited to: (1) our ability to successfully fund our operating costs in the near term through debtor-in-possession (“DIP”) financing, a restructuring or other strategic alternatives and (2) successfully emerging from Chapter 11 through a restructuring plan that will lead to our being able to obtain the funds necessary for long-term operating costs.

 
16

 
 
We had a net decrease in cash of approximately $30,000 during the six months ended April 30, 2012, compared to a net decrease in cash of $196,000 for the six months ended April 30, 2011. During the first six months of fiscal 2012, we used $8,000 of cash in operating activities. This amount is comprised primarily of our net loss of $1,152,000 and an increase in our accounts receivable of $6,000 partially offset by interest expense of $667,000 which includes the accrual of approximately $520,000 of the mandatory default amount and its associated $95,000 life-to-date interest on all the 10% senior convertible notes, the offset also includes an increase in our current liabilities of $230,000 loan discount amortization of $157,000, and non-cash share-based compensation expense of $53,000. As part of our total cash used during the first six months of fiscal 2012, we used approximately $13,000 in investing activities with the purchase of equipment and used $8,000 in the repayment of non-interest bearing notes.

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 April 30, 2012, 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 April 30, 2012 that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 
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PART II - OTHER INFORMATION

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.

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

 
18

 

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 June 12, 2012.


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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