Attached files
| file | filename |
|---|---|
| EX-23.1 - EXHIBIT 23.1 - XENONICS HOLDINGS, INC. | c09888exv23w1.htm |
| EX-31.2 - EXHIBIT 31.2 - XENONICS HOLDINGS, INC. | c09888exv31w2.htm |
| EX-32.2 - EXHIBIT 32.2 - XENONICS HOLDINGS, INC. | c09888exv32w2.htm |
| EX-31.1 - EXHIBIT 31.1 - XENONICS HOLDINGS, INC. | c09888exv31w1.htm |
| EX-32.1 - EXHIBIT 32.1 - XENONICS HOLDINGS, INC. | c09888exv32w1.htm |
Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
| þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended September 30, 2010
| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to .
Commission file number: 001-32469
XENONICS HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
| Nevada | 84-1433854 | |
| (State or other jurisdiction of | (I.R.S. Employer | |
| incorporation or organization) | Identification Number) | |
| 3186 Lionshead Avenue | ||
| Carlsbad, California | 92010-4701 | |
| (Address of principal executive offices) | (Zip code) |
Registrant’s telephone number, including area code: (760) 477-8900
Securities registered pursuant to Section 12(b) of the Act: Common Stock, $.001 par value
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act. o Yes þ No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
15(d) of the Exchange Act. o Yes þ No
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. þ Yes o 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 that the registrant was required to submit and post such files).
o Yes o No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of the registrant’s knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated
filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act
(Check one):
| Large accelerated filer o | Accelerated filer o | Non-accelerated filer o | Smaller reporting company þ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act): o Yes þ No
The aggregate market value of the common stock held by non-affiliates of the registrant as of March
31, 2010 was approximately $12,636,000.
There were 24,975,929 shares of the registrant’s common stock outstanding on December 10, 2010.
Documents Incorporated by Reference:
Certain portions of the registrant’s Proxy Statement for the 2011 annual meeting of shareholders to
be filed with the Securities and Exchange Commission pursuant to Regulation 14A, not later than 120
days after the close of the registrant’s fiscal year, are incorporated by reference under Part III
of this Form 10-K.
TABLE OF CONTENTS
| PART I |
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| 4 | ||||||||
| 8 | ||||||||
| 11 | ||||||||
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| 11 | ||||||||
| 11 | ||||||||
| PART II |
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| 12 | ||||||||
| 13 | ||||||||
| 13 | ||||||||
| 17 | ||||||||
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| 37 | ||||||||
| 37 | ||||||||
| 38 | ||||||||
| PART III |
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| 39 | ||||||||
| 39 | ||||||||
| 39 | ||||||||
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| 39 | ||||||||
| PART IV |
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| 40 | ||||||||
| Exhibit 23.1 | ||||||||
| Exhibit 31.1 | ||||||||
| Exhibit 31.2 | ||||||||
| Exhibit 32.1 | ||||||||
| Exhibit 32.2 | ||||||||
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Introductory Comment
Throughout this annual report on Form 10-K, the terms “we,” “us,” “our,” and “our company”
refer to Xenonics Holdings, Inc., a Nevada corporation, and, unless the context indicates
otherwise, also includes our subsidiary, Xenonics, Inc., a Delaware corporation.
Forward-Looking Statements
This annual report contains forward-looking statements, which reflect the views of our
management with respect to future events and financial performance. These forward-looking
statements are subject to a number of uncertainties and other factors that could cause actual
results to differ materially from such statements. Forward-looking statements are identified by
words such as “anticipates,” “believes,” “estimates,” “expects,” “plans,” “projects,” “targets” and
similar expressions. Readers are cautioned not to place undue reliance on these forward-looking
statements, which are based on the information available to management at this time and which speak
only as of this date. Our actual results may differ materially from results anticipated in these
forward-looking statements. We undertake no obligation to update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise. For a discussion of
some of the factors that may cause actual results to differ materially from those suggested by the
forward-looking statements, please read carefully the information under “Risk Factors.”
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PART I
| Item 1. | Business |
Overview
We design, manufacture and market high-end, high-intensity portable illumination products and
low light viewing systems (night vision). Our core product line consists of lightweight,
long-range, ultra-high intensity illumination products used in a wide variety of applications by
the military, law enforcement, security, search and rescue and, to a lesser extent, in commercial
markets. The night vision system is used across the entire spectrum from commercial to the
military. We have 18 general, utility and design patents issued, allowed or pending. Our
illumination line of products has 12 utility and design patents issued, allowed or pending,
including patents for our technology platform, which applies high efficiency dimmable electronic
ballast circuitry and precision optics to xenon light to produce an illumination device that
delivers improved performance over current technologies. For our night vision product line we have
4 utility and design patents with 55 separate claims included in the patents and 2 pending. They
include the integration of the entire system as well as weapons mounting and recording capability.
We are largely dependent upon government orders for our revenues. While the night vision
products expanded our sales into the commercial market and the international market, the government
market, particularly law enforcement, will continue to be a large part of the night vision sales.
Existing customers include all branches of the United States Armed Forces and federal, state and
local law enforcement.
We market our illumination products under the NightHunter brand name and night vision under
the SuperVision brand. The NightHunter series of products is produced in a variety of
configurations to suit specific customer needs. These include compact hand-held systems for
foot-borne personnel and stabilized systems for airborne, vehicular and shipboard use. These
NightHunter illumination systems are used for reconnaissance, surveillance, search and rescue,
physical security, target identification, navigation, and non-lethal deterrence. The systems allow
the user to illuminate an area, an object or a target with visible or non-visible light, and to
improve visibility through many types of obscurants such as smoke, haze and most types of fog.
The SuperVision product was launched in June 2007 and brings a new category to night vision
using a high resolution HDTV display with an ultra-sensitive infrared (IR)/visible sensor and a
proprietary Digital Signal Processor (DSP). This all digital format brings capabilities comparable
to high end military analog systems at less than half the price. In addition the digital format
allows for zoom capability. The price and capability opens the market to law enforcement and the
general consumer, whether in the maritime environment, hunting, camping, security, or any other
activity done in a low light situation.
Our Products
The NightHunter ultra-high intensity series of illumination products currently consists of
three versatile compact illumination systems — NightHunter One, NightHunter ext, and NightHunter
3, which replaced the NightHunter II. Our products are lightweight, ruggedized for operation in
harsh environments, and allow users to illuminate objects with visible or infrared (IR) light at
distances of more than one mile. With our infrared filter accessory in place, the NightHunter
products emit non-visible infrared light. When used with night vision devices or low-light cameras,
our NightHunter products can illuminate a target without the target knowing that it is being
illuminated. Each NightHunter product incorporates a mechanical focusing design that enables the
user to vary the flood spread of the beam. For example, the systems can be focused at a 0.5° spread
that results in only a 60-90 foot footprint at one mile, or at a 10° spread that results in a 900
foot footprint at one mile. Unlike other high intensity lighting systems (and traditional
flashlights), the NightHunter products do not have a “black hole” at the center of the light beam
that obstructs the field of view (that is, there is no “blind spot” in the beam), allowing the user
to keep the illumination centered on the target area. Our NightHunter One and NightHunter 3
products all have an internal rechargeable battery and built-in charger. In addition, the
NightHunter One, NightHunter ext and NightHunter 3 can be operated from external power sources.
Depending on the functionality and accessories of the product, the retail prices for our ultra-high
intensity products range from $3,000 to over $6,000.
The SuperVision HDTV display with an ultra-sensitive IR/visible sensor, zoom capability, and a
proprietary Digital Signal Processor (DSP) brings capability to a wide variety of customers.
Operating in both the visible and IR spectrum SuperVision allows the user to operate from dusk to
dark. SuperVision can operate with or without an illuminator and with its extended IR spectrum in
excess of 1,000 nanometers it can operate well past the range of a conventional analog tube system.
With a retail price of just $1,499 it is affordable at the local law enforcement level as well as
with commercial customers. In 2008 we added two products to the SuperVision line, the SuperVision
Tactical Package and the SuperVision Long Range Surveillance System. The Tactical Package was
specifically designed for the law enforcement community and packages the SuperVision with a
Tactical IR in a waterproof case. The Long Range Surveillance System expands the SuperVision
capability out to 100x zoom giving law enforcement facial identification out past half a mile. In
2009 we introduced SuperVision Video Out which added the ability to connect video signal to a
recording device, monitor or both for surveillance or evidence gathering. This unit runs for up to
eight hours on external DC or AC power, as well as its rechargeable battery.
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Our currently available products and their respective features are listed below.
NightHunter One The NightHunter One system is a lightweight (6.1 lbs.) illumination system
that can be readily adapted to a variety of uses and platforms, from handheld to fixed mounted use
on vehicles, boats, and helicopters. The NightHunter can be powered from its internal rechargeable
battery or from any 12-32 VDC power source.
NightHunter ext The NightHunter ext is a durable and lightweight (5.5 lbs) illumination system
that is designed for fixed mounted applications and for use on stationary platforms or vehicles,
boats, or helicopters. The NightHunter ext has the same range as the NightHunter One, but with an
increased field-of-view. The NightHunter ext can be equipped with an optional pistol grip and
utilized as a powerful spotlight.
NightHunter 3 The NightHunter 3 was designed to replace and improve upon the NightHunter II
capabilities in a light weight weapons mountable system. Utilizing Xenonics proprietary technology
and lessons learned NightHunter 3 is a 3.0 pound illuminator that exceeds the range of the
NightHunter II while at the same time incorporating an integral filter assembly, new battery
technology, and remote control.
SuperVision SuperVision allows the user to see in the dark with greater clarity than
conventional night vision, and with a zoom capability. The product is a small hand held device and
weighs only 20 ounces. SuperVision retails for significantly less than the high-end night vision
products.
SuperVision Video Out SuperVision with Video Out adds the ability to connect video signal to
a recording device, monitor or both for surveillance or evidence gathering. This unit runs for up
to eight hours on external DC or AC power, as well as its rechargeable battery.
SuperVision Tactical Package The package was designed to meet the need of law enforcement
professionals. It puts together SuperVision with the Tactical IR and mount, extra batteries and a
portable waterproof case. This has become the primary purchase item for the law enforcement market.
This package can also include video-out capability.
SuperVision Long Range Surveillance System The system adds a long range lens, the required
adapters, and a tactical case allowing the law enforcement professional the ability to view items
of interest at a much great distance.
The Markets
The actual and potential markets for our products consist of the following.
Military Forces, of the United States and Foreign Allies
Military forces in the United States currently represent the primary target market for our
NightHunter products. Through September 30, 2010, we have sold more than $39,000,000 of NightHunter
brand illumination systems into this market, which is estimated at over $700,000,000. Our customers
include the U.S. Army, the U.S. Air Force, the U.S. Navy and the U.S. Marine Corps.
According to the International Institute for Strategic Studies and the U.S. Department of
Defense, there are nearly 10,400,000 active and reserve troops, approximately 800 warships, and
1,600 amphibious, major mine, and support ships, 60,000 heavy tanks, and 97,000 armored infantry
vehicles in the armed forces of the United States and its key allies. Given the large number of
applications for NightHunter products, we believe that this represents a substantial market
opportunity for the NightHunter product line.
SuperVision has application to the US Military though it was not optimized for military
operations. It is listed on the GSA schedule and is also sold through the military exchange
network. With the high performance and quality of SuperVision and no export restrictions, we see a
good market in the international militaries.
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U.S. Department of Homeland Security
The agencies of the U.S. Department of Homeland Security represent another key market for
NightHunter and SuperVision products. These agencies include the U.S. Customs and Border
Protection, Federal Emergency Management Agency, the Transportation Security Administration, the
U.S. Secret Service and the U.S. Coast Guard. The United States Border Patrol has over 18,000
vehicles, nearly 200 marine vessels and over 1,200 canine teams deployed daily. The United States
Coast Guard has a fleet of 252 cutters, 945 shore units and 1,660 boats. FEMA has over 2,600
full-time employees along with 4,000 employees on standby for disaster relief. The TSA oversees
security on highway, railroads, buses, mass transit systems, ports and the 450 United States
airports. Our NightHunter products have been tested and deployed in key strategic locations for
port, waterway, coastline, airport and border security. We believe that the increased concern about
homeland security and the higher amounts budgeted for new security products may make homeland
security a potentially significant market for both of our product lines. Our goal is for agencies
within the United States Department of Homeland Security to use discretionary funding to purchase
our products, and we believe that in the future we may achieve specific line items in the budget
similar to our experience with the defense budget.
Law Enforcement and Fire, Search & Rescue
We have been actively pursuing additional opportunities for sales of NightHunter illumination
systems and SuperVision to law enforcement and fire, search and rescue organizations. We have seen
significant traction in this market and we currently have over 100 U.S. local, state, or federal
government agencies that have purchased and are using SuperVision. Law enforcement and fire, search
and rescue represent a large market opportunity. Approximately 860,000 law enforcement personnel
are estimated to be employed in the United States and there are approximately 40,000 fire, search &
rescue departments in the United States. In addition the international market opportunity remains
large, primarily with the SuperVision product line. SuperVision products have been sold into
Europe, South America, Mexico, and Asia.
Commercial Markets
SuperVision was designed to be a high performance but affordable night vision system. Because
of this, we have an excellent opportunity in several domestic and international commercial markets.
There are more than 5,100,000 registered maritime vehicles in the world and over 105,000,000
hunters, fisherman and wildlife watchers. There has also been interest from several industrial
customers.
Sales & Marketing
We generate most of our revenue from the direct sale of our products to customers. To date,
most of our sales have been to the United States military. In the past we have depended upon top
down funding through Congress matched with communication directly to end users to drive the demand.
Manufacturing
We conduct manufacturing and final assembly operations on the NightHunter One, NightHunter ext
and SuperVision products at our headquarters in Carlsbad, California, and own all of the equipment
required to manufacture and assemble these finished products. In addition, we also own all molds,
schematics, and prototypes utilized by our vendors in the production of the components and
sub-assemblies used in our products. We can expand our production capabilities by adding additional
personnel with negligible new investment in tooling and equipment.
We currently purchase both commodity off-the-shelf components and custom-designed fabricated
parts and sub-assemblies for use in our products from a number of qualified local, national and
international suppliers. Although we currently obtain these components from many single source
suppliers, we believe we could obtain components from alternative suppliers without incurring
significant production delays. We acquire all of our components on a purchase order basis and do
not have long-term contracts with suppliers.
We currently outsource the manufacturing of our NightHunter 3 product to PerkinElmer
Electronics, Inc. In recent years they manufactured over 12,000 of our NightHunter products.
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Competition
Other companies that offer high intensity, portable lighting products include SureFire, LLC,
Polarion-USA and Peak Beam Systems, Inc. We believe that none of these companies currently offers a
product with the features or range of applications of our NightHunter series. To our knowledge,
only one company, Peak Beam Systems, supplies a short-arc xenon-based product. Peak Beam’s product
also has the capability of utilizing infrared and ultraviolet filters, and provides a long-range
light beam. However, unlike our products, Peak Beam’s products project a “black hole” and hence an
obstructed field-of-view, are not as durable, and are not a self contained unit with integrated
charger and battery.
In addition to these suppliers of hand-held high intensity lighting products, we believe that
other companies that use first generation xenon technology, such as Spectrolab (helicopter
searchlights), Phoebus (entertainment spotlights), and Strong (entertainment spotlights) could
enter our market in the future. Our strategy is to remain the recognized market and technology
leader for hand held size systems thus not leaving an opening for the searchlight companies.
Furthermore, during this last fiscal year we became an approved supplier of crew served weapons
light systems for the Army.
In the night vision market we have chosen an open spot in the market. We deliver in a high
definition digital format, the capabilities of current analog Gen 3 systems, at about half to one
third the price. While our system retails at $1,499, analog Gen 3 systems are typically priced over
$3,800. There are also significant lower performing products, usually analog Gen 1 or 2 systems, in
the sub $600 retail range. Since our performance well exceeds these systems, our real competition
is with the higher end product.
Regulation
We applied to the United States Department of Commerce, Bureau of Export Administration for an
export license for both SuperVision and NightHunter products. In response to our inquiry, the
department assigned an EAR classification of 99. We can export all our products without a license
to all countries that are not on the restricted list IAW part 746 of the EAR. Xenonics is
registered with the Department of State for any restrictions under the ITAR rules. At this time
there are no restrictions on any of our products.
Intellectual Property
NightHunter has twelve design and utility patents issued, allowed or pending, including
patents for our technology platform, which applies high efficiency dimmable electronic ballast
circuitry and precision optics to xenon light. In addition to the foregoing patents, we also rely
on certain know-how and trade secrets related to the design and manufacture of our products. We
believe that the patents (both granted and pending) and our know-how and trade secrets provide
protection to certain of our core technologies, and allow us to develop future products that can be
scaled up or down (or to develop alternative packages for the existing products). We are not aware
of any infringement of our patents or that we are infringing any patents owned by others.
SuperVision has four design and utility patents issued and two pending. They include the
integration of the entire system as well as weapons mounting and recording capability.
Our “NightHunter”, “Xenonics” and “SuperVision” trademarks have been registered with the
United States Patent and Trademark Office.
Research and Development
We maintain a research and development program for the development and introduction of new
products and accessories and for the development of enhancements and improvements to our existing
products. In addition, we collaborate closely with certain of our largest customers in the design
and improvement of our products to suit their respective needs. As such, we consider our research
and development program to be an important element of our business, operations and future success.
Our research and development efforts currently are focused on (i) improving our current
product line, (ii) designing and developing product line extensions that employ our proprietary
illumination and electronics platforms, and (iii) designing and developing new products
complementary to our existing products. We maintain an active research and development program at
our facilities in Carlsbad, California, and as needed we retain outside consultants who can provide
any necessary additional engineering or technological expertise. We also regularly work with our
outside vendors and manufacturers to improve product performance and manufacturability, and to
reduce manufacturing costs.
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During the fiscal years ended September 30, 2010 and 2009, we spent $772,000 and $623,000,
respectively, on research and development.
Employees
As of September 30, 2010, we employed 17 persons. There are three officers on our executive
management team, eight persons are employed in operations, two persons in engineering, two persons
in customer service and two persons in administrative support. We are not a party to any collective
bargaining agreements.
| Item 1A. | Risk Factors |
RISK FACTORS
An investment in our common stock is subject to a high degree of risk. The risks described
below should be carefully considered, as well as the other information contained in this annual
report. If any of the following risks actually occurs, our business, financial condition, results
of operations and business prospects could be materially and adversely affected. In such event, the
trading price of our common stock would likely decline.
Risks Related to Our Business
Fluctuations in our quarterly and annual operating results make it difficult to assure future
positive cash flows from operations.
For the most recent fiscal year ended September 30, 2010, we posted a net loss of $1,781,000
on revenues of $4,397,000, compared to a net loss of $1,839,000 on revenues of $7,378,000 for the
year ended September 30, 2009. For the year ended September 30, 2008, we had a net loss of
$1,391,000 on revenues of $10,168,000. For the year ended September 30, 2007, we had a net loss of
$4,034,000 on revenues of $4,984,000. For the year ended September 30, 2006, we had a net loss of
$1,488,000 on revenues of $4,833,000. For the year ended September 30, 2005, we had a net loss of
$5,310,000 on revenues of $4,434,000. For the year ended September 30, 2004, we recorded net
income of $1,476,000 on revenues of $11,927,000. Since our revenues are primarily dependent upon
the receipt of large orders from the military and other governmental organizations, which orders
are sporadic and unpredictable, our revenues fluctuate significantly from quarter to quarter and
from year to year. No assurance can be given that we will generate sales at any specific levels or
that any additional sales that may be generated will result in the profitability or viability of
our Company.
The loss of contracts with U.S. government agencies would adversely affect our revenue.
To date, substantially all of our sales have been derived from sales to military and security
organizations, such as the U.S. military, and various other governmental law enforcement agencies.
While we believe that we will continue to be successful in marketing our products to these
entities, there are certain considerations and limitations inherent in sales to governmental or
municipal entities such as budgetary constraints, timing of procurement, political considerations,
and listing requirements that are beyond our control and could affect our future sales. There is no
assurance that we will be able to achieve our targeted sales objectives to these governmental and
municipal entities or that we will continue to generate any material sales to these entities in the
future.
Potential customers may prefer our competitors’ technology and products.
The ultra-high intensity lighting industry, in which we operate, is characterized by mature
products and established industry participants. We compete with other providers of specialized
lights in the United States and abroad who have created or are developing technologies and products
that are similar to the products we are selling to many of the same purchasers in our targeted
markets. Although we believe that our competitors do not offer products as advanced as ours,
competition from these companies is intense. Because we are currently a small company with a
limited marketing budget, our ability to compete effectively will depend on the benefits of our
technology and on our patents. There is no assurance that potential customers will select our
technology over that of a competitor, or that a competitor will not market a competing technology
with operating characteristics similar to those owned by us.
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Our products could be rendered obsolete or uneconomical by the introduction and market
acceptance of competing products, technological advances by current or potential competitors, or
other approaches. If such a development were to occur, we might be required to reduce our prices in
order to remain competitive and these lower prices could affect our profitability. There is no
assurance that we will be able to compete successfully against current or future competitors.
The loss of any of our key personnel could adversely affect our business.
We depend on the efforts of our senior management, particularly Alan P. Magerman, our Chairman
of the Board and Chief Executive Officer and Jeffrey P. Kennedy, our Chief Operating Officer and
President. The loss of the services of one of these individuals could delay or prevent us from
achieving our objectives.
The interests of our current shareholders will be diluted if we seek additional equity financing in
the future, and any debt financing that we seek in the future will expose us to the risk of default
and insolvency.
We are dependent on our ability to obtain sales orders and/or additional equity or debt
financing to continue to support planned operations and satisfy obligations. The Company’s
marketing activity has been intensified and management remains optimistic about our growth
opportunity. However, due to the nature of our business, there is no assurance that we will receive
new orders during the quarters that we expect them. Although management believes it can obtain
additional financing, there is no certainty that it can. Any equity financing may involve dilution
of the interests of our current shareholders, and any debt financing would subject us to the risks
associated with leverage, including the possible risk of default and insolvency.
We may experience production delays if suppliers fail to deliver materials to us, which could
reduce our revenue.
The manufacturing process for our products consists primarily of the assembly of purchased
components. Although we can obtain materials and purchase components from different suppliers, we
rely on certain suppliers for our components. If a supplier should cease to deliver such
components, this could result in added cost and manufacturing delays and have an adverse effect on
our business.
Our operations involve evolving products and technological change, which could make our products
obsolete.
Ultra-high intensity portable illumination products are continuously evolving and subject to
technological change. Our ability to maintain a competitive advantage and build our business
requires us to consistently invest in research and development. Many of the companies that
currently compete in the portable illumination market, or that may in the future compete with us in
our market, may have greater capital resources, research and development staffs, facilities and
field trial experience than we do. Our products could be rendered obsolete by the introduction and
market acceptance of competing products, technological advances by current or potential
competitors, or other approaches.
Any delay in our ability to market, sell or ship our existing products would adversely affect our
revenue.
To date, all of our revenues have been generated from the sales of our three NightHunter
illumination system products (the NightHunter One, NightHunter II and NightHunter ext), related
accessories and SuperVision. In addition to the NightHunter models and SuperVision with tactical
illumination, we are now marketing the NightHunter 3. The profitability and viability of our
Company is dependent upon our continued ability to sell, manufacture and ship our illumination
products and SuperVision, and any delay or interruption in our ability to market, sell, or ship our
NightHunter illumination systems or SuperVision and related accessories will have a material
adverse affect on our business and financial condition.
Further, our future growth and profitability will depend on our ability to both successfully
expand NightHunter, SuperVision and other products. While our goal is to develop and commercialize
a line of ultra-high intensity illumination systems, and digital low-light viewing devices, new
products will require substantial expenditures of money for development and advertising. There is
no guarantee that the market will accept these new products. If we are unable to develop and
release other products, the future of our Company will depend on the commercial success of our
existing NightHunter products and SuperVision.
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Because we depend on a single manufacturer to make our NightHunter 3 products, any failure by the
manufacturer to honor its obligations to us will impair our ability to deliver our products to
customers.
PerkinElmer is currently our sole manufacturer of the NightHunter 3 product. Accordingly, we
are dependent upon PerkinElmer for the manufacture and delivery of our NightHunter 3 product. To
date, as a small company with limited resources, our arrangement with PerkinElmer has provided us
with the manufacturing, packaging and shipping expertise normally only available to larger firms.
However, should PerkinElmer for any reason in the future be unable to meet its obligations, we
believe that we could transition to another manufacturer or manufacture the NightHunter 3 product
ourselves.
Risks Related to Our Common Stock
You may be unable to sell your shares at an adequate price or at all.
There is no assurance as to the depth or liquidity of any market for the common stock or the
prices at which holders may be able to sell the shares. As a consequence, there may be periods of
several days or more when trading activity in our shares is minimal or non-existent, as compared to
a seasoned issuer which has a large and steady volume of trading activity that will generally
support continuous sales without an adverse effect on share price. Due to these conditions, there
is no assurance that shareholders will be able to sell their shares at or near ask prices or at
all.
If securities or industry analysts do not publish research reports about our business or if they
downgrade our stock, the price of our common stock could decline.
Small, relatively unknown companies can achieve visibility in the trading market through
research and reports that industry or securities analysts publish. The lack of published reports by
independent securities analysts could limit the interest in our common stock and negatively affect
our stock price. We do not have any control over the research and reports these analysts publish or
whether they will be published at all. If any analyst who does cover us downgrades our stock, our
stock price would likely decline. If any analyst ceases coverage of our Company or fails to
regularly publish reports on us, we could lose visibility in the financial markets, which in turn
could cause our stock price to decline.
Anti-takeover provisions in our articles of incorporation could adversely affect the value of our
common stock.
Our articles of incorporation contain certain provisions that could impede a non-negotiated
change in control. In particular, without shareholder approval we can issue up to 5,000,000 shares
of preferred stock with rights and preferences determined by the board of directors. These
provisions could make a hostile takeover or other non-negotiated change in control difficult,
through which takeover or change of control could be at a premium to the then-current stock price.
The future issuance of additional common and preferred stock could dilute existing shareholders.
We are currently authorized to issue up to 50,000,000 shares of common stock. To the extent
that common shares are available for issuance, our board of directors has the ability, without
seeking shareholder approval, to issue additional shares of common stock in the future for such
consideration as the board of directors may consider sufficient. The issuance of additional common
stock in the future will reduce the proportionate ownership and voting power of the common stock
held by our existing shareholders.
We are also authorized to issue up to 5,000,000 shares of preferred stock, the rights and
preferences of which may be designated in series by the board of directors. Such designation of new
series of preferred stock may be made without shareholder approval and could create additional
securities which would have dividend and liquidation preferences over our common stock. Preferred
shareholders could adversely affect the rights of holders of common stock by:
| • | exercising voting, redemption and conversion rights to the detriment of the holders of common stock; |
||
| • | receiving preferences over the holders of common stock or surplus funds in the event of our dissolution or liquidation; |
||
| • | delaying, deferring or preventing a change in control of our company; and |
||
| • | discouraging bids for our common stock. |
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We do not plan to pay any cash dividends on our common stock.
We do not plan to pay any cash dividends on our common stock in the foreseeable future. Any
decision to pay dividends is within the discretion of the board of directors and will depend upon
our profitability at the time, cash available and other factors. As a result, there is no assurance
that there will ever be any cash dividends or other distributions on our common stock.
The exercise of outstanding stock options and warrants would dilute the ownership interests of our
existing shareholders.
There are currently outstanding stock options and warrants entitling the holders to purchase
8,961,000 shares of our common stock, including a number of options granted to directors, officers,
employees and consultants that are subject to vesting and financial performance conditions. These
options and warrants have exercise prices ranging from $0.50 per share to $5.75 per share. It is
likely that many of the holders of these options and warrants will exercise and sell shares of our
common stock when the stock price exceeds their exercise price. Substantial option and warrant
exercises and subsequent stock sales by our option and warrant holders would significantly dilute
the ownership interests of our existing shareholders.
Future sales of common stock by our existing shareholders and option and warrant holders could
cause our stock price to decline.
The release into the public market of a large number of freely tradable shares and restricted
securities that are now eligible or subsequently become eligible for public resale under Rule 144
could cause the market price of our common stock to decline. The perception among investors that
these sales may occur could produce the same adverse effect on our market price.
| Item 1B. | Unresolved Staff Comments |
None.
| Item 2. | Properties |
Our principal operations and executive offices are located at 3186 Lionshead Avenue, Carlsbad,
California 92010 and our telephone number is (760) 477-8900. The Company moved into new facilities
in January 2009, under the terms of a new lease that expires in March 2014. This new facility
consists of approximately 13,200 square feet of leased office, warehouse and manufacturing space.
| Item 3. | Legal Proceedings |
We are occasionally subject to legal proceedings and claims that arise in the ordinary course
of our business. It is impossible for us to predict with any certainty the outcome of pending
disputes, and we cannot predict whether any liability arising from pending claims and litigation
will be material in relation to our consolidated financial position or results of operations.
| Item 4. | Removed and Reserved |
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PART II
| Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities |
Our common stock is currently traded under the symbol “XNNH” on the OTCBB & OTCQB. The
following table sets forth, for the periods indicated, the high and low sales prices per share of
our common stock.
| Year ended September 30, 2010 | High | Low | ||||||
First Quarter |
$ | 1.12 | $ | 0.63 | ||||
Second Quarter |
$ | 1.04 | $ | 0.48 | ||||
Third Quarter |
$ | 0.53 | $ | 0.32 | ||||
Fourth Quarter |
$ | 0.42 | $ | 0.23 | ||||
| Year ended September 30, 2009 | High | Low | ||||||
First Quarter |
$ | 1.04 | $ | 0.48 | ||||
Second Quarter |
$ | 0.71 | $ | 0.26 | ||||
Third Quarter |
$ | 0.79 | $ | 0.55 | ||||
Fourth Quarter |
$ | 0.81 | $ | 0.55 | ||||
As of September 30, 2010, there were 25,509,458 common shares outstanding and 49 shareholders
of record, not including shareholders who hold their stock in “street name”.
Dividends
The Company has never paid any cash dividends on its common stock. The Company currently
anticipates that it will retain all future earnings for use in its business. Consequently, it does
not anticipate paying any cash dividends in the foreseeable future. The payment of dividends in the
future will depend upon our results of operations, as well as our short-term and long-term cash
availability, working capital, working capital needs and other factors, as determined by our Board
of Directors. Currently, except as may be provided by applicable laws, there are no contractual or
other restrictions on our ability to pay dividends if we were to decide to declare and pay them.
Repurchase of Securities
The Company did not repurchase any shares of its common stock during the year ended September
30, 2010.
Recent Sales of Unregistered Securities
The Company has previously reported all equity securities that it sold during the period
covered by this annual report that were not registered under the Securities Act.
Equity Compensation Plan Information
The following table summarizes as of September 30, 2010, the number of securities to be issued
upon the exercise of outstanding derivative securities (options, warrants and rights); the
weighted-average exercise price of the outstanding derivative securities; and the number of
securities remaining available for future issuance under the Company’s equity compensation plans.
| Number of securities | Number of securities | |||||||||||
| to be issued upon | Weighted-average | remaining available for | ||||||||||
| exercise of | exercise price of | future issuance under | ||||||||||
| outstanding options, | outstanding options, | equity compensation plans | ||||||||||
| Plan Category | warrants and rights | warrants and rights | (excluding column (a)) | |||||||||
| (a) | (b) | (c) | ||||||||||
Equity compensation plans approved by security holders |
1,813,000 | $ | 0.76 | 513,000 | ||||||||
Equity compensation plans not approved by security
holders |
600,000 | $ | 1.42 | — | ||||||||
Totals |
2,413,000 | $ | 0.92 | 513,000 | ||||||||
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The equity compensation plans approved by the security holders are the 2003 Stock Option Plan
of Xenonics Holdings, Inc. and the 2004 Stock Incentive Plan of Xenonics Holdings, Inc. Except as
described in the following paragraphs, the Company has not adopted without the approval of security
holders any equity compensation plan under which securities of the issuer are authorized for
issuance.
On September 5, 2006, the Company and a consultant entered into an agreement pursuant to which
the consultant will provide consulting services relating to financial public relations enhancing
the Company’s visibility in the financial community and introducing the Company and its products to
possible merger candidates, financial institutions and other members of the investment community;
and assisting Company personnel in preparing presentation materials in connection with meetings and
conferences involving the investment community. As part of this agreement the Company issued to the
consultant a five-year warrant, vested upon issuance, to purchase 500,000 shares of the Company’s
common stock at $1.60 per share (which exceeded the fair market value of the common stock as of
August 31, 2006, the day before an oral agreement was made).
On March 16, 2009 the Company entered into an agreement with an independent firm
for financial advisory services for a period of one year. As part of this agreement the Company
issued a five-year warrant, vested upon issuance, to purchase 300,000 shares of the Company’s
common stock at $0.50 per share (which exceeded the fair market value of the common stock as of the
date of the agreement). Subsequently, on June 11,2009 the Company engaged the same firm to assist
in raising funds for working capital by August 31, 2009. While the Company was able to privately
raise $525,000 in debt financing, this financing was not completed by the independent firm. On
September 16, 2009 the Company and the independent firm mutually agreed to modify the warrant to an
attainable performance level and reduce the number of shares to 50,000. Pursuant to the terms of
the warrant, the independent firm made a cashless exercise on December 21,2009 and 25,000 shares
were issued.
On November 11, 2009 the Company entered into an agreement with an independent firm to conduct
institutional investor services for a period of one year. As part of this agreement the Company
issued a five year warrant, vested upon issuance, to purchase 100,000 shares of the Company’s
common stock at $0.50 per share. Additionally, should the independent firm provide ancillary
services such as meetings or teleconferences with potential institutional investors, an additional
50,000 warrants to purchase the Company’s common stock at $0.50 per share shall be issued.
| Item 6. | Selected Financial Data |
Not applicable to a “smaller reporting company” as defined in Item 10(f)(1) of SEC Regulation
S-K.
| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Forward-Looking Statements
The following Management’s Discussion and Analysis of Financial Condition and Results of
Operations, as well as information contained elsewhere in this report, contain statements that
constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of
1933, and Section 21E of the Securities Exchange Act of 1934. These statements include statements
regarding the intent, belief or current expectations of management, our directors or our officers
with respect to, among other things: anticipated financial or operating results, financial
projections, business prospects, future product performance and other matters that are not
historical facts. The success of our business operations is dependent on factors such as the impact
of competitive products, product development, commercialization and technology difficulties, the
results of financing efforts and the effectiveness of our marketing strategies, general competitive
and economic conditions. Forward-looking statements are not guarantees of future performance and
involve risks and uncertainties. Actual results may differ materially from those projected in the
forward-looking statements as a result of various factors, including those described under “Risk
Factors” above.
Overview
We design, manufacture and market high-end, high-intensity portable illumination products and
low light viewing systems (night vision). Our core product line consists of lightweight,
long-range, ultra-high intensity illumination products used in a wide variety of applications by
the military, law enforcement, security, search and rescue and, to a lesser extent, in commercial
markets. The night vision system is used across the entire spectrum from commercial to the
military. We hold several patents for our technology platform, which applies high efficiency
dimmable electronic ballast circuitry and precision optics to xenon light to produce an
illumination
device that delivers improved performance over current technologies, and additional patents to
the integration of the night vision system.
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We are largely dependent upon government orders for our revenues. While the night vision
products will expand our sales into the commercial market, the government market, particularly law
enforcement, will continue to be a large part of the night vision sales. Existing customers include
all branches of the United States Armed Forces and federal law enforcement.
We market our illumination products under the NightHunter brand name and night vision under
the SuperVision brand. The NightHunter series of products is produced in a variety of
configurations to suit specific customer needs. These include compact hand-held systems for
foot-borne personnel and stabilized systems for airborne, vehicular and shipboard use. These
NightHunter illumination systems are used for reconnaissance, surveillance, search and rescue,
physical security, target identification and navigation. The systems allow the user to illuminate
an area, an object or a target with visible or non-visible light, and to improve visibility through
many types of obscurants such as smoke, haze and most types of fog.
The SuperVision product uses a high resolution HDTV display with an ultra-sensitive
IR/visible sensor and a proprietary Digital Signal Processor. This all digital format brings
capabilities comparable to high end military analog systems at less than half the price. In
addition the digital format allows for zoom capability. The price and capability opens the market
to law enforcement and the general consumer, whether in the maritime environment, hunting, camping,
security, or any other activity done in a low light situation.
We conduct all of our operations through our subsidiary, Xenonics, Inc.
How We Generate Revenue
We generate most of our revenue from the direct sale of our products to customers. To date,
most of our sales have been to the United States military. In the past we have depended upon top
down funding through Congress matched with communication directly to end users to drive the demand.
Trends in Our Business
The Company has not had revenue levels sufficient to generate net income in the last five
years. In order to improve our revenue levels, we are focusing on improving our current products,
introducing new products and expanding our customer base. In addition to an ongoing effort to
improve revenue levels, we continually look to lower costs wherever possible to improve our
operating margin.
Our current challenge is to supplement government sales with commercial sales of both our
current products and new products. Risks include new competitors entering the market, decreases in
government budgets (particularly the defense budget) and our previous inability to penetrate other
markets.
Critical Accounting Policies and Estimates
The preparation of financial statements and related disclosures in conformity with accounting
principles generally accepted in the United States requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the financial statements and revenues and expenses
during the period reported. The following accounting policies involve a “critical accounting
estimate” because they are particularly dependent on estimates and assumptions made by management
about matters that are highly uncertain at the time the accounting estimates are made. In addition,
while we have used our best estimates based on facts and circumstances available to us at the time,
different estimates reasonably could have been used in the current period, and changes in the
accounting estimates we used are reasonably likely to occur from period to period which may have a
material impact on the presentation of our financial condition and results of operations. We review
these estimates and assumptions periodically and reflect the effects of revisions in the period
that they are determined to be necessary and reviewed by the audit committee.
Revenue Recognition and Accounts Receivable — The Company recognizes revenue upon shipment and
transfer of title and when it has evidence that arrangements exist and the price to the buyer is
fixed through signed contracts or purchase orders. Collectibility is reasonably assured through one
or more of the following: government purchase, historical payment practices or review of new
customer credit. Customers do not have the right to return product unless it is damaged or
defective.
14
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Allowance for Doubtful Accounts — Credit evaluations are undertaken for all major sales
transactions before shipment is authorized. Normal terms require payment on a net 30 or 60-day
basis depending on the customer. On an ongoing basis, we analyze the payment history of customer
accounts, including recent purchases. We evaluate aged items in accounts receivable and provide
reserves for doubtful accounts. Customer creditworthiness and economic conditions may change,
including increased risk of collectibility and sales returns, and may require additional
provisions, which could negatively impact our operating results.
Tax Valuation Allowance — A tax valuation allowance is established, as needed, to reduce net
deferred tax assets to the amount for which recovery is probable. We have established a full
valuation allowance against our U.S. net deferred tax assets because of our history of losses. In
the event it becomes more likely than not that some or all of the deferred tax assets will be
realized, we will adjust our valuation allowance. Depending on the amount and timing of taxable
income we ultimately generate in the future, as well as other factors, we could recognize no
benefit from our deferred tax assets, in accordance with our current estimate, or we could
recognize a portion of or their full value.
Inventory Valuation — Inventories are stated at the lower of cost or market. Cost is computed
using weighted average cost, which approximates actual cost, on a first-in, first-out basis. The
Company may also provide inventory allowances based on excess and obsolete inventories determined
primarily by future demand forecasts.
A physical inventory is completed on a monthly basis, and adjustments are made based on such
inventories. If it is determined that our estimates of the valuation of inventories are incorrect,
we may need to establish reserves, which would negatively affect any future earnings.
Results of Operations
Year ended September 30, 2010 compared to September 30, 2009
We operate in the security lighting systems and night vision industries. The majority of our
revenues were derived from sales of our illumination products to various customers, primarily the
military.
Revenues: Revenues for the year ended September 30, 2010 were $4,397,000 compared to revenues
of $7,378,000 for the year ended September 30, 2009. In the year ended September 30, 2010, we sold
$3,950,000 or 90% of our NightHunter products to the US Government, which includes both direct
sales to the military (U.S. Army and U.S. Marines) as well as military resellers. This compares to
$6,121,000 or 83% of revenue to the military market (U.S. Army, U.S. Marines and military
resellers) in 2009. Shipments to commercial customers of our new SuperVision product accounted for
10% of revenues for the year ended September 30, 2010 and 17% for the year ended September 30,
2009.
Cost of Goods and Gross Profit: Cost of goods consist of our cost of manufacturing our
NightHunter and SuperVision products and the price that we pay to PerkinElmer for the NightHunter 3
products that PerkinElmer manufactures for us under our manufacturing agreement.
The gross profit percentage on revenue was 49% and 46% for the years ended September 30, 2010
and 2009, respectively.
Selling, General and Administrative: Selling, general and administrative expenses decreased by
$1,514,000 to $3,021,000 for the year ended September 30, 2010 as compared to $4,535,000 for the
year ended September 30, 2009. The decrease is primarily attributed to reductions in advertising,
trade show, travel and samples expenses of $542,000 and salaries and benefits of $602,000
consulting expenses of $186,000, bad debts of $56,000, legal expenses of $31,000, rent and
relocation expenses of $40,000 and insurance expenses of $27,000.
Research & Development: Research and development expenses increased by $149,000 for the
year ended September 30, 2010 compared to the prior year. The Company continues to spend for the
development of new products, including our NightHunter 3 ultra high intensity illumination system.
Other Income / Expense: In connection with the repurchase of the Company’s minority interest,
the Company issued 275,000 shares of common stock with a guaranteed market value of at least
$375,000 as of December 10, 2009. In connection with this repurchase, the Company recorded a
derivative at the time of the transaction of $161,000. At September 30, 2009, the fair value of the
common stock decreased in value and the Company recorded the mark to market year to date adjustment
of $39,000 as a loss on
derivative revaluation. The repurchase was completed in January 2010 for $161,000 and the Company
recorded the mark to market year to date adjustment of $38,000 as a gain on derivative revaluation.
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For the year ended September 30, 2010, interest income was $4,000 compared to $15,000 in the
prior year.
For the year ended September 30, 2010, interest expense was $152,000 compared to $38,000 in
the prior year. Interest expense for the year ended September 30, 2010 includes $84,000 of
amortization of warrants issued for notes payable and a full year of interest paid in cash for the
loan proceeds that were received in July 2009.
Provision for Income Taxes: For the years ended September 30, 2010 and 2009, the provision for
income tax was $2,000, which represent the minimum annual payments for state taxes.
Net Loss: Lower sales in the current year were offset by a large reduction in expenses and
accounted for the smaller net loss of $1,781,000 when compared to a net loss of $1,839,000 for the
prior year.
Liquidity and Capital Resources
The accompanying financial statements have been prepared assuming that we will continue as a
going concern. As reflected in the accompanying financial statements, we have incurred losses for
the years ended September 30, 2010 and 2009 and have an accumulated deficit of $23,324,000 as of
September 30, 2010. Our continued existence is dependent on our ability to obtain orders for our
products and/or additional equity and/or debt financing to support planned operations and satisfy
obligations. There is no assurance that we will be able to obtain enough orders for our products or
additional financing to support our current operations.
Historically, we have invested substantial resources in the development of our products and in
the establishment of our business, which negatively impacted our cost structure and created an
accumulated deficit of $23,324,000 as of September 30, 2010. Our net loss of $1,781,000 for 2010
negatively impacted cash. Cash flows from financing activities included the net proceeds from the
sales of common stock of $1,928,000. Significant sources of cash from operating activities
included a decrease in accounts receivable (net of allowances) of $622,000 and a decrease in
inventories of $103,000 offset by a decrease in accounts payable of $498,000. Cash used in
operating activities totaled $1,327,000. Cash used in investing activities included $28,000 for
demonstration equipment being used by our largest customer, Aardvark Tactical, Inc. Currently we
do not anticipate any material expenditures during the fiscal year ending September 30, 2011.
As of September 30, 2010, the Company had working capital of $3,065,000 and a current ratio of
5.2 to 1 as compared to working capital of $2,436,000 and a current ratio of 2.6 to 1 as of
September 30, 2009. Cash on hand at the end of the year increased by $579,000 from the amount of
cash on hand as of September 30, 2009.
We do not believe that inflation has had a material impact on our business or operations.
We are not a party to any off-balance sheet arrangements and do not engage in trading
activities involving non-exchange traded contracts. In addition, we have no financial guarantees,
debt or lease agreements or other arrangements that could trigger a requirement for an early
payment or that could change the value of our assets.
Based on the amount of working capital that we had on hand on September 30, 2010 and the
amount of unfilled and potential orders we have pending, we are optimistic about our ability to
obtain sales orders and/or additional equity or debt financing to continue to support planned
operations and satisfy obligations. Management remains optimistic about our growth opportunity.
However, due to the nature of our business, there is no assurance that we will receive new orders
during the quarters that we expect them and although management believes it can obtain additional
financing, there is no certainty that it can.
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| Item 7A. | Quantitative and Qualitative Disclosures About Market Risk |
Not applicable to a “smaller reporting company” as defined in Item 10(f)(1) of SEC Regulation
S-K
17
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| Item 8. | Financial Statements and Supplementary Data |
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
XENONICS HOLDINGS, INC.
| 19 | ||||
Consolidated Financial Statements: |
||||
| 20 | ||||
| 21 | ||||
| 22 | ||||
| 23 | ||||
| 24 |
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Xenonics Holdings, Inc.
Xenonics Holdings, Inc.
We have audited the accompanying consolidated balance sheets of Xenonics Holdings, Inc. and
subsidiary (the “Company”) as of September 30, 2010 and 2009, and the related consolidated
statements of operations, shareholders’ equity and cash flows for the years ended September 30,
2010 and 2009. These consolidated financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these financial statements based on our
audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material
respects, the consolidated financial position of Xenonics Holdings, Inc. and subsidiary as of
September 30, 2010 and 2009, and the consolidated results of their operations and their
consolidated cash flows for the years ended September 30, 2010 and 2009, in conformity with U.S.
generally accepted accounting principles.
We were not engaged to examine management’s assessment of the effectiveness of the Company’s
internal control over financial reporting as of September 30, 2010, included in the accompanying
management’s report on internal control over financial reporting and, accordingly, we do not
express an opinion thereon.
SingerLewak LLP
Irvine, CA
December 16, 2010
December 16, 2010
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CONSOLIDATED BALANCE SHEETS
| September 30, | ||||||||
| Rounded in thousands, except par value | 2010 | 2009 | ||||||
Assets |
||||||||
Current assets: |
||||||||
Cash |
$ | 705,000 | $ | 126,000 | ||||
Accounts receivable, net |
956,000 | 1,634,000 | ||||||
Inventories, net |
1,966,000 | 2,069,000 | ||||||
Other current assets |
166,000 | 119,000 | ||||||
Total Current Assets |
3,793,000 | 3,948,000 | ||||||
Equipment, furniture and leasehold improvements at cost, net |
69,000 | 130,000 | ||||||
Goodwill |
375,000 | 375,000 | ||||||
Other assets |
216,000 | — | ||||||
Total Assets |
$ | 4,453,000 | $ | 4,453,000 | ||||
Liabilities and Shareholders’ Equity |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 492,000 | $ | 1,000,000 | ||||
Accrued expenses |
126,000 | 157,000 | ||||||
Accrued payroll and related taxes |
110,000 | 156,000 | ||||||
Accrued derivative liability |
— | 199,000 | ||||||
Total Current Liabilities |
728,000 | 1,512,000 | ||||||
Notes payable |
376,000 | 292,000 | ||||||
Total Liabilities |
1,104,000 | 1,804,000 | ||||||
Commitments and contingencies (Note 14) |
||||||||
Shareholders’ equity: |
||||||||
Preferred shares, $0.001 par value, 5,000,000 shares authorized, 0 shares issued and outstanding |
— | — | ||||||
Common shares, $0.001 par value, 50,000,000 shares authorized as of September 30, 2010 and
2009; 25,622,000 shares issued as of September 30, 2010 and 20,571,000 as of September 30,
2009; 25,509,000 shares outstanding as of September 30, 2010 and 20,459,000 outstanding as of
September 30, 2009 |
25,000 | 20,000 | ||||||
Additional paid-in capital |
26,954,000 | 24,478,000 | ||||||
Accumulated deficit |
(23,324,000 | ) | (21,543,000 | ) | ||||
| 3,655,000 | 2,955,000 | |||||||
Less treasury stock, at cost, 113,000 shares |
(306,000 | ) | (306,000 | ) | ||||
Total Shareholders’ Equity |
3,349,000 | 2,649,000 | ||||||
Total Liabilities and Shareholders’ Equity |
$ | 4,453,000 | $ | 4,453,000 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
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CONSOLIDATED STATEMENTS OF OPERATIONS
| Years ended September 30, | ||||||||
| Rounded in thousands, except per share amounts | 2010 | 2009 | ||||||
Revenue |
$ | 4,397,000 | $ | 7,378,000 | ||||
Cost of goods sold |
2,247,000 | 4,005,000 | ||||||
Gross profit |
2,150,000 | 3,373,000 | ||||||
Selling, general and administrative |
3,021,000 | 4,535,000 | ||||||
Research and development |
772,000 | 623,000 | ||||||
Income (loss) from operations |
(1,643,000 | ) | (1,785,000 | ) | ||||
Other income (expense): |
||||||||
Gain (loss) on derivative revaluation |
38,000 | (39,000 | ) | |||||
Other (expense) income |
(26,000 | ) | 10,000 | |||||
Interest income |
4,000 | 15,000 | ||||||
Interest (expense) |
(152,000 | ) | (38,000 | ) | ||||
Income (loss) before provision for income taxes |
(1,779,000 | ) | (1,837,000 | ) | ||||
Income tax provision |
2,000 | 2,000 | ||||||
Net income (loss) |
$ | (1,781,000 | ) | $ | (1,839,000 | ) | ||
Net loss per share: |
||||||||
Basic and diluted |
$ | (0.08 | ) | $ | (0.09 | ) | ||
Weighted average shares outstanding |
||||||||
Basic and diluted |
22,994,000 | 20,405,000 | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
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CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
| Common Stock | Treasury Stock | Additional | Accumulated | |||||||||||||||||||||||||
| Rounded in thousands | Shares | Amount | Shares | Amount | Paid-In Capital | Deficit | Total | |||||||||||||||||||||
Balances at September 30,
2008 |
20,296,000 | $ | 20,000 | (113,000 | ) | $ | (306,000 | ) | $ | 23,744,000 | $ | (19,704,000 | ) | $ | 3,754,000 | |||||||||||||
Shares issued in exchange
for minority interest |
275,000 | 214,000 | 214,000 | |||||||||||||||||||||||||
Warrants issued for notes
payable |
250,000 | 250,000 | ||||||||||||||||||||||||||
Compensation charge for
stock options issued to
employees and directors |
237,000 | 237,000 | ||||||||||||||||||||||||||
Compensation charge for
warrants issued for
services |
33,000 | 33,000 | ||||||||||||||||||||||||||
Net loss |
(1,839,000 | ) | (1,839,000 | ) | ||||||||||||||||||||||||
Balances at September 30,
2009 |
20,571,000 | $ | 20,000 | (113,000 | ) | $ | (306,000 | ) | $ | 24,478,000 | $ | (21,543,000 | ) | $ | 2,649,000 | |||||||||||||
Shares issued for cash |
4,400,000 | 4,000 | 1,924,000 | 1,928,000 | ||||||||||||||||||||||||
Shares issued for services |
600,000 | 1,000 | 386,000 | 387,000 | ||||||||||||||||||||||||
Warrants and stock
options exercised |
50,000 | 16,000 | 16,000 | |||||||||||||||||||||||||
Compensation charge for
stock options issued to
employees and directors |
34,000 | 34,000 | ||||||||||||||||||||||||||
Compensation charge for
warrants issued for
services |
116,000 | 116,000 | ||||||||||||||||||||||||||
Net loss |
(1,781,000 | ) | (1,781,000 | ) | ||||||||||||||||||||||||
Balances at September 30,
2010 |
25,621,000 | $ | 25,000 | (113,000 | ) | $ | (306,000 | ) | $ | 26,954,000 | $ | (23,324,000 | ) | $ | 3,349,000 | |||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
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CONSOLIDATED STATEMENTS OF CASH FLOWS
| Years ended September 30, | ||||||||
| Rounded in thousands | 2010 | 2009 | ||||||
Cash flows from operating activities: |
||||||||
Net income (loss) |
$ | (1,781,000 | ) | $ | (1,839,000 | ) | ||
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: |
||||||||
Depreciation |
63,000 | 58,000 | ||||||
Impairment loss from fixed asset disposals |
26,000 | 9,000 | ||||||
Provision for bad debts |
165,000 | 110,000 | ||||||
Non-cash compensation for stock options issued to employees and directors |
34,000 | 236,000 | ||||||
Non-cash compensation for warrants issued |
116,000 | — | ||||||
Non-cash compensation to consultants |
90,000 | 33,000 | ||||||
(Gain) loss on derivative revaluation |
(38,000 | ) | 39,000 | |||||
Amortization of warrants for notes payable |
84,000 | 17,000 | ||||||
Changes in operating assets and liabilities: |
||||||||
Accounts receivable |
513,000 | (790,000 | ) | |||||
Inventories |
103,000 | (324,000 | ) | |||||
Other current assets |
34,000 | 256,000 | ||||||
Accounts payable |
(498,000 | ) | 461,000 | |||||
Accrued expenses |
(31,000 | ) | 63,000 | |||||
Accrued payroll and related taxes |
(46,000 | ) | (17,000 | ) | ||||
Accrued derivative liability |
(161,000 | ) | — | |||||
Net cash (used in) operating activities |
(1,327,000 | ) | (1,688,000 | ) | ||||
Cash flows from investing activities: |
||||||||
Proceeds from investments in marketable securities |
— | 1,000,000 | ||||||
Purchases of equipment, furniture and leasehold improvements |
(28,000 | ) | (36,000 | ) | ||||
Net cash provided by (used in) investing activities |
(28,000 | ) | 964,000 | |||||
Cash flows from financing activities: |
||||||||
Proceeds from sales of common stock, net of expenses |
1,928,000 | — | ||||||
Proceeds from bank note payable |
— | 1,000,000 | ||||||
Repayment of bank note payable |
— | (1,000,000 | ) | |||||
Proceeds from the exercises of warrants and stock options |
6,000 | — | ||||||
Proceeds from notes payable |
— | 525,000 | ||||||
Net cash provided by (used in) financing activities |
1,934,000 | 525,000 | ||||||
Net increase (decrease) in cash |
579,000 | (199,000 | ) | |||||
Cash, beginning of period |
126,000 | 325,000 | ||||||
Cash, end of period |
$ | 705,000 | $ | 126,000 | ||||
Supplemental cash flow information: |
||||||||
Cash paid during the year for income taxes |
$ | 2,000 | $ | 2,000 | ||||
Cash paid during the year for interest |
$ | 68,000 | $ | 7,000 | ||||
Supplemental schedule of non-cash financing activities: |
||||||||
The Company repurchased 125,000 shares of the non-controlling
interest in a subsidiary through the issuance of 275,000 shares of common stock worth $214,000 and
recording an initial accrual of $161,000 (Note 9) |
$ | — | $ | 375,000 | ||||
The Company issued 25,000 shares of common stock for the exercise of stock options and received $6,000 in
cash plus consulting services |
$ | 10,000 | $ | — | ||||
The Company issued 300,000 shares of common stock for a three-year financial advisory service
agreement
at $0.80 per share |
$ | 240,000 | $ | — | ||||
The Company issued 300,000 shares of common stock for a one-year extension of the financial advisory
service agreement at $0.49 per share |
$ | 147,000 | $ | — | ||||
The accompanying notes are an integral part of these consolidated financial statements
23
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. OPERATIONS AND OTHER ORGANIZATIONAL MATTERS
Xenonics, Inc. (Xenonics) was organized under the laws of the state of Delaware in November
1996. Xenonics was formed to develop and commercialize compact, ultra-high intensity illumination
products, based on patented technology. Xenonics markets its products directly to end users on a
contract and purchase order basis in a variety of markets for military, law enforcement, security,
and search and rescue applications.
In July 2003, Xenonics completed a reorganization with Digital Home Theater Systems, Inc.
(DHTS), a Nevada corporation that had previously operated as a multimedia service provider. DHTS
had discontinued operations in 1999. In connection with the transaction, DHTS acquired 100% of
Xenonics. Upon the closing of the reorganization, DHTS changed its name to Xenonics Holdings, Inc.
(Holdings), together with Xenonics, collectively, the “Company”. The transaction was accounted for
as a recapitalization of Xenonics with an issuance of common stock for cash. Although Holdings was
the legal acquirer in the transaction, Xenonics was the accounting acquirer and, as such, its
historical financial statements will continue. No goodwill was recorded as a result of the
transaction.
On December 14, 2004, one warrant holder of Xenonics exercised warrants to purchase 125,000
shares of Xenonics, Inc. Effective December 10, 2008 the Company repurchased these shares, thus
resulting in Xenonics, Inc. becoming a wholly-owned subsidiary of the Company — see Note 9 for more
details.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation — The consolidated financial statements include the accounts of
Holdings and its 100% owned subsidiary Xenonics.
Use of Estimates — The preparation of financial statements, in conformity with accounting
principles generally accepted in the United States of America, 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 revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Cash and Cash Equivalents — Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of cash and cash equivalents. The Company considers
highly liquid money market investments with original maturities of three months or less at the date
of purchase to be cash equivalents. The Company maintains its cash and cash equivalents with
high-credit quality financial institutions. At times, such amounts may exceed federally insured
limits; however, the Company has not experienced any losses in such accounts and believes it is not
exposed to any significant credit risk on its cash equivalent accounts.
Equipment, Furniture and Leasehold Improvements — Equipment, furniture and leasehold
improvements are stated at cost less accumulated depreciation which is computed using the
straight-line method over the estimated useful lives of the assets, generally ranging from five to
seven years. Leasehold improvements are amortized using the straight-line method over the shorter
of the estimated useful life of the asset or the lease term. Expenditures for repairs and
maintenance are charged to operations as incurred.
Long-Lived Assets — The Company reviews long-lived assets whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be recoverable. Any long-lived
assets held for disposal are reported at the lower of their carrying amounts or fair value less
costs to sell. For the year ended September 30, 2010 the Company recorded an impairment loss of
$26,000 for the disposal of equipment, furniture and leasehold improvements. For the year ended
September 30, 2009 the Company recorded an impairment loss of $9,000 for the disposal of equipment,
furniture and leasehold improvements
Fair Value Of Financial Instruments — The Company’s principal financial instruments
represented by cash and equivalents, accounts receivable, accounts payable and accrued expenses,
approximate their fair value due to the short-term nature of these items. The fair value of the
notes payable is estimated based on current rates offered to the Company for similar debt of the
same remaining maturities.
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Accounts Receivable — The Company provides for the possibility of customers’ inability to
make required payments by recording an allowance for doubtful accounts. The Company writes-off an
account when it is considered to be uncollectible. The Company evaluates the collectibility of its
accounts receivable on an on-going basis. In some circumstances the Company records a specific
allowance against amounts due to reduce the net recognized receivable to the amount the Company
reasonably believes will be collected. For all other customers, the Company records an allowance
for doubtful accounts based on the length of time the receivables are past due, the current
business environment and the Company’s historical experience. As of September 30, 2010, the
allowance for doubtful accounts was $176,000 compared to $120,000 as of September 30, 2009. The
Company allows its customers to return damaged or defective products following a customary return
merchandize authorization process. The Company utilizes actual historical return rates to
determine its allowance for returns each period. Gross sales are reduced by estimated returns and
cost of sales is reduced by the estimated cost of those sales. The Company records a corresponding
allowance for the estimated liability associated with the estimated returns. This estimated
liability is based on the gross margin of the products corresponding to the estimated returns.
This allowance is offset each period by the actual product returns. As of September 30, 2010, the
Company determined that no allowance for sales returns was necessary.
Concentrations of Credit Risk — The Company provides credit to its customers in the normal
course of business. During the year ended September 30, 2010, two customers accounted for 87% of
total product sales. These customers represented 81% of accounts receivable at September 30, 2010.
During the year ended September 30, 2009, three customers accounted for 78% of total product sales.
These customers represented 57% of accounts receivable, respectively at September 30, 2009. The
Company does not obtain collateral with which to secure its accounts receivable. The Company
performs ongoing credit evaluations of its customers and maintains reserves for potential credit
losses based upon the Company’s historical experience related to credit losses and any unusual
circumstances that may affect the ability of its customers to meet their obligations.
Inventories — Inventories are stated at the lower of cost or market. Cost is computed using
weighted average cost, which approximates actual cost, on a first-in, first-out basis. Inventories
on hand are evaluated on an on-going basis to determine if any items are obsolete or in excess of
future needs. Items determined to be obsolete are reserved for. The Company provides for the
possible inability to sell its inventories by providing an excess inventory reserve. As of
September 30, 2010 the Company determined that a reserve of $30,000 was required.
Revenue Recognition — The Company recognizes revenue net of discounts upon shipment and
transfer of title and when it has evidence that arrangements exist and the price to the buyer is
fixed through signed contracts or purchase orders. Collectibility is reasonably assured through one
or more of the following: government purchase, historical payment practices or review of new
customer credit. Customers do not have the right to return product unless it is damaged or
defective.
Advertising Costs — Advertising costs are expensed as incurred. For the year ended September
30, 2010 there were no expenditures for advertising compared to $48,000 for the year ended
September 30, 2009.
Cost of Goods Sold — Cost of goods sold includes raw materials and components, labor, and
manufacturing overhead. Also included are the costs related to outside production of product
through an exclusive manufacturing agreement.
Income Taxes — Income taxes are provided for the effects of transactions reported in the
financial statements and consist of taxes currently due plus deferred taxes related to differences
between the basis of certain assets and liabilities for financial and income tax reporting.
Deferred taxes are classified as current or non-current depending on the classification of the
assets and liabilities to which they relate. Deferred taxes arising from temporary differences that
are not related to an asset or liability are classified as current or non-current depending on the
periods in which the temporary differences are expected to reverse. A valuation allowance is
established, when necessary, to reduce deferred tax assets if it is more likely than not that all,
or some portion of, such deferred tax assets will not be realized.
The Company made a comprehensive review of its portfolio of uncertain tax positions in
accordance with recognition standards established for certain tax positions. In this regard, an
uncertain tax position represents the Company’s expected treatment of a tax position taken in a
filed tax return, or planned to be taken in a future tax return, that has not been reflected in
measuring income tax expense for financial reporting purposes. At the date of adoption, and as of
September 30, 2010 and September 30, 2009, the Company does not have a liability for unrecognized
tax benefits. The Company concluded that at this time there are no uncertain tax positions. There
was no cumulative effect on retained earnings.
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Loss Per Common Share — Basic loss per share is computed by dividing the net loss available to
common shareholders by the weighted average number of common shares outstanding. Diluted earnings
per share includes the dilutive effect, if any, from the potential exercise of stock options and
warrants using the treasury stock method.
The weighted average shares outstanding used in the calculations of earnings per share were as
follows:
| For the years ended | ||||||||
| September 30, | ||||||||
| 2010 | 2009 | |||||||
Shares outstanding, beginning |
20,459,000 | 20,184,000 | ||||||
Weighted average shares issued |
2,535,000 | 221,000 | ||||||
Weighted average shares outstanding — Basic and diluted |
22,994,000 | 20,405,000 | ||||||
Potential common shares not included in the calculation of net loss per share, as their effect
would be anti-dilutive, are as follows:
| September 30, | ||||||||
| 2010 | 2009 | |||||||
Stock options and warrants |
8,061,000 | 5,281,000 | ||||||
Research and Development — Research and development costs are expensed as incurred.
Substantially all research and development expenses are related to new product development and
designing improvements in current products.
Stock Options — The Company measures the compensation cost for all stock-based awards at fair
value on the date of grant and recognizes the compensation expense over the service period for
awards expected to vest. The fair value of stock options is determined using the Black-Scholes
valuation model, which is consistent with the Company’s valuation techniques previously utilized
for stock options. Such fair value is recognized as expense over the service period, net of
estimated forfeitures.
Recently Adopted and Issued Accounting Pronouncements
Recently Adopted:
On October 1, 2009, we adopted a new FASB rule that revises existing business combination
rules. The new rule requires most identifiable assets, liabilities, non-controlling interests, and
goodwill acquired in a business combination to be recorded at “full fair value.” The new rule
applies to all business combinations, including combinations among mutual entities and combinations
by contract alone. Additionally, all business combinations will be accounted for by applying the
acquisition method. The new rule was effective for business combinations for which the acquisition
date is on or after the beginning of the first annual reporting period beginning on or after
December 15, 2008. The adoption of this standard did not have an impact on our consolidated
financial statements.
On October 1, 2009, we adopted new FASB rules related to accounting for assets acquired and
liabilities assumed in a business combination that arise from contingencies. The new rules apply to
all assets acquired and liabilities assumed in a business combination that arise from certain
contingencies as defined by the FASB and requires (i) an acquirer to recognize at fair value, at
the acquisition date, an asset acquired or liability assumed in a business combination that arises
from a contingency if the acquisition-date fair value of that asset or liability can be determined
during the measurement period, otherwise the asset or liability should be recognized at the
acquisition date if certain defined criteria are met; (ii) contingent consideration arrangements of
an acquiree assumed by the acquirer in a business combination be recognized initially at fair
value; (iii) subsequent measurements of assets and liabilities arising from contingencies be based
on a systematic and rational method depending on their nature and contingent consideration
arrangements be measured subsequently; and (iv) disclosures of the amounts and measurement basis of
such assets and liabilities and the nature of the contingencies. The new rules were effective for
business combinations for which the acquisition date is on or after the beginning of the first
annual reporting period beginning on or after December 15, 2008. The adoption of this standard did
not have an impact on our consolidated financial statements.
On October 1, 2009, we adopted new FASB rules related to determining the useful life of
intangible assets. The new rules amend the factors that should be considered in developing renewal
or extension assumptions used to determine the useful life of a recognized intangible asset under
existing FASB rules for goodwill and other intangible assets. This change is intended to improve
the consistency between the useful life of a recognized intangible asset outside a business
combination and the period of expected cash
flows used to measure the fair value of an intangible asset in a business combination. The new
rules were effective for the financial statements issued for fiscal years beginning after December
15, 2008, and interim periods within those fiscal years. The requirement for determining useful
lives must be applied prospectively to intangible assets acquired after the effective date and the
disclosure requirements must be applied prospectively to all intangible recognized as of, and
subsequent to, the effective date. The adoption of this standard did not have an impact on our
consolidated financial statements.
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On October 1, 2009, we adopted a new FASB rule related to non-controlling interests in
consolidated financial statements. The new rule requires the ownership interests in subsidiaries
held by parties other than the parent to be treated as a separate component of equity and be
clearly identified, labeled, and presented in the consolidated financial statements. The new rule
was effective for fiscal years beginning on or after December 15, 2008 and interim periods within
those fiscal years. Earlier adoption was prohibited. The adoption of this standard did not have an
impact on our consolidated financial statements. On October 1, 2009, we also adopted related
guidance, FASB ASU No. 2010-2, Consolidation (Topic 810): Accounting and Reporting for Decreases in
Ownership of a Subsidiary — a Scope Clarification, which amended certain provisions of the
preceding new guidance for non-controlling interests and changes in ownership interests of a
subsidiary, specifically related to an entity that experiences a decrease in ownership in a
subsidiary. The new guidance clarifies the scope of the decrease in ownership provisions. The
adoption of this standard did not have an impact on our consolidated financial statements.
On October 1, 2009, we adopted new FASB rules related to determining whether an instrument (or
embedded feature) is indexed to an entity’s own stock. Existing accounting for derivatives and
hedging activities, specifies that a contract that would otherwise meet the definition of a
derivative but is both (a) indexed to the Company’s own stock and (b) classified in shareholders’
equity in the statement of financial position would not be considered a derivative financial
instrument. The new rules provide a new two-step model to be applied in determining whether a
financial instrument or an embedded feature is indexed to an issuer’s own stock and thus able to
qualify for the existing scope exception. The new rules were effective for the first annual
reporting period beginning after December 15, 2008, and early adoption is prohibited. The adoption
of this standard did not have an impact on our consolidated financial statements.
On October 1, 2009, we adopted the FASB ASU No. 2009-5, Fair Value Measurements and
Disclosures (Topic 820)—Measuring Liabilities at Fair Value, which changed the fair value
accounting for liabilities. These changes clarify existing guidance that in circumstances in which
a quoted price in an active market for the identical liability is not available, an entity is
required to measure fair value using either a valuation technique that uses a quoted price of
either a similar liability or a quoted price of an identical or similar liability when traded as an
asset, or another valuation technique that is consistent with the principles of fair value
measurements, such as an income approach (e.g., present value technique) or a market approach. This
guidance also states that both a quoted price in an active market for the identical liability and a
quoted price for the identical liability when traded as an asset in an active market when no
adjustments to the quoted price of the asset are required, are Level 1 fair value measurements. The
adoption of this standard did not have an impact on our consolidated financial statements.
Recently Issued:
In June 2009, the FASB issued new rules related to accounting for transfers of financial
assets. These new rules were incorporated into the Accounting Standards Codification in December
2009 as discussed in FASB Accounting Standards Update (ASU) No. 2009-16, Transfers and Servicing
(Topic 860): Accounting for Transfers of Financial Assets. The new rules amend various provisions
related to accounting for transfers and servicing of financial assets and extinguishments of
liabilities, by removing the concept of a qualifying special-purpose entity and removes the
exception from applying FASB rules related to variable interest entities that are qualifying
special-purpose entities; limits the circumstances in which a transferor derecognizes a portion or
component of a financial asset; defines a participating interest; requires a transferor to
recognize and initially measure at fair value all assets obtained and liabilities incurred as a
result of a transfer accounted for as a sale; and requires enhanced disclosure; among others. The
new rules become effective for the Company on October 1, 2010, earlier application is prohibited.
The adoption of this standard is not expected to have a material impact on our consolidated
financial statements.
In June 2009, the FASB issued new rules to amend certain accounting for variable interest
entities (VIE). These new rules were incorporated into the Accounting Standards Codification in
December 2009 as discussed in FASB ASU No. 2009-17, Consolidation (Topic 810): Improvements to
Financial Reporting by Enterprises Involved with Variable Interest Entities. The new rules require
an enterprise to perform an analysis to determine whether the enterprise’s variable interest or
interests give it a controlling financial interest in a VIE; to require ongoing reassessments of
whether an enterprise is the primary beneficiary of a VIE; to eliminate the quantitative approach
previously required for determining the primary beneficiary of a VIE; to add an additional
reconsideration event for determining whether an entity is a VIE when any changes in facts and
circumstances occur such that holders of the equity
investment at risk, as a group, lose the power from voting rights or similar rights of those
investments to direct the activities of the entity that most significantly impact the entity’s
economic performance; and to require enhanced disclosures that will provide users of financial
statements with more transparent information about an enterprise’s involvement in a VIE. The new
rules become effective for the Company on October 1, 2010; earlier application is prohibited. The
adoption of this standard is not expected to have a material impact on our consolidated financial
statements.
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In October 2009, the FASB issued ASU No. 2009-13, Revenue Recognition (Topic 605):
Multiple-Deliverable Revenue Arrangements—a consensus of the FASB Emerging Issues Task Force (ASU
2009-13). ASU 2009-13 amends accounting for revenue arrangements with multiple deliverables, to
eliminate the requirement that all undelivered elements have Vendor-Specific Objective Evidence
(VSOE) or Third-Party Evidence (TPE) before an entity can recognize the portion of an overall
arrangement fee that is attributable to items that already have been delivered. In the absence of
VSOE or TPE of the standalone selling price for one or more delivered or undelivered elements in a
multiple-element arrangement, entities will be required to estimate the selling prices of those
elements. The overall arrangement fee will be allocated to each element (both delivered and
undelivered items) based on their relative selling prices, regardless of whether those selling
prices are evidenced by VSOE or TPE or are based on the entity’s estimated selling price.
Application of the “residual method” of allocating an overall arrangement fee between delivered and
undelivered elements will no longer be permitted upon adoption of ASU 2009-13. Additionally, the
new guidance will require entities to disclose more information about their multiple-element
revenue arrangements. ASU 2009-13 is effective prospectively for revenue arrangements entered into
or materially modified in fiscal years beginning on or after June 15, 2010. Early adoption is
permitted. If a vendor elects early adoption and the period of adoption is not the beginning of
the entity’s fiscal year, the entity will be required to apply the amendments in this Update
retrospectively from the beginning of the entity’s fiscal year. Additionally, vendors electing
early adoption will be required to disclose the following information at a minimum for all
previously reported interim periods in the fiscal year of adoption: revenue, income before income
taxes, net income, earnings per share and the effect of the change for the appropriate captions
presented. The adoption of this standard is not expected to have a material impact on our
consolidated financial statements.
In January 2010, FASB issued ASU No. 2010-06, Fair Value Measurements and Disclosures (Topic
820): Improving Disclosures About Fair Value Measurements. The ASU requires new disclosures about
transfers into and out of Levels 1 and 2 and separate disclosures about purchases, sales,
issuances, and settlements relating to Level 3 measurements. It also clarifies existing fair value
disclosures about the level of disaggregation of disclosed assets and liabilities, and about inputs
and valuation techniques used to measure fair value for both recurring and nonrecurring fair value
measurements that fall in either Level 2 or Level 3. The new disclosures and clarifications of
existing disclosures were effective, and adopted, during the Company’s second quarter ended March
31, 2010, however the disclosures about purchases, sales, issuances, and settlements in the roll
forward of activity in Level 3 measurements, will be effective for the Company’s first quarter
ending December 31, 2011. Other than requiring additional disclosures, the full adoption of this
new guidance will not have an impact on our consolidated financial statements.
3. ACCOUNTS RECEIVABLE
Accounts receivable were comprised of:
| September 30, | September 30, | |||||||
| 2010 | 2009 | |||||||
Accounts Receivable |
$ | 1,132,000 | $ | 1,754,000 | ||||
Allowance for doubtful accounts |
(176,000 | ) | (120,000 | ) | ||||
| $ | 956,000 | $ | 1,634,000 | |||||
4. INVENTORIES
Inventories were comprised of:
| September 30, | September 30, | |||||||
| 2010 | 2009 | |||||||
Raw materials |
$ | 1,285,000 | $ | 1,338,000 | ||||
Work in process |
250,000 | 218,000 | ||||||
Finished goods |
431,000 | 513,000 | ||||||
| $ | 1,966,000 | $ | 2,069,000 | |||||
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5. FIXED ASSETS
Fixed assets consist of the following:
| Estimated | September 30, | September 30, | ||||||||
| Useful Lives | 2010 | 2009 | ||||||||
Computer equipment and software |
5 | $ | 109,000 | $ | 211,000 | |||||
Furniture and leasehold improvements |
7 | 92,000 | 67,000 | |||||||
| 201,000 | 278,000 | |||||||||
Less: accumulated depreciation and amortization |
(132,000 | ) | (148,000 | ) | ||||||
| $ | 69,000 | $ | 130,000 | |||||||
Depreciation expense was $63,000 and $58,000 for the years ended September 30, 2010 and 2009,
respectively.
6. GOODWILL
The $375,000 recorded as goodwill represents the excess of the purchase price over the
recorded minority interest of the Xenonics common stock repurchased as discussed in Note 9 below.
The Company does not amortize goodwill. Instead, the Company evaluates goodwill annually in the
fourth quarter and whenever events or changes in circumstances indicate that it is more likely than
not that an impairment loss has been incurred. As of September 30, 2010, the Company determined
that no such impairment indicators exist.
7. DERIVATIVE LIABILITY
In connection with the repurchase of the Company’s minority interest as discussed in Note 9
below, the Company issued 275,000 shares of common stock with a guaranteed market value of at least
$375,000 as of December 10, 2009. A derivative liability of $161,000 was initially recorded as the
difference between the stock price on December 10, 2008 and the guaranteed market value of
$375,000. Accordingly, any gains or losses resulting from the change in fair value of the common
stock are reported as other income or expense in the accompanying consolidated financial
statements. At September 30, 2009, the difference in the fair value of the common stock and the
guaranteed value of $375,000 amounted to $199,000. Accordingly the Company has recorded a mark to
market adjustment for the year ended September 30, 2009 of $39,000 as a loss on derivative
revaluation. On December 11, 2009 the Company was notified that the final liability for this
obligation would be $161,000. The repurchase was completed in January 2010 for $161,000 and the
Company recorded the mark to market year to date adjustment of $38,000 as a gain on derivative
revaluation.
8. NOTES PAYABLE
On July 15, 2009 the Company borrowed $525,000 under the terms of promissory notes due July
15, 2012 with interest only payments due quarterly at an annual rate of 13%. The notes may be
prepaid without penalty on or after January 15, 2010.
In connection with the notes payable transaction, the Company granted and issued 525,000
warrants with an exercise price of $0.75 and valued the warrants at $250,000 using the
Black-Scholes option-pricing model and the following assumptions: the market price was $0.68, the
volatility was estimated at 104%, the life of the warrants was 4 years, the risk free rate was
2.06% and the dividend yield of 0%. The value assigned for the warrants issued in conjunction with
the notes payable was recorded as debt discount and is being amortized over the three year life of
the notes. Pursuant to the terms of the promissory notes, the exercise price for the warrants was
adjusted to $0.65 in April 2010 when the Company issued warrants at that lower price in connection
with a stock offering. The Company recorded a valuation adjustment in 2010 of $6,000 for this
change in the exercise price. For the years ended September 30, 2010 and 2009 the Company recorded
amortization of $84,000 and $17,000, respectively.
| September 30, | September 30, | |||||||||
| 2010 | 2009 | |||||||||
| Notes payable | Unsecured Notes payable, maturing in July 2012, bearing interest at 13% per annum (net
of unamortized debt discount of $149,000 in
2010 and $233,000 in 2009) |
$ | 376,000 | $ | 292,000 | |||||
Total debt obligations |
376,000 | 292,000 | ||||||||
Less — current portion, net of debt discount |
— | — | ||||||||
Long-term portion |
$ | 376,000 | $ | 292,000 | ||||||
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Future payments under long-term obligations as of September 30, 2010 are as follows:
2011 |
$ | — | ||
2012 |
525,000 | |||
Total |
$ | 525,000 | ||
9. MINORITY INTEREST
On December 14, 2004, one warrant holder exercised warrants to purchase 125,000 shares of
Xenonics, Inc. resulting in Xenonics Holdings, Inc. owning 98.6% of the issued and outstanding
capital stock of Xenonics, Inc. On December 10, 2008 the Company repurchased the minority interest
in exchange for 275,000 shares of the Company, with a guaranteed value on December 10, 2009 of
$375,000 — see Note 14 below for more details.
10. SHAREHOLDERS’ EQUITY
The Company has two classes of stock. There is no cumulative voting by shareholders and no
preemptive rights. Each shareholder is entitled to have one vote for each share of stock held.
On October 10, 2009 the Company issued 300,000 shares of unregistered common stock to an
independent firm for investor relations, financial public relations and marketing services for a
period of three years. On April 28, 2010 the Company issued 300,000 shares to the same independent
firm for an additional year for investor relations, financial public relations and marketing
services.
On December 11, 2009 the Company sold 400,000 shares of common stock for $0.72 per share and
granted warrants to purchase 100,000 shares for $0.90 per share.
On April 6, 2010 the Company sold 2,900,000 shares of common stock for $0.50 per share and
granted warrants to purchase 2,900,000 shares for $0.65 per share.
On April 23, 2010 the Company sold 1,100,000 shares of common stock for $0.50 per share and
granted warrants to purchase 1,100,000 shares for $0.65 per share.
11. STOCK OPTIONS AND WARRANTS
Stock Options — The Company accounts for all share-based payments to employees, including
grants of employee stock options, based on their fair values and classifies all stock-based
compensation as selling, general and administrative expenses.
In July 2003, the Company’s Board of Directors adopted a stock option plan. Under the 2003
Option Plan, options to purchase up to 1,500,000 new shares of common stock are available for
issuance to employees, directors, and outside consultants. Each option is exercisable as set forth
in the documents evidencing the option, however, no option shall have a term in excess of ten years
from the grant date. Options outstanding under the 2003 Option Plan have vesting periods ranging
from immediate to three years.
In December 2004, the Company’s Board of Directors adopted a 2004 stock option plan. The
Company may issue up to 1,500,000 new shares of common stock under the 2004 plan and no person may
be granted awards during any twelve-month period that cover more than 300,000 shares of common
stock. Each option is exercisable as set forth in the documents evidencing the option, however, no
option shall have a term in excess of ten years from the grant date. Options outstanding under the
2004 stock option plan have vesting periods ranging from immediate to three years.
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The fair value of each option award is estimated on the date of grant using the Black-Scholes
valuation model. The following assumptions were used for options granted under both plans in the
years ended September 30, 2010 and 2009.
| For the years ended | ||||
| September 30, | ||||
| 2010 | 2009 | |||
Risk-free interest rate |
1.41% – 1.80% | 1.47% – 2.37% | ||
Expected life (in years) |
4 – 5 | 4 | ||
Dividend yield |
0.0% | 0.0% | ||
Expected volatility |
102% – 103% | 100% – 104% | ||
Weighted-average volatility |
103% | 103% | ||
Expected volatility is determined based on historical volatility. Expected life is determined
based on historical experience of similar awards, giving consideration to the contractual terms of
the stock-based awards and vesting schedules. The risk-free interest rate is based on the U.S.
Treasury yield curve in effect at the time of grant. Share-based compensation expense recognized is
based on the options ultimately expected to vest, reduced by estimated forfeitures.
On December 28, 2007, the Securities and Exchange Commission staff published Staff Accounting
Bulletin No. 110 (SAB 110), which updates SAB 107 and provides the SEC staff’s views on a variety
of matters relating to stock-based compensation. SAB 110 requires stock-based compensation to be
classified in the same expense line items as cash compensation. The Company classifies all
stock-based compensation as selling, general and administrative expenses.
A summary of the Company’s stock option activity for both plans as of September 30, 2010 and
2009, and changes during the years then ended is presented below:
| Weighted | ||||||||||||||||
| Average | ||||||||||||||||
| Weighted | Contractual | |||||||||||||||
| Stock | Average | Term in | Aggregate | |||||||||||||
| Options | Exercise Price | Years | Intrinsic Value | |||||||||||||
Outstanding at October 1, 2008 |
1,443,000 | $ | 2.77 | |||||||||||||
Granted |
1,905,000 | $ | 0.67 | |||||||||||||
Exercised |
— | — | ||||||||||||||
Forfeited or Cancelled |
(1,115,000 | ) | $ | 1.82 | ||||||||||||
Outstanding at September 30, 2009 |
2,233,000 | $ | 1.46 | 3.57 | — | |||||||||||
Granted |
985,000 | $ | 0.66 | 4.87 | — | |||||||||||
Forfeited |
(25,000 | ) | $ | 0.65 | ||||||||||||
Cancelled |
(1,355,000 | ) | $ | 1.65 | ||||||||||||
Exercised |
(25,000 | ) | $ | 0.65 | — | |||||||||||
Outstanding at September 30, 2010 |
1,813,000 | $ | 0.76 | 4.05 | — | |||||||||||
Exercisable at September 30, 2010 |
913,000 | $ | 0.86 | 3.20 | — | * | ||||||||||
| * | The aggregate intrinsic value of a stock option is the amount by which the market value of the
underlying stock exceeds the exercise price of the option. The market value of our stock was $0.34
at September 30, 2010. |
The weighted-average grant-date fair value of options granted during the year ended September
30, 2010 was $0.22 and $0.42 for options granted during the year ended September 30, 2009.
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A summary of the status of the Company’s non-vested stock options as of September 30, 2010,
and changes during the year ended September 30, 2010, is presented below:
| Weighted Average | ||||||||
| Grant-Date | ||||||||
| Stock Options | Fair Value | |||||||
Non-vested at October 1, 2009 |
900,000 | $ | 0.45 | |||||
Granted |
985,000 | $ | 0.22 | |||||
Forfeited or Exercised |
(905,000 | ) | $ | 0.24 | ||||
Vested |
(80,000 | ) | $ | 0.25 | ||||
Non-vested at September 30, 2010 |
900,000 | $ | 0.20 | |||||
As of September 30, 2010, there was $178,000 of total unrecognized compensation cost related
to non-vested performance-based compensation arrangements granted under the stock options plans.
That cost is expected to be recognized over a weighted-average period of 1.00 year but only if
performance milestones are achieved. The total fair value of options vested during the year ended
September 30, 2010, was $20,000.
Total compensation expense related to outstanding stock options for the years ended September
30, 2010 and 2009 was $34,000 and $263,000, respectively.
In September 2010, the Company granted a total of 900,000 new stock options. These options would
vest only if certain revenue and profitability milestones were achieved for the fiscal year ended
September 30, 2011. No expense was recorded at this time because the probability of achieving the
milestones is not certain. In October 2009 the Company granted a total of 45,000 new stock options
to two directors for $0.80 per share. In July 2010 the Company granted a total of 40,000 new stock
options to two new directors for $0.65 per share.
The following table summarizes information concerning currently outstanding and exercisable
stock options as of
September 30, 2010:
| Options Outstanding | Options Exercisable | |||||||||||||||||||
| At September 30, 2010 | at September 30, 2010 | |||||||||||||||||||
| Weighted | ||||||||||||||||||||
| Average | Weighted- | Weighted- | ||||||||||||||||||
| Range of | Remaining | Average | Number | Average | ||||||||||||||||
| Exercise | Number | Contractual | Exercise | Vested and | Exercise | |||||||||||||||
| Prices | Outstanding | Life (Years) | Price | Exercisable | Price | |||||||||||||||
$0.63 – $1.00 |
1,770,000 | 4.12 | $ | 0.68 | 870,000 | $ | 0.74 | |||||||||||||
$1.01 – $2.85 |
28,000 | 0.19 | $ | 1.83 | 28,000 | $ | 1.83 | |||||||||||||
$2.86 – $5.75 |
15,000 | 3.64 | $ | 5.75 | 15,000 | $ | 5.75 | |||||||||||||
| 1,813,000 | 4.05 | $ | 0.76 | 913,000 | $ | 0.86 | ||||||||||||||
Stock Warrants — The Company, from time to time, has issued common stock purchase warrants to
employees, directors, shareholders and others. The warrants are nontransferable and are exercisable
at any time after the date of issuance and on or before their respective expiration date, which is
generally five years.
On March 16, 2009 the Company entered into an agreement with an independent firm for financial
advisory services for a period of one year. As part of this agreement the Company issued a
five-year warrant, vested upon issuance, to purchase 300,000 shares of the Company’s common stock
at $0.50 per share (which exceeded the fair market value of the common stock as of the date of the
agreement). Subsequently, on June 11, 2009 the Company engaged the same firm to assist in raising
funds for working capital by August 31, 2009. While the Company was able to privately raise
$525,000 in debt financing, this financing was not completed by the independent firm. On September
16, 2009 the Company and the independent firm mutually agreed to modify the warrant to an
attainable performance level and reduce the number of shares to 50,000. Pursuant to the terms of
the warrant, the independent firm made a cashless exercise on December 21, 2009 and 25,000 shares
were issued.
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On July 15, 2009 the Company borrowed $525,000 under the terms of promissory notes due July
15, 2012 with interest only payments due quarterly at an annual rate of 13%. The Company also
issued 525,000 five-year warrants at an exercise price of $0.75 per share. Pursuant to the terms
of the promissory notes, the exercise price for the warrants was adjusted to $0.65 in April 2010
when the Company issued warrants at that lower price in connection with a stock offering. The
Company recorded a valuation adjustment in 2010 of $6,000 for this change in the exercise price.
A summary of the Company’s warrant activity is as follows:
| For the years ended September 30, | ||||||||||||||||
| 2010 | 2009 | |||||||||||||||
| Weighted | Weighted | |||||||||||||||
| Average | Average | |||||||||||||||
| Exercise | Exercise | |||||||||||||||
| Warrants | Price | Warrants | Price | |||||||||||||
Outstanding-beginning of period |
3,048,000 | $ | 2.31 | 3,388,000 | $ | 2.29 | ||||||||||
Issued |
4,200,000 | $ | 0.65 | 825,000 | $ | 0.66 | ||||||||||
Exercised |
(25,000 | ) | $ | 0.50 | — | — | ||||||||||
Canceled/Forfeited |
(75,000 | ) | $ | 3.86 | (1,165,000 | ) | $ | 0.77 | ||||||||
Outstanding-end of period |
7,148,000 | $ | 1.32 | 3,048,000 | $ | 2.31 | ||||||||||
Exercisable-end of period |
2,212,000 | $ | 1.72 | 2,112,000 | $ | 1.90 | ||||||||||
Total compensation expense related to outstanding warrants for the years ended September 30,
2010 and 2009 was $115,000 and $33,000, respectively.
The following table summarizes information concerning currently vested and exercisable
warrants as of September 30, 2010:
| Warrants Vested and Exercisable | ||||||||||||
| at September 30, 2010 | ||||||||||||
| Weighted | ||||||||||||
| Average | Weighted- | |||||||||||
| Range of | Number | Remaining | Average | |||||||||
| Exercise | Vested and | Contractual | Exercise | |||||||||
| Prices | Exercisable | Life (Years) | Price | |||||||||
$0.50 - $1.57 |
725,000 | 3.89 | $ | 0.66 | ||||||||
$1.58 - $2.20 |
800,000 | 0.82 | $ | 1.79 | ||||||||
$2.21 - $2.75 |
687,000 | 1.67 | $ | 2.75 | ||||||||
| 2,212,000 | 2.09 | $ | 1.72 | |||||||||
12. INCOME TAXES
The Company made a comprehensive review of its portfolio of uncertain tax positions. In this
regard, an uncertain tax position represents the Company’s expected treatment of a tax position
taken in a filed tax return, or planned to be taken in a future tax return, that has not been
reflected in measuring income tax expense for financial reporting purposes. As a result of this
review, the Company concluded that at this time there are no uncertain tax positions. As a result,
there was no cumulative effect on retained earnings.
The Company is subject to U.S. federal income tax as well as income tax in multiple states and
foreign jurisdictions. For all major taxing jurisdictions, the tax years 2004 through 2008 remain
open state and federal examination. As of September 30, 2010, the Company does not expect any
material changes to unrecognized tax positions within the next twelve months.
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The provision for income taxes is summarized below:
| For the years ended | ||||||||
| September 30, | ||||||||
| 2010 | 2009 | |||||||
Current provision: |
||||||||
Federal |
$ | — | $ | — | ||||
State |
2,000 | 2,000 | ||||||
| 2,000 | 2,000 | |||||||
Deferred provision: |
||||||||
Federal |
(580,000 | ) | (624,000 | ) | ||||
State |
(145,000 | ) | (140,000 | ) | ||||
| (725,000 | ) | (764,000 | ) | |||||
Valuation allowance |
725,000 | 764,000 | ||||||
| $ | 2,000 | $ | 2,000 | |||||
The principal components of deferred tax assets, liabilities and the valuation allowance are
as follows:
| For the years ended | ||||||||
| September 30, | ||||||||
| 2010 | 2009 | |||||||
Accrued derivative liability |
$ | — | $ | 79,000 | ||||
Inventory reserve |
12,000 | — | ||||||
Deferred lease liability |
17,000 | — | ||||||
Allowance for doubtful accounts |
70,000 | 48,000 | ||||||
Stock compensation expense |
874,000 | 865,000 | ||||||
Warrant expense |
386,000 | 340,000 | ||||||
State taxes |
1,000 | 1,000 | ||||||
Accumulated depreciation / amortization |
(6,000 | ) | (15,000 | ) | ||||
R&D credit |
642,000 | 575,000 | ||||||
Other |
48,000 | 72,000 | ||||||
Net operating loss carry-forwards |
6,705,000 | 6,059,000 | ||||||
| 8,749,000 | 8,024,000 | |||||||
Valuation allowance |
(8,749,000 | ) | (8,024,000 | ) | ||||
Net deferred tax asset |
$ | — | $ | — | ||||
As of September 30, 2010, the Company had federal and state net operating loss (NOL)
carry-forwards of $17,167,000 and $14,885,000, respectively, which begin to expire in 2012 for
federal tax purposes and 2011 for state purposes. A valuation allowance of $(8,749,000) has been
recorded to offset net deferred tax assets since the realization of these assets is uncertain. Some
of these carry forward NOL’s may be subjected to limitations imposed by the Internal Revenue Code.
Except to the extent of the valuation allowance that has been established, the Company believes
these limitations will not prevent the carry forward benefits from being realized.
The reconciliation of the federal statutory income tax rate to the effective tax rate is as
follows:
| For the years ended | ||||||||
| September 30, | ||||||||
| 2010 | 2009 | |||||||
Federal statutory rate |
34.00 | % | 34.00 | % | ||||
State income taxes, net of federal income tax benefit |
5.83 | % | 5.83 | % | ||||
Change in valuation allowance |
(40.70 | )% | (41.54 | )% | ||||
R&D credit carry-forward |
3.68 | % | 5.22 | % | ||||
Other |
(2.92 | )% | (3.62 | )% | ||||
| (0.11 | )% | (0.11 | )% | |||||
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13. SAVINGS PLAN
On July 1, 2004, the Company implemented a 401(k) Savings Plan (the “Savings Plan”) which
covers all eligible employees. Participants may contribute no less than 1% and up to the maximum
allowable under the Internal Revenue Service regulations. In addition, the Company may make
discretionary contributions to the Savings Plan, subject to certain limitations. For the years
ended September 30, 2010 and 2009, the Company made no matching contributions.
14. COMMITMENTS AND CONTINGENCIES
Leases — The Company moved into new facilities in January 2009, under the terms of a new lease
that expires in March 2014. The new lease requires that the Company pay a pro-rata share of all
operating expenses including, but not limited to, real estate taxes, common area maintenance and
utilities. The Company also leases office equipment under non-cancelable operating leases. Rent
expense under these leases totaled $210,000 and $179,000 for the years ended September 30, 2010 and
2009, respectively.
Minimum future cash obligations for the new lease total $213,000, $221,000, $229,000 and
$117,000 for the years ending September 30, 2011, 2012, 2013 and 2014 respectively.
Employment Agreements — Alan P. Magerman and Jeffrey P. Kennedy are our only employees who
have employment agreements. Under their employment agreements, Mr. Magerman is to serve as the
Chief Executive Officer of Xenonics, Inc., and Mr. Kennedy is to serve as President and Chief
Operating Officer of Xenonics, Inc. Both employment agreements were entered into by Xenonics, Inc.
as of January 1, 2003 and, except as set forth below, are substantially identical. Neither
employment agreement has a fixed term or expiration date. Instead, Mr. Magerman’s agreement will
continue until 24 months after either he or Xenonics, Inc. gives the other notice of termination.
Likewise, Mr. Kennedy’s agreement will continue until 12 months after either he or Xenonics gives
the other notice of termination. On December 15, 2010, the Board of Directors approved an
amendment to both agreements to provide that either party can terminate the agreement with 30 days
written notice, however, in the event of termination by Xenonics without cause, the benefits of the
agreements will continue for 36 months after notice of termination. Both agreements provide for
base compensation of $180,000 per year, to be adjusted annually according to the Consumer Price
Index. As of September 30, 2010 the base compensation for each of the two officers was $216,000.
In addition, if either Mr. Magerman or Mr. Kennedy is terminated for any reason other than for
cause, the agreements require that they must be paid the remaining balances due to them under the
agreements as liquidated damages.
Litigation — The Company received notice in February 2006 regarding a breach of contract
action filed in the Delaware Superior Court by Steven M. Mizel against Xenonics, Inc. (“Xenonics”),
a 98.6% owned subsidiary of the Company. Plaintiff, a former holder of warrants of Xenonics,
alleged that prior to the effective date of a transaction on or about July 23, 2003 between Digital
Home Theatre Systems, Inc. (“DHTS”) and Xenonics, plaintiff was not allowed to exercise his
warrants and that Xenonics wrongfully refused to permit him to purchase the Company’s shares at the
exercise price in his warrants for Xenonics shares. Effective December 10, 2008 the Company has
agreed to repurchase the minority interest pursuant to an Exchange Agreement between the Company
and Mr. Mizel (the “Exchange Agreement”), whereby Mr. Mizel transferred to the Company 125,000
shares of common stock of Xenonics in exchange for 275,000 shares of common stock of the Company
with a guaranteed market value (taking into account shares of common stock sold by Mr. Mizel before
December 10, 2009) of at least $375,000, on December 10, 2009. In connection with this exchange,
Mr. Mizel dismissed with prejudice the action in the Delaware Superior Court. On December 11, 2009
Mr. Mizel notified the Company that its final liability for this obligation would be $161,000.
The Company is occasionally subject to legal proceedings and claims that arise in the ordinary
course of our business. It is impossible to predict with any certainty the outcome of pending
disputes, and the Company cannot predict whether any liability arising from pending claims and
litigation will be material in relation to the consolidated financial position or results of
operations.
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15. SUBSEQUENT EVENTS
On November 30, 2010 the Company announced a $300,000 order from the U.S. Army Rapid Equipping
Force for crew served weapon lights and vehicle mount kits.
On December 7, 2010 the Company announced a $600,000 order from the U.S. Army Rapid Equipping
Force for crew served weapon light vehicle mount kits and related accessories.
On December 7, 2010 the Company announced the purchase of 533,529 shares of its common stock
for $106,706 or $0.20 per share from director, Robert F. Buie, who resigned from the Board for
personal reasons.
Management has evaluated all activity through the date that the consolidated financial
statements were issued and concluded that no other subsequent events have occurred that would
require recognition in the consolidated financial statements or disclosure in the notes to the
consolidated financial statements.
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Table of Contents
| ITEM 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
Not applicable
| Item 9A. | Controls and Procedures |
Evaluation of Disclosure Controls and Procedures
The Company’s management conducted an evaluation, with the participation of its Chief
Executive Officer and Chief Financial Officer, of the effectiveness as of the end of the period
covered by this annual report of the Company’s disclosure controls and procedures, as defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”).
Disclosure controls and procedures are designed to ensure that information required to be disclosed
in the reports that the Company files or submits under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the rules and forms of the Securities
and Exchange Commission (the “SEC”) and that such information is accumulated and communicated to
management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to
allow timely decisions regarding required disclosure. Based on that evaluation, the Chief
Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls
and procedures were effective as of September 30, 2010, which is the end of the period covered by
this annual report.
Management’s Report on Internal Control Over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal
control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange
Act, and for assessing the effectiveness of internal control over financial reporting.
Internal control over financial reporting is intended to provide reasonable assurance
regarding the reliability of the Company’s financial reporting and the preparation of financial
statements for external purposes in accordance with accounting principles generally accepted in the
United States of America. Internal control over financial reporting includes those policies and
procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of the Company’s assets, (ii) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with accounting principles generally accepted in the United States of
America and that the Company’s receipts and expenditures are being made only in accordance with
authorizations of its management and directors, and (iii) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisitions, use, or disposition of the Company’s
assets that could have a material effect on its financial statements.
Management, with the participation of the Chief Executive Officer and the Chief Financial
Officer, conducted an evaluation of the effectiveness of the Company’s internal control over
financial reporting, as of September 30, 2010, based on criteria established in Internal
Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). Based on that evaluation, management concluded that, as of September 30, 2010,
the Company’s internal control over financial reporting was effective.
Pursuant to applicable law, this annual report is not required to include an attestation
report of the Company’s registered public accounting firm regarding internal control over financial
reporting.
Changes in Internal Control Over Financial Reporting
There was no change in the Company’s internal control over financial reporting during the most
recent fiscal year that materially affected, or is reasonably likely to materially affect, the
Company’s internal control over financial reporting.
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Inherent Limitations on the Effectiveness of Controls
Management of the Company, including its Chief Executive Officer and Chief Financial Officer,
does not expect that the Company’s disclosure controls and procedures or its internal control over
financial reporting will prevent or detect all error and all fraud. A control system, no matter
how well designed and operated, can provide only reasonable, not absolute, assurance that the
control system’s objectives will be met. The design of a control system must reflect the fact that
there are resource constraints, and the benefits of controls must be considered relative to their
costs. Furthermore, because of the inherent limitations in all control
systems, no evaluation of controls can provide absolute assurance that misstatements due to
error or fraud will not occur or that all control issues and instances of fraud, if any, have been
detected. These inherent limitations include the realities that judgments in decision-making can
be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be
circumvented by the individual acts of some persons or by the collusion of two or more persons.
The design of any system of controls is based in part on certain assumptions about the likelihood
of future events, and there can be no assurance that any design will succeed in achieving its
stated goals under all potential future conditions. Projections of any evaluation of the
effectiveness of controls to future periods are subject to risks. Over time, controls may become
inadequate because of changes in conditions or deterioration in the degree of compliance with
policies or procedures.
| Item 9B. | Other Information |
None.
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PART III
| Item 10. | Directors, Executive Officers and Corporate Governance |
The information required is incorporated herein by reference to the issuer’s definitive Proxy
Statement for the 2011 Annual Meeting of Shareholders.
| Item 11. | Executive Compensation |
The information required is incorporated herein by reference to the issuer’s definitive Proxy
Statement for the 2011 Annual Meeting of Shareholders.
| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters |
The information required is incorporated herein by reference to the issuer’s definitive Proxy
Statement for the 2011 Annual Meeting of Shareholders.
| Item 13. | Certain Relationships and Related Transactions, and Director Independence |
The information required is incorporated herein by reference to the issuer’s definitive Proxy
Statement for the 2011 Annual Meeting of Shareholders.
| Item 14. | Principal Accountant Fees and Services |
The information required is incorporated herein by reference to the issuer’s definitive Proxy
Statement for the 2011 Annual Meeting of Shareholders.
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PART IV
| Item 15. | Exhibits and Financial Statement Schedules |
| Exhibit | ||||
| Number | Description | |||
| 3.1 | Restated Articles of Incorporation of Xenonics Holdings, Inc. (incorporated by reference to Exhibit
3.1 to the Registration Statement on Form SB-2 of Xenonics Holdings, Inc., File No. 333-123221, filed
on March 9, 2005). |
|||
| 3.2 | Bylaws of Xenonics Holdings, Inc., formerly known as Digital Home Theater Systems, Inc. (incorporated
by reference to Exhibit 3.3 to Amendment No. 1 to the Registration Statement on Form SB-2 of Xenonics
Holdings, Inc., File No. 333-115324, filed on June 30, 2004). |
|||
| 10.1 | Lease between Xenonics Holdings, Inc. and Lionshead Investments, LLC dated October 27, 2008
(incorporated by reference to Exhibit 10.1 to the Annual Report on Form 10-KSB of Xenonics Holdings,
Inc. filed on December 18, 2008). |
|||
| 10.2 | PerkinElmer Manufacturing Terms and Conditions Agreement, dated as of January 6, 2003, between
Xenonics, Inc. and PerkinElmer Electronics, Inc. (incorporated by reference to Exhibit 10.7 to
Amendment No. 4 to the Registration Statement on Form SB-2 of Xenonics Holdings, Inc., File No.
333-115324, filed on September 21, 2004. |
|||
| 10.3 | Agreement for the License and Transfer of Intellectual Property Rights from Lightrays, Ltd. to
Xenonics, Inc., dated March 27, 1997, between Xenonics, Inc. and Lightrays, Ltd. (incorporated by
reference to Exhibit 10.9 to Amendment No. 2 to the Registration Statement on Form SB-2 of Xenonics
Holdings, Inc., File No. 333-115324, filed on August 16, 2004). |
|||
| 10.4 | Amendment to Agreement for the License and Transfer of Intellectual Property Rights, dated April 23,
1998, between Xenonics, Inc. and Lightrays, Ltd. (incorporated by reference to Exhibit 10.10 to
Amendment No. 2 to the Registration Statement on Form SB-2 of Xenonics Holdings, Inc., File No.
333-115324, filed on August 16, 2004). |
|||
| 10.5 | Form of Indemnification Agreement entered into between Xenonics Holdings, Inc. and its directors and
certain officers (incorporated by reference to Exhibit 10.1 to the Registration Statement on Form SB-2
of Xenonics Holdings, Inc., File No. 333-115324, filed on May 10, 2004).* |
|||
| 10.6 | Employment Agreement between Xenonics, Inc. and Alan P. Magerman, dated January 1, 2003 (incorporated
by reference to Exhibit 10.5 to the Registration Statement on Form SB-2 of Xenonics Holdings, Inc.,
File No. 333-115324, filed on May 10, 2004).* |
|||
| 10.7 | Amendment dated April 15, 2005 to Employment Agreement between Xenonics, Inc. and Alan P. Magerman
(incorporated by reference to Exhibit 99.1 to the Current Report on Form 8-K of Xenonics Holdings,
Inc. filed on April 21, 2005).* |
|||
| 10.8 | Employment Agreement between Xenonics, Inc. and Jeffrey Kennedy, dated January 1, 2003 (incorporated
by reference to Exhibit 10.6 to the Registration Statement on Form SB-2 of Xenonics Holdings, Inc.,
File No. 333-115324, filed on May 10, 2004).* |
|||
| 10.9 | 2003 Stock Option Plan of Xenonics Holdings, Inc. (incorporated by reference to Exhibit 10.4 to
Amendment No. 1 to the Registration Statement on Form SB-2 of Xenonics Holdings, Inc., File No.
333-115324, filed on June 30, 2004).* |
|||
| 10.10 | Form of Option Agreement for the 2003 Stock Option Plan (incorporated by reference to Exhibit 4.3 to
the Registration Statement on Form S-8 of Xenonics Holdings, Inc., File No. 333-125468, filed on June
3, 2005).* |
|||
| 10.11 | 2004 Stock Incentive Plan of Xenonics Holdings, Inc (incorporated by reference to Exhibit 10.12 to
Post-Effective Amendment No. 1 to the Registration Statement on Form SB-2 of Xenonics Holdings, Inc.,
File No. 333-115324, filed on February 17, 2005).* |
|||
| 10.12 | Form of Option Agreement for the 2004 Stock Incentive Plan (incorporated by reference to Exhibit 10.13
to the Registration Statement on Form SB-2 of Xenonics Holdings, Inc., File No. 333-123221, filed on
March 9, 2005).* |
|||
| 10.13 | Form of Warrant Certificate of Xenonics Holdings, Inc. (incorporated by reference to Exhibit 4.2 to
the Registration Statement on Form SB-2 of Xenonics Holdings, Inc., File No. 333-115324, filed on May
10, 2004). |
|||
| 10.15 | Form of Stock Purchase Agreement entered into by Xenonics Holdings, Inc. and certain investors in
March 2004 in connection with the purchase of common stock (incorporated by reference to Exhibit 10.2
to the Registration Statement on Form SB-2 of Xenonics Holdings, Inc., File No. 333-115324, filed on
May 10, 2004). |
|||
40
Table of Contents
| Exhibit | ||||
| Number | Description | |||
| 10.19 | Warrant, dated September 5, 2006, issued by Xenonics Holdings, Inc. to Third Coast Marketing, LLC for
the purchase of an aggregate of 500,000 shares of the common stock of Xenonics Holdings, Inc.
(incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K of Xenonics Holdings,
Inc. filed on September 11, 2006). |
|||
| 10.20 | Form of Selling Shareholder and Securities Purchase Agreement, dated as of January 17, 2005, entered
into by and among Xenonics Holdings, Inc. and the Selling Shareholders and the Investors named therein
(incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K of Xenonics Holdings,
Inc. filed on January 18, 2005). |
|||
| 10.21 | Form of Registration Rights Agreement, dated as of January 17, 2005, entered into among Xenonics
Holdings, Inc. and the Selling Shareholders and the Investors named therein (incorporated by reference
to Exhibit 10.2 to the Current Report on Form 8-K of Xenonics Holdings, Inc. filed on January 18,
2005). |
|||
| 10.22 | Consulting Agreement dated as of September 5, 2006 between Xenonics Holdings, Inc. and Third Coast
Marketing, LLC (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K of
Xenonics Holdings, Inc. filed on September 11, 2006). |
|||
| 10.23 | Securities Purchase Agreement dated as of February 2, 2007 between Xenonics Holdings, Inc. and Gemini
Master Fund, Ltd. (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K of
Xenonics Holdings, Inc. filed on February 7, 2007). |
|||
| 10.24 | Registration Rights Agreement dated as of February 2, 2007 between Xenonics Holdings, Inc. and Gemini
Master Fund, Ltd. (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K of
Xenonics Holdings, Inc. filed on February 7, 2007). |
|||
| 10.25 | “A Warrant” issued by Xenonics Holdings, Inc. on February 2, 2007 to Gemini Master Fund, Ltd. for the
purchase of 300,000 shares of the common stock of Xenonics Holdings, Inc. (incorporated by reference
to Exhibit 10.3 to the Current Report on Form 8-K of Xenonics Holdings, Inc. filed on February 7,
2007). |
|||
| 10.26 | “B Warrant” issued by Xenonics Holdings, Inc. on February 2, 2007 to Gemini Master Fund, Ltd. for the
purchase of 300,000 shares of the common stock of Xenonics Holdings, Inc. (incorporated by reference
to Exhibit 10.4 to the Current Report on Form 8-K of Xenonics Holdings, Inc. filed on February 7,
2007). |
|||
| 10.27 | Engagement Letter dated January 25, 2007 between Xenonics Holdings, Inc. and Granite Financial Group,
Inc. (incorporated by reference to Exhibit 10.5 to the Current Report on Form 8-K of Xenonics
Holdings, Inc. filed on February 7, 2007). |
|||
| 10.28 | “A Warrant” issued by Xenonics Holdings, Inc. on February 2, 2007 to Granite Financial Group, Inc. for
the purchase of 30,000 shares of the common stock of Xenonics Holdings, Inc. (incorporated by
reference to Exhibit 10.6 to the Current Report on Form 8-K of Xenonics Holdings, Inc. filed on
February 7, 2007). |
|||
| 10.29 | “B Warrant” issued by Xenonics Holdings, Inc. on February 2, 2007 to Granite Financial Group, Inc. for
the purchase of 30,000 shares of the common stock of Xenonics Holdings, Inc. (incorporated by
reference to Exhibit 10.7 to the Current Report on Form 8-K of Xenonics Holdings, Inc. filed on
February 7, 2007). |
|||
| 10.30 | Securities Purchase Agreement dated as of September 21, 2007 among Xenonics Holdings, Inc., Gemini
Master Fund, Ltd., and the other purchasers named in the Securities Purchase Agreement (incorporated
by reference to Exhibit 10.1 to the Current Report on Form 8-K of Xenonics Holdings, Inc. filed on
September 27, 2007). |
|||
| 10.31 | Registration Rights Agreement dated as of September 21, 2007 among Xenonics Holdings, Inc., Gemini
Master Fund, Ltd., and the other purchasers named in the Registration Rights Agreement (incorporated
by reference to Exhibit 10.2 to the Current Report on Form 8-K of Xenonics Holdings, Inc. filed on
September 27, 2007). |
|||
| 10.32 | Form of “A Warrant” and “B Warrant” issued by Xenonics Holdings, Inc. on September 21, 2007 to Gemini
Master Fund, Ltd. and the other purchasers named in the Securities Purchase Agreement dated as of
September 21, 2007 for the purchase of 615,000 shares of the common stock of Xenonics Holdings, Inc.
(incorporated by reference to Exhibit 10.3 to the Current Report on Form 8-K of Xenonics Holdings,
Inc. filed on September 27, 2007). |
|||
41
Table of Contents
| Exhibit | ||||
| Number | Description | |||
| 10.33 | Form of “A Warrant” and “B Warrant” issued by Xenonics Holdings, Inc. to Granite Financial Group,
Inc. for the purchase of 98,400 shares of the common stock of Xenonics Holdings, Inc. (incorporated by
reference to Exhibit 10.4 to the Current Report on Form 8-K of Xenonics Holdings, Inc. filed on
September 27, 2007). |
|||
| 10.34 | Securities Purchase Agreement dated as of April 1, 2010 between Xenonics Holdings, Inc. and the
investors identified on the signature pages thereto (incorporated by reference to Exhibit 10.1 to the
Current Report on Form 8-K of Xenonics Holdings, Inc. filed on April 2, 2010). |
|||
| 10.35 | Form of Warrant between Xenonics Holdings, Inc. and the investors who are parties to a Securities
Purchase Agreement dated as of April 1, 2010 with Xenonics Holdings, Inc. (incorporated by reference
to Exhibit 4.1 to the Current Report on Form 8-K of Xenonics Holdings, Inc. filed on April 2, 2010). |
|||
| 10.36 | Securities Purchase Agreement dated as of April 20, 2010 between Xenonics Holdings, Inc. and the
investors identified on the signature pages thereto (incorporated by reference to Exhibit 10.1 to the
Current Report on Form 8-K of Xenonics Holdings, Inc. filed on April 22, 2010). |
|||
| 10.37 | Amendment dated as of April 20, 2010 to Securities Purchase Agreement dated as of April 1, 2010
between Xenonics Holdings, Inc. and the investors identified on the signature pages thereto
(incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K of Xenonics Holdings,
Inc. filed on April 22, 2010). |
|||
| 10.38 | Form of Warrant between Xenonics Holdings, Inc. and the investors who are parties to a Securities
Purchase Agreement dated as of April 20, 2010 with Xenonics Holdings, Inc. (incorporated by reference
to Exhibit 4.1 to the Current Report on Form 8-K of Xenonics Holdings, Inc. filed on April 22, 2010). |
|||
| 21.1 | List of subsidiaries of Xenonics Holdings, Inc. (incorporated by reference to Exhibit 21.1 to the
Registration Statement on Form SB-2 of Xenonics Holdings, Inc., File No. 333-115324, filed on May 10,
2004). |
|||
| 23.1 | Consent of SingerLewak LLP |
|||
| 31.1 | Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|||
| 31.2 | Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|||
| 32.1 | Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|||
| 32.2 | Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|||
| * | Denotes a management contract or compensatory plan or arrangement in which one or more
directors or executive officers participate. |
42
Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
| Xenonics Holdings, Inc. |
||||
| By: | /s/ Alan P. Magerman | |||
| Date: December 16, 2010 | Alan P. Magerman | |||
| Chief Executive Officer | ||||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the capacities and on the
dates indicated.
| Signature | Title | Date | ||
/s/ Alan P. Magerman
|
Chairman of the Board and Chief Executive Officer (Principal Executive Officer) | December 16, 2010 | ||
/s/ Jeffrey P. Kennedy
|
Chief Operating Officer, President and Director | December 16, 2010 | ||
/s/ Richard S. Kay
|
Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) | December 16, 2010 | ||
/s/ Allen K. Fox
|
Director | December 16, 2010 | ||
/s/ Brad J. Shapiro
|
Director | December 16, 2010 |
43