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EXCEL - IDEA: XBRL DOCUMENT - CDEX INC | Financial_Report.xls |
EX-31.2 - EXHIBIT 31.2 - CDEX INC | ex31_2.htm |
EX-32.1 - EXHIBIT 32.1 - CDEX INC | ex32_1.htm |
EX-31.1 - EXHIBIT 31.1 - CDEX INC | ex31_1.htm |
EX-32.2 - EXHIBIT 32.1 - CDEX INC | ex32_2.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended July 31, 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
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52-2336836
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(State or other jurisdiction of
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(I.R.S. Employer
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incorporation or organization)
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Identification No.)
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4555 South Palo Verde Road, Suite 123, Tucson, Arizona
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85714
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(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.
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QUARTERLY REPORT ON FORM 10-Q
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TABLE OF CONTENTS
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Part I FINANCIAL INFORMATION
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Item 1. Financial Statements
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Balance Sheets as of July 31, 2011 (unaudited) and
October 31, 2010
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1
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Statements of Operations for the three months ended
July 31, 2011 and 2010 (unaudited)
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2
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Statements of Operations for the nine months ended
July 31, 2011 and 2010 (unaudited)
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3
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Statements of Cash Flow for the three months ended
July 31, 2011 and 2010 (unaudited)
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4
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Statements of Cash Flow for the nine months ended
July 31, 2011 and 2010 (unaudited)
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5
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Notes to Financial Statements (unaudited)
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6
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Item 2. | Management's Discussion and Analysis of Financial Condition and
Results of Operations
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11 |
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Item 4. | Controls and Procedures | 16 |
Part II OTHER INFORMATION
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ITEM 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
16
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ITEM 5. | Other Information |
16
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ITEM 6. | Exhibits |
17
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Signatures
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18
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i
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
CDEX INC.
BALANCE SHEETS
July 31, 2011
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October 31. 2010
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Unaudited
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Assets
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Current assets
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Cash
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$ | 130,255 | $ | 312,844 | ||||
Accounts receivable - net
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37,760 | 22,301 | ||||||
Inventory - net
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193,126 | 212,585 | ||||||
Deferred costs - current
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15,246 | 10,890 | ||||||
Total current assets
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376,387 | 558,620 | ||||||
Property and equipment, net
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81,810 | 45,948 | ||||||
Patents, net
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64,700 | 70,418 | ||||||
Other assets
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1,397 | 41,673 | ||||||
Total assets
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$ | 524,294 | $ | 716,659 | ||||
Liabilities and stockholders' deficit
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Current liabilities
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Accounts payable and accrued expenses
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$ | 471,726 | $ | 413,285 | ||||
Notes payable and accrued interest
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1,822,267 | 113,449 | ||||||
Deferred revenue - current
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127,518 | 117,426 | ||||||
Total current liabilities
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2,421,511 | 644,160 | ||||||
Deferred revenue - noncurrent
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238,133 | 395,658 | ||||||
Notes payable and accrued interest - net
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- | 3,067,473 | ||||||
Total liabilities
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2,659,644 | 4,107,291 | ||||||
Commitments and Contingencies
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Stockholders' deficit
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Preferred stock - undesignated - $.005 par value per share,
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350,000 shares authorized and none outstanding
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- | - | ||||||
Preferred stock - series A - $.005 par value per share,
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150,000 shares authorized and 6,675 outstanding at
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July 31, 2011 and October 31, 2010
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33 | 33 | ||||||
Class A common stock - $.005 par value per share, 100,000,000
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shares authorized and 99,615,206 outstanding at July 31,
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2011 and 66,453,462 outstanding at October 31, 2010
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498,050 | 332,242 | ||||||
Additional paid in capital
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29,822,303 | 27,644,626 | ||||||
Accumulated deficit
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(32,455,736 | ) | (31,367,533 | ) | ||||
Total stockholders' deficit
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(2,135,350 | ) | (3,390,632 | ) | ||||
Total liabilities and stockholders' deficit
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$ | 524,294 | $ | 716,659 | ||||
The accompanying notes are an integral part of these financial statements.
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1
CDEX INC.
STATEMENTS OF OPERATIONS
(unaudited)
For the three months ended
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July 31
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2011
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2010
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Revenue
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$ | 231,693 | $ | 202,381 | ||||
Cost of revenue
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36,842 | 16,668 | ||||||
Gross profit
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194,851 | 185,713 | ||||||
Operating Expenses
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Selling, general and administrative
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211,394 | 508,683 | ||||||
Research and development
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28,165 | 24,647 | ||||||
Total operating expenses
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239,559 | 533,330 | ||||||
Loss from operations
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(44,708 | ) | (347,617 | ) | ||||
Other expense
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Interest expense
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(213,184 | ) | (189,697 | ) | ||||
Total other (expense)
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(213,184 | ) | (189,697 | ) | ||||
Net loss
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$ | (257,892 | ) | $ | (537,314 | ) | ||
Basic net loss
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per common share:
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$ | (0.00 | ) | $ | (0.01 | ) | ||
Basic weighted average
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common shares outstanding
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95,291,618 | 65,239,634 | ||||||
The accompanying notes are an integral part of these financial statements.
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2
CDEX INC.
STATEMENTS OF OPERATIONS
(unaudited)
For the nine months ended
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July 31
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2011
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2010
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Revenue
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$ | 452,882 | $ | 332,876 | ||||
Cost of revenue
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135,921 | 44,599 | ||||||
Gross profit
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316,961 | 288,277 | ||||||
Operating Expenses
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Selling, general and administrative
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648,854 | 938,547 | ||||||
Research and development
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115,418 | 71,066 | ||||||
Total operating expenses
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764,272 | 1,009,613 | ||||||
Loss from operations
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(447,311 | ) | (721,336 | ) | ||||
Other (expense)
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Interest expense
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(640,892 | ) | (530,865 | ) | ||||
Total other (expense)
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(640,892 | ) | (530,865 | ) | ||||
Net loss
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$ | (1,088,203 | ) | $ | (1,252,201 | ) | ||
Basic and diluted net loss
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per common share:
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$ | (0.01 | ) | $ | (0.02 | ) | ||
Basic and diluted weighted average
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common shares outstanding
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77,384,033 | 64,961,856 | ||||||
The accompanying notes are an integral part of these financial statements.
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3
CDEX INC.
STATEMENTS OF CASH FLOWS
(unaudited)
For the three months ended
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July 31
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2011
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2010
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Cash Flows from Operating Activities
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Net loss
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$ | (257,892 | ) | $ | (537,314 | ) | ||
Adjustments to reconcile net loss to cash used by
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operating activities
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Depreciation and amortization
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7,885 | (19,669 | ) | |||||
Loan discount amortization
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154,452 | 30,020 | ||||||
Share-based compensation
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51,718 | 50,205 | ||||||
Noncash interest expense
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56,232 | 187,198 | ||||||
Changes in operating assets and liabilities
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Accounts receivable
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(12,704 | ) | 13,315 | |||||
Inventory
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535 | (4,467 | ) | |||||
Deferred costs and other assets
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1,073 | (2,923 | ) | |||||
Current liabilities
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35,764 | 215,344 | ||||||
Net cash provided (used) by operating activities
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37,063 | (68,291 | ) | |||||
Cash Flows from Investing Activities
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Purchase of equipment
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(16,273 | ) | - | |||||
Net cash used by investing activities
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(16,273 | ) | - | |||||
Cash Flows from Financing Activities
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Repayment of notes payable
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(7,176 | ) | - | |||||
Net cash used by financing activities
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(7,176 | ) | - | |||||
Net increase (decrease) in cash
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13,614 | (68,291 | ) | |||||
Cash, beginning of the period
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116,641 | 128,469 | ||||||
Cash, end of the period
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$ | 130,255 | $ | 60,178 | ||||
Supplemental Cash Flow Information
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Conversion of notes payable and accrued interest
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to common stock
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$ | 1,414,216 | $ | - | ||||
Transfer from inventory to fixed assets
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$ | - | $ | 4,248 | ||||
The accompanying notes are an integral part of these financial statements.
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4
CDEX INC.
STATEMENTS OF CASH FLOWS
(unaudited)
For the nine months ended
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July 31
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2011
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2010
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Cash Flows from Operating Activities
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Net loss
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$ | (1,088,203 | ) | $ | (1,252,201 | ) | ||
Adjustments to reconcile net loss to cash used by
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operating activities
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Depreciation and amortization
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22,994 | 22,986 | ||||||
Loan discount amortization
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407,958 | 30,020 | ||||||
Share-based compensation
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262,287 | 55,280 | ||||||
Adjustment for doubtful accounts
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- | (2,325 | ) | |||||
Negotiated settlements on account payable
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- | (31,637 | ) | |||||
Noncash interest expense
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227,934 | 500,846 | ||||||
Changes in operating assets and liabilities
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Accounts receivable
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(15,459 | ) | 34,092 | |||||
Inventory
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19,459 | 38,525 | ||||||
Deferred costs and other assets
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5,441 | 18,776 | ||||||
Current liabilities
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(88,992 | ) | 123,097 | |||||
Net cash used by operating activities
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(246,581 | ) | (462,541 | ) | ||||
Cash Flows from Investing Activities
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Purchase of equipment
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(16,273 | ) | - | |||||
Net cash used by investing activities
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(16,273 | ) | - | |||||
Cash Flows from Financing Activities
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Proceeds from issuance of convertible notes payable
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100,000 | 514,950 | ||||||
Repayment of notes payable
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(19,735 | ) | - | |||||
Net cash provided by financing activities
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80,265 | 514,950 | ||||||
Net increase (decrease) in cash
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(182,589 | ) | 52,409 | |||||
Cash, beginning of the period
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312,844 | 7,769 | ||||||
Cash, end of the period
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$ | 130,255 | $ | 60,178 | ||||
Supplemental Cash Flow Information
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Conversion of notes payable and accrued interest
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to common stock
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$ | 1,985,462 | $ | 50,000 | ||||
Warrant incremental fair value on renegotiated debt
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$ | 86,850 | $ | - | ||||
Warrants issued for oncology agreement
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$ | 8,886 | $ | - | ||||
Conversion of accounts payable to notes payable
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$ | - | $ | 832,127 | ||||
Transfer from inventory to fixed assets
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$ | - | $ | 9,900 | ||||
Discount on refinanced notes
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$ | - | $ | 1,004,023 | ||||
The accompanying notes are an integral part of these financial statements.
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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
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October 31, 2010
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Accounts receivable
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$ | 40,570 | $ | 25,111 | ||||
Less: Allowance for doubtful accounts
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2,810 | 2,810 | ||||||
Net accounts receivable
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$ | 37,760 | $ | 22,301 | ||||
3. Inventory - Net
Our inventories consisted of the following:
July 31, 2011
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October 31, 2010
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Raw materials
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$ | 126,627 | $ | 119,958 | ||||
Finished goods
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74,590 | 101,465 | ||||||
Subtotal
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201,217 | 221,423 | ||||||
Obsolescence reserve
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(8,091 | ) | (8,838 | ) | ||||
Total inventory
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$ | 193,126 | $ | 212,585 | ||||
4. Property and equipment, net
Our property and equipment consisted of the following:
July 31, 2011
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October 31, 2010
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Furniture, fixtures and leasehold improvements
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$ | 2,931 | $ | 2,931 | ||||
Equipment
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717,710 | 677,803 | ||||||
Leased equipment
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67,348 | 67,348 | ||||||
Total
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787,989 | 748,082 | ||||||
Less accumulated depreciation
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(706,179 | ) | (702,134 | ) | ||||
Net property and equipment
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$ | 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
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October 31, 2010
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Patents
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$ | 100,000 | $ | 100,000 | ||||
Less accumulated amortization
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(35,300 | ) | (29,582 | ) | ||||
Net patents
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$ | 64,700 | $ | 70,418 | ||||
6. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consisted of the following:
July 31, 2011
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October 31, 2010
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Legal fees
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$ | 28,249 | $ | 31,508 | ||||
Deferred compensation
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163,986 | 118,986 | ||||||
Accounts payable
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262,606 | 252,951 | ||||||
Accrued payable to a distributor
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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,
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2011
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2010
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Weighted average grant date fair value
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$0.03
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$0.08
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Expected volatility
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75%
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75%
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Expected dividends
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0%
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0%
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Expected term (years)
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3 - 4.17
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1 - 5.75
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Risk free rate
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0.05 - 2.74%
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0.30 - 3.14%
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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.
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, 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:
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1.
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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);
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2.
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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
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3.
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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).
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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:
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1.
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Healthcare Market.
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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.
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2.
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Security Market.
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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
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2010
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|||||||
Revenue
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$ | 231,693 | $ | 202,381 | ||||
Cost of revenue
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36,842 | 16,668 | ||||||
Selling, general and administrative
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211,394 | 508,683 | ||||||
Research and development
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28,165 | 24,647 | ||||||
Other expense
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(213,184 | ) | (189,697 | ) | ||||
Net loss
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$ | (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 $537,000 during the three months ended July 31, 2010, due to the foregoing factors.
COMPARISON OF OPERATIONS FOR THE NINE MONTHS ENDED JULY 31, 2011 AND 2010:
2011
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2010
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|||||||
Revenue
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$ | 452,882 | $ | 332,876 | ||||
Cost of revenue
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135,921 | 44,599 | ||||||
Selling, general and administrative
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648,854 | 938,547 | ||||||
Research and development
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115,418 | 71,066 | ||||||
Other expense
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(640,892 | ) | (530,865 | ) | ||||
Net loss
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$ | (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
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(a)
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Not Applicable
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(b)
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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
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Certification of Chief Executive Officer.
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31.2
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Certification of Chief Financial Officer.
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32.1
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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).
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32.2
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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).
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101.INS
|
XBRL Instance Document
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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
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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:
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/s/ Jeff Brumfield
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Jeff Brumfield
|
||
Chief Executive Officer
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By:
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/s/ Stephen A. McCommon
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Stephen A. McCommon
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||
Chief Financial Officer and
|
||
Vice President of Finance
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