10-Q 1 d846357d10q.htm FORM 10-Q Form 10-Q
Table of Contents

 

 

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 December 31, 2014

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 24,975,929 shares of common stock outstanding as of February 3, 2015.


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TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION

Item 1.

Financial Statements

Condensed Consolidated Balance Sheets as of December 31, 2014 (unaudited)
and September 30, 2014

  1   

Condensed Consolidated Statements of Operations for the Three Months
ended December 31, 2014 and 2013 (unaudited)

  2   

Condensed Consolidated Statements of Cash Flows for the Three Months
ended December 31, 2014 and 2013 (unaudited)

  3   
Notes to Unaudited Condensed Consolidated Financial Statements   4   

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations   11   

Item 3.

Quantitative and Qualitative Disclosures About Market Risk   12   

Item 4.

Controls and Procedures   12   

PART II. OTHER INFORMATION

Item 6.

Exhibits   13   

SIGNATURES

  14   

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

 

  December 31,   September 30,  
   2014   2014  

Rounded to the nearest thousand, except par value

  (unaudited)         

Assets

Current Assets:

Cash

  $ 273,000      $  130,000   

Accounts receivable

  2,000      432,000   

Inventories, net

  566,000      701,000   

Deferred financing costs, current portion

  55,000      55,000   

Other current assets

  34,000      19,000   

Total Current Assets

  930,000      1,337,000   

Inventories, net

  444,000      444,000   

Equipment, furniture and fixtures at cost, net

  4,000      5,000   

Deferred financing costs, less current portion, net

  89,000      103,000   

Other assets

  21,000      20,000   

Goodwill

  375,000      375,000   

Total Assets

  $1,863,000      $2,284,000   

Liabilities and Shareholders’ Deficit

Current Liabilities:

Accounts payable

  $  547,000      $ 593,000   

Accrued expenses

  172,000      207,000   

Accrued payroll and related taxes

  135,000      131,000   

Accrued interest

  469,000      367,000   

Total Current Liabilities

  1,323,000      1,298,000   

Notes payable, net of debt discount

  2,275,000      2,271,000   

Derivative liabilities

  2,128,000      904,000   

Convertible notes payable, net of debt discount

  153,000      74,000   

Total Liabilities

  5,879,000      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 December 31, 2014 and September 30, 2014; 24,976,000 shares issued and outstanding as of December 31, 2014 and September 30, 2014

  25,000      25,000   

Additional paid-in capital

  27,567,000      27,561,000   

Accumulated deficit

  (31,608,000)      (29,849,000)   

Total Shareholders’ Deficit

  (4,016,000)      (2,263,000)   

Total Liabilities and Shareholders’ Deficit

  $1,863,000      $2,284,000   

See notes to unaudited condensed consolidated financial statements.

 

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 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

    Three months ended  
 

 

            December 31,

 
      2014   2013  

Rounded to the nearest thousand, except per share amounts

    (unaudited)   

Revenues

  $   468,000      $ 63,000   

Cost of goods sold

    289,000      37,000   

Gross profit

  178,000      26,000   

Selling, general and administrative

  404,000      415,000   

Research and development

    102,000      127,000   

Loss from operations

  (328,000)      (516,000)   

Other expenses:

Interest expense

  (112,000)      (84,000)   

Amortization of deferred financing costs

  (92,000)      ---         

Change in fair value of derivative liabilities

    (1,224,000)      ---         

Loss before provision for income taxes

  (1,756,000)      (600,000)   

Income tax provision

    2,000      2,000   

Net loss

    $ (1,758,000)      $(602,000)   

Net loss per share:

Basic and fully-diluted

  $ (0.07)      $ (0.02)   

Weighted average shares outstanding:

Basic and fully-diluted

  24,976,000      24,976,000   

See notes to unaudited condensed consolidated financial statements.

 

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

  Three months ended  
  December 31,  
   2014   2013  

Rounded to the nearest thousand

 

(unaudited)

  

Cash flows from operating activities:

Net loss

  $  (1,758,000)      $  (602,000)   

Adjustments to reconcile net loss to net cash provided by (used in) operating activities:

Depreciation

  1,000      4,000   

Non-cash charge for warrant extension

  6,000      ---     

Amortization of debt discount and non-cash interest expense on convertible notes

  83,000      18,000   

Amortization of deferred financing costs

  14,000      ---     

Change in fair value of derivative liabilities

  1,224,000      ---     

Changes in operating assets and liabilities:

Accounts receivable

  430,000      30,000   

Inventories

  135,000      27,000   

Other current assets

  (17,000)      8,000   

Accounts payable

  (47,000)      116,000   

Accrued expenses

  (35,000)      (23,000)   

Accrued interest

  102,000      66,000   

Accrued payroll and related taxes

  5,000      (13,000)   

Net cash provided by (used in) operating activities

  143,000      (369,000)   

Cash flows from financing activities:

Proceeds from notes payable

  --        200,000   

Net cash provided by financing activities

  --        200,000   

Net increase (decrease) in cash

  143,000      (169,000)   

Cash, beginning of period

  130,000      220,000   

Cash, end of period

  $ 273,000      $ 51,000   

Supplemental cash flow information:

Cash paid during the period for income taxes

  $          -      $           -   

Cash paid during the period for interest

  $  7,000      $           -   

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 months ended December 31, 2014, the number of unvested stock options and vested warrants excluded was 10,674,000. Also excluded were 14,014,000 shares that could be issued for convertible debt. For the three months ended December 31, 2013, the number of unvested stock options and vested warrants excluded was 7,187,000. There was no convertible debt as of December 31, 2013.

 

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5. INVENTORIES

Inventories were comprised of :

 

  December 31,   September 30,  
  2014   2014  
  (unaudited)       

Raw materials

  $879,000      $ 961,000   

Work in process

  58,000      50,000   

Finished goods

  73,000      135,000   

Total

  1,110,000      1,145,000   

Less: Current portion

  (566,000)      (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 December 31, 2014 the following promissory notes were outstanding. There were no new borrowings during the quarter ended December 31, 2014.

 

Notes Payable    

    December 31,
2014
        September 30,
2014
 

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 December 31, 2014 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 December 31, 2014 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 December 31, 2014 are as follows:

 

2017

$ 2,275,000   
  

 

 

 

Total

$ 2,275,000   
  

 

 

 

 

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 December 31, 2014, $523,000 of the note discount remains unamortized. The notes are due three years from issuance and expire through September 9, 2017.

 

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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.

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 December 31, 2014 was $346,000. As a result of a change in the estimated fair market value of the warrant liability the Company recorded other expense of $195,000 for the quarter ended December 31, 2014. 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: 1.49% - 1.57%, Volatility: 118% - 120%.

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 December 31, 2014 was $1,782,000 As a result of a change in the estimated fair market value of the derivative liability the Company recorded other expense of $1,029,000 for the quarter ended December 31, 2014. 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: 132% - 133%; Risk free rate: 0.897% - 0.969%.

 

Secured Convertible Notes Payable

    December 31,
2014
          September 30,    
2014
 
XNNH Secured Convertible Notes Payable, maturing through September, 2017, bearing interest at 13% per annum, net of debt discount of $523,000   $115,000          $65,000         
Private Placement Secured Convertible Notes Payable, maturing through September, 2017, bearing interest at 13% per annum, net of debt discount of $305,000         38,000                9,000         
Total secured convertible notes payable   $153,000              $74,000         

Future payments under secured convertible notes payable as of December 31, 2014 are as follows:

 

2017

$ 981,000   
  

 

 

 

Total

$ 981,000   
  

 

 

 

 

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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 in the three months ended December 31, 2014 and 2013.

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.

A summary of the Company’s stock option activity as of December 31, 2014, and changes during the three 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 December 31, 2014

        2,315,000        $0.18        3.19        $532,000     
  

 

 

    

 

 

    

 

 

    

 

 

 

Exercisable at December 31, 2014

  -              -           -            $            -  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

 

* 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 $0.41 at December 31, 2014.

None of the outstanding stock options were vested as of December 31, 2014.

 

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There was no compensation expense related to outstanding options for the three months ended December 31, 2014 and 2013.

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 December 31, 2014 and 2013, 8,259,000 and 7,187,000 warrants were outstanding and 8,259,000 and 7,187,000 warrants were vested, respectively.

During the three months ended December 31, 2014, the Company extended the due dates for 100,000 outstanding warrants from December 10, 2014 to March 9, 2015. Non-cash compensation expense of $6,000 was recorded for the three months ended December 31, 2014 for this extension. There was no compensation expense related to outstanding warrants for the three months ended December 31, 2013.

 

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 December 31, 2014 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 December 31, 2014, 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 three months ended December 31, 2014, deferred income tax assets and the corresponding valuation allowance increased by $840,000.

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.

 

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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 December 31, 2014:

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.

 

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.

 

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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” 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 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 December 31, 2014 compared to the three-months ended December 31, 2013

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 December 31, 2014 were $468,000 compared to revenues of $63,000 for the quarter ended December 31, 2013. In the quarter ended December 31, 2014, 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 December 31, 2013, 73% of revenues were to the military market and 27% were from sales of SuperVision units.

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 38% and 40% for the quarters ended December 31, 2014 and 2013, 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 decreased by $11,000 to $404,000 for the quarter ended December 31, 2014 as compared to $415,000 for the quarter ended December 31, 2013. The decrease is primarily attributed to lower consulting fees of $11,000.

Research & Development: Research and development expenses decreased by $25,000 to $102,000 for the quarter ended December 31, 2014 compared to $127,000 for the quarter ended December 31, 2013. The decrease is primarily attributed to a lower allocation of engineering expenses of $27,000.

Other Expenses: For the quarter ended December 31, 2014 Other expenses include a derivative loss of $1,224,000, compared to none for quarter ended December 31, 2013. Derivative liabilities were recorded during 2014 for new three-year convertible notes totaling $343,000 that include variable conversion elements and warrant liabilities.

 

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The derivative loss for the quarter ended December 31, 2014 was caused by the increase in the Company’s common stock price from $0.21 per share at September 30, 2014 to $0.41 per share at December 31, 2014.

Interest expense for the quarter ended December 31, 2014 was $112,000 compared to $84,000 for the quarter ended December 31, 2013. The increase of $28,000 is attributed to the increase in interest for additional notes payable and debt discount amortization for the new convertible notes payable.

Net Loss: Higher revenues for the quarter ended December 31, 2014 were offset by the significant increases in Other expenses that account for the net loss of $1,758,000 compared to the net loss of $602,000 for the quarter ended December 31, 2013.

Liquidity and Capital Resources

As of December 31, 2014, the Company had negative working capital of $392,000 and a current ratio of 0.7 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 $2,128,000 for the 2014 three-year convertible notes totaling $343,000. 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 $135,000, offset by a decrease in accounts payable of $47,000 and a decrease in accrued expenses of $35,000. Cash provided by operating activities totaled $143,000 for the three months ended December 31, 2014.

Based on the amount of working capital that we had on hand on December 31, 2014 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. 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.

 

ITEM 3. Quantitative and Qualitative Disclosures about Market Risk

Not applicable

 

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 December 31, 2014, 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 December 31, 2014, formatted in XBRL (eXtensible Business Reporting Language): (1) Condensed Consolidated Balance Sheets as of December 31, 2014 (unaudited) and September 30, 2014; (2) Condensed Consolidated Statements of Operations for the three months ended December 31, 2014 and 2013 (unaudited); (3) Condensed Consolidated Statements of Cash Flows for the three months ended December 31, 2014 and 2013 (unaudited); and (4) Notes to Unaudited Condensed Consolidated 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:  February 17, 2015

By:

/s/ Alan P. Magerman

    Alan P. Magerman

    Chairman of the Board

    Chief Executive Officer

Date:  February 17, 2015

By:

/s/ Richard S. Kay

    Richard S. Kay

    Chief Financial Officer

 

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