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SINX > SEC Filings for SINX > Form 10-Q on 27-Aug-2013All Recent SEC Filings

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Form 10-Q for SIONIX CORP


27-Aug-2013

Quarterly Report

Part I, Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.

The information in this quarterly report on Form 10-Q contains forward-looking statements. These forward-looking statements involve risks and uncertainties, including statements regarding our capital needs, business strategy and expectations. Any statements contained in this report that are not statements of historical facts may be deemed to be forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as "may", "should", "expect", "plan", "intend", "anticipate", "believe", "estimate", "predict", "potential" or "continue", the negative of such terms or other comparable terminology. Actual events or results may differ materially from those events or results included in the forward-looking statements. In evaluating these statements, you should consider various factors, including the risks outlined from time to time in the reports we file with the Securities and Exchange Commission. Some, but not all, of these risks include, among other things:

? our inability to obtain the financing we need to continue our operations;

? changes in regulatory requirements that adversely affect our business;

? loss of our key personnel; and

? risks over which we have no control, such as the general global downturn in the economy which may adversely affect spending by private and government agencies.

We do not intend to update forward-looking statements. You should refer to and carefully review the information in future documents we file with the Securities and Exchange Commission.

Overview and Plan of Operation

The water treatment recycling and reuse industry is highly fragmented, consisting of many companies involved in various operational capacities, including companies that design fully integrated systems for processing millions of gallons of water for municipal, industrial, and commercial applications. Demand for water treatment and purification has continued to grow due to economic expansion, population growth, scarcity of usable water, concerns about water quality and regulatory requirements.

Many believe the world is facing a global crisis in both the supply and quality of available water. Water is a natural resource that has a limited supply and no true substitute with only a small percentage of the earth's water is available for human consumption. Demand for water resources is compounded by a growing and developing world population, Third World urbanization, and increasing water usage in industries such as oil and gas, agriculture and food processing. It has been reported in a television broadcast by CNBC titled "Liquid Assets: The Big Business of Water," aired originally in 2010, that by 2025, 48 countries will be without sufficient water to meet basic requirements. We believe the lack of water resources is directly linked to inadequate water management strategies on the part of governments, businesses, consumers and private individuals. We believe that the demand for cost-effective water treatment technology and services will continue to grow.

We plan to continue marketing our existing patented Sionix Dissolved Air Flotation ("DAF") system to potential domestic and international customers. We believe that we are now able to aggressively market our systems to a variety of private companies and governmental entities in several vertical markets including oil and gas, agriculture, manufacturing, health care and public water utilities. We are engaging in selective sales and promotional activities in connection with the operation of the unit, including media exposure. If the unit continues to operate successfully, we believe we can receive orders for operating units.

We plan to market Sionix technology incorporating the patented Sionix DAF system to markets including; oil and gas drilling and production, agriculture, manufacturing, food processing, municipalities and public utilities. We are also continuing to extend the Sionix technologies, add to the Company's intellectual property and develop alliances and working relationships with independent laboratories, equipment manufacturers, technology providers and potential customers and partner in our markets of interest.

Recent Developments

The Company designed and manufactured a DAF system for a leading maple syrup producer in New York State. The unit was leased to Madava Sugar Maple LLC and was operated between January and March 2013. Sionix provided on-site training, installation, technical and research support during the sap-to-syrup production season. The unit performed successfully, improving operating economics and product quality. Sionix is engaged in discussions with the customer regarding upgrades to and sale of the unit, as well as announcing the results of the successful operation. We anticipate that published results of this successful DAF performance will lead to further opportunities in this market.

The Company completed an initial demonstration of its proprietary water treatment technology in the Williston Basin of North Dakota in January 2013. The processing facility located in Dickinson, North Dakota, successfully treated production and flow back water from drilling and fracking operations in the Bakken Shale. The first round of testing was done with the participation of Clear Water Services, an independent, experienced and innovative water treating company and laboratory analysis was performed by two independent third party testing laboratories in North Dakota and California. Test results show significant reduction in turbidity and total suspended solids as well as reductions in metals, hydrocarbons and bicarbonate.


In April 2013, Sionix began a second round of field testing after modifying equipment and its testing protocol based on information and analysis gleaned from earlier test results. The treatment process consisted of initial residence time, pH control and chemical pre-treatment, clarification, filtration and the patented Sionix DAF system. The objective of the test was to demonstrate the ability to treat commercial volumes of production and flow back water and generate treated brine that could be recycled for use in fracking. Preliminary data from the second round of testing indicate the successful treatment of production and flow back waters that were destined for disposal wells. Our process yielded clear, treated brine with a density of more than 9.6 pounds per gallon at a near neutral pH.

The Company plans to complete the analysis of test results and aggressively market the Sionix frack water recycling technology in the Bakken and other shale areas as a cost-effective way to treat flow back and production water and return it to the driller for reuse in fracking.

Results of Operations

Three Months Ended June 30, 2013, Compared to Three Months Ended June 30, 2012

Revenues for the three months ended June 30, 2013 and 2012 were $22,500 and $0, respectively.

The Company's total operating expenses were $418,667 during the three months ended June 30, 2013, a decrease of $733,151 or 64%, as compared to $1,151,818 for the three months ended June 30, 2012. General and administrative expenses were $208,457 during the three months ended June 30, 2013, a decrease of $587,678 or 74%, as compared to $796,135 for the three months ended June 30, 2012. Sales and marketing expenses were $5,112 for the three months ended June 30, 2013, a decrease of $56,908 or 92%, as compared to $62,020 for the three months ended June 30, 2012. The decrease in sales and marketing expense was related to a reduction of personnel and vendors for sales support and the related payroll taxes and benefits, as well as decreased travel and related expenses. Research and development expenses were $198,626 during the three months ended June 30, 2013, a decrease of $86,430 or 30%, as compared to $285,056 for the three months ended June 30, 2012. This increase is directly attributable to the write off and the write down of inventory due to obsolescence, lack of the ability to realize the carrying value of the inventory and the change in the product mix required by the change in business focus and the costs associated with ongoing tests in the Williston Basin.

The Company also incurred interest costs related to various notes in the amount of $489,671 during the three months ended June 30, 2013, an increase of $237,840 or 94% as compared to $251,831 for the three months ended June 30, 2012. Normal operations were limited by the lack of available cash. The Company incurred a loss on the change in the fair value of the derivative liability of $241,520 during the three months ended June 30, 2013, a decrease of $278,431 as compared to a gain of $36,911 for the three months ended June 30, 2012.

Nine Months Ended June 30, 2013 Compared to Nine Months Ended June 30, 2012

Revenues for the nine months ended June 30, 2013 and 2012 were $50,000 and $0, respectively.

The Company's total operating expenses were $2,825,988 during the nine months ended June 30, 2013, a decrease of $169,246 or 6%, as compared to $2,995,234 for the nine months ended June 30, 2012. General and administrative expenses were $1,407,201 during the nine months ended June 30, 2013, a decrease of $761,722 or 35%, as compared to $2,168,923 for the nine months ended June 30, 2012. Sales and marketing expenses were $58,924 for the nine months ended June 30, 2013, a decrease of $151,403 or 72%, as compared to $210,327 for the nine months ended June 30, 2012. The decrease in sales and marketing expense was related to a loss of personnel and vendors for sales support, as well as decreased travel and related expenses. Research and development expenses were $1,336,015 during the nine months ended June 30, 2013, an increase of $736,086 or 123%, as compared to $599,929 for the nine months ended June 30, 2012. This increase is directly attributable to the write off and the write down of inventory due to obsolescence, lack of the ability to realize the carrying value of the inventory and the change in the product mix required by the change in business focus and the costs associated with ongoing tests in the Williston Basin.

The Company also incurred interest costs related to various notes in the amount of $1,198,216 during the nine months ended June 30, 2013, an increase of $483,760 or 68%, as compared to $714,456 for the nine months ended June 30, 2012. Normal operations were limited by the lack of available cash. The Company also incurred a loss on the change in the fair value of the derivative liability of $272,097 during the nine months ended June 30, 2013, a decrease of $307,635 as compared to a gain of $35,538 for the nine months ended June 30, 2012.


Liquidity and Capital Resources

The Company had cash of $100,962 and $1,348,069 at June 30, 2013 and September 30, 2012, respectively. Historically the Company's source of cash for operations has been the sale of its equity and debt securities. During the period ended June 30, 2013 the Company obtained $255,000 from the sale of notes. If it does not receive additional orders or if these orders do not satisfy its capital needs, the Company expects to sell its securities or obtain loans to meet its capital requirements. The Company has no additional orders for the sale of water treatment systems or for the deployment of its DAF system, except as noted above. There can be no assurance that sales of the Company's securities, additional contracts for the sale of water treatment services, or of its water treatment systems, if such sales occur, will provide sufficient capital for its operations or that the Company will not encounter unforeseen difficulties that may deplete its capital resources more rapidly than anticipated. As of June 30, 2013, approximately $2,897,326 in principal and interest of certain promissory notes issued by the Company were due or will be coming due on or before September 30, 2014, which is the latest maturity date of its existing notes. The Company anticipates that it can continue normal operations for approximately one month unless additional financing is obtained.

Operating Activities

During the nine months ended June 30, 2013, the Company used $1,861,769 of cash in operating activities, primarily to fund its net loss. Non-cash adjustments included $287,401 for common stock issued for services, $5,156 for a loss on the change in fair value of derivative liability and unregistered shares shortfall and $1,359,226 for the amortization of debt discounts. Cash provided by operating activities included $403,247 in accrued expenses. Cash used in operating activities included $132,230 in other current assets.

Investing Activities

During the nine months ended June 30, 2013, the Company received net proceeds from the sale of property and equipment totaling $81,127, as compared to acquisitions of $5,748 and $124,434 during the nine months ended June 30, 2013 and June 30, 2012 respectively.

Financing Activities

Financing activities by the Company provided net cash of $539,283 and $2,975,000 during the nine months ended June 30, 2013 and June 30, 2012, respectively.

As of June 30, 2013, the Company had an accumulated deficit of $41,947,870. Management anticipates that future operating results will continue to be subject to many of the problems, expenses, delays and risks inherent in the establishment of a developmental business enterprise, many of which the Company cannot control.

Material Trends, Events or Uncertainties

The Company is not certain how the current economic downturn may affect its business. Because of the global recession, government agencies and private industry may not have the funds to purchase its water treatment systems. It may also be more difficult for the Company to raise capital in the current economic environment. Other than as discussed herein, the Company does not know of any material trends, events or uncertainties that may impact its operations in the future.


Going Concern

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. This basis of accounting contemplates the recovery of the Company's assets and the satisfaction of its liabilities in the normal course of business. Through June 30, 2013, the Company has incurred cumulative losses of $41,947,870 including a net income for the three months ended June 30, 2013 of $294,097. As the Company has no cash flow from operations, its ability to maintain normal operations is entirely dependent upon obtaining adequate cash to finance its overhead, research and development activities, and acquisition of production equipment. It is unknown when, if ever, the Company will achieve a level of revenues adequate to support its costs and expenses. In order for the Company to meet its basic financial obligations, including rent, salaries, debt service and operations, it plans to seek additional equity or debt financing. Because of the Company's history and current debt levels, there is considerable doubt that the Company will be able to obtain financing. The Company's ability to meet its cash requirements for the next twelve months depends on its ability to obtain such financing. Even if financing is obtained, any such financing will likely involve additional fees and debt service requirements that may significantly reduce the amount of cash it will have for operations. Accordingly, there is no assurance that the Company will be able to implement its plans.

The Company expects to continue to incur substantial operating losses for the foreseeable future, and it cannot predict the extent of the future losses or when it may become profitable, if ever. The Company expects to incur increasing sales and marketing, research and development and general and administrative expenses. Also, the Company has a substantial amount of short-term debt, which will need to be repaid or refinanced, unless it is converted into equity. As a result, if the Company begins to generate revenues from operations, those revenues will need to be significant in order to cover current and anticipated expenses. These factors raise substantial doubt about the Company's ability to continue as a going concern unless it is able to obtain substantial additional financing in the short term and generate revenues over the long term. If the Company is unable to obtain financing, it would likely discontinue its operations.

Critical Accounting Policies

The discussion and analysis of its financial condition and results of operations is based upon the Company's unaudited condensed financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires it to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. On an on-going basis, the Company evaluates its critical accounting policies and estimates. The Company bases its estimates on historical experience 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. Actual results may differ from these estimates under different assumptions or conditions. The Company's critical accounting policies and estimates are discussed in its Annual Report on Form 10-K for the fiscal year ended September 30, 2012.


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