10-Q/A

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q/A

(Amendment No. 1)

þ QUARTERLY REPORT UNDER SECTION 13 0R 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: June 30, 2011

o TRANSITION REPORT UNDER SECTION 13 0R 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from:

Commission file number: 002-95626-D

SIONIX CORPORATION

(Exact name of registrant as specified in its charter)

Nevada	87-0428526
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.

914 Westwood Blvd., Box 801 Los Angeles, California	90024
(Address of principal executive offices)	(Zip Code)

Issuer’s telephone number (704) 971-8400

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ   No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period than the registrant was required to submit and post such files).  Yes þ   No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filed,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	o	Accelerated filer	o
Non-accelerated filer	o	Smaller reporting company	þ
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). ¨ Yes   þ No

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.  As of August 10, 2011 the number of shares of the registrant’s classes of common stock outstanding was 294,516,257.

Explanatory Note

The purpose of this Amendment No. 1 to Sionix Corporation Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2011, filed with the Securities and Exchange Commission on June 30, 2011 (the “Form 10-Q”), is solely to furnish Exhibit 101 to the Form 10-Q in accordance with Rule 405 of Regulation S-T. Exhibit 101 to this report provides the consolidated financial statements and related notes from the Form 10-Q formatted in XBRL (eXtensible Business Reporting Language).

No other changes have been made to the Form 10-Q. This Amendment No. 1 to the Form 10-Q speaks as of the original filing date of the Form 10-Q, does not reflect events that may have occurred subsequent to the original filing date, and does not modify or update in any way disclosures made in the original Form 10-Q.

Pursuant to Rule 406T of Regulation S-T, the interactive data files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

Item 6.	Exhibits.
31.1	Certification of Chief Executive Officer pursuant to Section 302 of the SOX of 2002*
31.2	Certification of Chief Financial Officer pursuant to Section 302 of the SOX of 2002*
32.1	Certificate of Chief Executive Officer pursuant to 18 U.S.C.ss.1350*
32.2	Certificate of Chief Financial Officer pursuant to 18 U.S.C.ss.1350*
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB	XBRL Taxonomy Extension Label Linkbase Document
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

____________________

*           These exhibits were previously included or incorporated by reference in Sionix Corporation Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2011, filed with the Securities and Exchange Commission on August 11, 2011.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	SIONIX CORPORATION
Date: August 16, 2011	By:	/s/ David R. Wells
		David R. Wells
		President, Chief Financial Officer, Secretary/Treasurer, and Principal Financial and Accounting Officer

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Balance Sheets (Parenthetical) (USD $)	Jun. 30, 2011	Sep. 30, 2010
Stockholders' deficit:
Preferred stock, par value	$ 0.001	$ 0.001
Preferred stock, authorized shares	10,000,000	10,000,000
Common stock, par value	$ 0.001	$ 0.001
Common stock, authorized shares	600,000,000	150,000,000
Common stock, issued shares	286,322,104	217,154,741
Common stock, outstanding shares	286,322,104	217,154,741

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(Unaudited) Statements of Operations (USD $)	3 Months Ended		9 Months Ended
	Jun. 30, 2011	Jun. 30, 2010	Jun. 30, 2011	Jun. 30, 2010
Income Statement [Abstract]
Net revenues	$ 0	$ 0	$ 0	$ 1,620,000
Cost of sales	0	0	0	1,091,500
Gross profit	0	0	0	528,500
Operating expenses
General and administrative	740,281	580,095	2,217,475	1,273,969
Sales and marketing	131,674	80,255	336,181	138,101
Research and development	296,009	74,662	470,215	192,928
Depreciation and amortization	3,468	5,708	8,702	18,284
Total operating expenses	1,171,432	740,720	3,032,573	1,623,282
(Loss) income from operations	(1,171,432)	(740,720)	(3,032,573)	(1,094,782)
Other income (expense)
Interest expense and financing costs	(125,760)	(290,910)	(321,373)	(740,507)
Derivative liability	(2,618)	0	(25,075)	0
Warrant and option liability	0	0		4,359,957
Beneficial conversion liability	0	0	0	959,985
Other income	0	0	470,132	0
Legal settlements	0	0	(236,821)	0
Gain (loss) on settlement of debt	(1,312,315)	(608,625)	(1,386,586)	(578,625)
Loss on lease termination	0	0	0	(197,455)
Loss on asset disposition	0	0	0	(11,217)
Total other income (expense)	(1,440,693)	(899,535)	(1,499,723)	3,792,138
(Loss) income before income taxes	(2,612,125)	(1,640,255)	(4,532,296)	(2,697,356)
Income taxes	0	(1,600)	0	(1,600)
Net (loss) income attributable to common shareholders	$ (2,612,125)	$ (1,641,855)	$ (4,532,296)	$ 2,695,756
Basic (loss) income per share	$ (0.01)	$ (0.01)	$ (0.02)	$ 0.02
Diluted (loss) income per share	$ (0.01)	$ (0.01)	$ (0.02)	$ 0.03
Basic weighted average number of shares of common stock outstanding	265,479,323	151,655,634	244,657,656	149,677,378
Diluted weighted average number of shares of common stock outstanding	265,479,323	151,655,634	244,657,656	180,710,139

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Document and Entity Information (USD $)	9 Months Ended
	Jun. 30, 2011	Aug. 16, 2011
Document And Entity Information
Entity Registrant Name	SIONIX CORP
Entity Central Index Key	0000764667
Document Type	10-Q
Document Period End Date	Jun. 30, 2011
Amendment Flag	false
Current Fiscal Year End Date	--09-30
Is Entity a Well-known Seasoned Issuer?	No
Is Entity a Voluntary Filer?	No
Is Entity's Reporting Status Current?	Yes
Entity Filer Category	Smaller Reporting Company
Entity Public Float		$ 13,460,134
Entity Common Stock, Shares Outstanding		294,516,257
Document Fiscal Period Focus	Q3
Document Fiscal Year Focus	2011

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Convertible Notes

9 Months Ended

Jun. 30, 2011

Notes to Financial Statements

Convertible Notes

Note 7 – Convertible Notes

At June 30, 2011 and September 30, 2010, convertible notes payable amounted to $987,776 and $1,470,776, respectively, net of discounts of $113,162 and $111,808, respectively. The notes bear interest at 10% - 12% per annum, and are convertible into common stock of the Company at $0.15 - $0.25 per share (as well as variable conversion rates as described below). The notes are due at various dates through March 2012, and are unsecured.

Through June 30, 2011, the Company issued $340,000 of convertible debentures (of which $190,000 is outstanding at June 30, 2011) that are convertible into common stock of the Company at variable conversion rates that provide a fixed rate of return to the note-holder. Under the terms of the notes, however, the Company could be required to issue additional shares of common stock in the event of default. The Company applied the provisions of ASC Topic 815, “Derivatives and Hedging” and determined that the conversion option should be bifurcated from the notes and valued separately. This conversion option has been recorded as a derivative liability, is being amortized over the terms of the related notes, and is carried at fair value in the accompanying balance sheet. During the three and nine months ended June 30, 2011, the change in fair value of this derivative liability amounted to $2,618 and $25,075, respectively.

During the nine months ended June 30, 2011, convertible note-holders (including subordinated note-holders described below) who were owed $946,391 (including interest) elected to convert their debt into 21,466,526 shares of common stock. In connection with the conversion, the Company issued warrants to purchase 979,167 shares of common stock, and issued warrants to purchase 6,500,000 shares of common stock to replace warrants to purchase 4,166,666 shares of common stock.

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Subsequent Events

9 Months Ended

Jun. 30, 2011

Notes to Financial Statements

Subsequent Events

Note 12 – Subsequent Events

Subsequent to June 30, 2011, the Company issued $35,000 of convertible debentures that are convertible into common stock of the Company at variable conversion rates that provide a fixed rate of return to the note-holder, similar to those described in Note 7. Under the terms of the notes, however, the Company could be required to issue additional shares in the event of default.

Subsequent to June 30, 2011, the Company received $88,540 in advances related to a private placement.

Subsequent to June 30, 2011, the Company issued a total of 15,000,000 warrants to three holders with an exercise price of $0.07 and a term of two years from the date of issue, in return for $75,000 in funding. No fees were paid on this transaction.

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Property and Equipment

9 Months Ended

Jun. 30, 2011

Notes to Financial Statements

Property and Equipment

Note 3 – Property and Equipment

Property and equipment consisted of the following at:

	June  30,			September  30,
	2011			2010
Machinery and equipment	$	41,726		$	38,599
Less accumulated depreciation		(8,702	)		-
Property and equipment, net	$	33,024		$	38,599

Depreciation expense for the three months ended June 30, 2011 and 2010 was $3,468 and $5,708, respectively. For the nine months ended June 30, 2011 and 2010, depreciation expense amounted to $8,702and $18,284, respectively.

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Income Taxes

9 Months Ended

Jun. 30, 2011

Notes to Financial Statements

Income Taxes

Note 9 – Income Taxes

For the three months and nine months ended June 30, 2011, the accompanying Condensed Statements of Income reflect net income that is largely comprised of items that do not represent taxable income.

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Stockholders’ Equity

9 Months Ended

Jun. 30, 2011

Notes to Financial Statements

Stockholders’ Equity

Note 10 – Stockholders’ Equity

Common Stock

The Company has 600,000,000 authorized shares of common stock, par value $0.001 per share. As of June 30, 2011 and September 30, 2010, the Company had 286,322,104 and 217,154,741 shares of common stock issued, respectively.

During the nine months ended June 30, 2011, the Company issued 10,192,503 shares of common stock (valued at $1,131,850 based on closing market prices), for services. The Company also issued 21,466,526 shares of common stock for conversion of debt in the amount of $946,391 (including interest), and issued 5,800,000 shares of common stock in settlement of an accounts payable balance in the amount of $290,000.

During the nine months ended June 30, 2011, the Company issued 31,541,667 shares of common stock together with warrants to purchase 15,770,827 shares of common stock, for gross proceeds of $1,892,500 ($0.06 per share). The Company paid finders’ fees of $160,000 in connection with this offering. The warrants issued are exercisable at $0.17 per share and expire five years from the date of issuance.

Employee Stock Options and Warrants

A summary of the Company’s activity for employee stock options and warrants:

			Average		Aggregate		Remaining
	Number		Exercise		Intrinsic		Contractual
	of Options		Price		Value		Life
Outstanding at October 1, 2010		24,501,316	$	0.13	$	-		2.55
Granted		13,365,000		0.10
Expired		-		-
Forfeited		-		-
Exercised		-		-
Outstanding at June 30, 2011		37,866,316	$	0.12	$	722,237		3.22
Exercisable at June 30, 2011		37,302,645	$	0.12	$	717,956		3.19

Outstanding and exercisable as of June 30, 2011:

			Weighted			Weighted
			Average			Average
			Remaining			Remaining
Exercise		Options	Contractual		Options	Contractual
Price		Outstanding	Life		Exercisable	Life
$	0.06	6,565,000		4.02	6,493,658		4.01
$	0.07	2,000,000		4.51	2,000,000		4.51
$	0.09	2,000,000		4.51	2,000,000		4.51
$	0.10	8,416,850		2.85	8,416,850		2.85
$	0.12	8,450,940		2.79	8,450,940		2.79
$	0.14	500,000		3.31	7,671		3.31
$	0.15	7,000,000		3.31	7,000,000		3.31
$	0.25	2,933,526		1.47	2,933,526		1.47
		37,866,316		3.22	37,302,645		3.19

During the nine months ended June 30, 2011, the Company granted a total of 13,365,000 options and warrants to certain officers and employees. Certain warrants vested immediately upon grant and have a term of five years; other warrants with a two-year term vest ratably over the vesting period. The weighted average grant-date fair value of these warrants was $707,154.   The fair value of these warrants was estimated on the date of the grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:

· risk free rate of return of 0.44 – 2.24%;

· volatility of 152 – 190%

· dividend yield of 0%; and

· expected term of 5 years.

During the nine months ended June 30, 2011, the Company amended the terms of 1,583,200 options granted to former officers. The officers’ options had original exercise prices of $0.15 - $0.25 per share, and were re-priced to $0.10 per share. The Company compared the fair value of the options immediately before and immediately after the amendments, and determined that the excess fair value of $36,542 should be recognized as compensation expense.

Stock Warrants

A summary of the Company’s warrant activity with non-employees:

				Weighted
				Average		Aggregate
	Number			Exercise		Intrinsic
	of Warrants			Price		Value
Outstanding at October 1, 2010		65,238,820		$	0.18	$	-
Granted		31,929,161			0.14
Expired		-			-
Forfeited		(833,333	)		-
Exercised		(500,000	)		-
Outstanding as of June 30, 2011		95,834,648		$	0.16	$	1,174,344
Exercisable as of June 30, 2011		95,834,648		$	0.16	$	1,174,344

Warrants outstanding and exercisable as of June 30, 2011:

						Weighted
						Average
						Remaining		Weighted Average
Exercise		Warrants		Warrants		Contractual		Exercise Price
Price		Outstanding		Exercisable		Life		Outstanding		Exercisable
$	0.06		7,500,000		7,500,000		4.89	$	0.06	$	0.06
$	0.07		8,333,333		8,333,333		3.88	$	0.07	$	0.07
$	0.10		15,383,889		15,383,889		1.10	$	0.10	$	0.10
$	0.12		5,760,000		5,760,000		2.23	$	0.12	$	0.12
$	0.14		5,000,000		5,000,000		4.32	$	0.14	$	0.14
$	0.15		2,107,667		2,107,667		3.33	$	0.15	$	0.15
$	0.17		24,574,993		24,574,993		4.53	$	0.17	$	0.17
$	0.18		850,000		850,000		1.54	$	0.18	$	0.18
$	0.25		21,029,312		21,029,312		1.64	$	0.25	$	0.25
$	0.30		5,295,454		5,295,454		1.30	$	0.30	$	0.30
			95,834,648		95,834,648

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10 Percent Subordinated Notes

9 Months Ended

Jun. 30, 2011

Notes to Financial Statements

Ten Percent Subordinated Notes

Note 8 – 10% Subordinated Notes

At June 30, 2011 and September 30, 2010, subordinated notes amounted to $0 and $56,615 respectively. Such subordinated notes (which are unsecured) matured on December 31, 2008, bear interest at the rate of 10% per annum, and are subordinated to certain notes described in Note 7, above.  During the three months ended June 30, 2011, such subordinated notes were converted into 695,150 shares of common stock.

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Organization and Description of Business

9 Months Ended

Jun. 30, 2011

Notes to Financial Statements

Organization and Description of Business

Note 1 – Organization and Description of Business

Sionix Corporation (the "Company") was incorporated in Utah in 1996.  The Company 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 designs, develops, markets and sells both turnkey and stand-alone water management and treatment systems intended for use in several industries including oil & gas mining, agriculture, commercial, municipalities (both potable and wastewater), industry (both make-up water and wastewater), energy production and emergency response. Our executive offices are located at 914 Westwood Blvd., Box 801, Los Angeles, California 90024.  Our telephone number is (704) 971-8400, and our website is www.sionix.com.  Information included in our website is not a part of these financial statements.

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Accrued Expenses

9 Months Ended

Jun. 30, 2011

Notes to Financial Statements

Accrued Expenses

Note 4 – Accrued Expenses

Accrued expenses consisted of the following at:

	June  30,		September  30,
	2011		2010
Accrued salaries	$	212,066	$	77,000
Interest payable		208,763		256,777
Claims payable		33,925		290,000
Other accrued expenses		228,408		319,708
Total accrued expenses	$	683,162	$	943,485

During the nine months ended June 30, 2011, common stock valued at $290,000 was issued in settlement of certain claims payable, and $214,366 of accrued interest was included in the conversion of notes payable into common stock described in Note 7.

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Deferred Revenue

9 Months Ended

Jun. 30, 2011

Notes to Financial Statements

Deferred Revenue

Note 5 – Deferred Revenue

In June 2010, the Company received an order for a Mobile Water Treatment System (“MWTS”), which required a deposit. As of December 31, 2010, the Company had completed its design and manufacture of the system and has put the unit in place, and as of December 31, 2010 and September 30, 2010, customer deposits were $648,000 and $300,000, respectively. These deposits were classified as deferred revenue and reported net of related deferred costs of $28,168 and $0 at December 31, 2010 and September 30, 2010, respectively.

In March 2011, the Company entered into a settlement agreement with the MWTS customer, which included return of the MWTS unit to the Company, forfeiture of customer deposits, and re-pricing of a warrant previously issued to the customer.  Other income of $470,132 was recognized in the nine months ended June 30, 2011, representing the net impact of the above items.

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Notes Payable Related Parties

9 Months Ended

Jun. 30, 2011

Notes to Financial Statements

Notes Payable Related Parties

Note 6 – Notes Payable – Related Parties

The Company has received advances in the form of unsecured promissory notes from stockholders. The original date of these advances was November 2009 and March 2011. These notes bear interest at rates up to 10% and are due on demand. As of June 30, 2011 and September 30, 2010, such notes payable amounted to $25,000 and $27,000, respectively. Accrued interest on the notes amounted to $16,246 and $15,486 at June 30, 2011 and September 30, 2010, respectively, and is included in accrued expenses. Interest expense on these notes for the three months ended June 30, 2011 and 2010 amounted to $632 and $2,517, respectively. Interest expense on these notes for the nine months ended June 30, 2011 and 2010 amounted to $1,997 and $7,888, respectively. No demand for payment has been made as of June 30, 2011.

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(Unaudited) Statements of Cash Flows (USD $)	9 Months Ended
	Jun. 30, 2011	Jun. 30, 2010
Cash flows from operating activities
Net (loss) income	$ (4,532,296)	$ 2,695,756
Adjustments to reconcile net (loss) income to net cash used by operating activities:
Depreciation	8,702	18,284
Amortization of beneficial conversion feature and debt discounts	142,248	477,203
Share based payments	682,832	433,456
Common stock issued for services	1,127,050	588,732
(Gain) loss on change in fair value of:
Derivative liability	25,075	0
Warrant and option liability		(4,359,957)
Beneficial conversion liability	0	(959,985)
(Gain) loss on settlement of debt	1,386,586	578,625
Loss on termination of lease	0	197,455
Impairment of property and equipment	0	11,217
(Increase) decrease in:
Inventory	(612,689)	875,404
Other current assets	(48,828)	(69,802)
Other assets	0	25,950
Increase (decrease) in:
Accounts payable	219,542	(55,094)
Accrued expenses	(45,957)	380,275
Deferred revenue	(300,000)	(1,620,000)
Net cash used by operating activities	(1,947,735)	(979,936)
Cash flows from investing activities:
Purchase of property and equipment	(3,127)	0
Cash flows from financing activities:
Borrowings	195,278	510,000
Common stock issued for cash	1,732,500	450,000
Net cash provided by financing activities	1,927,778	960,000
Net (decrease) increase in cash and cash equivalents	(23,084)	(19,936)
Cash and cash equivalents, beginning of period	23,084
Cash and cash equivalents, end of period	0
SUPPLEMENTARY CASH FLOW INFORMATION:
Income taxes paid	2,569	0
Interest paid	$ 0	$ 0

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Basis of Presentation, Significant Accounting Policies

9 Months Ended

Jun. 30, 2011

Notes to Financial Statements

Basis of Presentation, Significant Accounting Policies

Note 2 – Basis of Presentation and Summary of Significant Accounting Policies

The accompanying unaudited condensed interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules and regulations of the United States Securities and Exchange Commission for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and footnotes necessary for a comprehensive presentation of financial position, results of operations, or cash flows. It is management's opinion, however, that all material adjustments (consisting of normal recurring adjustments) have been made which are necessary for a fair financial statement presentation.

The unaudited interim financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K, which contains the audited financial statements and notes thereto, together with the Management’s Discussion and Analysis, for the years ended September 30, 2010 and 2009.  The interim results for the period ended June 30, 2011 are not necessarily indicative of results for the full fiscal year.

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles in the United States (“GAAP”) requires management to make certain 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 revenues and expenses during the reporting period.  Actual results could differ from those estimates.  Significant estimates include collectability of accounts receivable, accounts payable, sales returns, and recoverability of long-term assets.

Derivatives

Derivative instruments are recognized as either assets or liabilities and are measured at fair value. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation.

Fair Value Measurements

For certain of the Company’s financial instruments, including cash and cash equivalents, accounts payable, accrued expenses and short-term debt, the carrying amounts approximate fair value due to their short maturities.  In addition, the Company has short-term debt with investors. The carrying amounts of the short-term liabilities approximate their fair value based on current rates for instruments with similar characteristics.

Revenue Recognition

Revenues from product 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) collectability 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 them in revenue in accordance with ASC Topic 605, “Revenue Recognition,” which requires 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 earned no revenues for the three or nine months ended June 30, 2011 and earned revenues of $1,620,000 for the nine months ended June 30, 2010.  For the nine months ended June 30, 2011, the Company recognized $470,132 of other income in connection with the cancellation of a sales contract.

Research and Development

The cost of research and development is expensed as incurred. Total research and development costs were $296,009 and $74,662 for the three months ended June 30, 2011 and 2010, respectively and $470,215 and $192,928 for the nine months ended June 30, 2011 and 2010, respectively.

Stock-Based Compensation

The costs of all employee stock options, as well as other equity-based compensation arrangements, are reflected in the financial statements based on the estimated fair value of the awards on the grant date. That cost is recognized over the period during which an employee is required to provide service in exchange for the award—the requisite service period (usually the vesting period). Stock compensation for stock granted to non-employees is determined as the fair value of the consideration received or the fair value of equity instruments issued, whichever is more reliably measured.

Earnings Per Share

Earnings per share is calculated in accordance with the ASC Topic 260, “Earnings Per Share.”  Basic net income or loss per share is computed by dividing the net income or loss available to common stock holders by 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 and warrants were converted or exercised. Dilution is computed by applying the treasury stock method. Under this method, options and warrants that are deemed “in the money” 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. Also, under this method, convertible notes are treated as if they were converted at the beginning of the period.  The following is a reconciliation of the income (numerator) and number of shares (denominator) used in the basic and diluted earnings per share computations for the nine months ended June 30, 2010. There was no difference between the basic and diluted weighted average shares or earnings for the three or nine months ended June 30, 2011.
 

	For the Nine Months Ended June 30, 2010
	Income (Numerator)		Weighted Average Number of Shares (Denominator)		Amount per Share
Basic Earnings Per Share
Income available to common stockholders	$	2,695,756		149,677,378	$	0.02
Effect of Dilutive Securities
Stock options		-		632,194
Warrants		-		864,793
Convertible debt		684,370		29,535,774
Diluted Earnings Per Share
Adjusted income available to common stockholders	$	3,380,126		180,710,139	$	0.02

Recently Issued Accounting Pronouncements

In October 2009, the FASB issued ASU No. 2009-14, Software (Topic 985) – Certain Revenue Arrangements That Include Software Element, a Consensus of the FASB Emerging Issues Task Force, to address concerns relating to the accounting for revenue arrangements that contain tangible products and software. It requires a vendor to use vendor-specific objective evidence of selling price to separate deliverables in a multiple-element arrangement. The update will be effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on January 1, 2011. We are currently evaluating the impact, if any, of adopting the update.

In January 2010, the FASB issued ASU No. 2010-06, “Improving Disclosures about Fair Value Measurements (“ASU 2010-06”). ASU 2010-06 amends ASC 820, “Fair Value Measurements” ("ASC 820") to require a number of additional disclosures regarding fair value measurements. The amended guidance requires entities to disclose the amounts of significant transfers between Level 1 and Level 2 of the fair value hierarchy and the reasons for these transfers, the reasons for any transfers in or out of Level 3, and information in the reconciliation of recurring Level 3 measurements about purchases, sales, issuances and settlements on a gross basis. The ASU also clarifies the requirement for entities to disclose information about both the valuation techniques and inputs used in estimating Level 2 and Level 3 fair value measurements. The amended guidance was effective for financial periods beginning after December 15, 2009, except the requirement to disclose Level 3 transactions on a gross basis, which becomes effective for financial periods beginning after December 15, 2010. ASU 2010-06 did not have a significant effect on the Company’s consolidated financial position or results of operations.

In July 2010, the FASB issued an accounting update to provide guidance to enhance disclosures related to the credit quality of a company's financing receivables portfolio and the associated allowance for credit losses. Pursuant to this accounting update, a company is required to provide a greater level of disaggregated information about its allowance for credit loss with the objective of facilitating a user’s evaluation of the nature of credit risk inherent in the company's portfolio of financing receivables, how that risk is analyzed and assessed in arriving at the allowance for credit losses, and the changes and reasons for those changes in the allowance for credit losses. The revised disclosures as of the end of the reporting period are effective for the Company beginning in the second quarter of fiscal 2011, and the revised discourses related to activities during the reporting period are effective for the Company beginning in the third quarter of fiscal 2011. The Company is currently evaluating the impact of this accounting update on its financial disclosures.

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Going Concern

9 Months Ended

Jun. 30, 2011

Notes to Financial Statements

Going Concern

Note 11 – Going Concern

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. This basis of accounting contemplates the recovery of the Company’s assets and the satisfaction of its liabilities in the normal course of business. Through June 30, 2011, the Company has incurred cumulative losses of $30,131,363 including a net loss for the nine months ended June 30, 2011 of $4,532,296. As the Company has limited cash flow from operations, its ability to maintain normal operations is entirely dependent upon obtaining adequate cash to finance its overhead, research and development activities, and acquisition of production equipment. It is unknown when, if ever, the Company will achieve a level of revenues adequate to support its costs and expenses. In order for the Company to meet its basic financial obligations, including salaries, debt service and normal operating expenses, it plans to sell additional units of its water treatment system, and to seek additional equity or debt financing. Because of the Company’s history and current debt levels, there is considerable doubt that the Company will be able to obtain financing. The Company’s ability to meet its cash requirements for the next twelve months depends on its ability to obtain such financing. Even if financing is obtained, any such financing will likely involve additional fees and debt service requirements which may significantly reduce the amount of cash we will have for our operations. Accordingly, there is no assurance that the Company will be able to implement its plans.

As mentioned in Notes 6, 7, and 8, the Company has related party notes, convertible notes, and subordinated debentures that have matured. The Company is continuing its efforts to obtain customers for its products, expanding its sales efforts worldwide as well as expanding the industries it targets for possible customers. The Company also has future plans for additional products, and revisions to its current products. In support of this the Company plans to hire additional personnel who have the industry experience and the training so that they can be immediately effective in the building of the Company. The Company retains most design, system configuration, and technical engineering resources “in-house.”  Certain design and specific research and development activities are periodically sub-contracted to our partner, Pacific Advanced Civil Engineering, Inc. (“PACE”) as access to scientific and engineering resources exceed our “in-house” capability.  Additionally PACE provides overview of MWTS application configurations as part of a long-term services contract.  System controls for our MWTS products are designed and implemented by PACE’s sister company, PERC Water, Inc. (“PERC”) under a long-term supply contract.  Only fabrication of the DAF component of our MWTS is sub-contracted, and then only for the construction of the stainless steel DAF tank.  With the exception of plumbing and electrical sub-contractors, all other fabrication and assembly activities are supervised and managed by “in-house” resources.. This would reduce costs and improve the quality of its products. It is also continuing to seek additional investment capital in the form of debt or equity to sustain continued operations, and is considering certain changes to its capital structure to become more attractive to potential investors and business partners. Last, to manage these activities the Company has hired new senior management who have the manufacturing, finance and public company experience necessary to manage the Company.

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(Unaudited) Balance Sheets (USD $)	Jun. 30, 2011	Sep. 30, 2010
ASSETS
Cash and cash equivalents	$ 0	$ 23,084
Other receivable	7,742	1,500
Inventory	1,191,849	579,160
Other current assets	49,430	11,750
Total current assets	1,249,021	615,494
Non-current assets:
Property and equipment, net	33,024	38,599
Total assets	1,282,045	654,093
LIABILITIES AND STOCKHOLDER'S DEFICIT
Bank overdraft	278	0
Accounts payable	657,089	215,842
Accrued expenses	683,162	943,485
Deferred revenue	0	300,000
Notes payable - related parties	25,000	27,000
Convertible notes, net of debt discount	987,776	1,470,776
10% subordinated convertible notes	0	56,615
Derivative liability	221,266	137,063
Total current liabilities	2,574,571	3,150,771
Stockholders' deficit:
Preferred stock $0.001 par value, 10,000,000 shares authorized at March 31 2011	0	0
Common stock, $0.001 par value (600,000,000 shares authorized; 244,088,755 and 217,154,741 shares issued and outstanding at March 31, 2011 and September 30, 2010, respectively)	286,322	217,155
Additional paid-in capital	28,552,515	22,885,234
Accumulated deficit	(30,131,363)	(25,599,067)
Total stockholders' deficit	(1,292,526)	(2,496,678)
Total liabilities and stockholder's deficit	$ 1,282,045	$ 654,093