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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

[X]    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

   OF THE SECURITIES EXCHANGE ACT OF 1934                  

For the quarterly period ended March 31, 2015

or

[   ]    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 incorporation or organization)		(I.R.S. Employer Identification No.)
3186 Lionshead Avenue Carlsbad, California		92010
(Address of principal executive offices)		(Zip code)

(760) 477-8900

(Registrant’s telephone number, including area code)

 

                                                                                                                                     

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

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

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

 

Large accelerated filer   ¨		Accelerated filer   ¨
Non-accelerated filer   ¨		Smaller Reporting Company   x

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

The registrant had 25,326,368 shares of common stock outstanding as of May 4, 2015.

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TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION
Item 1.		Financial Statements
		Condensed Consolidated Balance Sheets as of March 31, 2015 (unaudited) and September 30, 2014			2
		Condensed Consolidated Statements of Operations for the Three and Six Months ended March  31, 2015 and 2014 (unaudited)			3
		Condensed Consolidated Statements of Cash Flows for the Six Months ended March  31, 2015 and 2014 (unaudited)			4
		Notes to Unaudited Condensed Consolidated Financial Statements			5
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			12
Item 3.		Quantitative and Qualitative Disclosures About Market Risk			14
Item 4.		Controls and Procedures			15
PART II. OTHER INFORMATION					16
Item 6.		Exhibits			16
SIGNATURES					17
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2

 

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PART I.  FINANCIAL INFORMATION

ITEM 1.  Financial Statements

CONDENSED CONSOLIDATED BALANCE SHEETS

		March 31, 2015				September 30, 2014
Rounded to the nearest thousand, except par value			(unaudited	)
Assets
Current Assets:
Cash		$	157,000			$	130,000
Accounts receivable			2,000				432,000
Inventories, net			614,000				701,000
Deferred financing costs, current portion			55,000				55,000
Other current assets			5,000				19,000
Total Current Assets			833,000				1,337,000
Inventories, net			444,000				444,000
Equipment, furniture and fixtures at cost, net			3,000				5,000
Deferred financing costs, less current portion, net			75,000				103,000
Other assets			21,000				20,000
Goodwill			375,000				375,000
Total Assets		$	1,751,000			$	2,284,000
Liabilities and Shareholders’ Deficit
Current Liabilities:
Accounts payable		$	508,000			$	593,000
Accrued expenses			152,000				207,000
Accrued payroll and related taxes			163,000				131,000
Accrued interest			576,000				367,000
Note payable			146,000				-
Total Current Liabilities			1,545,000				1,298,000
Notes payable, net of debt discount			2,275,000				2,271,000
Derivative liabilities			1,633,000				904,000
Convertible notes payable, net of debt discount			228,000				74,000
Total Liabilities			5,681,000				4,547,000
Contingencies (Note 13)
Shareholders’ Deficit:
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 March 31, 2015 and September 30, 2014; 25,326,000 shares issued and outstanding as of March 31, 2015 and 24,476,000 as of September 30, 2014			25,000				25,000
Additional paid-in capital			27,721,000				27,561,000
Accumulated deficit			(31,676,000	)			(29,849,000	)
Total Shareholders’ Deficit			(3,930,000	)			(2,263,000	)
Total Liabilities and Shareholders’ Deficit		$	1,751,000			$	2,284,000

See notes to unaudited condensed consolidated financial statements.

 

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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

				Three months ended March 31,								Six months ended March 31,
				2015				2014				2015				2014
Rounded to the nearest thousand, except per share amounts					(unaudited)								(unaudited)
Revenues				$	493,000			$	16,000			$	961,000			$	79,000
Cost of goods sold					266,000				6,000				556,000				44,000
Gross profit					227,000				10,000				405,000				35,000
Selling, general and administrative					386,000				384,000				789,000				799,000
Research and development					65,000				101,000				167,000				229,000
Loss from operations					(224,000	)			(475,000	)			(551,000	)			(993,000	)
Other expenses:
Interest expense					(202,000	)			(101,000	)			(394,000	)			(184,000	)
Amortization of deferred financing costs					(14,000	)			---				(28,000	)			---
Change in fair value of derivative liabilities					372,000				---				(852,000	)			---
Loss before provision for income taxes					(68,000	)			(576,000	)			(1,825,000	)			(1,177,000	)
Income tax provision					---				---				2,000				2,000
Net loss				$	(68,000	)		$	(576,000	)		$	(1,827,000	)		$	(1,179,000	)
Net loss per share:
Basic and fully-diluted				$	0.00			$	(0.02	)		$	(0.07	)		$	(0.05	)
Weighted average shares outstanding:
Basic and fully-diluted					25,151,000				24,976,000				25,054,000				24,976,000

See notes to unaudited condensed consolidated financial statements.

 

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

		Six months ended March 31,
		2015				2014
Rounded to the nearest thousand			(unaudited)
Cash flows from operating activities:
Net loss		$	(1,827,000	)		$	(1,179,000	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation			2,000				5,000
Non-cash charge for warrant extension			3,000				---
Amortization of debt discount and non-cash interest expense on convertible notes			178,000				38,000
Amortization of deferred financing costs			28,000				---
Change in fair value of derivative liabilities			852,000				---
Changes in operating assets and liabilities:
Accounts receivable			430,000				29,000
Inventories			87,000				33,000
Other current assets			12,000				(8,000	)
Accounts payable			(86,000	)			192,000
Accrued expenses			(55,000	)			---
Accrued interest			209,000				146,000
Accrued payroll and related taxes			34,000				77,000
Net cash used in operating activities			(133,000	)			(667,000	)
Cash flows from financing activities:
Proceeds from notes payable			146,000				451,000
Warrants exercised			14,000				---
Net cash provided by financing activities			160,000				451,000
Net increase (decrease) in cash			27,000				(216,000	)
Cash, beginning of period			130,000				220,000
Cash, end of period		$	157,000			$	4,000
Supplemental cash flow information:
Cash paid during the period for income taxes		$	2,000			$	---
Cash paid during the period for interest		$	8,000			$	---
Supplemental schedule of non-cash financing activities
Convertible note conversion		$	20,000			$	---
Derivative expense for conversion of notes payable		$	123,000			$	---

See notes to unaudited condensed consolidated financial statements.

 

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Rounded in thousands)

 

1.	BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. These financial statements and notes thereto should be read in conjunction with the financial statements and notes thereto for the year ended September 30, 2014 included in the Xenonics Holdings, Inc. (“Holdings”) Form 10-K filing. The results for the interim period are not necessarily indicative of the results for the full fiscal year.

The condensed consolidated financial statements include the accounts of Holdings and its wholly-owned subsidiary, Xenonics, Inc. (“Xenonics”), collectively, the “Company”.

 

2.	GOING CONCERN

The Company’s financial statements are prepared using generally accepted accounting principles in the United States of America applicable to a going concern which contemplates the realization of assets and liquidation of liabilities in the normal course of business. At this time the Company has not yet received pending sufficient orders for its products to cover its operating costs and meet its obligations as they become due, which raises substantial doubt about its ability to continue as a going concern.

The future of the Company as an operating business will depend on its ability to (1) obtain purchase orders and ship its products, (2) collect for sales in a timely manner, (3) continue to exercise tight cost controls to conserve cash and attain profitable operations, and (4) obtain sufficient financing as may be required to sustain its operations.

The accompanying financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern. If the Company is unable to obtain adequate revenues and financing, it could be forced to cease operations.

 

3.	RECENT ACCOUNTING PRONOUNCEMENTS

The Company reviews new accounting standards as issued. Although some of these accounting standards issued are effective after the end of the Company’s previous fiscal year may be applicable to the Company, it has not identified any standards that it believes merit further discussion. The Company believes that none of the new standards will have a significant impact on its consolidated financial statements.

 

4.	EARNINGS (LOSS) PER SHARE

Earnings (loss) per share is computed by dividing the income (loss) available to common shareholders by the weighted average number of common shares outstanding. Diluted earnings per share is computed similarly to basic earnings per share, except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential additional common shares that were dilutive had been issued. Common share equivalents are excluded from the computation if their effect is anti-dilutive. The Company’s common share equivalents consist of stock options and warrants.

The diluted earnings per share did not include the dilutive effect, if any, from the potential exercise of stock options and warrants outstanding using the treasury stock method, because their effect would have been anti-dilutive to the loss in the period. For the three and six months ended March 31, 2015, the number of unvested stock options and vested warrants excluded was 10,474,000. Also excluded were 13,729,000 shares that could be issued for convertible debt. For the three months ended March 31, 2014, the number of unvested stock options and vested warrants excluded was 7,187,000. There was no convertible debt as of March 31, 2014.

 

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5.	INVENTORIES

Inventories were comprised of :

 

		March 31, 2015				September 30, 2014
		(unaudited)
Raw materials		$	864,000			$	961,000
Work in process			61,000				50,000
Finished goods			133,000				134,000
Total			1,058,000				1,145,000
Less: Current portion			(614,000	)			(701,000	)
Long-term portion		$	444 ,000			$	444,000

 

6.	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.

 

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7.	NOTES PAYABLE

As of March 31, 2015 the following promissory notes were outstanding.

 

Notes Payable		March 31, 2015				September 30, 2014
Short-term note payable, non-interest bearing		$	146,000				-
Total short-term notes payable		$	146,000			$	-
Secured note payable maturing on June 23, 2017 bearing interest at 13% per annum		$	450,000			$	450,000
Secured note payable maturing on June 23, 2017 bearing interest at 13% per annum			500,000				500,000
Secured note payable maturing on June 23, 2017 bearing interest at 13% per annum			500,000				500,000
Secured note payable maturing on June 23, 2017, bearing interest at 18% per annum, net of debt discount of $-0- and $2,000 at March 31, 2015 and September 30, 2014, respectively			200,000				198,000
Secured note payable, maturing on June 23, 2017, bearing interest at 10% per annum, net of debt discount of $-0- and $2,000 at March 31, 2015 and September 30, 2014, respectively			50,000				48,000
Secured notes payable, maturing on June 23, 2017, bearing interest at 18% per annum			50,000				50,000
Secured notes payable, maturing on June 23, 2017, bearing interest at 13% per annum			525,000				525,000
Total long-term notes payable		$	2,275,000			$	2,271,000
Future payments under long-term notes payable as of March 31, 2015 are as follows:
2017		$	2,275,000
Total		$	2,275,000

 

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8.	SECURED CONVERTIBLE NOTES PAYABLE

XNNH Secured Convertible Notes Payable

During the year ended September 30, 2014, the Company issued and sold secured convertible notes of the Company in an aggregate principal amount of $638,000. The convertible promissory notes bear interest at a rate of 13% per annum and are convertible at the option of the holder into common stock of the Company at a conversion rate of $0.07 per share. Management evaluated the embedded conversion option in light of the guidance in ASC 815: Derivatives and Hedging and noted that the conversion option did not require bifurcation and derivative accounting. Management further evaluated the conversion option in light of the guidance in ASC 470: Debt and determined that a beneficial conversion feature existed and required measurement and recognition. Management valued the beneficial conversion feature at $595,000 based on the intrinsic value of the beneficial conversion feature capped at total proceeds related to the instrument. The beneficial conversion feature was recorded as a debt discount (with a corresponding credit to Additional Paid in Capital) and such discount is being amortized to interest expense using the effective interest rate method over the life of the note. As of March 31, 2015, $474,000 of the note discount remains unamortized. The notes are due three years from issuance and expire through September 9, 2017.

Private Placement Secured Convertible Notes Payable

During the year ended September 30, 2014, the Company issued and sold secured convertible notes of the Company in an aggregate principal amount of $343,000 through a private placement offering pursuant to a Subscription Agreement. The notes bear interest at 13% per annum and are convertible at the option of the holder thereof into shares of the Company’s common stock at a conversion rate of $0.07 per share. Additionally, the Company paid commissions of $56,000 and issued to the Placement Agent five-year warrants to purchase 922,902 shares of common stock of the Company at $0.12 per share. As of March 31, 2015, $259,000 of the note discount remains unamortized. The notes are due three years from issuance and expire through September 9, 2017.

The Company accounted for the Warrants relating to the aforementioned Private Placement in accordance with ASC 815-10, Derivatives and Hedging. They are marked to market for each reporting period through the consolidated statement of operations. On the closing date, the warrant liabilities were recorded at fair value of $109,000. The value of the warrant liability as of September 30, 2014 was $151,000 and as of March 31, 2015 was $283,000. As a result of a change in the estimated fair market value of the warrant liability the Company recorded other expense of $132,000 for the six months ended March 31, 2015. Such change in the estimated fair value was primarily due to the fluctuation in the Company’s common stock price.

The fair value of the warrants was determined using a path-dependent Monte Carlo simulation based on the following assumptions: Expected term: 4.4-4.7 years, Risk free rate: 1.20% - 1.24%, Volatility: 118% - 119%.

The Company accounted for the Convertible Notes relating to the aforementioned Private Placement in accordance with ASC 815-10, Derivatives and Hedging. Because the embedded conversion feature in the notes is not indexed to the Company’s stock and is not classified in stockholders’ equity, they are bifurcated and recorded as liabilities at fair value. They are marked to market each reporting period through the consolidated statement of operations. On the closing date, the derivative liabilities were recorded at fair value of $547,000. The value of the derivative liability as of September 30, 2014 was $753,000 and as of March 31, 2015 was $1,350,000 As a result of a change in the estimated fair market value of the derivative liability the Company recorded other expense of $597,000 for the six months ended March 31, 2015. Such change in the estimated fair value was primarily due to the fluctuation in the Company’s common stock price.

The fair value of the embedded derivative was determined using the Monte Carlo simulation based on the following assumptions: Hazard rate: 31.42%; Volatility: 128% - 129%; Risk free rate: 0.652% - 0.707%.

 

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Secured Convertible Notes Payable		March 31, 2015				September 30, 2014
XNNH Secured Convertible Notes Payable, maturing through September, 2017, bearing interest at 13% per annum, net of debt discount of $474,000 and $573,000 at March 31, 2015 and September 30, 2014, respectively		$	164,000			$	65,000
Private Placement Secured Convertible Notes Payable, maturing through September, 2017, bearing interest at 13% per annum, net of debt discount of $259,000 and $334,000 at March 31, 2015 and September 30, 2014, respectively			64,000				9,000
Total secured convertible notes payable		$	228,000			$	74,000
Future payments under secured convertible notes payable as of March 31, 2015 are as follows:
2017		$	961,000
Total		$	961,000

 

9.	STOCK BASED COMPENSATION

Stock Options - US GAAP requires that compensation cost relating to share-based payment arrangements be recognized in the financial statements. US GAAP requires measurement of compensation cost for all employee share-based awards at fair value on date of grant and recognition of compensation over the service period for awards expected to vest. The fair value of stock options is determined using the Black-Scholes valuation model. Such fair value is recognized as expense over the service period, net of estimated forfeitures.

US GAAP requires that equity instruments issued to non-employees in exchange for services be valued at the more accurate of the fair value of the services provided or the fair value of the equity instruments issued. For equity instruments issued that are subject to a required service period the expense associated with the equity instruments is recorded as the instruments vest or the services are provided. The Company has granted options and warrants to non-employees and recorded the fair value of these equity instruments on the date of issuance using the Black-Scholes valuation model. The Company has granted stock to non-employees for services and values the stock at the more reliable of the market value on the date of issuance or the value of the services provided. For grants subject to vesting or service requirements, expenses are deferred and recognized over the more appropriate of the vesting period, or as services are provided.

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 shares of common stock are available for employees, directors, and outside consultants.

In December 2004, the Company’s board of directors adopted a 2004 stock incentive plan. The Company may issue up to 1,500,000 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.

The fair value of each option award is estimated on the date of grant using the Black-Scholes valuation model. There were no options granted during the three months ended March 31, 2015 and 2014.

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. US GAAP requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimated. Forfeitures were estimated based on the Company’s historical experiences.

 

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A summary of the Company’s stock option activity as of March 31, 2015, and changes during the six months then ended is presented below:

 

		Stock Options				Weighted Average Exercise Price				Weighted Average Contractual Term (Years)				Aggregate Intrinsic Value *
Outstanding at October 1, 2014			2,315,000			$	0.18				3.44
Granted			-				-
Exercised			-				-
Forfeited, Expired or Cancelled			-				-
Outstanding at March 31, 2015			2,315,000			$	0.18				2.95			$	370,000
Exercisable at March 31, 2015			-				-				-			$	-	*

 

 

* 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 March 31, 2015.

None of the outstanding stock options were vested as of March 31, 2015.

There was no compensation expense related to outstanding options for the three and six months ended March 31, 2015 and 2014.

Stock warrants – The Company recognizes the value of stock warrants issued based upon an option-pricing model at their fair value as an expense over the period in which the grants vest from the measurement date, which is the date when the number of warrants, their exercise price and other terms became certain.

At March 31, 2015 and 2014, 8,159,000 and 7,187,000 warrants were outstanding and 8,159,000 and 7,187,000 warrants were vested, respectively.

During the six months ended March 31, 2015, the Company extended the due dates for 100,000 outstanding warrants from December 10, 2014 to March 9, 2015. Non-cash compensation expense of $3,000 was recorded for the six months ended March 31, 2015 for this extension. During the three months ended March 31, 2015, these warrants were exercised – 50,000 for cash and 50,000 pursuant to a cashless exercise.

There was no compensation expense related to outstanding warrants for the three and six months ended March 31, 2014.

 

10.	INCOME TAXES

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. As of March 31, 2015 and September 30, 2014, the Company does not have a liability for unrecognized tax benefits. The Company concluded that at this time there are no uncertain tax positions. As of March 31, 2015, the Company does not expect any material changes to unrecognized tax positions within the next twelve months.

The Company recognizes the amount of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in the Company’s financial statements or tax returns. Judgment is required in assessing the future tax consequences of events that have been recognized in our financial statements or tax returns. Fluctuations in the actual outcome of these future tax consequences could materially impact our financial position or our results of operations. For the six months ended March 31, 2015, deferred income tax assets and the corresponding valuation allowance increased by $901,000.

 

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The Company’s 2015 provision for income taxes primarily relates to state taxes. The difference between the Company’s 2015 effective rate and statutory rate is primarily due to the use of federal net operating losses to offset taxable income. The difference between the Company’s 2014 effective rate and statutory rate is primarily due to the utilization of net operating losses.

 

11.	FAIR VALUES, INPUTS AND VALUATION TECHNIQUES FOR FINANCIAL ASSETS AND LIABILITIES DISCLOSURES

The fair value measurements and disclosure guidance defines fair value and establishes a framework for measuring fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In accordance with this guidance, the Company has categorized its recurring basis financial assets and liabilities into a three-level fair value hierarchy based on the priority of the inputs to the valuation technique.

The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.

The levels of the fair value hierarchy are described below:

 

•

Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access.

•

Level 2 inputs utilize other than quoted prices included in Level 1 that are observable for the asset, either directly or indirectly, for substantially the full term of the asset. Level 2 inputs include quoted prices for similar assets in active markets, quoted prices for identical or similar assets in markets that are not active and inputs other than quoted prices that are observable in the marketplace for the asset. The observable inputs are used in valuation models to calculate the fair value for the asset.

•

Level 3 inputs are unobservable but are significant to the fair value measurement for the asset, and include situations where there is little, if any, market activity for the asset. These inputs reflect management’s own assumptions about the assumptions a market participant would use in pricing the asset.

The following sets forth by level, within the fair value hierarchy, the Company’s assets and liabilities measured at fair value in the balance sheet as of March 31, 2015:

Level 1 - The Company’s cash and cash equivalents are measured using level 1 inputs.

Level 2 - The Company’s embedded derivative liabilities and warrant liabilities are measured on a recurring basis using Level 2 inputs.

Level 3 - The Company has no Level 3 inputs.

The Company’s embedded derivative liabilities are re-measured to fair value as of each reporting date until the notes are converted or paid off. See Note 8 above for more information about these liabilities and the inputs used for calculating fair value.

A review of fair value hierarchy classifications is conducted on a quarterly basis. Changes in the observability of valuation inputs may result in a reclassification of levels for certain securities within the fair value hierarchy.

 

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12.	FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company’s cash and cash equivalents are measured at fair value in the Company’s condensed consolidated financial statements and are valued using unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 inputs under ASC 820). 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.

 

13.	CONTINGENCIES

The Company is occasionally subject to legal proceedings and claims that arise in the ordinary course of business. It is impossible to predict with any certainty the outcome of pending disputes, and management cannot predict whether any liability arising from pending claims and litigation will be material in relation to the Company’s consolidated financial position or results of operations.

 

14.	SUBSEQUENT EVENTS

Management has evaluated all activity through the date that the consolidated financial statements were issued and concluded that there were no subsequent events that occurred that would require recognition in the consolidated financial statements or disclosure in the notes to the consolidated financial statements.

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

(rounded in thousands)

The following discussion and analysis should be read in conjunction with the condensed consolidated financial statements and accompanying notes filed as part of this report.

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.” These statements include statements regarding the intent, belief or current expectations of us, 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 as a result of the factors described in the “Risk Factors” section of our most recent Annual Report on Form 10-K. We do not undertake any obligation to update or revise any forward-looking statements contained in this report, whether as a result of new information, future events or otherwise.

Results of Operations

Three-months ended March 31, 2015 compared to the three-months ended March 31, 2014

We operate in the security lighting systems and night vision industries, and the majority of our revenues are derived from sales of our illumination products and our SuperVision night vision product to various customers.

Revenues: Revenues for the quarter ended March 31, 2015 were $493,000 compared to revenues of $16,000 for the quarter ended March 31, 2014. In the quarter ended March 31, 2015, 100% of revenues were from sales of our NightHunter products to the military (U.S. Army, U.S. Marines and military distributors) and -0-% were from sales of SuperVision units. In the quarter ended March 31, 2014, 100% of revenues were to the military market and -0-% were from sales of SuperVision units.

 

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Cost of Goods and Gross Profit: Cost of goods consists of the cost of manufacturing our NightHunter and SuperVision products.

The gross profit percentages were 46% and 63% for the quarters ended March 31, 2015 and 2014, respectively. The decrease in the gross profit percentage was caused by a change in the product mix which has varying margins.

Selling, General and Administrative: Selling, general and administrative expenses increased by $1,000 to $385,000 for the quarter ended March 31, 2015 as compared to $384,000 for the quarter ended March 31, 2014.

Research & Development: Research and development expenses decreased by $36,000 to $65,000 for the quarter ended March 31, 2015 compared to $101,000 for the quarter ended March 31, 2014. The decrease is primarily attributable to lower engineering expenses in the quarter.

Other Expenses: For the quarter ended March 31, 2015 Other expenses include a derivative gain of $372,000, compared to none for quarter ended March 31, 2014. Derivative liabilities were recorded during 2014 for new three-year convertible notes totaling $343,000 that include variable conversion elements and warrant liabilities. The derivative gain for the quarter ended March 31, 2015 was caused by the decrease in the Company’s common stock price from $0.41 per share at December 31, 2014 to $0.34 per share at March 31, 2015.

Interest expense for the quarter ended March 31, 2015 was $202,000 compared to $101,000 for the quarter ended March 31, 2014. The increase is attributed to the increase in interest for additional notes payable. There was $95,000 of debt discount amortization for the quarter ended March 31, 2015. There was $20,000 of debt discount amortization for the quarter ended March 31, 2014.

Amortization of deferred financing costs was $14,000 for the quarter ended March 31, 2015. There was no amortization of deferred financing costs for the quarter ended March 31, 2014.

Net Loss: Higher revenues and the derivative gain for the quarter ended March 31, 2015 account for the net loss of $68,000 compared to the net loss of $576,000 for the quarter ended March 31, 2014.

Six months ended March 31, 2015 compared to the six months ended March 31, 2014

Revenues: Revenues for the six months ended March 31, 2015 were $961,000 compared to revenues of $79,000 for the six months ended March 31, 2014. For the six months ended March 31, 2015, 100% of revenues were from sales of our NightHunter products to the military (U.S. Army, U.S. Marines and military distributors) and 0% were from sales of SuperVision units. For the six months ended March 31, 2014, 79% of revenues were from sales of our NightHunter products to the military market and 21% were from sales of SuperVision units.

Cost of Goods and Gross Profit: Cost of goods consists of the costs of manufacturing our NightHunter and SuperVision products.

The gross profit percentages were 42% and 44% for the six months ended March 31, 2015 and 2014, respectively.

Selling, General and Administrative: Selling, general and administrative expenses decreased by $10,000 to $789,000 for the six months ended March 31, 2015 as compared to $799,000 for the six months ended March 31, 2014.

Research & Development: Research and development expenses decreased by $62,000 to $167,000 for the six months ended March 31, 2015 compared to $229,000 for the six months ended March 31, 2014. The decrease is primarily attributable to lower engineering expenses in the first six months of the fiscal year.

 

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Other Expense: For the six months ended March 31, 2015 interest expense was $394,000 compared to $184,000 of interest expense for the six months ended March 31, 2014. The increase is attributed to the increase in interest for additional notes payable. Debt discount amortization for the six months ended March 31, 2015 and 2014 was $178,000 and $38,000, respectively.

For the six months ended March 31, 2015 Other expenses include a derivative loss of $852,000, compared to none for six months ended March 31, 2014. Derivative liabilities were recorded during 2014 for new three-year convertible notes totaling $343,000 that include variable conversion elements and warrant liabilities. The derivative loss for the six months ended March 31, 2015 was caused by the increase in the Company’s common stock price from $0.21 per share at September 30, 2014 to $0.34 per share at March 31, 2015.

Amortization of deferred financing costs was $28,000 for the six months ended March 31, 2015. There was no amortization of deferred financing costs for the six months ended March 31, 2014.

Net Loss: Higher revenues for the six month period ended March 31, 2015 offset by the derivative loss accounted for a net loss of $1,827,000 compared to a net loss of $1,179,000 for the six month months ended March 31, 2014.

Liquidity and Capital Resources

As of March 31, 2015, the Company had negative working capital of $712,000 and a current ratio of 0.54 to 1 as compared to working capital of $39,000 and a current ratio of 1.03 to 1 as of September 30, 2014.

Long term liabilities include derivative liabilities of $1,633,000 for the 2014 three-year convertible notes totaling $323,000. These notes include variable conversion elements and warrant liabilities. The notes are convertible into common stock at $0.07 per share. If the notes are converted into common stock, the derivative liabilities would be eliminated.

Significant sources of cash provided by operating activities during the first three months of the current year included a decrease in accounts receivable of $430,000 and a decrease in inventories of $87,000, offset by a decrease in accounts payable of $86,000 and a decrease in accrued expenses of $55,000. Cash used in operating activities totaled $133,000 for the six months ended March 31, 2015.

Based on the pending U.S. military and possible international orders, no additional financing will be required, but if these orders are not forthcoming, short –term financing will be required. Although management believes it can obtain additional financing, there is no certainty that it can.

ITEM 3. Quantitative and Qualitative Disclosures about Market Risk

Not applicable

 

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ITEM 4. Controls and Procedures

The Company’s management conducted an evaluation, with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness as of the end of the period covered by this quarterly 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 March 31, 2015, which is the end of the period covered by this quarterly report.

Based upon our evaluation, we also concluded that there was no change in our internal control over financial reporting during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II. OTHER INFORMATION

 

ITEM 6.

Exhibits

 

Exhibit Number		Description
31.1		Certification of the Chairman of the Board and Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act
31.2		Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act
32.1		Certification pursuant to Section 906 of the Sarbanes-Oxley Act
32.2		Certification pursuant to Section 906 of the Sarbanes-Oxley Act
101		The following financial information from the Quarterly Report on Form 10-Q of Xenonics Holdings, Inc. for the quarter ended March 31, 2015, formatted in XBRL (eXtensible Business Reporting Language): (1) Consolidated Balance Sheets as of March 31, 2015 and September 30, 2014; (2) Consolidated Statements of Operations for the three and six months ended March 31, 2015 and 2014; (3) Consolidated Statements of Cash Flows for six months ended March 31, 2015 and 2014; and (4) Notes to Condensed Financial Statements.

 

 

 

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SIGNATURES

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

 

				XENONICS HOLDINGS, INC.
Date:  May 15, 2015				By:		/s/ Alan P. Magerman
						Alan P. Magerman
						Chairman of the Board
						Chief Executive Officer
Date:  May 15, 2015				By:		/s/ Richard S. Kay
						Richard S. Kay
						Chief Financial Officer

 

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