-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, O8pW9ICaXivloQc7qtri/MNFeXoGkjI0uQ9727Vb16nJ9B8+yjX9JXd7ODifgikN sjDCuvJDm8P3vYeTk1vW5w== 0001116502-10-000011.txt : 20100105 0001116502-10-000011.hdr.sgml : 20100105 20100104212318 ACCESSION NUMBER: 0001116502-10-000011 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20070630 FILED AS OF DATE: 20100105 DATE AS OF CHANGE: 20100104 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SIONIX CORP CENTRAL INDEX KEY: 0000764667 STANDARD INDUSTRIAL CLASSIFICATION: REFRIGERATION & SERVICE INDUSTRY MACHINERY [3580] IRS NUMBER: 870428526 STATE OF INCORPORATION: NV FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q/A SEC ACT: 1934 Act SEC FILE NUMBER: 002-95626-D FILM NUMBER: 10503979 BUSINESS ADDRESS: STREET 1: 2082 MICHELSON DRIVE, #306 CITY: IRVINE STATE: CA ZIP: 92612 BUSINESS PHONE: 949-454-9283 MAIL ADDRESS: STREET 1: 2082 MICHELSON DRIVE, #306 CITY: IRVINE STATE: CA ZIP: 92612 FORMER COMPANY: FORMER CONFORMED NAME: SIONIX CORP /UT/ DATE OF NAME CHANGE: 19960515 FORMER COMPANY: FORMER CONFORMED NAME: AUTOMATIC CONTROL CORP /NV DATE OF NAME CHANGE: 19960422 FORMER COMPANY: FORMER CONFORMED NAME: SIONIX CORP DATE OF NAME CHANGE: 19960214 10-Q/A 1 sinx_10qa.txt AMENDMENT NO. 1 TO FORM 10-Q/A ================================================================================ U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------- FORM 10-QSB/A --------------- (Amendment Number 1) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2007 Commission File Number 2-95626-D --------------- Sionix Corporation (Exact name of small business issuer as specified in its charter) --------------- NEVADA 87-0428526 ------ ---------- State or other jurisdiction (IRS Employer of incorporation or organization) Identification No.) 2801 OCEAN PARK BLVD., SUITE 339, SANTA MONICA, CALIFORNIA 90405 (Address of principal executive offices) (714) 678-1000 (Issuer's telephone number) 3880 E. Eagle Drive, Anaheim, California 92807 (Former name, former address and former fiscal year, if changed since last report) Check whether the issuer: (1) 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 for such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X] As of July 31, 2007, there were 106,635,201 shares of Common Stock of the issuer outstanding. Transitional Small Business Disclosure Format (check one) [ ] Yes; [X] No ================================================================================ EXPLANATORY NOTE Between October 17, 2006 and February 27, 2007 the Sionix Corporation issued twenty-five (25) secured convertible promissory notes for total proceeds to the Company of $750,000 ("Convertible Notes 1"). Convertible Notes 1 had a conversion price of $0.05 into common stock. Convertible Notes 1 contained a provision that would automatically adjust the conversion price if equity securities or instruments convertible into equity securities were issued at a conversion price less than $0.05. On June 6, 2007, the Company issued five (5) convertible promissory notes for a total of $86,000 ("Convertible Notes 2"). No warrants were issued in connection with Convertible Notes 2. Convertible Notes 2 matures on or about December 31, 2008, and is convertible into common stock at $0.01. As a result of the issuance of Convertible Notes 2, the conversion price for Convertible Notes 1 was adjusted down from $0.05 to $0.01. The decrease in the conversion price increased the potential dilutive shares from 15,000,000 to 75,000,000, and this subsequently increased the total outstanding and potential dilutive shares over the authorized common share limit of 150,000,000. Because there were insufficient authorized shares to fulfill all potential conversions, the Company should have classified all potentially dilutive securities as derivative liabilities as of June 6, 2007. The Company researched its debt and equity instruments and determined that the potentially dilutive securities are as follows: o 2001 Executive Officers Stock Option Plan o Advisory Board Compensation o Warrants Related to 2004 Stock Purchase Agreement o Convertible Notes 1 o Convertible Notes 2 o Subordinated Convertible Notes 3 o Warrants related to Subordinated Convertible Notes 3 As a result of these transactions, we filed amendment number 1 ("Amendment 1") to our Form 10-QSB (the "Original Report") that was originally filed with the Securities and Exchange Commission (the "SEC") on August 14, 2007 for the period ended June 30, 2007. The primary purpose of the Amendment is to disclose the restatement of our financial statements for the three and nine months ended June 30, 2007 and cumulative inception to date operations for June 30, 2007. A complete discussion of the restatement is included in the section of the Amendment 1 titled "Management's Discussion and Analysis or Plan of Operation" and in note 10 to our financial statements for the periods ended June 30, 2007. This Amendment 1 includes all of the information contained in the Original Report, and we have made no attempt in this Amendment to modify or update the disclosures presented in the Original Report, except as identified. The disclosures in this Amendment continue to speak as of the date of the Original Report, and do not reflect events occurring after the filing of the Original Report. Accordingly, this Amendment should be read in conjunction with our other filings made with the SEC subsequent to the filing of the Original Report, including any amendments to those filings. The filing of this Amendment shall not be deemed to be an admission that the Original Report, when made, included any untrue statement of a material fact or omitted to state a material fact necessary to make a statement not misleading. The following adjustments were made to our financial statements for the periods ended June 30, 2007:
AS BENFICIAL WARRANTS AS RESTATED PREVIOUSLY CONVERSION AND JUNE 30, STATED FEATURES OPTIONS 2007 ------------ ------------ ------------ ------------ BALANCE SHEET Accrued expenses $ 1,525,397 $ 576,000 $ -- $ 2,101,397 Warrant and option liability -- -- 2,379,561 2,379,561 Beneficial conversion liability -- 26,269,071 -- 26,269,071 Additional paid in capital 13,969,888 (595,147) (2,561,339) 10,813,402 Deficit accumulated during developmental stage (16,400,573) (26,249,924) 181,778 (42,468,719) STATEMENT OF OPERATIONS (FOR THE THREE MONTHS ENDED JUNE 30, 2007) Gain on change in fair value of warrant and option liability $ -- $ -- $ 692,799 $ 692,799 Gain on change in fair value of beneficial conversion liability -- 7,923,801 -- 7,923,801 General and administrative (compensation expense) 444,544 3,661,741 -- 4,106,285 Interest expense and financing costs (74,307) (29,958,427) (511,021) (30,543,755) STATEMENT OF OPERATIONS (FOR THE NINE MONTHS ENDED JUNE 30, 2007) Gain on change in fair value of warrant and option liability $ -- $ -- $ 692,799 $ 692,799 Gain on change in fair value of beneficial conversion liability -- 7,923,801 -- 7,923,801 General and administrative (compensation expense) 932,668 3,661,741 -- 4,594,409 Interest expense and financing costs (144,895) (29,958,427) (511,021) (30,614,343) STATEMENT OF OPERATIONS (SINCE INCEPTION) Gain on change in fair value of warrant and option liability $ -- $ -- $ 692,799 $ 692,799 Gain on change in fair value of beneficial conversion liability -- 7,923,801 -- 7,923,801 General and administrative (compensation expense) 12,661,991 4,215,298 -- 16,877,289 Interest expense and financing costs (379,581) (29,958,427) (511,021) (30,849,029) STATEMENT OF CASH FLOWS (FOR THE NINE MONTHS ENDED JUNE 30, 2007) Net (loss) gain $ (1,101,520 $(25,696,367) $ 181,778 $(26,616,109) Gain on change in fair value of warrant and option liability -- -- (692,799) (692,799) Gain on change in fair value of beneficial conversion liability -- (7,923,801) -- (7,923,801) Change in accrued expenses 319,558 96,000 -- 415,558 Non-cash compensation expense -- 3,565,741 -- 3,565,741 Non-cash financing costs -- 29,958,427 511,021 30,469,448 STATEMENT OF CASH FLOWS (SINCE INCEPTION) Net (loss) gain $(16,400,573) $(26,249,924) $ 181,778 $ (42,468,719) Gain on change in fair value of warrant and option liability -- -- (692,799) (692,799) Gain on change in fair value of beneficial conversion liability -- (7,923,801) -- (7,923,801) Change in accrued expenses 1,387,473 576,000 -- 1,963,473 Non-cash compensation expense -- 3,639,298 -- 3,639,298 Non-cash financing costs -- 29,958,427 511,021 30,469,448
CAUTIONARY NOTICE REGARDING FORWARD LOOKING STATEMENTS We desire to take advantage of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. This Report on Form 10-QSB contains a number of forward-looking statements that reflect management's current views and expectations with respect to our business, strategies, products, future results and events and financial performance. All statements made in this Report other than statements of historical fact, including statements that address operating performance, events or developments that management expects or anticipates will or may occur in the future, including statements related to distributor channels, volume growth, revenues, profitability, new products, acquisitions, adequacy of funds from operations, statements expressing general optimism about future operating results and non-historical information, are forward-looking statements. In particular, the words "believe," "expect," "intend," "anticipate," "estimate," "may," "will," variations of such words, and similar expressions identify forward-looking statements, but are not the exclusive means of identifying such statements and their absence does not mean that the statement is not forward-looking. These forward-looking statements are subject to certain risks and uncertainties, including those discussed below. Our actual results, performance or achievements could differ materially from historical results as well as those expressed in, anticipated or implied by these statements. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Readers should not place undue reliance on these forward-looking statements, which are based on management's current expectations and projections about future events, are not guarantees of future performance, are subject to risks, uncertainties and assumptions (including those described below) and apply only as of the date of this Report. Our actual results, performance or achievements could differ materially from the results expressed in, or implied by, these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed below "Management's Discussion and Analysis and Plan of Operation," as well as those discussed elsewhere in this Report, and the risks discussed in our most recently filed Annual Report on Form 10-KSB and in the press releases and other communications to shareholders issued by us from time to time which attempt to advise interested parties of the risks and factors that may affect our business. PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS SIONIX CORPORATION (A DEVELOPMENT STAGE COMPANY) BALANCE SHEET AS OF JUNE 30, 2007 (UNAUDITED) ASSETS
AS RESTATED ------------ CURRENT ASSETS: Cash & cash equivalents $ 455,563 PROPERTY AND EQUIPMENT, NET 46,399 DEPOSITS 4,600 ------------ Total assets $ 506,562 ============ LIABILITIES AND STOCKHOLDERS' DEFICIT CURRENT LIABILITIES: Accounts payable $ 204,805 Accrued expenses 2,101,397 Notes payable - related parties 129,000 Note payable - officers 32,860 Convertible notes, net of debt discounts of $543,686 792,314 Equity line of credit 102,336 ------------ Warrant and option liability 2,379,561 Beneficial conversion liability 26,269,071 ------------ Total current liabilities 32,011,344 ------------ STOCKHOLDERS' DEFICIT Common stock, $0.001 par value ;150,000,000 shares authorized; 107,117,101 shares issued and 106,635,201 shares outstanding 106,635 Additional paid-in capital 10,813,402 Shares to be issued 43,900 Deficit accumulated during development stage (42,468,719) ------------ Total stockholders' deficit (31,504,782) ------------ Total liabilities & stockholders' deficit $ 506,562 ============
The accompanying notes form an integral part of these unaudited condensed financial statements SIONIX CORPORATION (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF OPERATIONS (UNAUDITED)
CUMULATIVE FROM INCEPTION NINE MONTH PERIODS (OCTOBER 3, THREE MONTH PERIODS ENDED ENDED 1994) TO JUNE 30, JUNE 30, JUNE 30, 2007 2006 2007 2006 2007 (AS RESTATED) (AS RESTATED) (AS RESTATED) ------------- ------------- ------------- ------------- ------------- NET SALES $ -- $ -- $ -- $ -- $ -- OPERATING EXPENSES: General and administrative 4,106,285 242,236 4,594,409 447,247 16,877,289 Research and development -- -- -- -- 1,449,475 Impairment of intangible assets -- -- -- -- 1,267,278 Inventory obsolescence -- -- -- -- 365,078 Depreciation and amortization 7,936 7,745 23,723 23,486 524,129 ------------- ------------- ------------- ------------- ------------- Total operating expenses 4,114,221 249,981 4,618,132 470,733 20,483,249 ------------- ------------- ------------- ------------- ------------- LOSS FROM OPERATIONS (4,114,221) (249,981) (4,618,132) (470,733) 20,483,249) OTHER INCOME (EXPENSES) Interest income 56 666 -- 54,324 Interest expense and financing costs (30,543,755) (2,406) (30,614,343) (7,218) 30,849,029) Gain on change in fair value of warrant and option liability 692,799 -- 692,799 -- 692,799 Gain on change in fair value of beneficial conversion liability 7,923,801 -- 7,923,801 -- 7,923,801 Loss on settlement of debts -- -- -- (94,221) (230,268) Loss on legal settlement -- -- -- -- 434,603 ------------- ------------- ------------- ------------- ------------- Total other expenses (21,927,099) (2,406) (21,997,077) (101,439) (21,973,770) ------------- ------------- ------------- ------------- ------------- LOSS BEFORE INCOME TAXES (26,041,320) (252,387) (26,615,209) (572,172) (42,457,019) Income taxes 900 -- 900 -- 11,700 ------------- ------------- ------------- ------------- ------------- NET LOSS $ (26,042,220) $ (252,387) $ (26,616,109) $ (572,172) $ (42,468,719) ============= ============= ============= ============= ============= BASIC AND DILUTED LOSS PER SHARE $ (0.25) $ (0.00) $ (0.25) $ (0.01) ============= ============= ============= ============= *BASIC AND DILUTED WEIGHTED AVERAGE NUMBER OF COMMON STOCK OUTSTANDING 106,431,387 102,524,186 105,901,243 102,524,186 ============= ============= ============= =============
- ------------ * Weighted average number of shares used to compute basic and diluted loss per share is the same as the effect of dilutive securities is anti-dilutive The accompanying notes form an integral part of these unaudited condensed financial statements SIONIX CORPORATION (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF CASH FLOWS (UNAUDITED)
CUMULATIVE FROM INCEPTION (OCTOBER 3, FOR THE NINE MONTH PERIODS 1994) TO ENDED JUNE 30, JUNE 30, 2007 2007 (AS RESTATED) 2006 (AS RESTATED) ------------ ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $(26,616,109) $ (572,172) $(42,468,7193) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 23,723 23,486 611,046 Amortization of consulting fees -- -- 13,075 Amortization of debt discount on convertible notes 75,827 -- 75,827 Issuance of common stock for compensation -- -- 1,835,957 Issuance of common stock for services & prepaid consulting fees 84,929 -- 2,181,217 Gain on change in fair value of warrant and option liability (692,799) -- (692,799) Gain on change in fair value of beneficial conversion liability (7,923,801) -- (7,923,801) Impairment of assets -- -- 514,755 Write-down of obsolete assets -- -- 38,862 Impairment of intangible assets -- -- 1,117,601 Loss on settlement of debts -- 94,221 130,268 Non-cash financing costs 30,469,448 -- 30,469,448 Non-cash compensation costs 3,565,741 -- 3,639,298 Other -- -- 40,370 Changes in assets and liabilities: Increase in other current assets -- -- (510,727) Decrease in other receivable -- -- 3,000 Increase in deposits (4,600) -- (4,600) Increase (decrease) in accounts payable (67,806) 7,713 274,804 Increase in accrued interest 69,068 7,218 137,749 Increase in accrued expenses 415,558 422,139 1,963,743 ------------ ------------ ------------ Total adjustments 26,015,288 554,777 33,915,093 ------------ ------------ ------------ Net cash used in operating activities (600,821) (17,395) (8,553,626 ------------ ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of patents -- -- (154,061) Purchase of equipment (25,360) -- (405,535) ------------ ------------ ------------ Net cash used in investing activities (25,360) -- (559,596) ------------ ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of notes 1,336,000 47,780 1,793,433 Proceeds from (payment for) notes payable under equity line of credit (225,000) -- 531,000 Payment of notes payable - officers (33,800) (30,340) (185,642) Issuance of common stock for cash -- -- 7,376,094 Receipt of cash for stock to be issued -- -- 53,900 ------------ ------------ ------------ Net cash provided by financing activities 1,077,200 17,440 9,568,785 ------------ ------------ ------------ Net increase in cash & cash equivalents 451,019 45 455,563 CASH & CASH EQUIVALENTS, BEGINNING 4,544 343 -- ------------ ------------ ------------ CASH & CASH EQUIVALENTS, ENDING 455,563 $ 388 $ 455,563 ============ ============ ============ SUPPLEMENTAL INFORMATION: Cash and cash equivalents paid for: Taxes $ -- $ -- ============ ============ Interest expense $ -- $ -- ============ ============
The accompanying notes form an integral part of these unaudited condensed financial statements SIONIX CORPORATION (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) FROM INCEPTION (OCTOBER 3, 1994) TO JUNE 30, 2007 (UNAUDITED)
TOTAL COMMON STOCK DEFICIT STOCK- -------------------- ADDITIONAL STOCK STOCK STOCK UNAMORTIZED ACCUMULATED HOLDERS' NUMBER OF PAID-IN TO BE SUBSCRIPTION TO BE CONSULTING FROM EQUITY SHARES AMOUNT CAPITAL ISSUED RECEIVABLE CANCELLED FEES INCEPTION (DEFICIT) ----------- ------------ ----------- ------ ----------- --------- -------- ----------- --------- Stock issued for cash, October 3, 1994 10,000 $ 10 $ 90 $ -- $ -- $ -- $ -- $ -- $ 100 Net loss -- -- -- -- -- -- -- (1,521) (1,521) Balance at December 31, 1994 10,000 10 90 -- -- -- -- (1,521) (1,421) Shares issued for assignment rights 1,990,000 1,990 (1,990) -- -- -- -- -- -- Shares issued for services 572,473 572 135,046 -- -- -- -- -- 135,618 Shares issued for debt 1,038,640 1,038 1,164,915 -- -- -- -- -- 1,165,953 Shares issued for cash 232,557 233 1,119,027 -- -- -- -- -- 1,119,260 Shares issued for subscription receivable 414,200 414 1,652,658 -- (1,656,800) -- -- -- (3,728) Shares issued for productions costs 112,500 113 674,887 -- (675,000) -- -- -- -- Net loss -- -- -- -- -- -- -- (914,279) (914,279) Balance at December 31, 1995 4,370,370 4,370 4,744,633 -- (2,331,800) -- -- (915,800) 1,501,403 Shares issued for reorganization 18,632,612 18,633 (58,033) -- -- -- -- -- (39,400) Shares issued for cash 572,407 573 571,834 -- -- -- -- -- 572,407 Shares issued for services 24,307 24 24,283 -- -- -- -- -- 24,307 Net loss -- -- -- -- -- -- -- (922,717) (922,717) Balance at September 30, 1996 23,599,696 23,600 5,282,717 -- (2,331,800) -- -- (1,838,517) 1,136,000 Shares issued for cash 722,733 723 365,857 -- -- -- -- -- 366,580 Shares issued for services 274,299 274 54,586 -- -- -- -- -- 54,860 Cancellation of shares (542,138) (542) (674,458) -- 675,000 -- -- -- -- Net loss -- -- -- -- -- -- -- (858,915) (858,915) Balance at September 30, 1997 24,054,590 24,055 5,028,702 -- (1,656,800) -- -- (2,697,432) 698,525 Shares issued for cash 2,810,000 2,810 278,190 -- -- -- -- -- 281,000 Shares issued for services 895,455 895 88,651 -- -- -- -- -- 89,546 Shares issued for compensation 2,200,000 2,200 217,800 -- -- -- -- -- 220,000 Cancellation of shares (2,538,170) (2,538) (1,534,262) -- 1,656,800 -- -- -- 120,000 Net loss -- -- -- -- -- -- -- (1,898,376) (1,898,376) Balance at September 30, 1998 27,421,875 27,422 4,079,081 -- -- -- -- (4,595,808) (489,305) Shares issued for compensation 3,847,742 3,847 389,078 -- -- -- -- -- 392,925
SIONIX CORPORATION (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) FROM INCEPTION (OCTOBER 3, 1994) TO JUNE 30, 2007 (UNAUDITED)
TOTAL COMMON STOCK DEFICIT STOCK- -------------------- ADDITIONAL STOCK STOCK STOCK UNAMORTIZED ACCUMULATED HOLDERS' NUMBER OF PAID-IN TO BE SUBSCRIPTION TO BE CONSULTING FROM EQUITY SHARES AMOUNT CAPITAL ISSUED RECEIVABLE CANCELLED FEES INCEPTION (DEFICIT) ----------- ---------- ----------- --------- ----------- -------- -------- ----------- ---------- Share issued for service 705,746 706 215,329 -- -- -- -- -- 216,035 Share issued for cash 9,383,000 9,383 928,917 -- -- -- -- -- 938,300 Net loss -- -- -- -- -- -- -- (1,158,755) (1,158,755) ----------- ---------- ----------- --------- ----------- -------- -------- ---------- ----------- Balance September 30, 1999 41,358,363 41,358 5,612,405 -- -- -- -- (5,754,563) (100,800) Share issued for cash 10,358,500 10,304 1,020,046 -- -- -- -- -- 1,030,350 Shares issued for compensation 1,517,615 1,518 1,218,598 -- -- -- -- -- 1,220,116 Shares issued for service 986,844 986 253,301 -- -- -- -- -- 254,287 Net loss -- -- -- -- -- -- -- (2,414,188) (2,414,188) ----------- ---------- ----------- --------- ----------- -------- -------- ---------- ----------- Balance September 30, 2000 54,166,322 54,166 8,104,350 -- -- -- -- (8,168,751) (10,235) Shares issued for service 2,517,376 2,517 530,368 -- -- -- (141,318) -- 391,567 Share issued for cash 6,005,000 6,005 594,495 -- -- -- -- -- 600,500 Shares to be issued for cash (100,000 shares) -- -- -- 10,000 -- -- -- -- 10,000 Shares to issued for debt (639,509 shares) -- -- -- 103,295 -- -- -- -- 103,295 Net loss -- -- -- -- -- -- -- (1,353,429) (1,353,429)
SIONIX CORPORATION (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) FROM INCEPTION (OCTOBER 3, 1994) TO JUNE 30, 2007 (UNAUDITED)
TOTAL COMMON STOCK DEFICIT STOCK- -------------------- ADDITIONAL STOCK STOCK STOCK UNAMORTIZED ACCUMULATED HOLDERS' NUMBER OF PAID-IN TO BE SUBSCRIPTION TO BE CONSULTING FROM EQUITY SHARES AMOUNT CAPITAL ISSUED RECEIVABLE CANCELLED FEES INCEPTION (DEFICIT) ----------- ---------- ----------- --------- ----------- -------- -------- ---------- ----------- Balance September 30, 2001 62,688,698 62,688 9,229,213 113,295 -- -- (141,318) (9,522,180) (258,302) Shares issued for services 1,111,710 1,112 361,603 -- -- -- 54,400 -- 417,115 Shares issued as contribution 100,000 100 11,200 -- -- -- -- -- 11,300 Shares issued for compensation 18,838 19 2,897 -- -- -- -- -- 2,916 Share issued for cash 16,815,357 16,815 1,560,782 (10,000) -- -- -- -- 1,567,597 Shares issued for debt 1,339,509 1,340 208,639 (103,295) -- -- -- -- 106,684 Shares to be issued related to equity financing (967,742 shares) -- -- (300,000) 300,000 -- -- -- -- -- Cancellation of shares (7,533,701) (7,534) -- -- -- -- -- -- (7,534) Net loss -- -- -- -- -- -- -- (1,243,309) (1,243,309) ----------- ---------- ----------- --------- ----------- -------- -------- ---------- ----------- Balance September 30, 2002 74,540,411 74,540 11,074,334 300,000 -- -- (86,918) (10,765,489) 596,467 Shares issued for services 2,467,742 2,468 651,757 (300,000) -- -- -- -- 354,225 Shares issued for capital equity line 8,154,317 8,154 891,846 -- -- -- -- -- 900,000 Amortization of consulting fees -- -- -- -- -- -- 86,918 -- 86,918 Cancellation of shares (50,000) (50) 50 -- -- -- -- -- -- Shares to be cancelled -- -- 7,349 -- (7,349) -- -- -- --
SIONIX CORPORATION (A DEVELOPMENT STAGE COMPANY) STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) FROM INCEPTION (OCTOBER 3, 1994) TO JUNE 30, 2007 (UNAUDITED)
TOTAL COMMON STOCK DEFICIT STOCK- -------------------- ADDITIONAL STOCK STOCK STOCK UNAMORTIZED ACCUMULATED HOLDERS' NUMBER OF PAID-IN TO BE SUBSCRIPTION TO BE CONSULTING FROM EQUITY SHARES AMOUNT CAPITAL ISSUED RECEIVABLE CANCELLED FEES INCEPTION (DEFICIT) ----------- ---------- ----------- --------- ----------- -------- -------- ---------- ----------- Net loss -- -- -- -- -- -- -- (1,721,991) (1,721,991) ----------- ---------- ----------- --------- ----------- -------- -------- ---------- ----------- Balance September 30, 2003 85,112,470 85,112 12,625,336 -- -- (7,349) -- (12,487,480) 215,619 Shares issued for capital equity line 19,179,016 19,179 447,706 -- -- -- -- -- 466,885 Shares issued for services 5,100,004 5,100 196,997 -- -- -- (13,075) -- 189,022 Shares to be issued for cash (963,336 shares) -- -- -- 28,900 -- -- -- -- 28,900 Shares to be issued for debt (500,000 shares) -- -- -- 15,000 -- -- -- -- 15,000 Cancelled of shares (7,349,204) (7,349) -- -- -- 7,349 -- -- -- Issuance of warrants related to 2004 stock purchase -- -- 24,366 -- -- -- -- -- 24,366 Net loss -- -- -- -- -- -- -- (1,593,135) (1,593,135) ----------- ---------- ----------- --------- ----------- -------- -------- ---------- ----------- Balance September 30, 2004 restated 102,042,286 102,042 13,294,405 43,900 -- -- (13,075) (14,080,615) (653,343) Amortization of consuting fees -- -- -- -- -- -- 13,075 -- 13,075 Net loss -- -- -- -- -- -- -- (722,676) (722,676) ----------- ---------- ----------- --------- ----------- -------- -------- ---------- ----------- Balance September 30, 2005 restated 102,042,286 102,042 13,294,405 43,900 -- -- -- (14,803,291) (1,362,944) Net loss -- -- -- -- -- -- -- (1,049,319) (1,049,319) ----------- ---------- ----------- --------- ----------- -------- -------- ---------- ----------- Balance September 30, 2006 102,042,286 102,042 13,294,405 43,900 -- -- -- (15,852,610) (2,412,263) Stock issued for consulting 4,592,915 4,593 80,336 -- -- -- -- -- 84,929 Reclassification to warrant and option liability -- -- (2,561,339) -- -- -- -- -- (2,561,339) Net loss -- -- -- -- -- -- -- (26,616,109) (26,616,109) ----------- ---------- ----------- --------- ----------- -------- -------- ---------- ----------- Balance June 30, 2007 unaudited, restated 106,635,201 $ 106,635 $10,813,402 $ 43,900 $ -- $ -- $ -- $(42,468,719) $(31,504,782) =========== ========== =========== ========= =========== ======== ======== ============ ============
The accompanying notes form an integral part of these unaudited condensed financial statements Note 1. ORGANIZATION AND DESCRIPTION OF BUSINESS Sionix Corporation (the "Company") was incorporated in Utah in 1985. The Company was formed to design, develop, and market automatic water filtration system primarily for small water districts. The Company has completed its reincorporation as a Nevada corporation, effective July 1, 2003. The reincorporation was completed pursuant to an Agreement and Plan of Merger between Sionix Corporation, a Utah corporation ("Sionix Utah") and its wholly-owned Nevada subsidiary, Sionix Corporation ("Sionix Nevada"). Under the merger agreement, Sionix Utah merged with and into Sionix Nevada, and each share of Sionix Utah's common stock was automatically converted into one share of common stock, par value $0.001 per share, of Sionix Nevada. The merger was effected by the filing of Articles of Merger, along with the Agreement and Plan of Merger, with the Secretary of State of Nevada. The Company is a development stage company as defined in Statement of Financial Accounting Standards ("SFAS") No. 7 "Accounting and Reporting by Development Stage Enterprises." The Company is in the development stage and its efforts have been principally devoted to research and development, organizational activities, and raising capital. All losses accumulated since inception has been considered as part of the Company's development stage activities. Note 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The unaudited financial statements have been prepared by the Company, pursuant to the rules and regulations of the Securities and Exchange Commission. The information furnished in these condensed consolidated financial statements reflects all adjustments (consisting of normal recurring accruals and adjustments) which are, in the opinion of management, necessary to fairly present the operating results for the respective periods. Certain information and footnote disclosures normally present in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted pursuant to such rules and regulations. The results of the nine month periods ended June 30, 2007 are not necessarily indicative of the results to be expected for the full year ending September 30, 2007. REVENUE RECOGNITION The Company's policy to recognize revenues is in accordance with SEC Staff Accounting Bulletin No. 101, or other specific authoritative literature, as applicable. Accordingly, revenues from products sales are recorded when all four of the following criteria are met: (i) persuasive evidence of an arrangement exists; (ii) delivery has occurred or services have been rendered; ( iii) the Company's price to the buyer is fixed or determinable; and (iv) collectibility is reasonably assured. The Company's policy is to report its sales levels on a net revenue basis, with net revenues being computed by deducting from gross revenues the amount of actual sales returns and the amount of reserves established for anticipated sales returns. The Company's policy for shipping and handling costs, billed to customers, is to include it in revenue in accordance with Emerging Issues Task Force ("EITF") issue No. 00-10, "Accounting for Shipping and Handling Revenues and Costs." The purpose of this issue was to clarify the classification of shipping and handling revenues and costs. The consensus reached was that all shipping and handling billed to customers should be recorded as revenue. Accordingly, the Company records its shipping and handling amounts within net sales and operating expenses. The Company has not earned any revenue since its inception to the date of this report. STOCK-BASED COMPENSATION Effective October 1, 2006, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 123-R, "Share-Based Payment" ("SFAS 123-R"), which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors, including stock options based on their fair values. SFAS 123-R supersedes Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), which the Company previously followed in accounting for stock-based awards. In March 2005, the SEC issued Staff Accounting Bulletin No. 107 ("SAB 107") to provide guidance on SFAS 123-R. The Company has applied SAB 107 in its adoption of SFAS 123-R. NET LOSS PER SHARE Net loss per share is calculated in accordance with Statement of Financial Accounting Standards No. 128, "Earnings Per Share." Basic net loss per share is based upon the weighted average number of common shares outstanding. Diluted net loss per share is based on the assumption that all dilutive convertible shares and stock options were converted or exercised. Dilution is computed by applying the treasury stock method. Under this method, options and warrants are assumed to be exercised at the beginning of the period (or at the time of issuance, if later), and as if funds obtained thereby were used to purchase common stock at the average market price during the period. ESTIMATES The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates ADVERTISING The cost of advertising is expensed as incurred. Total advertising costs were $3,385 and $3,310 for the nine month periods ended June 30, 2007 and 2006, respectively. RECLASSIFICATION For comparative purposes, prior period's consolidated financial statements have been reclassified to conform to report classifications of the current period. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements." This statement clarifies the definition of fair value, establishes a framework for measuring fair value and expands the disclosures on fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. Company management is currently evaluating the effect of this pronouncement on financial statements. In September 2006, the FASB issued SFAS No. 158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans--an amendment of FASB Statements No. 87, 88, 106, and 123(R)." One objective of this standard is to make it easier for investors, employees, retirees and other parties to understand and assess an employer's financial position and its ability to fulfill the obligations under its benefit plans. SFAS No. 158 requires employers to fully recognize in their financial statements the obligations associated with single-employer defined benefit pension plans, retiree healthcare plans, and other postretirement plans. SFAS No. 158 requires an employer to fully recognize in its statement of financial position the overfunded or underfunded status of a defined benefit postretirement plan (other than a multiemployer plan) as an asset or liability and to recognize changes in that funded status in the year in which the changes occur through comprehensive income. This Statement also requires an employer to measure the funded status of a plan as of the date of its year-end statement of financial position, with limited exceptions. SFAS No. 158 (ASC 715) requires an entity to recognize as a component of other comprehensive income, net of tax, the gains or losses and prior service costs or credits that arise during the period but are not recognized as components of net periodic benefit cost pursuant to SFAS No. 87. This Statement requires an entity to disclose in the notes to financial statements additional information about certain effects on net periodic benefit cost for the next fiscal year that arise from delayed recognition of the gains or losses, prior service costs or credits, and transition asset or obligation. The Company is required to initially recognize the funded status of a defined benefit postretirement plan and to provide the required disclosures for fiscal years ending after December 15, 2006. Company management is currently evaluating the effect of this pronouncement on financial statements. In February 2007, FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. SFAS No. 159 (ASC 825) is effective for fiscal years beginning after November 15, 2007. Early adoption is permitted subject to specific requirements outlined in the new Statement. Therefore, calendar-year companies may be able to adopt SFAS No. 159 for their first quarter 2007 financial statements. The new Statement allows entities to choose, at specified election dates, to measure eligible financial assets and liabilities at fair value that are not otherwise required to be measured at fair value. If a company elects the fair value option for an eligible item, changes in that item's fair value in subsequent reporting periods must be recognized in current earnings. SFAS No. 159 also establishes presentation and disclosure requirements designed to draw comparison between entities that elect different measurement attributes for similar assets and liabilities. Note 3. PROPERTY AND EQUIPMENT Equipment and machinery $ 213,166 Furniture and fixtures 22,183 ----------- 235,349 Less accumulated depreciation (188,950) ----------- $ 46,399 =========== Depreciation expenses for the nine month periods ended June 30, 2007 and 2006 were $23,723 and $23,486, respectively. Note 4. ACCRUED EXPENSES (RESTATED) Accrued expenses comprised of the following at June 30, 2007: Accrued advisory board compensation $ 576,000 Payroll taxes 142,672 Accrued salaries 1,098,182 Interest payable 120,767 Other accruals 163,776 ---------- Total $2,101,397 ========== Note 5. NOTES PAYABLE RELATED PARTIES The Company has received advances in the form of unsecured promissory notes from stockholders in order to pay ongoing operating expenses. These notes are at interest rates up to 13% and are due on demand. As of June 30, 2007, notes payable amounted to $129,000. The Company recorded $27,315 interest expense for the nine month period ended June 30, 2007. OFFICERS Notes payables to officers are unsecured, interest free and due on demand. Proceeds from these notes payable were used to pay ongoing operating expense. The balance at June 30, 2007 was $32,860. Note 6. NOTES PAYABLE UNDER EQUITY LINE OF CREDIT During the year ended September 30, 2003, the Company received $1,307,500 proceeds from promissory notes to Cornell Capital Partners, LP, net of 4% fee of $56,000 and $36,500 for escrow and other fees. The Company has settled $900,000 by issuing shares of common stock during the year ended September 30, 2003 (note 7). The notes payable outstanding at September 30, 2003, amounted to $500,000. The balance for the notes payable outstanding at September 30, 2004 and 2005 were $233,115 and $233,115, respectively. In 2006, Company has entered into a settlement agreement with Cornell Capital Partner to pay the total amount of $327,336; $50,000 shall be paid on or before November 15, 2006, $25,000 payable per month on the 15th day of each month commencing December 15, 2006, with the balance of $27,336 due and payable on or before October 15, 2007. The Company recorded loss on settlement of debt of $94,221 for the year ended September 30, 2006. The balance payable was $102,336 as of June 30, 2007. Note 7. CONVERTIBLE NOTES During the nine month period ended June 30, 2007, the Company entered into various debenture agreements (the "Bridge Notes") with several investors. Under the terms of the agreements, the notes bear interest at the rate of 10% per annum. The notes will automatically mature and the entire outstanding principal amount, together with all unpaid and accrued interest, shall become due and payable after the earlier of (i) the eighteen (18) month anniversary of the date of issuance (ii) an event of default or (iii) the closing of any equity related financing by the Company in which the gross proceeds to the Company are at least $2,500,000, unless, prior to such time, the notes have been converted into shares of the Company's common stock. The notes are convertible into shares of Common stock of the Company at $0.05 per share or shares of any equity security issued by the Company at a conversion price equal to the price at which such security is sold to any other party. The conversion price is adjustable as per the terms of the agreement for the subsequent issuances of equity security at a price different than the conversion price. The conversion price is also adjustable if a registration statement covering the underlying shares is not declared effective within 180 days after the closing, but in no case the conversion price to be reduced below $0.04 per share. As of June 30, 2007 the Company had received $836,000 under the Bridge Notes. On July 18, 2007 Sionix completed an offering of $1,025,000 of Subordinated Convertible Debentures to a group of institutional and accredited investors. The Subordinated Convertible Debentures are convertible into shares of Common Stock of Sionix at an initial conversion rate of $ .22 per share, subject to anti-dilution adjustments. For each $100,000 of Convertible Debentures purchased, the investor received Warrants to purchase 227,272 shares of Common Stock. Each Warrant entitles the holder to purchase one share of common stock of Sionix (the "Warrant Shares") for a period of five years at a price of $0.50 per Warrant Share. Under the terms of the Registration Rights Agreement , Sionix is required to file a registration statement under the Securities Act of 1933 Act in order to register the resale of the shares of Common Stock issuable upon conversion of the Subordinated Convertible Debentures and the Warrant Shares (collectively, the "Registrable Securities"). If Sionix does not file a registration statement with respect to the Registrable Securities within forty-five days following the closing of the Offering, or if the Registration Statement is not declared effective by the Securities and Exchange Commission within 90 days, then Sionix must pay to each purchaser damages equal to 1.5% of the purchase price paid by the purchaser for its Subordinated Convertible Debentures, for each 30 days that transpires after these deadlines. The amount of the aggregate damages payable by Sionix is limited to 15% of the purchase price. Southridge Investment Group LLC, Ridgefield, Connecticut ("Southridge") acted as agent for Sionix in arranging the transaction, and received a placement fee of $102,500. Southridge also received warrants to purchase 698,863 shares of Common Stock of Sionix, on the same terms and conditions as the Warrants issued to the purchasers. As part of the above offering the Company received $500,000 of financing under the convertible debenture and issued 1,136,364 warrants as of June 30, 2007. The grant date fair value of the warrants amounted to $318,939 was calculated using the Black-Scholes option pricing model, using the following assumptions: risk free rate of return of 6%, volatility of 195.97%, and dividend yield of 0% and expected life of five years. As of June 30, 2007, the Company recorded beneficial conversion feature expense of $75,827 and the unamortized beneficial conversion feature amount of $353,082 and unamortized warrant discount of 190,604 showing as net of the note payable amount of $1,336,000. The Company recorded an interest expense of $46,464 on the notes. Note 8. STOCKHOLDERS' EQUITY COMMON STOCK The Company has 150,000,000 authorized shares, par value $ .001 per share. As of June 30, 2007, the Company had 107,117,101 shares issued and 106,635,201 shares outstanding. During the nine month period ended June 30, 2007, the Company issued 3,292,915 shares, valued at $0.01 per share, and 1,300,000 shares valued at $0.04 per share for consulting services recorded at the fair market value. STOCK OPTIONS 2001 Executive Officers Stock Option Plan In October of 2000, the company entered into amendments to the employment agreements with each of the executive officers, eliminating the provisions of stock bonuses. In lieu of the bonus provision, the Company adopted the 2001 Executive Officers Stock option Plan. The Company reserved 7,576,680 shares for issuance under the plan. Options outstanding:
WEIGHTED AVERAGE NUMBER OF OUTSTANDING AGGREGATE INTRINSIC EXERCISE PRICE OPTIONS VALUE - ---------------------------------------------------------------------------------------------------------- Outstanding as of $0.15 7,343,032 $ -- September 30, 2006 - ---------------------------------------------------------------------------------------------------------- Granted - ---------------------------------------------------------------------------------------------------------- Forfeited - ---------------------------------------------------------------------------------------------------------- Exercised - ---------------------------------------------------------------------------------------------------------- Outstanding as of $0.15 7,343,032 $ 881,165 June 30, 2007 - ----------------------------------------------------------------------------------------------------------
A summary of the Company's option activity is listed below:
WEIGHTED- WEIGHTED- WEIGHTED- AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE STOCK STOCK REMAINING PRICE OF PRICE OF EXERCISE OPTIONS OPTIONS CONTRACTUAL OPTIONS OPTIONS PRICE OUTSTANDING EXERCISABLE LIFE OUTSTANDING EXERCISABLE - ------------------------------------------------------------------------------------------------------------------------------- $0.15 7,343,032 7,343,032 3 years $ 0.15 $ 0.15
The fair value of the options was calculated using the Black-Scholes option valuation model with the following weighted-average assumptions: Dividend yields of 0%; risk free interest rates of 6%; expected volatility of 100% and expected lives of 4.9 years. All options were vested prior to September 30, 2006. No options are vested during the nine month period ended June 30, 2007. Note 9. GOING CONCERN (RESTATED) 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, 2007, the Company had incurred cumulative losses of $42,468,719 including a current loss for the nine months ended June 30, 2007 of $26,616,109. The Company's successful transition from a development stage company to attaining profitable operations is dependent upon obtaining financing adequate to fulfill its research and development activities, production of its equipment and achieving a level of revenues adequate to support the Company's cost structure. Management's plan of operations anticipates that the cash requirements for the next twelve months will be met by obtaining capital contributions through the sale of common stock and cash flow from operations. However, there is no assurance that the Company will be able to implement its plan. Note 10. RESTATEMENT The Company issued twenty-five (25) secured convertible promissory notes between October 17, 2006 and February 27, 2007 for total proceeds to the Company of $750,000 ("Convertible Notes 1"). Convertible Notes 1 had a conversion price of $0.05 into common stock. Convertible Notes 1 contained a provision that would automatically adjust the conversion price if equity securities or instruments convertible into equity securities were issued at a conversion price less than $0.05. On June 6, 2007, the Company issued five (5) convertible promissory notes for a total of $86,000 ("Convertible Notes 2"). No warrants were issued in connection with Convertible Notes 2. Convertible Notes 2 matures on or about December 31, 2008, and is convertible into common stock at $0.01. As a result of the issuance of Convertible Notes 2, the conversion price for Convertible Notes 1 was adjusted down from $0.05 to $0.01. The decrease in the conversion price increased the potential dilutive shares from 15,000,000 to 75,000,000, and this subsequently increased the total outstanding and potential dilutive shares over the authorized common share limit of 150,000,000. Because there were insufficient authorized shares to fulfill all potential conversions, the Company should have classified all potentially dilutive securities as derivative liabilities as of June 6, 2007. The Company researched its debt and equity instruments and determined that the potentially dilutive securities are as follows: o 2001 Executive Officers Stock Option Plan o Advisory Board Compensation o Warrants Related to 2004 Stock Purchase Agreement o Convertible Notes 1 o Convertible Notes 2 o Subordinated Convertible Notes 3 o Warrants related to Subordinated Convertible Notes 3 The Company analyzed the effect of the recalculation on the balance sheet and the statements of operations and cash flows as of June 30, 2007. The analysis and results were as follows: 2001 EXECUTIVE OFFICERS STOCK OPTION PLAN In October 2000, the Company amended the employment agreements with its executive officers. In conjunction with the amendments, the Company adopted the 2001 Executive Officers Stock Option Plan ("Plan"). The Plan has reserved 7,576,680 shares of common stock and has issued options for the purchase of 7,034,140 shares of common stock. The options vest over five (5) years and expire ten (10) years from the date of issuance. BALANCE SHEET The Company determined that because there were not sufficient authorized shares available the embedded conversion feature met the definition of a derivative based on the SFAS No.133, "Accounting for Derivatives and Hedging Activities," as of June 6, 2007. The Company determined the fair value of the stock options to be $2,454,597 using the Black Sholes model with the following assumptions: o risk free rate of return of 5.03%; o volatility of 285%; o dividend yield of 0%; and o expected term of 3.87 years. Therefore, at June 6, 2007 the Company will record on the accompanying balance sheet a liability of $2,454,597 for the fair value of the options and a reduction to additional paid in capital ("APIC") of $2,454,597. The Company followed the guidance of SFAS No. 133, which requires all contracts classified as liabilities to be measured at fair value with changes in fair value reported in earnings as long as the contracts remain classified as liabilities. At June 30, 2007, the Company determined the fair value of the options to be $1,892,508 using the Black Sholes model with the following assumptions: o risk free rate of return of 4.89%; o volatility of 286%; o dividend yield of 0%; and o expected term of 3.81 years. The decrease of $562,089 will be recorded as a change in accrued derivative liability in the accompanying statement of operations. STATEMENT OF OPERATIONS At June 30, 2007, the Company will record $562,089 as a change in accrued derivative liability in the accompanying statement of operations. STATEMENT OF CASH FLOWS Changes in the statement of cash flows were the result of the change in fair value of the liability of $562,089. ADVISORY BOARD COMPENSATION On October 1, 2004, the Company formed an advisory board consisting of four members. In exchange for their services, each member was to receive $5,000 monthly from October 1, 2004 to February 22, 2007, for a total of $576,000 to be paid to all members. Each member, in his sole discretion, was entitled to convert some or all of the cash amount owed to him into shares of common stock at a rate of $0.05 per share. If all of the members of the advisory board converted the total amount of cash compensation due to them into shares of common stock, the Company would be required to issue 11,520,000 shares. The Company determined that the accrued expense, embedded beneficial conversion features, embedded beneficial conversion feature discount, and related amortization expense were not recorded at the date of issuance or prior to the restatement. No payments have been made to any advisory board members and there has been no conversion by any advisory board members of the accrued liability into shares of common stock. BALANCE SHEET The Company determined that because there were not sufficient authorized shares available, the embedded conversion feature met the definition of a derivative based on SFAS No. 133 as of June 6, 2007. The Company determined the fair value of the embedded conversion feature to be $3,614,932 using the Black Sholes model with the following assumptions: o risk free rate of return of 4.99%; o volatility between 186% and 277%; o dividend yield of 0%; and o an expected term of 0.52 years to 1.30 years. Therefore, at June 6, 2007, the Company will record on the accompanying balance sheet an accrued liability of $576,000 for the accrued compensation and an embedded conversion derivative liability of $3,614,932. The Company followed the guidance of SFAS No. 133, which requires all contracts classified as liabilities to be measured at fair value, with changes in fair value reported in earnings as long as the contracts remain classified as liabilities. At June 30, 2007, the Company determined the fair value of the embedded conversion feature to be $2,680,539 using the Black Sholes model with the following assumptions: o risk free rate of return between 4.91% and 4.99%; o volatility between 167% and 279%; o dividend yield of 0%; and o expected term of 0.45 years to 1.24 years. The decrease of $934,393 will be recorded as a change in accrued derivative liability in the accompanying statement of operations. STATEMENT OF OPERATIONS The Company will record an adjustment of $3,661,741 to compensation expense which is the the fair value of the embedded derivative. At June 30, 2007, the Company will record $934,393 as a change in accrued derivative liability in the accompanying statement of operations. STATEMENT OF CASH FLOWS Changes in the statement of cash flows were the result of the advisory board compensation accrued expense of $96,000, additional compensation expense for beneficial conversion features liability of $3,614,932, and change in fair value of the liability of $934,393. WARRANTS RELATED TO 2004 STOCK PURCHASE AGREEMENT Under the terms of a 2004 Stock Purchase Agreement, the Company issued warrants to purchase 1,463,336 shares of common stock at an exercise price of $0.03, which expired between February 9, 2007 and August 25, 2007. The Company determined that the warrants and related expense were not recorded at the date of issuance or prior to the restatement and there has been no exercise of the warrants into shares of common stock. As of June 6, 2007, only 333,335 warrants remained outstanding as all of the others had expired. BALANCE SHEET The Company determined that because there were not sufficient authorized shares available, the warrants met the definition of a derivative based on SFAS No. 133 as of June 6, 2007. The Company calculated the fair value of the 333,335 warrants to be $106,742 at June 6, 2007 using the Black Sholes model with the following assumptions: o risk free rate of return of 5.06%; o volatility of 144%; o dividend yield of 0%; and o expected term between 0.01 years and 0.22 years. The Company will record an accrued warrant derivative liability of $106,742 and a reduction to its additional paid in capital of $106,742 on the accompanying balance sheet. The Company followed the guidance of SFAS No. 133, which requires all contracts classified as liabilities to be measured at fair value, with changes in fair value reported in earnings as long as the contracts remain classified as liabilities. At June 30, 2007, the Company determined the fair value of the embedded conversion feature to be $56,042 using the Black Sholes model with the following assumptions: o risk free rate of return of 4.28%; o volatility of 167%; o dividend yield of 0%; and o expected term of 0.10 years to .15 years. The decrease of $50,700 will be recorded as a change in accrued derivative liability in the accompanying statement of operations. STATEMENT OF OPERATIONS The decrease of $50,700 will be recorded as a change in accrued derivative liability in the accompanying statement of operations. STATEMENT OF CASH FLOWS Changes in the statement of cash flows were the result of the change in fair value of the warrants of $50,700 on the statement of operations. CONVERTIBLE NOTES 1 As of June 6, 2007, the Company had Convertible Notes 1 outstanding totaling $750,000 that were issued between October 17, 2006 and February 27, 2007. Convertible Notes 1 included an embedded beneficial conversion feature that allowed the holders to convert the Convertible Notes 1 into common stock at an initial rate of $0.05. Convertible Notes 1 matures between April 2008 and August 2008, accrues interest at 10%, and any accrued but unpaid interest is also convertible into common stock at $0.05. Because of the price protection offered holders of Convertible Notes 1 and the subsequent issuance of Convertible Note, 2, the conversion price was decreased from $0.05 to $0.01. BALANCE SHEET The Company determined that because there were not sufficient authorized shares available, the embedded conversion feature met the definition of a derivative based on SFAS No. 133 as of June 6, 2007. The Company determined the fair value of the embedded conversion feature to be $27,057,645 using the Black Sholes model with the following assumptions: o risk free rate of return of 4.99%; o volatility between 186% and 277%; o dividend yield of 0%; and o expected term of 0.87 years to 1.23 years. Therefore, at June 6, 2007, the Company will record on the accompanying balance sheet an accrued embedded conversion derivative liability of $27,057,645, a reduction to additional paid in capital of $619,513 (the amount that had been previously recorded to APIC) and financing costs of $26,438,132. At June 30, 2007, the Company determined the fair value of the embedded conversion feature to be $20,841,459 using the Black Sholes model with the following assumptions: o risk free rate of return of 4.91%; o volatility between 197% and 279%; o dividend yield of 0%; and o expected term of 0.80 years to 1.17 years. The decrease of $6,216,186 will be recorded as a change in accrued derivative liability in the accompanying statement of operations. STATEMENT OF OPERATIONS The Company will record the $26,438,132 as financing costs and record the decrease of $6,216,186 as a change in accrued derivative liability in the accompanying statement of operations. STATEMENT OF CASH FLOWS Changes in the statement of cash flows were the result of the non cash financing charge of $26,438,132 and the $6,216,186 change in accrued derivative liability. CONVERTIBLE NOTES 2 On June 6, 2007, the Company issued five (5) convertible promissory notes for a total of $86,000. No warrants were issued in connection with Convertible Notes 2. The Convertible Notes 2 matures on or about December 31, 2008, accrues interest at 10% and is convertible at $0.01. BALANCE SHEET The Company determined that because there were not sufficient authorized shares available that the embedded conversion feature met the definition of a derivative based on SFAS No. 133 as of June 6, 2007. The Company determined the fair value of the embedded conversion feature to be $2,982,540 using the Black Sholes model with the following assumptions: o risk free rate of return of 4.99%; o volatility of 277%; o dividend yield of 0%; and o expected term of 1.57 years. Therefore, at June 6, 2007, the Company will record on the accompanying balance sheet an accrued embedded conversion derivative liability of $2,982,540 and financing costs of $2,982,540. At June 30, 2007, the Company determined the fair value of the embedded conversion feature to be $2,310,505 using the Black Sholes model with the following assumptions: o risk free rate of return of 4.87%; o volatility of 279%; o dividend yield of 0%; and o expected term of 1.51 years. The decrease of $672,035 will be recorded as a change in accrued derivative liability in the accompanying statement of operations. STATEMENT OF OPERATIONS The Company will record the $2,982,540 as financing costs and the decrease of $672,035 as a change in accrued derivative liability in the accompanying statement of operations. STATEMENT OF CASH FLOWS Changes in the statement of cash flows were the result of the non cash financing charge of $2,982,540 and the $672,035 change in accrued derivative liability. SUBORDINATED CONVERTIBLE NOTES 3 On June 21, 2007, the Company issued two subordinated convertible promissory notes ("Subordinated Convertible Notes 3") for a total of $500,000. The Company issued to the investors 1,136,364 five year warrants with an exercise price of $0.50. In addition, the Company issued 465,908 warrants as a placement fee which have the same terms as the warrants issued to the investors. The Subordinated Convertible Notes 3 mature on June 20, 2008, accrues interest at 8% and is convertible at $0.22. BALANCE SHEET The Company determined that because there were not sufficient authorized shares available that the embedded conversion feature met the definition of a derivative based on SFAS No. 133 as of June 6, 2007. The Company determined the fair value of the embedded conversion feature to be $537,755 using the Black Sholes model with the following assumptions: o risk free rate of return of 4.96%; o volatility of 196%; o dividend yield of 0%; and o expected term of 1 year. Therefore, at June 21, 2007, the Company will record in the accompanying balance sheet an accrued embedded conversion derivative liability of $537,755 and financing costs of $537,755. At June 30, 2007, the Company determined the fair value of the embedded conversion feature to be $436,568 using the Black Sholes model with the following assumptions: o risk free rate of return of 4.91%; o volatility of 197%; o dividend yield of 0%; and o expected term of 0.98 years. The decrease of $101,187 will be recorded as a change in accrued derivative liability in the accompanying statement of operations. STATEMENT OF OPERATIONS The Company will record the $537,755 as financing costs and will record the decrease of $101,187 as a change in accrued derivative liability in the accompanying statement of operations. STATEMENT OF CASH FLOWS Changes in the statement of cash flows were the result of the non cash financing charge of $537,775 and change in accrued derivative liability of $101,187. WARRANTS RELATED TO SUBORDINATED CONVERTIBLE NOTES 3 On June 21, 2007, the Company issued to the investors 1,136,364 five year warrants with an exercise price of $0.50. In addition, the Company issued 465,908 warrants as a placement fee, which have the same terms as the warrants issued to the investors. BALANCE SHEET The Company determined that because there were not sufficient authorized shares available that the warrants met the definition of a derivative based on SFAS No. 133 as of June 6, 2007. The Company calculated the fair value of the 1,136,364 and 465,908 warrants to be $362,426 and $148,595, respectively, at June 21, 2007 using the Black Sholes model with the following assumptions: o risk free rate of return of 5.06%; o volatility of 265%; o dividend yield of 0%; and o expected term of 5 years. The Company will record an accrued warrant derivative liability of $511,021 and financing costs of $511,021. The Company followed the guidance of SFAS No. 133, which requires all contracts classified as liabilities to be measured at fair value, with changes in fair value reported in earnings as long as the contracts remain classified as liabilities. At June 30, 2007, the Company determined the fair value of the warrants to be $431,011 using the Black Sholes model with the following assumptions: o risk free rate of return of 4.92%; o volatility of 265%; o dividend yield of 0%; and o expected term of 4.98 years. The decrease of $80,010 will be recorded as a change in accrued derivative liability in the accompanying statement of operations. STATEMENT OF OPERATIONS The Company will record as financing costs $511,021 and will record the decrease of $80,010 as a change in accrued derivative liability in the accompanying statement of operations. STATEMENT OF CASH FLOWS Changes in the statement of cash flows were the result of the non cash financing charge of $511,021 and a change in accrued derivative liability of $80,010. The following table shows the effect of each of the changes discussed above on the Company's balance sheet, statement of operation, and statement of cash flows for the three and nine months ended June 30, 2007.
AS AS BENEFICIAL WARRANTS RESTATED PREVIOUSLY CONVERSION AND JUNE 30, STATED FEATURES OPTIONS 2007 ------------ ------------ ----------- ------------ BALANCE SHEET Accrued expenses $ 1,525,397 $ 576,000 $ -- $ 2,101,397 Warrant and option liability -- -- 2,379,561 2,379,561 Beneficial conversion liability -- 26,269,071 -- 26,269,071 Additional paid in capital 13,969,888 (595,147) (2,561,339) 10,813,402 Deficit accumulated during developmental stage (16,400,573) (26,249,924) 181,778 (42,468,719) STATEMENT OF OPERATIONS (FOR THE THREE MONTHS ENDED JUNE 30, 2007) Gain on change in fair value of warrant and option liability $ -- $ -- $ 692,799 $ 692,799 Gain on change in fair value of beneficial conversion liability -- 7,923,801 -- 7,923,801 General and administrative (compensation expense) 444,544 3,661,741 -- 4,106,285 Interest expense and financing costs (74,307) (29,958,427) (511,021) (30,543,755) STATEMENT OF OPERATIONS (FOR THE NINE MONTHS ENDED JUNE 30, 2007) Gain on change in fair value of warrant and option liability $ -- $ -- $ 692,799 $ 692,799 Gain on change in fair value of beneficial conversion liability -- 7,923,801 -- 7,923,801 General and administrative (compensation expense) 932,668 3,661,741 -- 4,594,409 Interest expense and financing costs (144,895) (29,958,427) (511,021) (30,614,343) STATEMENT OF OPERATIONS (SINCE INCEPTION) Gain on change in fair value of warrant and option liability $ -- $ -- $ 692,799 $ 692,799 Gain on change in fair value of beneficial conversion liability -- 7,923,801 -- 7,923,801 General and administrative (compensation expense) 12,661,991 4,215,298 -- 16,877,289 Interest expense and financing costs (379,581) (29,958,427) (511,021) (30,849,029) STATEMENT OF CASH FLOWS (FOR THE NINE MONTHS ENDED JUNE 30, 2007) Net (loss) gain $ (1,101,520 $(25,696,367) $ 181,778 $(26,616,109) Gain on change in fair value of warrant and option liability -- -- (692,799) (692,799) Gain on change in fair value of beneficial conversion liability -- (7,923,801) -- (7,923,801) Change in accrued expenses 319,558 96,000 -- 415,558 Non-cash compensation expense -- 3,565,741 -- 3,565,741 Non-cash financing costs -- 29,958,427 511,021 30,469,448 STATEMENT OF CASH FLOWS (SINCE INCEPTION) Net (loss) gain $(16,400,573) $(26,249,924) $ 181,778 $ (42,468,719) Gain on change in fair value of warrant and option liability -- -- (692,799) (692,799) Gain on change in fair value of beneficial conversion liability -- (7,923,801) -- (7,923,801) Change in accrued expenses 1,387,473 576,000 -- 1,963,473 Non-cash compensation expense -- 3,639,298 -- 3,639,298 Non-cash financing costs -- 29,958,427 511,021 30,469,448
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION GENERAL. The following discussion and analysis should be read in conjunction with our Financial Statements and Notes thereto, included elsewhere in this Quarterly Report on Form 10-QSB. Except for the historical information contained in this report, the following discussion contains certain forward-looking statements that involve risks and uncertainties, such as statements of our plans, objectives, expectations and intentions. The cautionary statements made in our most recent Annual Report on Form 10-KSB should be read as being applicable to all related forward-looking statements wherever they appear in this Report. Our actual results may differ materially from the results discussed in the forward-looking statements, as a result of certain factors including, but not limited to, those discussed elsewhere herein and in our most recent Annual Report on Form 10-KSB. RESTATEMENT OF PRIOR PERIOD. The Company issued twenty-five (25) secured convertible promissory notes between October 17, 2006 and February 27, 2007 for total proceeds to the Company of $750,000 ("Convertible Notes 1"). Convertible Notes 1 had a conversion price of $0.05 into common stock. Convertible Notes 1 contained a provision that would automatically adjust the conversion price if equity securities or instruments convertible into equity securities were issued at a conversion price less than $0.05. On June 6, 2007, the Company issued five (5) convertible promissory notes for a total of $86,000 ("Convertible Notes 2"). No warrants were issued in connection with Convertible Notes 2. Convertible Notes 2 matures on or about December 31, 2008, and is convertible into common stock at $0.01. As a result of the issuance of Convertible Notes 2, the conversion price for Convertible Notes 1 was adjusted down from $0.05 to $0.01. The decrease in the conversion price increased the potential dilutive shares from 15,000,000 to 75,000,000, and this subsequently increased the total outstanding and potential dilutive shares over the authorized common share limit of 150,000,000. Because there were insufficient authorized shares to fulfill all potential conversions, the Company should have classified all potentially dilutive securities as derivative liabilities as of June 6, 2007. The Company researched its debt and equity instruments and determined that the potentially dilutive securities are as follows: o 2001 Executive Officers Stock Option Plan o Advisory Board Compensation o Warrants Related to 2004 Stock Purchase Agreement o Convertible Notes 1 o Convertible Notes 2 o Subordinated Convertible Notes 3 o Warrants related to Subordinated Convertible Notes 3 The Company analyzed the effect of the recalculation on the balance sheet and the statements of operations and cash flows as of June 30, 2007. The analysis and results were as follows: 2001 EXECUTIVE OFFICERS STOCK OPTION PLAN In October 2000, the Company amended the employment agreements with its executive officers. In conjunction with the amendments, the Company adopted the 2001 Executive Officers Stock Option Plan ("Plan"). The Plan has reserved 7,576,680 shares of common stock and has issued options for the purchase of 7,034,140 shares of common stock. The options vest over five (5) years and expire ten (10) years from the date of issuance. BALANCE SHEET The Company determined that because there were not sufficient authorized shares available the embedded conversion feature met the definition of a derivative based on the SFAS No. 133 as of June 6, 2007. The Company determined the fair value of the stock options to be $2,454,597 using the Black Sholes model with the following assumptions: o risk free rate of return of 5.03%; o volatility of 285%; o dividend yield of 0%; and o expected term of 3.87 years. Therefore, at June 6, 2007 the Company will record on the accompanying balance sheet a liability of $2,454,597 for the fair value of the options and a reduction to additional paid in capital ("APIC") of $2,454,597. The Company followed the guidance of SFAS No. 133, which requires all contracts classified as liabilities to be measured at fair value with changes in fair value reported in earnings as long as the contracts remain classified as liabilities. At June 30, 2007, the Company determined the fair value of the options to be $1,892,508 using the Black Sholes model with the following assumptions: o risk free rate of return of 4.89%; o volatility of 286%; o dividend yield of 0%; and o expected term of 3.81 years. The decrease of $562,089 will be recorded as a change in accrued derivative liability in the accompanying statement of operations. STATEMENT OF OPERATIONS At June 30, 2007, the Company will record $562,089 as a change in accrued derivative liability in the accompanying statement of operations. STATEMENT OF CASH FLOWS Changes in the statement of cash flows were the result of the change in fair value of the liability of $562,089. ADVISORY BOARD COMPENSATION On October 1, 2004, the Company formed an advisory board consisting of four members. In exchange for their services, each member was to receive $5,000 monthly from October 1, 2004 to February 22, 2007, for a total of $576,000 to be paid to all members. Each member, in his sole discretion, was entitled to convert some or all of the cash amount owed to him into shares of common stock at a rate of $0.05 per share. If all of the members of the advisory board converted the total amount of cash compensation due to them into shares of common stock, the Company would be required to issue 11,520,000 shares. The Company determined that the accrued expense, embedded beneficial conversion features, embedded beneficial conversion feature discount, and related amortization expense were not recorded at the date of issuance or prior to the restatement. No payments have been made to any advisory board members and there has been no conversion by any advisory board members of the accrued liability into shares of common stock. BALANCE SHEET The Company determined that because there were not sufficient authorized shares available, the embedded conversion feature met the definition of a derivative based on SFAS No. 133 as of June 6, 2007. The Company determined the fair value of the embedded conversion feature to be $3,614,932 using the Black Sholes model with the following assumptions: o risk free rate of return of 4.99%; o volatility between 186% and 277%; o dividend yield of 0%; and o an expected term of 0.52 years to 1.30 years. Therefore, at June 6, 2007, the Company will record on the accompanying balance sheet an accrued liability of $576,000 for the accrued compensation and an embedded conversion derivative liability of $3,614,932. The Company followed the guidance of SFAS No. 133, which requires all contracts classified as liabilities to be measured at fair value, with changes in fair value reported in earnings as long as the contracts remain classified as liabilities. At June 30, 2007, the Company determined the fair value of the embedded conversion feature to be $2,680,539 using the Black Sholes model with the following assumptions: o risk free rate of return between 4.91% and 4.99%; o volatility between 167% and 279%; o dividend yield of 0%; and o expected term of 0.45 years to 1.24 years. The decrease of $934,393 will be recorded as a change in accrued derivative liability in the accompanying statement of operations. STATEMENT OF OPERATIONS The Company will record an adjustment of $3,661,741 to compensation expense which is the accrued advisory board compensation related to the fiscal year ended September 30, 2006 plus the fair value of the embedded derivative. At June 30, 2007, the Company will record $934,393 as a change in accrued derivative liability in the accompanying statement of operations. STATEMENT OF CASH FLOWS Changes in the statement of cash flows were the result of the advisory board compensation accrued expense of $96,000, additional compensation expense for beneficial conversion features liability of $3,614,932, and change in fair value of the liability of $934,393. WARRANTS RELATED TO 2004 STOCK PURCHASE AGREEMENT Under the terms of a 2004 Stock Purchase Agreement, the Company issued warrants to purchase 1,463,336 shares of common stock at an exercise price of $0.03, which expired between February 9, 2007 and August 25, 2007. The Company determined that the warrants and related expense were not recorded at the date of issuance or prior to the restatement and there has been no exercise of the warrants into shares of common stock. As of June 6, 2007, only 333,335 warrants remained outstanding as all of the others had expired. BALANCE SHEET The Company determined that because there were not sufficient authorized shares available, the warrants met the definition of a derivative based on SFAS No. 133 as of June 6, 2007. The Company calculated the fair value of the 333,335 warrants to be $106,742 at June 6, 2007 using the Black Sholes model with the following assumptions: o risk free rate of return of 5.06%; o volatility of 144%; o dividend yield of 0%; and o expected term between 0.01 years and 0.22 years. The Company will record an accrued warrant derivative liability of $106,742 and a reduction to its additional paid in capital of $106,742 on the accompanying balance sheet. The Company followed the guidance of SFAS No. 133, which requires all contracts classified as liabilities to be measured at fair value, with changes in fair value reported in earnings as long as the contracts remain classified as liabilities. At June 30, 2007, the Company determined the fair value of the embedded conversion feature to be $56,042 using the Black Sholes model with the following assumptions: o risk free rate of return of 4.28%; o volatility of 167%; o dividend yield of 0%; and o expected term of 0.10 years to .15 years. The decrease of $50,700 will be recorded as a change in accrued derivative liability in the accompanying statement of operations. STATEMENT OF OPERATIONS The decrease of $50,700 will be recorded as a change in accrued derivative liability in the accompanying statement of operations. STATEMENT OF CASH FLOWS Changes in the statement of cash flows were the result of the change in fair value of the warrants of $50,700 on the statement of operations. CONVERTIBLE NOTES 1 As of June 6, 2007, the Company had Convertible Notes 1 outstanding totaling $750,000 that were issued between October 17, 2006 and February 27, 2007. Convertible Notes 1 included an embedded beneficial conversion feature that allowed the holders to convert the Convertible Notes 1 into common stock at an initial rate of $0.05. Convertible Notes 1 matures between April 2008 and August 2008, accrues interest at 10%, and any accrued but unpaid interest is also convertible into common stock at $0.05. Because of the price protection offered holders of Convertible Notes 1 and the subsequent issuance of Convertible Note, 2, the conversion price was decreased from $0.05 to $0.01. BALANCE SHEET The Company determined that because there were not sufficient authorized shares available, the embedded conversion feature met the definition of a derivative based on SFAS No. 133 as of June 6, 2007. The Company determined the fair value of the embedded conversion feature to be $27,057,645 using the Black Sholes model with the following assumptions: o risk free rate of return of 4.99%; o volatility between 186% and 277%; o dividend yield of 0%; and o expected term of 0.87 years to 1.23 years. Therefore, at June 6, 2007, the Company will record on the accompanying balance sheet an accrued embedded conversion derivative liability of $27,057,645, a reduction to additional paid in capital of $619,513 (the amount that had been previously recorded to APIC) and financing costs of $26,438,132. At June 30, 2007, the Company determined the fair value of the embedded conversion feature to be $20,841,459 using the Black Sholes model with the following assumptions: o risk free rate of return of 4.91%; o volatility between 197% and 279%; o dividend yield of 0%; and o expected term of 0.80 years to 1.17 years. The decrease of $6,216,186 will be recorded as a change in accrued derivative liability in the accompanying statement of operations. STATEMENT OF OPERATIONS The Company will record the $26,438,132 as financing costs and record the decrease of $6,216,186 as a change in accrued derivative liability in the accompanying statement of operations. STATEMENT OF CASH FLOWS Changes in the statement of cash flows were the result of the non cash financing charge of $26,438,132 and the $6,216,186 change in accrued derivative liability. CONVERTIBLE NOTES 2 On June 6, 2007, the Company issued five (5) convertible promissory notes for a total of $86,000. No warrants were issued in connection with Convertible Notes 2. The Convertible Notes 2 matures on or about December 31, 2008, accrues interest at 10% and is convertible at $0.01. BALANCE SHEET The Company determined that because there were not sufficient authorized shares available that the embedded conversion feature met the definition of a derivative based on SFAS No. 133 as of June 6, 2007. The Company determined the fair value of the embedded conversion feature to be $2,982,540 using the Black Sholes model with the following assumptions: o risk free rate of return of 4.99%; o volatility of 277%; o dividend yield of 0%; and o expected term of 1.57 years. Therefore, at June 6, 2007, the Company will record on the accompanying balance sheet an accrued embedded conversion derivative liability of $2,982,540 and financing costs of $2,982,540. At June 30, 2007, the Company determined the fair value of the embedded conversion feature to be $2,310,505 using the Black Sholes model with the following assumptions: o risk free rate of return of 4.87%; o volatility of 279%; o dividend yield of 0%; and o expected term of 1.51 years. The decrease of $672,035 will be recorded as a change in accrued derivative liability in the accompanying statement of operations. STATEMENT OF OPERATIONS The Company will record the $2,982,540 as financing costs and the decrease of $672,035 as a change in accrued derivative liability in the accompanying statement of operations. STATEMENT OF CASH FLOWS Changes in the statement of cash flows were the result of the non cash financing charge of $2,982,540 and the $672,035 change in accrued derivative liability. SUBORDINATED CONVERTIBLE NOTES 3 On June 21, 2007, the Company issued two subordinated convertible promissory notes ("Subordinated Convertible Notes 3") for a total of $500,000. The Company issued to the investors 1,136,364 five year warrants with an exercise price of $0.50. In addition, the Company issued 465,908 warrants as a placement fee which have the same terms as the warrants issued to the investors. The Subordinated Convertible Notes 3 mature on June 20, 2008, accrues interest at 8% and is convertible at $0.22. BALANCE SHEET The Company determined that because there were not sufficient authorized shares available that the embedded conversion feature met the definition of a derivative based on SFAS No. 133 as of June 6, 2007. The Company determined the fair value of the embedded conversion feature to be $537,755 using the Black Sholes model with the following assumptions: o risk free rate of return of 4.96%; o volatility of 196%; o dividend yield of 0%; and o expected term of 1 year. Therefore, at June 21, 2007, the Company will record in the accompanying balance sheet an accrued embedded conversion derivative liability of $537,755 and financing costs of $537,755. At June 30, 2007, the Company determined the fair value of the embedded conversion feature to be $436,568 using the Black Sholes model with the following assumptions: o risk free rate of return of 4.91%; o volatility of 197%; o dividend yield of 0%; and o expected term of 0.98 years. The decrease of $101,187 will be recorded as a change in accrued derivative liability in the accompanying statement of operations. STATEMENT OF OPERATIONS The Company will record the $537,755 as financing costs and will record the decrease of $101,187 as a change in accrued derivative liability in the accompanying statement of operations. STATEMENT OF CASH FLOWS Changes in the statement of cash flows were the result of the non cash financing charge of $537,775 and change in accrued derivative liability of $101,187. WARRANTS RELATED TO SUBORDINATED CONVERTIBLE NOTES 3 On June 21, 2007, the Company issued to the investors 1,136,364 five year warrants with an exercise price of $0.50. In addition, the Company issued 465,908 warrants as a placement fee, which have the same terms as the warrants issued to the investors. BALANCE SHEET The Company determined that because there were not sufficient authorized shares available that the warrants met the definition of a derivative based on SFAS No. 133 as of June 6, 2007. The Company calculated the fair value of the 1,136,364 and 465,908 warrants to be $362,426 and $148,595, respectively, at June 21, 2007 using the Black Sholes model with the following assumptions: o risk free rate of return of 5.06%; o volatility of 265%; o dividend yield of 0%; and o expected term of 5 years. The Company will record an accrued warrant derivative liability of $511,021 and financing costs of $511,021. The Company followed the guidance of SFAS No. 133, which requires all contracts classified as liabilities to be measured at fair value, with changes in fair value reported in earnings as long as the contracts remain classified as liabilities. At June 30, 2007, the Company determined the fair value of the warrants to be $431,011 using the Black Sholes model with the following assumptions: o risk free rate of return of 4.92%; o volatility of 265%; o dividend yield of 0%; and o expected term of 4.98 years. The decrease of $80,010 will be recorded as a change in accrued derivative liability in the accompanying statement of operations. STATEMENT OF OPERATIONS The Company will record as financing costs $511,021 and will record the decrease of $80,010 as a change in accrued derivative liability in the accompanying statement of operations. STATEMENT OF CASH FLOWS Changes in the statement of cash flows were the result of the non cash financing charge of $511,021 and a change in accrued derivative liability of $80,010. The following table shows the effect of each of the changes discussed above on the Company's balance sheet, statement of operation, and statement of cash flows for the three and nine months ended June 30, 2007.
AS BENFICIAL WARRANTS AS PREVIOUSLY CONVERSION AND RESTATED STATED FEATURES OPTIONS JUNE 30, 2007 ------------- ----------- ----------- ------------ BALANCE SHEET Accrued expenses $ 1,525,397 $ 576,000 $ -- $ 2,101,397 Warrant and option liability -- -- 2,379,561 2,379,561 Beneficial conversion liability -- 26,269,071 -- 26,269,071 Additional paid in capital 13,969,888 (595,147) (2,561,339) 10,813,402 Deficit accumulated during developmental stage (16,400,573) (26,249,924) 181,778 (42,468,719) STATEMENT OF OPERATIONS (FOR THE THREE MONTHS ENDED JUNE 30, 2007) Gain on change in fair value of warrant and option liability $ -- $ -- $ 692,799 $ 692,799 Gain on change in fair value of beneficial conversion liability -- 7,923,801 -- 7,923,801 General and administrative (compensation expense) 444,544 3,661,741 -- 4,106,285 Interest expense and financing costs (74,307) (29,958,427) (511,021) (30,543,755) STATEMENT OF OPERATIONS (FOR THE NINE MONTHS ENDED JUNE 30, 2007) Gain on change in fair value of warrant and option liability $ -- $ -- $ 692,799 $ 692,799 Gain on change in fair value of beneficial conversion liability -- 7,923,801 -- 7,923,801 General and administrative (compensation expense) 932,668 3,661,741 -- 4,594,409 Interest expense and financing costs (144,895) (29,958,427) (511,021) (30,614,343) STATEMENT OF OPERATIONS (SINCE INCEPTION) Gain on change in fair value of warrant and option liability $ -- $ -- $ 692,799 $ 692,799 Gain on change in fair value of beneficial conversion liability -- 7,923,801 -- 7,923,801 General and administrative (compensation expense) 12,661,991 4,215,298 -- 16,877,289 Interest expense and financing costs (379,581) (29,958,427) (511,021) (30,849,029) STATEMENT OF CASH FLOWS (FOR THE NINE MONTHS ENDED JUNE 30, 2007) Net (loss) gain $ (1,101,520 $(25,696,367) $ 181,778 $(26,616,109) Gain on change in fair value of warrant and option liability -- -- (692,799) (692,799) Gain on change in fair value of beneficial conversion liability -- (7,923,801) -- (7,923,801) Change in accrued expenses 319,558 96,000 -- 415,558 Non-cash compensation expense -- 3,565,741 -- 3,565,741 Non-cash financing costs -- 29,958,427 511,021 30,469,448 STATEMENT OF CASH FLOWS (SINCE INCEPTION) Net (loss) gain $(16,400,573) $(26,249,924) $ 181,778 $ (42,468,719) Gain on change in fair value of warrant and option liability -- -- (692,799) (692,799) Gain on change in fair value of beneficial conversion liability -- (7,923,801) -- (7,923,801) Change in accrued expenses 1,387,473 576,000 -- 1,963,473 Non-cash compensation expense -- 3,639,298 -- 3,639,298 Non-cash financing costs -- 29,958,427 511,021 30,469,448
PLAN OF OPERATION. During the next twelve months we plan to continue testing of the ELIXIR unit at the Villa Park Dam under our arrangement with the Serrano Water District. We believe that if the unit operates successfully, we will be in a position to aggressively market the ELIXIR product, using the Villa Park Dam unit as a prototype for additional installations. We plan to engage in substantial promotional activities in connection with the installation and operation of the unit, including media exposure and access to other public agencies and potential private customers. If the unit continues to operate successfully, we believe we will receive orders for additional units. Depending on the availability of financing, we plan to establish a manufacturing facility in Southern California to commence production of the units. Depending on the size of the planned facility, we believe it may require capital expenditures in the range of $5 million to $20 million. In addition to capital expenditures, this will require hiring of a substantial number of additional employees. We anticipate that all of our capital needs will need to be funded by equity financing. RESULTS OF OPERATIONS (THREE MONTHS ENDED JUNE 30, 2007 COMPARED TO THREE MONTHS ENDED JUNE 30, 2006, AS RESTATED). The Company was relatively inactive during the quarter ended June 30, 2006 due to lack of resources. During the first nine months of fiscal 2007, the Company raised capital through the sale of Convertible Debentures, and was able to resume activities in the first quarter of fiscal 2007. Revenues for both the three month period ended June 30, 2006 and the three month period ended June 30, 2007 were zero, as the Company has not yet commenced the sale of products. General and administrative expenses for the period of three months ended June 30, 2007 totaled $4,106,285, an increase of $3,864,049 over the $242,236 incurred in the corresponding period in 2006, due to the resumption of development and capital-raising activities and advisory board compensation expense of $3,661,741. Interest expense and financing costs increased by $30,541,349 from $2,406 for the quarter ended June 30, 2006 to $30,543,755 for the quarter ended June 30, 2007. The increase represents interest on convertible notes issued during the past nine months and financing costs of $30,469,448 related to beneficial conversion features on the Company's convertible notes and warrants issued in connection with those notes. Increase in gain on change in fair value of the warrant and option liability was $692,799 for the three months ended June 30, 2007 and represents the decrease in the fair value of the warrant and option liability. The warrants and options were required to be classified as liabilities as of June 6, 2007, and valued at fair value on each balance sheet date, with the change in value reported in earnings. Therefore, there was no increase or decrease in the change in the option and warrant liability for the three months ended June 30, 2006. The increase in the gain on change in fair value of the beneficial conversion liability was $7,923,801 for the three months ended June 30, 2007 and represents the decrease in the fair value of the beneficial conversion liability. The beneficial conversion features were required to be classified as liabilities as of June 6, 2007, and valued at fair value on each balance sheet date, with the change reported in earnings. Therefore, there was no increase or decrease in the change of beneficial conversion liability for the three months ended June 30, 2006. As a result of these items, the loss for the three months ended June 30, 2007 was $26,042,220 representing an increase of $25,789,833 over the loss of $252,387 for the corresponding period in the 2006 fiscal year. RESULTS OF OPERATIONS (NINE MONTHS ENDED JUNE 30, 2007 COMPARED TO NINE MONTHS ENDED JUNE 30, 2006, AS RESTATED). During the first nine months of fiscal 2007, the Company raised capital through the sale of Convertible Debentures, and was able to resume activities in the first quarter of fiscal 2007. Revenues for both the nine month period ended June 30, 2006 and the nine month period ended June 30, 2007 were zero, as the Company has not yet commenced the sale of products. General and administrative expenses for the nine months ended June 30, 2007 totaled $4,549,409, an increase of $4,147,162 over the $447,247 incurred in the corresponding period in 2006, due to the resumption of development and capital-raising activities and advisory board compensation expense of $3,661,741. Interest expense and financing costs increased by $30,607,125 from $7,218 for the nine months ended June 30, 2006 to $30,614,343 for the nine months ended June 30, 2007. The increase represents interest on convertible notes issued during the past nine months and financing costs of $30,469,448 related to beneficial conversion features on the Company's convertible notes and warrants issued in connection with those notes. Increase in gain on change in fair value of the warrant and option liability was $692,799 for the nine months ended June 30, 2007 and represents the decrease in the fair value of the warrant and option liability. The warrants and options were required to be classified as liabilities as of June 6, 2007, and valued at fair value on each balance sheet date, with the change in value reported in earnings. Therefore, there was no increase or decrease in the change in the option and warrant liability for the nine months ended June 30, 2006. The increase in the gain on change in fair value of the beneficial conversion liability was $7,923,801 for the nine months ended June 30, 2007 and represents the decrease in the fair value of the beneficial conversion liability. The beneficial conversion features were required to be classified as liabilities as of June 6, 2007, and valued at fair value on each balance sheet date, with the change reported in earnings. Therefore, there was no increase or decrease in the change of beneficial conversion liability for the nine months ended June 30, 2006. As a result of these items, the loss for the nine months ended June 30, 2007 was $26,616,109 representing an increase of $26,043,937 over the loss of $572,172 for the nine months ended June 30, 2006. LIQUIDITY AND CAPITAL RESOURCES, AS RESTATED. On June 30, 2007, the Company had cash and cash equivalents of $455,563. The sole source of liquidity has been borrowings from affiliates and the sale of securities. Management anticipates that additional capital will be required to finance the Company's operations. The Company believes that anticipated proceeds from sales of securities and other financing activities, plus possible cash flow from operations during the 2007 fiscal year, will be sufficient to finance the Company's operations. However, the Company has no commitments for financing, and there can be no assurance that such financing will be available or that the Company will not encounter unforeseen difficulties that may deplete its capital resources more rapidly than anticipated. Also, the Company may not be able to generate revenues from operations during the fiscal year. As of June 30, 2007, the Company had an accumulated deficit of $42,468,719. It can be expected that the 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. GOING CONCERN OPINION. We currently have insufficient assets to continue our operations, unless we secure additional financing. As a result of our ongoing losses, lack of revenues from operations, and accumulated deficits, there is doubt about our ability to continue as a going concern. ITEM 3. CONTROLS AND PROCEDURES. At the end of the period covered by this Form 10-QSB, the Company's then management, including its Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of the Company's disclosure controls and procedures. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer determined that at the time of its original filing, such controls and procedures were effective to ensure that information relating to the Company required to be disclosed in reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. The management also reported that there had been no changes in the Company's internal controls over financial reporting that were identified during the evaluation that occurred during the Company's last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. Subsequent to the original filing of this Form 10-QSB for the period ended June 30, 2007 on August 14, 2007, the Company identified the following material weaknesses as of June 30, 2007: (1) Insufficient numbers of internal personnel possessing the appropriate knowledge, experience and training in applying US GAAP and in reporting financial information in accordance with the requirements of the SEC; and (2) lack of audit committee to oversee the Company's accounting and financial reporting processes, as well as approval of the Company's independent auditors. These material weaknesses may also constitute deficiencies in the disclosure of controls and procedures. In light of these weaknesses, the Company's management, including the CEO and CFO, have concluded that as of the Evaluation Date, the disclosure controls and procedures were not effective, in that they did not ensure (i) that information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and (ii) that information required to be disclosed in reports that we file or submit under the Exchange Act is accumulated and communicated to its management including its Chief Executive and Financial Officers, to allow timely decisions regarding required disclosure. To address this ineffectiveness of its disclosure controls and procedures, the Company is continuing with corrective actions, including the search for additional staff with certain qualifications and independent internal reviews of key account reconciliations, to ensure that the financial statements and other financial information included in this quarterly report are complete and accurate in all material respects. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company is not a party to any material pending legal proceedings. ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS During the period of three months ended June 30, 2007 the Company issued Convertible Debentures in the amount of $569,000 to three accredited investors. The Company believes such sales were exempt from the registration requirements of the Securities Act of 1933, as amended, by virtue of Section 4 (2) thereof and Regulation D thereunder. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM 5. OTHER INFORMATION None ITEM 6. EXHIBITS 10.1 Form of Securities Purchase Agreement, dated as of June 18, 2007, between Sionix Corporation and certain investors. (1) 10.2 Form of Convertible Debenture, dated as of June 18, 2007, issued by Sionix Corporation to certain investors. (1) 10.3 Form of Registration Rights Agreement, dated as of June 18, 2007, between Sionix Corporation and certain investors. (1) 10.4 Form of Warrant, dated as of June 18, 2007, issued by Sionix Corporation to certain investors. (1) 31.1 Certificate of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. * 31.2 Certificate of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. * 32.1 Certificate of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. * 32.2 Certificate of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. * - ------------ * Filed herewith. (1) Filed on August 14, 2007 as an exhibit to our Form 10-KSB, and incorporated by reference. SIGNATURES In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SIONIX CORPORATION Date: January 5, 2010 By: /s/ James R. Currier ------------------------------------- James R. Currier, Chairman and Chief Executive Officer By: /s/ David R. Wells ---------------------------------- David R. Wells, President, Chief Financial Officer and Director EX-31.1 2 sinx_ex311.txt CERTIFICATION EXHIBIT 31.1 CERTIFICATION PURSUANT TO RULE 13A-14 UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED (SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002) I, James R. Currier, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Sionix Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and (5) The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: January 5, 2010 /s/ James R. Currier ----------------------------------------------- James R. Currier Chairman, Chief Executive Officer, Secretary and Principal Executive Officer EX-31.2 3 sinx_ex312.txt CERTIFICATION EXHIBIT 31.2 CERTIFICATION PURSUANT TO RULE 13A-14 UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED (SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002) I, David R. Wells, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Sionix Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: January 5, 2010 /s/ David R. Wells ------------------------------------------ David R. Wells President, Chief Financial Officer, Assistant Secretary and Principal Financial and Accounting Officer EX-32.1 4 sinx_ex321.txt CERTIFICATION EXHIBIT 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 (AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002) In connection with the Quarterly Report of Sionix Corporation (the "Company") on Form 10-Q for the period ended June 30, 2007 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, James R. Currier, Chief Executive Officer of the Company, certify to my knowledge and in my capacity as an officer of the Company, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and, 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of the dates and for the periods expressed in the Report. Date: January 5, 2010 /s/ James R. Currier ------------------------------------------ James R. Currier Chairman, Chief Executive Officer, Secretary and Principal Executive Officer A certification furnished pursuant to this Item will not be deemed "filed" for purposes of section 18 of the Exchange Act (15 U.S.C. 78r), or otherwise subject to the liability of that section. Such certification will not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference. EX-32.2 5 sinx_ex322.txt CERTIFICATION EXHIBIT 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 (AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002) In connection with Quarterly Report of Sionix Corporation (the "Company") on Form 10-Q for the period ended June 30, 2007 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, David R. Wells, Chief Financial Officer of the Company, certify to my knowledge and in my capacity as an officer of the Company, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and, 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of the dates and for the periods expressed in the Report. Date: January 5, 2010 /s/ David R. Wells -------------------------------------------- David R. Wells President, Chief Financial Officer, Assistant Secretary and Principal Financial and Accounting Officer A certification furnished pursuant to this Item will not be deemed "filed" for purposes of section 18 of the Exchange Act (15 U.S.C. 78r), or otherwise subject to the liability of that section. Such certification will not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference. -----END PRIVACY-ENHANCED MESSAGE-----