|• QUARTERLY REPORT • CERTIFICATION • CERTIFICATION • CERTIFICATION • CERTIFICATION • EX-101.INS • EX-101.SCH • EX-101.CAL • EX-101.DEF • EX-101.LAB • EX-101.PRE|
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
For the quarterly period ended: June 30, 2012
For the transition period from:
Commission file number: 002-95626-D
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 ¨
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 ¨
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.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). ¨ Yes x 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, 2012 the number of shares of the registrant’s classes of common stock outstanding was 388,453,661.
Table of Contents
Part I, Item 1. Financial Statements.
Condensed Consolidated Balance Sheets
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
Condensed Consolidated Statements of Operations
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
Condensed Consolidated Statements of Cash Flows
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
Notes to Condensed Consolidated Unaudited Financial Statements
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. Sionix designs, develops, markets and sells cost-effective water management and treatment solutions intended for use in the oil and gas, agriculture, disaster relief, and municipal (both potable and wastewater) markets.
Note 2 – Basis of Presentation and Summary of Significant Accounting Policies
In the opinion of management, the accompanying balance sheets and related interim statements of operations, and cash flows include all adjustments, consisting only of normal recurring items, necessary for their fair presentation in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”). Interim results are not necessarily indicative of results for a full year. The information included in this Form 10-Q should be read in conjunction with information included in the Company’s annual report on Form 10-K for the fiscal year ended September 30, 2011 filed with the U.S. Securities and Exchange Commission (the “Commission”) on December 21, 2011.
Use of Estimates
The preparation of financial statements in conformity with U.S. 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.
All significant intercompany accounts and balances have been eliminated in consolidation. Participation of other unit holders in the net assets and net earnings of consolidated subsidiaries is included in the captions ‘equity attributable to noncontrolling interest’ and ‘net loss attributable to the noncontrolling interest’ in the accompanying condensed consolidated balance sheet and condensed consolidated statement of operations, respectively.
Recently Issued Accounting Pronouncements
In December 2011, the FASB issued disclosure guidance related to the offsetting of assets and liabilities. The guidance requires an entity to disclose information about offsetting and related arrangements for recognized financial and derivative instruments to enable users of its financial statements to understand the effect of those arrangements on its financial position. The amended guidance is effective for us on a retrospective basis commencing in the first quarter of 2014. We are currently evaluating the impact of this new guidance on our consolidated financial statements.
In September 2011, the FASB issued ASU No. 2011-08, “Intangibles – Goodwill and Other (Topic 350): Testing Goodwill for Impairment.” ASU No. 2011-08 provides companies an option to perform a qualitative assessment to determine whether further goodwill impairment testing is necessary. If, as a result of the qualitative assessment, it is determined that it is more likely than not that a reporting unit’s fair value is less than its carrying amount, the two-step quantitative impairment test is required. Otherwise, no further testing is required. ASU No. 2011-08 will be effective for the Company for goodwill impairment tests performed in the fiscal year ending September 30, 2013, with early adoption permitted. The adoption of this guidance is expected to have no impact on the Company’s consolidated financial condition and results of operations.
In June 2011, the FASB issued ASU No. 2011-05, “Comprehensive Income (Topic 220): Presentation of Comprehensive Income.” ASU No. 2011-05 eliminates the option to present components of other comprehensive income as part of the statement of shareholders’ equity. All non-owner changes in shareholders’ equity instead must be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. Also, reclassification adjustments for items that are reclassified from other comprehensive income to net income must be presented on the face of the financial statements. ASU No. 2011-05 will be effective for the Company for the quarter ending December 31, 2012. The adoption of this guidance will have no impact on the Company’s financial condition and results of operations.
In May 2011, the FASB issued ASU No. 2011-04, “Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.” ASU No. 2011-04 clarifies and changes the application of various fair value measurement principles and disclosure requirements, and will be effective for the Company in the second quarter of fiscal 2012 (January 1, 2012). The adoption of this guidance will have no impact on the Company’s consolidated financial condition and results of operations.
Note 3 – Property and Equipment
Property and equipment consisted of the following at:
Depreciation expense for the three months ended June 30, 2012 and 2011 was $8,607 and $3,468, respectively. For the nine months ended June 30, 2012 and 2011, depreciation expense was $16,055 and $8,702, respectively.
Note 4 – Accrued Expenses
Accrued expenses consisted of the following at:
During the nine months ended June 30, 2012, $17,597 of accrued interest was included in the conversion of notes payable into common stock described in Note 6. During the same period, 5,000,000 shares of common stock were issued in settlement of $240,000 of accrued compensation.
Note 5 – 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, March 2011 and October 2011. These notes bear interest at rates up to 10% and are due on demand. As of both June 30, 2012 and September 30, 2011, such notes payable amounted to $25,000. Accrued interest on the notes amounted to $19,078 and $16,885 at June 30, 2012 and September 30, 2011, respectively, and is included in accrued expenses. Interest expense on these notes for the nine months ended June 30, 2012 and 2011 amounted to $2,194 and $1,997, respectively. No demand for payment has been made as of June 30, 2012.
Note 6 – Convertible Notes
At June 30, 2012 and September 30, 2011, convertible notes payable amounted to $1,054,427 and $934,567, respectively, net of discounts of $281,011 and $143,871, respectively. The notes bear interest at 6% - 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 October 2013 and are unsecured.
Unsecured Convertible Notes:
Through June 30, 2012, the Company issued $645,000 of convertible debentures (of which $115,000 is outstanding at June 30, 2012) 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 nine months ended June 30, 2012 and 2011, the change in fair value of this derivative liability amounted to $35,538 and $(25,075), respectively.
During the nine months ended June 30, 2012, holders of convertible debentures elected to convert $403,000 of their debt plus accrued interest into 13,026,887 shares of common stock.
6% Convertible Redeemable Note:
On November 23, 2011 Sionix issued a 6% Convertible Redeemable Note in the principal amount $100,000 maturing on November 23, 2012. Sionix has an optional right of redemption prior to maturity upon a five (5) day notice and payment of a 40% premium on the unpaid principal amount of the loan. Sionix paid fees of $15,000 in connection with the funding of this loan. In addition, the Company received a commitment in the form of a promissory note from the lender pursuant to which the lender will provide the Company with funding of up to an additional $300,000 at the Company's discretion beginning on June 1, 2012, at which time $100,000 will become available, on each of June 1, 2012, July 1, 2012 and August 1, 2012 (the "Additional Financing"). In conjunction with obtaining the Additional Financing, the Company issued 500,000 shares of common stock to the lender (the "Lender's Shares"). If the Company fails to draw down all of the funds made available by the Additional Financing between June 1, 2012 and August 1, 2012, the lender will be entitled to keep the Lender's Shares. If the Company draws down all of the funds made available by the Additional Financing between June 1, 2012 and August 1, 2012, the lender will use the Lender's Shares toward the conversion of the outstanding principal amount on the 6% Convertible Redeemable Note into shares of the Company's common stock. The conversion price for each share of common stock will be equal to 70% of the lowest closing bid price of the common stock for a period of five trading days, but no lower than $0.001 per share.
On June 1, 2012, Sionix borrowed an additional $100,000 in connection with the Additional Financing described above.
8% Convertible Debentures:
In April, 2012 the Company entered into an agreement with Ascendiant Capital Group, LLC ("Ascendiant") for the sale of $550,000 of unsecured Convertible Debentures (the “Primary Debentures”) to accredited investors (the “Debenture Holders”) which bear an interest rate of 8% and are due to be repaid 18 months from the closing date. The Debenture Holders will receive guaranteed interest on the original principal amount for a twelve-month period, even if the Primary Debentures are repaid within that period. As of June 30, 2012 Ascendiant has placed $200,000 of the Primary Debentures. Subsequent to June 30, 2012 the Company terminated the offering.
The Primary Debentures are convertible into the Company’s common stock during the forty-five days following the issue date at a floor price of $0.08, and from the issue date until September 28, 2012 at a conversion price of no more than $0.13, based on the average of the three lowest closing bid prices for the common stock during the ten consecutive trading days immediately preceding the conversion request. After this period the conversion price will be 75% of the average of the three lowest closing bid prices for the common stock during the ten consecutive trading days immediately preceding the conversion request. The Company has the right to demand immediate conversion of the Primary Debentures or some part of them if, at any time prior to the maturity date, the Company’s common stock has, for any twenty consecutive trading-day period, reported a closing bid price of $0.40 per share or greater and reported daily trading volume of 300,000 shares or more.
As of June 30, 2012 the Company issued a total of 2,700,000 warrants to the holders of the Primary Debentures, which can be exercised for a period of 3 years from the closing date at an exercise price of $0.10. Using the Black-Scholes method, the warrants were valued at $93,731, which was recorded as a debt discount and is being amortized over the term of the Primary Debentures. The following weighted-average assumptions were used in the Black-Scholes calculation.
The Company has agreed to register the common stock into which the Primary Debentures may be converted, any shares of common stock that may be issued as payment of principal or interest, the common stock underlying the warrants and any additional shares of common stock that may be issued in connection with any anti-dilution provisions included in the Primary Debentures as well as any shares of common stock that may be issued as a result of any stock split, dividend or other distribution. The Company has agreed to file the registration statement within 30 days of the closing date.
During the 45 day period following the closing, the Debenture Holders may exercise a right to purchase additional debentures (the “Additional Debentures”) in amounts equal to their initial investments. During the 90 days following the date of issuance of the Additional Debentures, the floor price for their conversion will be $0.13, with a maximum price of $0.20. After that period, the conversion price will equal 90% of the lowest three bid prices over the previous ten trading days. Also, the interest rate on the Additional Debentures will be 6%, there will be no guaranteed interest, and the warrant exercise price will be $0.20. All other terms and conditions will be identical to the Primary Debentures, including the registration right. Subsequent to June 30, 2012 the 45 day period expired and the Debenture Holders did not exercise their right to purchase Additional Debentures.
At the closing of the sale of the Primary Debentures, the Company paid a cash placement fee to Ascendiant Capital Markets of 10% of the gross proceeds of the Primary Debentures, and 10% warrant coverage on the same terms as the warrants issued to the Debenture Holders.
Note 7 – 12% Secured Promissory Note
On November 8, 2011 Sionix issued a 12% Secured Promissory Note in the principal amount of $300,000 maturing on July 31, 2012. The Company has an optional right of redemption prior to maturity. Sionix must redeem the debenture on the maturity date at a redemption premium of 7.5%. Sionix granted to the investor a continuing, first priority security interest in certain property of Sionix to secure the prompt payment, performance, and discharge in full of all of the Company’s obligations under the Secured Promissory Note, Securities Purchase Agreement, and Pledge Agreement.
In connection with this borrowing, Sionix issued 2,358,491 shares of common stock as Incentive Shares, and 16,981,132 shares of common stock as Pledged Shares. At the Company’s option, the Incentive Shares may be redeemed for cash in the amount of $125,000; otherwise they are retained by the lender. The value of the Incentive Shares has been classified as a liability and is being amortized as interest expense over the term of the borrowing. The Pledged Shares were issued as security under the Pledge Agreement.
Both the Incentive Shares and Pledged Shares are considered outstanding but not issued as of June 30, 2012.
Note 8 – Equity Line of Credit
On May 8, 2012, the Company entered into a Securities Purchase Agreement (the “Agreement”) with Ascendiant Capital Group, LLC (“Ascendiant”) in order to establish a source of funding. The Agreement establishes an equity drawdown facility.
Under the Agreement, Ascendiant has agreed to provide the Company with up to $5,000,000 of funding for a period of 24 months after the date that the registration statement required in conjunction with the funding is declared effective. During this period, the Company may request a drawdown under the equity line of credit by selling shares of its common stock to Ascendiant and Ascendiant will be obligated to purchase the shares. The Company may request a drawdown once every five trading days although it is under no obligation to request any drawdowns under the equity line of credit. There must be a minimum of three trading days between each drawdown request.
Sionix is allowed to sell up to 20% of the total trading volume of its common stock during the ten-day trading period that immediately precedes its drawdown request. With respect to the shares of common stock purchased, the purchase price will be the lesser of (i) 100% of the volume weighted average price on the date of purchase and (ii) the price that is $0.01 below the market price, as defined in the Agreement.
No drawdowns on the line of credit will occur until the SEC approves the registration statement covering the shares. The Company has agreed to pay Ascendiant a fee in connection with this facility, payable in common stock in four installments, as follows:
Pursuant to a Registration Rights Agreement entered into between the Company and Ascendiant in connection with the equity line of credit, the Company is required to file a registration statement with the Securities and Exchange Commission (the “SEC”) within 30 days of the agreement date. The registration statement will register shares of common stock to be purchased under the equity line of credit and the shares of common stock issued to Ascendiant for their commitment to the equity line of credit. There are no penalties assessed to us in connection with the filing and effectiveness deadlines associated with the registration statement. As of August 10, 2012 the Company had not yet filed the registration statement related to the Agreement.
Note 9 – Income Taxes
For the nine months ended June 30, 2012, the accompanying Condensed Statements of Operations reflect net income that is largely comprised of items that do not represent taxable income.
Note 10 – Stockholders’ Equity
The Company has 600,000,000 authorized shares of common stock, par value $0.001 per share. As of June 30, 2012, the Company had 349,823,438 shares issued and 369,758,275 shares outstanding. As of September 30, 2011, the Company had 299,331,673 shares of common stock issued and outstanding.
During the nine months ended June 30, 2012, the Company issued 19,831,184 shares of common stock (valued at $1,029,550 based on closing market prices), for services. The Company also issued 13,026,887 shares of common stock for conversion of debt in the amount of $435,597 (including interest). During the same period, the Company received $400,200 from the sale of 6,670,001 shares of common stock together with warrants to purchase 3,334,999 shares of common stock, and issued 9,988,709 shares of common stock in settlement of certain accounts payable and accrued compensation.
Employee Stock Options and Warrants
A summary of the Company’s activity for employee stock options and warrants:
Outstanding and exercisable as of June 30, 2012:
During the nine months ended June 30, 2012, the Company granted a total of 3,850,000 options and warrants to certain officers and employees. The options and warrants vested immediately upon grant and have a term of five years. The weighted average grant-date fair value of these options and warrants was $203,766. The fair value of these options and warrants was estimated on the date of the grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:
A summary of the Company’s warrant activity with non-employees:
Warrants outstanding and exercisable as of June 30, 2012:
In March 2012 Sionix formed a subsidiary named Williston Basin I, LLC, a Nevada limited liability company (“Williston”). On March 12, 2012, Williston entered into securities purchase agreements with 19 accredited investors for the sale and issuance of 4,000 membership units, constituting 40% of the outstanding equity of Williston, for an aggregate purchase price of $1,350,000. Williston consummated the issuance of its membership units to investors on March 16, 2012. The Company holds a 60% interest in Williston, and is entitled to 60% of its net profit and/or distributable assets. Out of its entitlement to net profit, the Company agreed to pay an amount equal to 15% of any operating net profit generated by Williston in its first 12 months of operations, to certain investors. Williston intends to use the proceeds principally for the acquisition of assets relating to the McFall project, as well as LLC operating expenses. Williston was formed for the purpose of delivering services to McFall Incorporated under its February 2012 Water Treatment Agreement. The entity has a five year term, but the term may be extended by majority consent of its members.
In connection with the formation and financing of Williston, Sionix (i) agreed to assign its rights to the McFall Water Treatment Agreement to Williston, and (ii) will contribute one of its Mobile Water Treatment Systems (MWTS) to Williston, which it will operate during the project.
During the period ended June 30, 2012 the Company formed five more limited liability companies for the purpose of funding additional projects in the Williston Basin should they become available to the Company. In connection with these Sionix received an advance of $250,000 against a funding commitment from REVH20 who holds an approximately 20% interest in Williston. The terms of these additional limited liability companies are expected to be substantially the same as that of Williston. As of August 10, 2012 the Company had not received any additional funding into these new limited liability companies.
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, 2012, the Company has incurred cumulative losses of $35,990,085 including a net loss for the nine months ended June 30, 2012 of $4,215,745. 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 5, 6, and 7, 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, expand its sales efforts worldwide and expand 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 reduces costs and improves the quality of the Company's products. The Company 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.
PART I, ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The information in this quarterly report on Form 10-Q contains forward-looking statements. These forward-looking statements involve risks and uncertainties, including statements regarding our capital needs, business strategy and expectations. Any statements contained in this report that are not statements of historical facts may be deemed to be forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “may”, “should”, “expect”, “plan”, “intend”, “anticipate”, “believe”, “estimate”, “predict”, “potential” or “continue”, the negative of such terms or other comparable terminology. Actual events or results may differ materially from those events or results included in the forward-looking statements. In evaluating these statements, you should consider various factors, including the risks outlined from time to time in the reports we file with the Securities and Exchange Commission. Some, but not all, of these risks include, among other things:
We do not intend to update forward-looking statements. You should refer to and carefully review the information in future documents we file with the Securities and Exchange Commission.
The global market for water recycling, reuse and treatment includes a broad array of commercial, industrial, agricultural, municipal and disaster relief applications. We design, develop, market and sell cost-effective water management and treatment solutions intended for use in the oil and gas, agriculture, disaster relief, and municipal (both potable and wastewater) markets. Our selling efforts in the United States will target the established base of small to medium water systems, as well as industrial users (such as the oil and gas industry, agriculture and food producers, and pharmaceuticals) and disaster relief agencies with a need for a clean and consistent water supply. We are currently focusing our sales efforts primarily on the domestic oil and gas industry, and the international wastewater market.
Results of Operations
Three Months Ended June 30, 2012, Compared to Three Months Ended June 30, 2011
Revenues for the three months ended June 30, 2012 and 2011 were $0 and $0, respectively.
The Company’s total operating expenses were $1,151,818 during the three months ended June 30, 2012, a decrease of $19,614 or 2%, as compared to $1,171,432 for the three months ended June 30, 2011. General and administrative expenses were $796,135 during the three months ended June 30, 2012, an increase of $55,854 or 7.5%, as compared to $740,281 for the three months ended June 30, 2011. The net increase in general and administrative expenses was the result of decreases in legal fees and travel costs, offset by increases in officer and director compensation (all stock-based). Sales and marketing expenses were $62,020 for the three months ended June 30, 2012, a decrease of $69,654 or 53%, as compared to $131,674 for the three months ended June 30, 2011. The decrease in sales and marketing expense was related to a reduction of personnel and vendors for sales support, as well as decreased travel and related expenses. Research and development expenses were $285,056 during the three months ended June 30, 2012, an decrease of $10,953 or 4%, as compared to $296,009 for the three months ended June 30, 2011.
The Company also incurred interest costs related to various notes in the amount of $251,831; an increase of $126,071 from the prior period when it reported interest costs of $125,760. Normal operations were limited by the lack of available cash.
Nine Months Ended June 30, 2012, Compared to Nine Months Ended June 30, 2011
Revenues for the nine months ended June 30, 2012 and 2011 were $0 and $0, respectively.
The Company’s total operating expenses were $2,995,234 during the nine months ended June 30, 2012, a decrease of $37,339 or 1%, as compared to $3,032,573 for the nine months ended June 30, 2011. General and administrative expenses were $2,168,923 during the nine months ended June 30, 2012, an increase of $48,552 or 2%, as compared to $2,217,475 for the nine months ended June 30, 2011. The net decrease in general and administrative expenses was the result of decreases in employee incentive compensation (all non-cash), offset by increases in investor relations expenses and director fees (all stock-based). Sales and marketing expenses were $210,327 for the nine months ended June 30, 2012, a decrease of $125,714 or 28%, as compared to $336,181 for the nine months ended June 30, 2011. The decrease in sales and marketing expense was related to a reduction of personnel and vendors for sales support, as well as decreased travel and related expenses Research and development expenses were $599,929 during the nine months ended June 30, 2012, an increase of $129,714 or 28%, as compared to $470,215 for the nine months ended June 30, 2011. The increase was due to increase personnel and the renting of a facility for the development of products.
The Company also incurred interest costs related to various notes in the amount of $714,456; an increase of $393,083 from the prior period when it reported interest costs of $321,373. Normal operations were limited by the lack of available cash.
Liquidity and Capital Resources
The Company had cash of $804,214 and $685 at June 30, 2012 and September 30, 2011, respectively. Historically the Company’s source of cash for operations has been the sale of its equity and debt securities. During the period ended June 30, 2012 the Company formed five additional Asset Controlling Partnerships (ACP) for the purpose of raising capital to support the purchase of assets, a Mobile Water Treatment System (MWTS) assembly, and the initial operation of its systems deployed for the sale of treatment services and treated water. The first of these entities, Williston Basin 1 (WBI), was formed on March 7, 2012 under Nevada law. Williston Basin II through VI were formed under Nevada law as well and in substantially the same form. Under the terms of this WBI, the Company contributed a standard MWTS to WBI, which was specifically designed for operation in the Williston Basin of North Dakota for treatment of water contaminated by the harvesting of energy resources in this region. The Company expects to receive additional orders for water treatment systems as it pursues other ACPs for the sale of water within its core commercial business segments. If it does not receive additional orders or if these orders do not satisfy its capital needs, the Company expects to sell its securities or obtain loans to meet its capital requirements. The Company has no additional orders for the sale of water treatment systems or for the deployment of its MWTS, except as noted above. There can be no assurance that sales of the Company’s securities, additional contracts for the sale of water treatment services, or of its water treatment systems, if such sales occur, will provide sufficient capital for its operations or that the Company will not encounter unforeseen difficulties that may deplete its capital resources more rapidly than anticipated. As of June 30, 2012, approximately $1,660,438 in principal and interest of certain promissory notes issued by the Company were due or will be coming due on or before March 4, 2013, which is the latest maturity date of its existing notes.
During the nine months ended June 30, 2012, the Company used $2,047,237 of cash in operating activities, primarily to fund its net loss. Non-cash adjustments included $1,220,341 for common stock issued for services, $548,501 for a gain on settlement of debt, $366,985 for the amortization of debt discounts, $203,766 for share based payments to consultants and employees and $16,055 for depreciation. Cash provided by operating activities included $380,399 in accrued expenses. Cash used in operating activities included $322,809 in other current assets, $149,627 in inventory, and $59,565 in account payable.
During the nine months ended June 30, 2011, the Company used $1,947,735 of cash in operating activities. Non-cash adjustments included $8,702 for depreciation, $142,248 for the amortization of beneficial conversion feature and debt discounts, $1,809,882 for share-based payments to consultants and employees, and $1,386,586 for a loss on settlement of debt. Cash provided by operating activities included $219,542 in accounts payable. Cash used in operating activities included $612,689 in inventory, $48,828 in other current assets, $45,957 in accrued expenses, and $300,000 in deferred revenue.
During the nine months ended June 30, 2012, the Company acquired property and equipment totaling $124,434, as compared to $3,127 during the nine months ended June 30, 2011. The equipment acquired was mainly for use in the treatment of contaminated water.
During the nine months ended June 30, 2012, financing activities provided $2,975,200, including $1,600,000 from the issuance of a noncontrolling interests in the Williston entities for cash, $400,200 from net proceeds from the sale of common stock and $975,000 from borrowings.
During the nine months ended June 30, 2011 financing activities provided $1,927,778, including $1,732,500 from net proceeds from the sale of common stock and $195,278 from borrowings.
As of June 30, 2012, the Company had an accumulated deficit of $35,990,085. Management anticipates that future operating results will continue to be subject to many of the problems, expenses, delays and risks inherent in the establishment of a developmental business enterprise, many of which the Company cannot control.
Material Trends, Events or Uncertainties
The Company is not certain how the current economic downturn may affect its business. Because of the global recession, government agencies and private industry may not have the funds to purchase its water treatment systems. It may also be more difficult for the Company to raise capital in the current economic environment. Other than as discussed herein, the Company does not know of any material trends, events or uncertainties that may impact its operations in the future.
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, 2012, the Company has incurred cumulative losses of $35,990,085 including a net loss for the nine months ended June 30, 2012 of $4,215,745. As the Company has no cash flow from operations, its ability to maintain normal operations is entirely dependent upon obtaining adequate cash to finance its overhead, research and development activities, and acquisition of production equipment. It is unknown when, if ever, the Company will achieve a level of revenues adequate to support its costs and expenses. In order for the Company to meet its basic financial obligations, including rent, salaries, debt service and operations, it plans to seek additional equity or debt financing. Because of the Company’s history and current debt levels, there is considerable doubt that the Company will be able to obtain financing. The Company’s ability to meet its cash requirements for the next twelve months depends on its ability to obtain such financing. Even if financing is obtained, any such financing will likely involve additional fees and debt service requirements which may significantly reduce the amount of cash it will have for operations. Accordingly, there is no assurance that the Company will be able to implement its plans.
The Company expects to continue to incur substantial operating losses for the foreseeable future, and it cannot predict the extent of the future losses or when it may become profitable, if ever. The Company expects to incur increasing sales and marketing, research and development and general and administrative expenses. Also, the Company has a substantial amount of short-term debt, which will need to be repaid or refinanced, unless it is converted into equity. As a result, if the Company begins to generate revenues from operations, those revenues will need to be significant in order to cover current and anticipated expenses. These factors raise substantial doubt about the Company's ability to continue as a going concern unless it is able to obtain substantial additional financing in the short term and generate revenues over the long term. If the Company is unable to obtain financing, it would likely discontinue its operations.
Critical Accounting Policies
The discussion and analysis of its financial condition and results of operations is based upon the Company’s unaudited condensed financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires it to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. On an on-going basis, the Company evaluates its critical accounting policies and estimates. The Company bases its estimates on historical experience and on various other assumptions that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The Company’s critical accounting policies and estimates are discussed in its Annual Report on Form 10-K for the fiscal year ended September 30, 2011.
PART I, ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
As a smaller reporting company, the Company is not required to provide this disclosure.
PART I, ITEM 4. CONTROLS AND PROCEDURES.
(a) Disclosure Controls and Procedures
Regulations under the Securities Exchange Act of 1934 require public companies to maintain “disclosure controls and procedures,” which are defined to mean a company’s controls and other procedures that are designed to ensure that information required to be disclosed in the 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 Commission’s rules and forms and is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.
We conducted an evaluation, with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that as of June 30, 2012, our disclosure controls and procedures were effective.
(b) Changes in internal control over financial reporting
During the three months ended June 30, 2012, the Company has not made any changes to internal control over financial reporting that have materially affected, or are reasonably likely to affect, its internal control over financial reporting.
PART II, ITEM 1. LEGAL PROCEEDINGS.
PART II, ITEM 1A. RISK FACTORS.
As a smaller reporting company the Company is not required to provide this information.
PART II, ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
During the three months ended June 30, 2012, we:
PART II, ITEM 3. DEFAULTS UPON SENIOR SECURITIES
PART II, ITEM 4. MINE SAFETY DISCLOSURES
PART II, ITEM 5. OTHER INFORMATION.
(b) There were no changes to the procedures by which security holders may recommend nominees to our board of directors.
PART II, ITEM 6. EXHIBITS.
* Filed herewith.
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.