UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





FORM 10-Q








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





For the quarterly period ended: March 31, 2010





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





For the transition period from:





Commission file number: 002-95626-D








SIONIX CORPORATION(Exact name of registrant as specified in its charter)





Nevada

87-0428526(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.2801 Ocean Park Blvd., Suite 339

Santa Monica, California

90405(Address of principal executive offices)

(Zip Code)





Issuer’s telephone number (847) 235-4566





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





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





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





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





Large accelerated filer
o
Accelerated filer
oNon-accelerated filer

(Do not check if a smaller reporting company)
o
Smaller reporting company
þ





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





Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.  As of May 14, 2010 the number of shares of the registrant’s classes of common stock outstanding was 149,988,947.












Table of Contents





Part I - Financial Information

3Item 1. Financial Statements

3Balance Sheets (Unaudited) as of March 31, 2010 and September 30, 2009

3Statements of Income (Unaudited) for the three and six months ended March 31, 2010 and March 31, 2009

4Statements of Cash Flows (Unaudited) for the six months ended March 31, 2010 and March 31, 2009

5Notes to unaudited condensed financial statements

6Forward-Looking StatementsItem 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

15Item 3. Quantitative and Qualitative Disclosures About Market Risk

17Item 4(T). Controls and Procedures

17Part II – Other Information

18Item 1. Legal Proceedings

18Item 1A. Risk Factors

18Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

18Item 3. Defaults Upon Senior Securities

18Item 4. Reserved

19Item 5. Other Information

19Item 6. Exhibits

19Signatures

20




2





PART I - FINANCIAL INFORMATION
 
 ITEM 1.  FINANCIAL STATEMENTS.


Sionix Corporation
 Condensed Balance Sheets (Unaudited)


March 31, 2010


September 30, 2009ASSETSCurrent assetsCash and cash equivalents

$
30,799


$
22,982Other receivable


155,000


$
155,000Inventory


-



1,069,460Other current assets


11,990



40,698Total current assets


197,789



1,288,140Non-current assets:Property and equipment, net


40,410



64,203Deposits


4,945



28,495Total assets

$
243,144


$
1,380,838LIABILITIES AND STOCKHOLDERS'  DEFICITCurrent liabilitiesAccounts payable

$
697,543


$
611,693Accrued expenses


3,305,788



3,066,106Customer deposits


-



1,620,000Liquidated damages liability


78,750



78,750Notes payable - related parties


107,000



107,000Short-term promissory notes payable


-



390,000Convertible notes, net of discount of $196,950 and $0 respectively


2,273,025



1,738,19410% subordinated convertible notes


482,492



482,492Warrant and option liability


-



7,937,620Beneficial conversion liability


-



2,001,143Total current liabilities


6,944,598



18,032,998Convertible notes, non-current net of discount of $63,275


176,725



-Stockholders' deficitPreferred stock, $0.001 par value, 10,000,000 shares authorized at March 31, 2010


-



-Common stock, $0.001 par value (600,000,000 and 150,000,000 shares authorized at March 31, 2010 and September 30, 2009, respectively; 149,557,046 shares issued and outstanding at March 31, 2010; 148,795,946 shares issued and 148,314,046 outstanding at September 30, 2009)


149,557



148,313Additional paid-in capital


17,498,876



12,089,664Shares to be issued


26,315



400Accumulated deficit


(24,552,927
)


(28,890,537
)Total stockholders' deficit


(6,878,179
)


(16,652,160
)Total liabilities and stockholders'  deficit

$
243,144


$
1,380,838





The accompanying notes are an integral part of these unaudited condensed financial statements.





3


Sionix Corporation
 Condensed Statements of Income (Unaudited)




Three Months Ended March 31,


Six Months Ended March 31,2010


2009


2010


2009Net revenues

$
-


$
-


$
1,620,000


$
-Cost of sales


-



-



1,091,500



-Gross profit


-



-



528,500



-Operating expensesGeneral and administrative


498,965



314,055



751,720



964,891Research and development


7,323



178,265



118,266



357,229Depreciation and amortization


5,707



7,615



12,576



15,104Total operating expenses


511,995



499,935



882,562



1,337,224Loss from operations


(511,995
)


(499,935
)


(354,062
)


(1,337,224
)Other income (expense)Interest income


-



277



-



3,868Interest expense and financing costs


(365,587
)


(63,758
)


(449,597
)


(158,523
)Gain on change in fair value of:Warrant and option liability


353,353



617,525



4,359,957



3,121,580Beneficial conversion liability


93,595



907,549



959,985



4,768,622Impairment of property and equipment


-



-



(11,217
)


-Gain (loss) on settlement of debt


30,000



(16,184
)


30,000



(16,184
)Loss on lease termination


-



-



(197,455
)


-Total other income (expense)


111,361



1,445,409



4,691,673



7,719,363Income (loss) before income taxes


(400,634
)


945,474



4,337,611



6,382,139Income taxes


-



-



-



-Net income (loss) available to common shareholders

$
(400,634
)

$
945,474


$
4,337,611


$
6,382,139Basic income (loss) per share

$
(0.00
)

$
0.01


$
0.03


$
0.05Diluted income (loss) per share

$
(0.00
)

$
0.01


$
0.03


$
0.05Basic weighted average number of shares of common stock outstanding


149,055,621



136,973,884



148,682,785



136,277,277Diluted weighted average number of shares of common stock outstanding


149,055,621



136,973,884



177,006,938



136,277,277





The accompanying notes are an integral part of these unaudited condensed financial statements.





4


Sionix Corporation
 Statements of Cash Flows Six Months Ended March 31, 2010 and 2009 (Unaudited)




2010


2009Cash flows from operating activitiesNet income

$
4,337,611


$
6,382,139Adjustments to reconcile net income to net cash used by operating activities:Depreciation


12,576



15,104Amortization of beneficial conversion feature and debt discounts


279,753



27,094Stock based compensation expense - employee


196,367



116,241Stock based compensation expense - consultant


111,203



248,752Gain on change in fair value of:Warrant and option liability


(4,359,957
)


(3,121,580
)Beneficial conversion liability


(959,985
)


(4,768,622
)(Gain) loss on settlement of debt


(30,000
)


16,184Impairment of property and equipment


11,217



-Loss on termination of lease


197,455



-(Increase) decrease in:Inventory


1,069,460



(608,565
)Other current assets


28,708



12,230Deposits


23,550



(150,400
)Increase (decrease) in:Accounts payable


85,850



92,508Accrued expenses


224,009



200,000Customer deposits


(1,620,000
)


344,486Net cash used by operating activities


(392,183
)


(1,194,429
)Cash flows from investing activities:Purchase of property and equipment


-



(5,546
)Cash flows from financing activities:Proceeds from convertible notes payable


400,000



-Common stock issued for cash


-



5,000Net cash provided by financing activities


400,000



5,000Net increase (decrease) in cash


7,817



(1,194,975
)Cash, beginning of period


22,982



1,220,588Cash, end of period

$
30,799


$
25,613SUPPLEMENTARY CASH FLOW INFORMATION:Income taxes paid

$
-


$
-Interest paid

$
-


$
-





The accompanying notes are an integral part of these unaudited condensed financial statements.





5




Sionix Corporation


Notes to Condensed Unaudited Financial Statements





Note 1 – Organization and Description of Business





Sionix Corporation (the "Company") was incorporated in Utah in 1985.  The Company was formed to design, develop, and market automatic water filtration systems primarily for small water districts.





The Company completed its reincorporation as a Nevada corporation effective July 1, 2003. The reincorporation was completed pursuant to an Agreement and Plan of Merger between Sionix Corporation, a Utah corporation ("Sionix Utah") and its wholly-owned Nevada subsidiary, Sionix Corporation ("Sionix Nevada"). Under the merger agreement, Sionix Utah merged with and into Sionix Nevada, and each share of Sionix Utah’s common stock was automatically converted into one share of common stock, par value $0.001 per share, of Sionix Nevada. The merger was effected by the filing of Articles of Merger, along with the Agreement and Plan of Merger, with the Secretary of State of Nevada.





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





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





The unaudited interim financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K, which contains the audited financial statements and notes thereto, together with the Management’s Discussion and Analysis, for the years ended September, 2009 and 2008.  The interim results for the period ended March 31, 2010 are not necessarily indicative of results for the full fiscal year.





Use of Estimates





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





Accrued Derivative Liabilities





The Company applies ASC Topic 815, “Derivatives and Hedging,” which provides a two-step model to determine whether a financial instrument or an embedded feature is indexed to an issuer’s own stock and thus able to qualify for equity treatment. Prior to the quarter ended March 31, 2010, liability accounting was triggered for the Company as there were insufficient shares to fulfill all potential conversions. The Company determines which instruments or embedded features require liability accounting and records the fair values as an accrued derivative liability. The changes in the values of the accrued derivative liabilities are shown in the accompanying statements of operations as “gain (loss) on change in fair value of warrant and option liability” and “gain (loss) on change in fair value of beneficial conversion liability.”





Fair Value Measurements





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





ASC Topic 820, “Fair Value Measurements and Disclosures,” requires disclosure of the fair value of financial instruments held by the Company. ASC Topic 825, “Financial Instruments,” defines fair value, and establishes a three-level valuation hierarchy for disclosures of fair value measurement that enhances disclosure requirements for fair value measures.  The carrying amounts reported in the balance sheets for receivables and current liabilities each qualify as financial instruments and are a reasonable estimate of their fair values because of the short period of time between the origination of such instruments and their expected realization and their current market rate of interest. The three levels of valuation hierarchy are defined as follows:




6




·
Level 1 inputs to the valuation methodology are quoted prices for identical assets or liabilities in active markets.





·
Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.





·
Level 3 inputs to the valuation methodology are unobservable and significant to the fair value measurement.





The Company analyzes all financial instruments with features of both liabilities and equity under ASC Topic 480, “Distinguishing Liabilities from Equity,” and ASC Topic 815.





The Company’s warrant and option liability is carried at fair value totaling $0 and $7,937,620 as of March 31, 2010 and September 30, 2009, respectively.  The Company’s beneficial conversion liability is carried at fair value totaling $0 and $2,001,143 as of March 31, 2010 and September 30, 2009, respectively.  The Company used Level 2 inputs for its valuation methodology for the warrant and option liability and beneficial conversion liability as their fair values were determined by using the Black-Scholes option pricing model based on various assumptions.





Fair Value as of

March 31, 2010

(Unaudited)


Fair Value Measurements at March 31, 2010 Using Fair Value HierarchyLiabilities




Level 1


Level 2


Level 3Warrant and option liability

$
0






$
0Conversion option liability


0







0Total accrued derivative liabilities

$
0






$
0




Fair Value as of

September 30, 2009


Fair Value Measurements at September 30, 2009 Using Fair Value HierarchyLiabilities




Level 1


Level 2


Level 3Warrant and option liability

$
7,937,620



-


$
7,937,620Conversion option liability


2,001,143







2,001,143Total accrued derivative liabilities

$
9,938,763






$
9,938,763




The Company recognized a gain on the fair value of the warrant and option liability of $353,353 and $617,525 for the three months ended March 31, 2010 and 2009, respectively, and $4,359,957 and $3,121,580 for the six months ended March 31, 2010 and 2009, respectively. The Company recognized a gain on the change in fair value of the beneficial conversion liability of $93,595 and $907,549 for the three months ended March 31, 2010 and 2009, respectively, and $959,985 and $4,768,622 for the six months ended March 31, 2010 and 2009, respectively.





As described in Notes 11 and 12, the warrant and option liability and the beneficial conversion liability were both eliminated during the quarter ended March 31, 2010 as the Company increased the numbers of shares of authorized common stock.





The Company did not identify any other non-recurring assets and liabilities that are required to be presented in the balance sheets at fair value in accordance with ASC Topic 825.





Revenue Recognition





Revenues from products sales are recorded when all four of the following criteria are met: (i) persuasive evidence of an arrangement exists; (ii) delivery has occurred or services have been rendered; (iii) the Company's price to the buyer is fixed or determinable; and (iv) collectability is reasonably assured. The Company's policy is to report its sales levels on a net revenue basis, with net revenues being computed by deducting from gross revenues the amount of actual sales returns and the amount of reserves established for anticipated sales returns.





The Company's policy for shipping and handling costs, billed to customers, is to include it in revenue in accordance with ASC Topic 605, “Revenue Recognition,” which requires that all shipping and handling billed to customers should be recorded as revenue. Accordingly, the Company records its shipping and handling amounts within net sales and operating expenses.





The Company earned no revenues for the three months ended March 31, 2010 and earned revenues of $1,620,000 for the six months ended March 31, 2010. The Company did not earn revenue for the three or six months ended March 31, 2009.




7




Research and Development





The cost of research and development is expensed as incurred. Total research and development costs were $7,323 and $178,265 for the three months ended March 31, 2010 and 2009, respectively and $118,266 and $357,229 for the six months ended March 31, 2010 and 2009, respectively.




Stock-Based Compensation





The Company records stock-based compensation in accordance with ASC Topic 718, “Compensation - Stock Compensation.”  ASC Topic 718 requires companies to measure compensation cost for stock-based employee compensation at fair value at the grant date and recognize the expense over the employee’s requisite service period. Under ASC Topic 718, the Company’s volatility is based on the historical volatility of the Company’s stock or the expected volatility of similar companies. The expected life assumption is primarily based on historical exercise patterns and employee post-vesting termination behavior. The risk-free interest rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of grant.





The Company uses the Black-Scholes option-pricing model, which was developed for use in estimating the fair value of options. Option-pricing models require the input of highly complex and subjective variables including the expected life of options granted and the Company’s expected stock price volatility over a period equal to or greater than the expected life of the options. Because changes in the subjective assumptions can materially affect the estimated value of the Company’s employee stock options, it is management’s opinion that the Black-Scholes option-pricing model may not provide an accurate measure of the fair value of the Company’s employee stock options. Although the fair value of employee stock options is determined in accordance with ASC Topic 718 using an option-pricing model, that value may not be indicative of the fair value observed in a willing buyer/willing seller market transaction.





Earnings Per Share





Earnings per share is calculated in accordance with the ASC Topic 260, “Earnings Per Share.”  Basic net income or loss per share is computed by dividing the net income or loss available to common stock holders by the weighted average number of common shares outstanding. Diluted net loss per share is based on the assumption that all dilutive convertible shares and stock options and warrants were converted or exercised. Dilution is computed by applying the treasury stock method. Under this method, options and warrants that are deemed “in the money” are assumed to be exercised at the beginning of the period (or at the time of issuance, if later), and as if funds obtained thereby were used to purchase common stock at the average market price during the period. Also, under this method, convertible notes are treated as if they were converted at the beginning of the period.  The following is a reconciliation of the income (numerator) and number of shares (denominator) used in the basic and diluted earnings per share computations for the six months ended March 31, 2010. There was no difference between the basic and diluted weighted average shares or earnings for any other periods presented.




For the Six Months Ended March 31, 2010Weighted AverageIncome


Number of Shares


Amount per(Numerator)


(Denominator)


ShareBasic Earnings Per ShareIncome available to common stockholders

$
4,337,611



148,682,785


$
0.03Effect of Dilutive SecuritiesAdjustment - gain on debt conversions and interest, net


125,059



28,324,153Diluted earnings per shareAdjusted income available to common stockholders

$
4,462,670



177,006,938


$
0.03




Recently Issued Accounting Pronouncements





In September 2009, the FASB issued Accounting Standards Update (“ASU”) No. 2009-13, “Multiple-Deliverable Revenue Arrangements—a consensus of the FASB Emerging Issues Task Force” (ASU 2009-13). It updates the existing multiple-element revenue arrangements guidance currently included under ASC 605-25, which originated primarily from the guidance in EITF Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables” (EITF 00-21). The revised guidance primarily provides two significant changes: 1) eliminates the need for objective and reliable evidence of the fair value for the undelivered element in order for a delivered item to be treated as a separate unit of accounting, and 2) eliminates the residual method to allocate the arrangement consideration. In addition, the guidance also expands the disclosure requirements for revenue recognition. ASU 2009-13 will be effective for the first annual reporting period beginning on or after June 15, 2010, with early adoption permitted provided that the revised guidance is retroactively applied to the beginning of the year of adoption. The Company is currently assessing the future impact of this new accounting update to its financial statements.




8




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





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





In April 2010, The FASB issued ASU No. 2010-17, Revenue Recognition – Milestone Method (Topic 605), to provide guidance on the criteria that should be met for determining whether the milestone method of revenue recognition is appropriate. The amendments in the update are effective on a prospective basis for milestones achieved for fiscal years, and interim periods within those years, beginning on or after June 15, 2010. Early adoption is permitted.  The Company is currently assessing the future impact of this new accounting update to its financial statements.





Note 3 – Other Receivable





Other receivables, amounting to $155,000 at both March 31, 2010 and September 30, 2009, represent amounts due from a former officer.





Note 4 – Property and Equipment





Property and equipment consisted of the following at:





March 31,


September 30,2010


2009Machinery and equipment

$
115,010


$
271,972Furniture and fixtures


12,597



41,176Leasehold improvement


-



1,695TOTAL PROPERTY AND EQUIPMENT


127,607



314,843Less accumulated depreciation


(87,197
)


(250,640
)NET PROPERTY AND EQUIPMENT

$
40,410


$
64,203





Depreciation expense for the three months ended March 31, 2010 and 2009 were $5,707 and $7,615, respectively, and for the six months ended March 31, 2010 and 2009 were $12,576 and $15,104, respectively.





Note 5 – Accrued Expenses





Accrued expenses consisted of the following at:


March 31,


September 30,2010


2009Accrued salaries

$
1,841,989


$
1,652,174Advisory board compensation


576,000



576,000Auto allowance accruals


104,785



104,785Interest payable


395,067



407,005Accrued lease liability


171,505



-Other accruals


216,442



326,142TOTAL ACCRUED EXPENSES

$
3,305,788


$
3,066,106





9




Note 6 – Customer Deposits





In May 2008, the Company received an order for two water filtration systems, which required a deposit. As of December 31, 2009, the Company had completed its design and manufacturing phase for one of the two filtration systems and has recognized the customer deposits into revenue during the three months ended December 31, 2009. No deposits have been received for the second unit as of the filing date. As of March 31, 2010 and September 30, 2009, customer deposits were $0 and $1,620,000, respectively.





Note 7 – Notes Payable – Related Parties





The Company has received advances in the form of unsecured promissory notes from stockholders in order to pay ongoing operating expenses. These notes bear interest at rates up to 10% and are due on demand. As of March 31, 2010 and September 30, 2009, notes payable amounted to $107,000. Accrued interest on the notes amounted to $89,388 and $84,016 at March 31, 2010 and September 30, 2009, respectively, and is included in accrued expenses. Interest expense on these notes for the three months ended March 31, 2010 and 2009 amounted to $2,675 and $2,886, respectively. For the six months ended March 31, 2010 and 2009, interest expense amounted to $5,371 and $5,872, respectively.





No demand for payment has been made as of March 31, 2010.





Note 8 – Short-Term Promissory Notes Payable





At September 30, 2009, short term promissory notes payable amounted to $390,000. The notes bear interest at 10% per annum and are unsecured. During the six months ended March 31, 2010, such notes have been reclassified as convertible notes due to amendments made during the period.




Note 9 – Convertible Notes





At March 31, 2010 and September 30, 2009, current convertible notes payable amounted to $2,273,025 and $1,738,194, respectively, net of discounts of $196,950 and $0, respectively. The notes bear interest at 10% - 12% per annum, and are convertible into common stock of the Company at $0.15 - $0.25 per share. The notes are due at various dates through August 31, 2010 and are unsecured.








Subsequent to the period ending March 31, 2010 one note holder with a balance of $53,073 noticed the Company of its conversion of the outstanding principal and accrued interest into restricted common stock.


During the six months ended March 31, 2010, the Company issued $400,000 of convertible debentures that included warrants to purchase 2,266,667 shares of common stock at $0.25- $0.30 per share. The Company determined that the fair value of the warrants, using the method described in Note 11, amounted to $391,504 which was recorded as a debt discount. For certain notes, the Company also determined that there was a beneficial conversion feature that should be recognized, and recorded a related debt discount of $55,161 for the six months ended March 31, 2010. The discounts are being amortized over the extended term of the related notes.





During the six months ended March 31, 2010, the Company issued 440,000 shares of common stock valued at $129,800 in connection with the extension of the due dates for short-term promissory notes, and also has agreed to issue an additional 259,144 shares valued at $25,914. Such shares are shown as ‘shares to be issued’ in the accompanying condensed balance sheet. The issued and to be issued shares have been recorded as a debt discount and are being amortized over the extended term of the related notes.


Note 10 – 10% Subordinated Notes





At both March 31, 2010 and September 30, 2009, subordinated notes amounted to $482,492. Such Subordinated Debentures (which are unsecured) matured on December 31, 2008, and bear interest at the rate of 10% per annum, and are subordinated to certain notes described in Note 9, above.





The Company is seeking to renegotiate the terms of these notes. The Company has not received any demand for payment on these notes.





Note 11 – Warrant and Option Liability





The Company issued warrants as part of debt issuances, stock issuances, and services.  The warrants and options qualify as derivative instruments with the fair value of the warrants and options being $0 and $7,937,620 at March 31, 2010 and September 30, 2009, respectively.  The fair value was determined using the Black-Scholes option pricing model under the following assumptions:




10
 
  September 30,2009Risk free rate of return

0.40% to 2.31%Volatility

155% to 230%Dividend yield


0
%Expected Term

1.45 to 4.73 years




During the three months ended March 31, 2010, the Company received shareholder approval to increase the authorized number of commons shares which had the effect of eliminating the derivative liability.




Note 12 – Beneficial Conversion Features Liability





Between October 17, 2006 and February 27, 2007, the Company issued 25 secured convertible promissory notes for total proceeds to the Company of $750,000 (“Convertible Notes 1”). Convertible Notes 1 could be converted into shares of the Company’s common stock at a conversion price of $0.05 per share. Convertible Notes 1 contained a provision that would automatically adjust the conversion price if equity securities or instruments convertible into equity securities were issued at a conversion price of less than $0.05.





On June 6, 2007, the Company issued 5 convertible promissory notes for a total of $86,000 (“Convertible Notes 2”).  No warrants were issued in connection with Convertible Notes 2. Convertible Notes 2 mature on December 31, 2008 and are convertible into common stock at $0.01 per share.





As a result of the issuance of Convertible Notes 2, the conversion price for Convertible Notes 1 was adjusted down from $0.05 to $0.01.  The decrease in the conversion price increased the potential dilutive shares from 15,000,000 to 75,000,000, and this subsequently increased the total outstanding and potential dilutive shares over the authorized common share limit of 150,000,000.  Because there were insufficient authorized shares to fulfill all potential conversions, the Company classified all embedded conversion options as liabilities. On August 13, 2009, the holders agreed to forever waive any reduction of the conversion price that would have occurred as a result of the issuance of Convertible Notes 2.  Therefore, the conversion rate was increased to $0.04.





As of September 30, 2009, the Company had $893,571 convertible notes and interest, respectively, which could be converted into 16,527,565 shares of common stock.  The Company determined the fair value of the beneficial conversion option to be $2,001,143 at September 30, 2009, using the Black-Scholes model with the following assumptions:




September 30,2009Risk free rate of return


0.14
%Volatility


132
%Dividend yield


0
%Expected Term

0.25 Years





During the three months ended March 31, 2010, the Company received shareholder approval to increase the authorized number of commons shares which had the effect of eliminating the derivative liability.




Note 13 – Income Taxes





Through September 30, 2009, the Company incurred net operating losses for tax purposes of approximately $24,605,000. The net operating loss for federal and state purposes may used to reduce taxable income through the year 2029. For the six months ended March 31, 2010 and 2009, the accompanying Condensed Statements of Income reflect net income that is largely comprised of items that do not represent taxable income. As a result, the provision for income taxes is zero in all periods presented.




11




Note 14 – Stockholders’ Equity





Common Stock





The Company has 600,000,000 authorized shares of common stock, par value $0.001 per share. In March, 2010, the Company received shareholder approval to increase the number of common shares authorized, from 150,000,000.  As of March 31, 2010 and September 30, 2009, the Company had 149,557,046 and 148,795,946 shares of common stock issued, respectively. As of September 30, 2009, there were 481,900 shares of common stock subject to cancellation.








Stock Options





A summary of the Company’s stock option activities:





WeightedWeighted





AverageAverage


Aggregate


RemainingNumber


Exercise


Intrinsic


Contractualof Options


Price


Value


LifeOutstanding at October 1, 2009


19,301,336


$
0.18


$
287,356



3.02Granted


1,600,000



0.15Expired


-



-Forfeited


-



-Exercised


-



-Outstanding at March 31, 2010


20,901,336


$
0.17


$
-



2.51Exercisable at March 31, 2010


20,422,106


$
0.17


$
-



2.48





Options outstanding and exercisable as of March 31, 2010:





Weighted





WeightedAverage





AverageRemaining





RemainingExercise


Options


Contractual


Options


ContractualPrice


Outstanding


Life


Exercisable


Life$
0.15



15,967,790



2.58



15,488,580



2.53$
0.25



4,933,526



2.71



4,933,526



2.7120,901,316



2.51



20,422,106



2.48





During December 2009 and January 2010, the Company granted a total of 1,600,000 options to its new Chief Executive Officer and Chief Financial Officer in connection with their employment agreements. The options vested immediately upon grant and have a term of five years. The weighted average grant-date fair value of these options was $149,396.   The fair value of these options was estimated on the date of the grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:





·
risk free rate of return of 2.35%;


·
volatility of 218 – 219%;


·
dividend yield of 0%; and


·
expected term of 5 years.





12





Stock Warrants





A summary of the Company’s warrant activities:


WeightedAverage


AggregateNumber


Exercise


Intrinsicof Warrants


Price


ValueOutstanding at October 1, 2009


39,699,099


$
0.18


$
850,320Granted


2,266,667



0.20Expired


-



-Forfeited


-



-Exercised


-



-Outstanding as of March 31, 2010


41,965,766


$
0.20


$
-Exercisable as of March 31, 2010


41,965,766


$
0.20


$
-





Warrants outstanding and exercisable as of March 31, 2010:





WeightedAverageRemaining


Weighted AverageExercise


Warrants


Warrants


Contractual


Exercise PricePrice


Outstanding


Exercisable


Life


Outstanding


Exercisable$
0.10



11,850,000



11,850,000



1.39


$
0.10


$
0.10$
0.15



2,107,667



2,107,667



4.58


$
0.15


$
0.15$
0.18



850,000



850,000



2.79


$
0.18


$
0.18$
0.25



21,029,312



21,029,312



2.88


$
0.25


$
0.25$
0.30



6,128,787



6,128,787



2.84


$
0.30


$
0.30





During the six months ended March 31, 2010, the Company completed offerings of $400,000 in principal amount of convertible debentures to a group of institutional and accredited investors.  As part of the above offering, the Company issued warrants to purchase 2,266,667 shares of common stock at exercise prices of $0.15 to $0.25 per share, which expire five years from date of grant.





Note 15 – Commitments





Operating Lease





As of August 1, 2008, the Company entered into a 36 month lease for an industrial site consisting of approximately 12,000 square feet of administrative offices and a manufacturing facility.  Monthly lease payments for the period from August 1, 2008 through July 31, 2009 are $8,650 plus common area maintenance charges; monthly lease payments for the period from August 1, 2009 through July 31, 2010 are $8,995 plus common area maintenance charges and monthly lease payments for the period from August 1, 2010 through July 31, 2011 are $9,355 plus common area maintenance charges.  The lease agreement includes an option to extend the lease for an additional 36 months. If the option is exercised, monthly payments over the three year term would be $9,730 plus common area maintenance charges from August 1, 2011 through July 31, 2012, $10,118 plus common area maintenance charges from August 1, 2012 through July 31, 2012, and $10,523 plus common area maintenance charges from August 1, 2013 through July 31, 2014.





On December 22, 2009, the Company vacated the administrative offices and manufacturing facility. No formal agreement has been reached by the Company with the lessor relating to the future aggregate minimum annual lease payments arising from this lease agreement. As of March 31, 2010, the Company has recorded the future minimum rental and common area maintenance charges under the lease agreement totaling $197,455 and is included in the accompanying statement of operations as “loss on lease termination” in the other income (expense) section.





Total rent expense under this operating lease was $30,495 and $29,460 for the three months ended March 31, 2010 and 2009, respectively.




13




Note 16 – Going Concern





The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. This basis of accounting contemplates the recovery of the Company’s assets and the satisfaction of its liabilities in the normal course of business. Through March 31, 2010, the Company has incurred cumulative losses of $24,552,927 including net income for the six months ended March 31, 2010 of $4,337,611. As the Company has no cash flow from operations, its ability to transition from a development stage company to an operating company is entirely dependent upon obtaining adequate cash to finance its overhead, research and development activities, and acquisition of production equipment. It is unknown when, if ever, the Company will achieve a level of revenues adequate to support its costs and expenses. In order for the Company to meet its basic financial obligations, including salaries, debt service and normal operating expenses, it plans to sell additional units of its water treatment system, and to seek additional equity or debt financing. Because of the Company’s history and current debt levels, there is considerable doubt that the Company will be able to obtain financing. The Company’s ability to meet its cash requirements for the next twelve months depends on its ability to obtain such financing. Even if financing is obtained, any such financing will likely involve additional fees and debt service requirements which may significantly reduce the amount of cash we will have for our operations. Accordingly, there is no assurance that the Company will be able to implement its plans.





As mentioned in Notes 7, 8, and 9, the Company has short-term promissory notes, convertible notes, and subordinated debentures that have matured. The Company is in the process of renegotiating the terms of the notes with the note holders to extend the maturity date. If the Company is unsuccessful in extending the maturity date, the Company may not be able to continue as a going concern. The Company is continuing its efforts to obtain customers for its ELIXIR product, expanding its sales efforts worldwide as well as expanding the industries it targets for possible customers. The Company also has future plans for additional products, and revisions to its current products. In support of this the Company plans to hire additional personnel who have the industry experience and the training so that they can be immediately effective in the building of the Company. The Company is also considering alternatives related to its manufacturing capabilities and believes that it can effectively outsource most if not all of its production to contract manufacturers. This would reduce costs and improve the quality of its products. It is also continuing to seek additional investment capital in the form of debt or equity to sustain continued operations, and considering certain changes to its capital structure to become more attractive to potential investors and business partners. Last, to manage these activities the Company has hired new senior management who have the manufacturing, finance and public company experience necessary to manage the Company.





Note 17 – Supplemental Cash Flow Information





Supplemental information of non-cash financing and investing activities:





Accrued interest of $181,782 relating to convertible notes was reclassified to principal pursuant to note amendments during the six months ended March 31, 2010.









On October 26, 2009, a short-term promissory note of $50,000 was amended that allowed the note to be convertible into shares of the Company’s common stock at $0.15 per share.





Note 18 – Related Party Transaction





A director of the Company loaned $25,000 to the Company as part of the completion of its 10% Convertible Debentures offering. See Note 9 under "10% Convertible Debentures.”





During December 2009, impaired production machinery and equipment was sold to a director of the Company for $10. Upon the sale of the machinery and equipment, the responsibility of the removal and cost of the removal of the property from the Company’s former operating headquarters rested with the director. The machinery and equipment was removed by the director prior to December 31, 2009.





Note 19 – Subsequent Events





Subsequent to March 31, 2010 the Company entered into a Convertible Promissory Note in the amount of $75,000 which expires on January 28, 2011 and bears an interest rate of 8% per year. The note is convertible into shares of common stock, at the request and discretion of the lender, after a period of 120 days from the date of issuance, at 55% of the average of the 3 lowest closing prices during the 10 trading days prior to the notice of conversion by the noteholder.  The note cannot be prepaid by the borrower prior to its maturity.




14




ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.





The information in this quarterly report on Form 10-Q contains forward-looking statements.  These forward-looking statements involve risks and uncertainties, including statements regarding our capital needs, business strategy and expectations.  Any statements contained in this report that are not statements of historical facts may be deemed to be forward-looking statements.  In some cases, you can identify forward-looking statements by terminology such as may, will, should, expect, plan, intend, anticipate, believe, estimate, predict, potential or continue, the negative of such terms or other comparable terminology.  Actual events or results may differ materially from those events or results included in the forward-looking statements.  In evaluating these statements, you should consider various factors, including the risks outlined from time to time in the reports we file with the Securities and Exchange Commission.  Some, but not all, of these risks include, among other things:





·
our inability to obtain the financing we need to continue our operations;





·
changes in regulatory requirements that adversely affect our business;





·
loss of our key personnel; and





·
risks over which we have no control, such as the general global downturn in the economy which may adversely affect spending by government agencies.





We do not intend to update forward-looking statements.  You should refer to and carefully review the information in future documents we file with the Securities and Exchange Commission.





Overview





Plan of Operation





During the next fiscal year we plan to continue marketing and selling our DAF and ELIXIR water treatment system to potential domestic and international customers. We believe that the operation of the units at Villa Park Dam ("VPD") and Arkansas will position us to aggressively market the Sionix products to oil and gas drillers, mining operators, global disaster and emergency relief organizations, third world countries, domestic public water utilities, private companies requiring water treatment, and other potential customers.  The projects at VPD and Arkansas will serve as a sales tool for possible applications and installations. Once we obtain sufficient financing, we plan to engage in substantial promotional activities in connection with the sales of the Sionix units, including media exposure and access to other public agencies and potential private customers. We have demonstrated the unit at the VPD to numerous prospective clients over several years and are considering different alternative uses for this unit.





We intend to contract with outside manufacturers to begin production of the Sionix products. We anticipate that most of our capital needs will need to be funded by equity financing or debt funding until such time that we have received orders for, and deposits with respect to, our products.





Results of Operations





Three Months Ended March 31, 2010 Compared to Three Months Ended March 31, 2009





Revenues for the three months ended March 31, 2010 and 2009 were $0 with no new sales during either of these periods.





Our total operating expenses were $511,995 during the three months ended March 31, 2010, an increase of $12,060 or 2.4%, as compared to $499,935 for the three months ended March 31, 2009.  General and administrative expenses were $498,965 during the three months ended March 31, 2010, an increase of $184,910 or 58.9%, as compared to $314,055 for the three months ended March 31, 2009.  The increase in general and administrative expenses was due to increased wage accruals related to new management personnel. Research and development expenses were $7,323 during the three months ended March 31, 2010, a decrease of $170,942 or 95.9%, as compared to $178,265 for the three months ended March 31, 2009.  The substantial decrease is due to the lack of cash available for normal operations. We also incurred interest costs related to our various notes in the amount of $365,587; this is an increase of $301,829 from the prior period when we reported interest costs of $63,758. Our normal operations were severely limited by the lack of available cash.





Six Months Ended March 31, 2010 Compared to Six Months Ended March 31, 2009





Revenues for the six months ended March 31, 2010 and 2009 were $1,620,000 and $0, respectively.  As of March 31, 2010, we completed the delivery of the filtration systems and recognized the contract into revenue during the six months ended March 31, 2010. As of March 31, 2009, revenue from this order had not been recognized because the units were not completed and delivered. Our costs associated with the delivery of this unit were $832,749 for Product Costs, or 51.4% of revenue, and $258,751 or 16.0% of revenue for Warranty costs which included on-site modification and repair of the unit based on the unexpected demanding environment which the unit is being used. We achieved a Gross Profit from normal operations of $528,500 or 32.6% of revenue.




15




Our total operating expenses were $882,562 during the six months ended March 31, 2010, a decrease of $454,662 or 34.0%, as compared to $1,337,224 for the six months ended March 31, 2009.  General and administrative expenses were $751,720 during the six months ended March 31, 2010, a decrease of $213,171 or 22.1%, as compared to $964,891 for the six months ended March 31, 2009.  The decrease in general and administrative expenses is due to a decrease in officer wages for the comparative periods, and the reduction in rent costs associated with the closure of the Anaheim facility. Research and development expenses were $118,266 during the six months ended March 31, 2010, a decrease of $238,963 or 66.9%, as compared to $357,229 for the six months ended March 31, 2009.  This decrease reflects the completion of the development of the operating unit that was installed in Arkansas, as well as the continued lack of available cash resources for continued development. Overall expenses were down due to limited capital available for spending, and the reduction of overhead costs.





Liquidity and Capital Resources





The Company had cash of $30,799 and $22,982 and at March 31, 2010 and September 30, 2009, respectively. The Company’s source of liquidity has been the sale of its securities and deposits received from orders for one water treatment system. The Company expects to receive additional orders for water treatment systems but if it does not receive additional orders or if these orders do not satisfy its capital needs, the Company expects to sell its securities or obtain loans to meet its capital requirements.  The Company has no binding commitments for financing and, with the exception of the orders it received during the 2008 fiscal year, no additional orders for the sale of water treatment systems.  There can be no assurance that sales of the Company’s securities or of its water treatment systems, if such sales occur, will provide sufficient capital for its operations or that the Company will not encounter unforeseen difficulties that may deplete its capital resources more rapidly than anticipated. As of March 31, 2010, approximately $3,117,791 in principal and interest of certain promissory notes issued by the Company were due or will be coming due on or before August 31, 2010, which is the latest maturity date of its existing notes.





During the six months ended March 31, 2010, the Company used $392,183 of cash in operating activities. Non-cash adjustments included $12,576 for depreciation, $279,753 for the amortization of beneficial conversion feature and debt discounts, $307,570 for share-based payments to consultants and employees, $11,217 for the impairment of property and equipment, and $197,455 for loss on the termination of a lease. Cash provided by operating activities included $1,069,460 in inventory, $28,708 in other current assets, $23,550 in deposits, $85,850 in accounts payable, and $421,464 in accrued expenses. Cash used in operating activities included $1,620,000 in customer deposits, $30,000 for gain on settlement of debt, $4,359,957 for warrant and option liability, and $959,985 in beneficial conversion liability.





During the six months ended March 31, 2009, the Company used $1,194,429 of cash in operating activities.  Non-cash adjustments included $15,104 for depreciation, $27,094 for the amortization of beneficial conversion feature and debt discounts, $364,993 for share-based payments to consultants and employees, and $16,184 for the loss on settlement of debt. Cash provided by operating activities included $12,230 in other current assets, $92,508 in accounts payable, $200,000 in accrued expenses, and $344,486 in customer deposits. Cash used in operating activities included $608,565 for inventory, $150,400 for deposits, $3,121,580 for warrant and option liability, and $4,768,622 for beneficial conversion feature liability.





Investing Activities





During the six months ended March 31, 2010, the Company acquired property and equipment totaling $0, as compared to $5,546 during the six months ended March 31, 2009.





Financing Activities





Financing activities provided $400,000 to the Company during the six months ended March 31, 2010 and related to proceeds received from convertible debentures.  During the six months ended March 31, 2009, cash of $5,000 was provided by financing activities from the sale of common stock..





As of March 31, 2010, the Company had an accumulated deficit of $24,552,927. Management anticipates that future operating results will continue to be subject to many of the problems, expenses, delays and risks inherent in the establishment of a developmental business enterprise, many of which the Company cannot control.





Material Trends, Events or Uncertainties





We are not certain how the current economic downturn may affect our business.  Because of the global recession, government agencies and private industry may not have the funds to purchase our water treatment systems.  It may also be more difficult for us to raise capital in the current economic environment. Other than as discussed herein, the Company does not know of any material trends, events or uncertainties that may impact its operations in the future.




16




Going Concern





The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. This basis of accounting contemplates the recovery of the Company’s assets and the satisfaction of its liabilities in the normal course of business. Through March 31, 2010, the Company has incurred cumulative losses of $24,552,927 including net income for the six months ended March 31, 2010 of $4,337,611. As the Company has no cash flow from operations, its ability to transition from a development stage company to an operating company is entirely dependent upon obtaining adequate cash to finance its overhead, research and development activities, and acquisition of production equipment. It is unknown when, if ever, the Company will achieve a level of revenues adequate to support its costs and expenses. In order for the Company to meet its basic financial obligations, including rent, salaries, debt service and operations, it plans to seek additional equity or debt financing. Because of the Company’s history and current debt levels, there is considerable doubt that the Company will be able to obtain financing. The Company’s ability to meet its cash requirements for the next twelve months depends on its ability to obtain such financing. Even if financing is obtained, any such financing will likely involve additional fees and debt service requirements which may significantly reduce the amount of cash we will have for our operations. Accordingly, there is no assurance that the Company will be able to implement its plans.





The Company expects to continue to incur substantial operating losses for the foreseeable future, and it cannot predict the extent of the future losses or when it may become profitable, if ever. The Company expects to incur increasing sales and marketing, research and development and general and administrative expenses. Also, the Company has a substantial amount of short-term debt, which will need to be repaid or refinanced, unless it is converted into equity. As a result, if the Company begins to generate revenues from operations, those revenues will need to be significant in order to cover current and anticipated expenses. These factors raise substantial doubt about the Company's ability to continue as a going concern unless it is able to obtain substantial additional financing in the short term and generate revenues over the long term. If the Company is unable to obtain financing, it would likely discontinue its operations.





As mentioned in Notes 7, 8 and 9, the Company has convertible notes and subordinated notes payable that have matured. The Company is in the process of renegotiating the terms of the notes with the note holders to extend the maturity date. If the Company is unsuccessful in extending the maturity date, the Company may not be able to continue as a going concern.





Critical Accounting Policies





The discussion and analysis of our financial condition and results of operations is based upon our unaudited condensed financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. On an on-going basis, we evaluate our critical accounting policies and estimates. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Our critical accounting policies and estimates are discussed in our Annual Report on Form 10-K for the fiscal year ended September 30, 2009.





ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.





As a smaller reporting company, we are not required to provide this disclosure.





ITEM 4(T).  CONTROLS AND PROCEDURES.





(a) Disclosure Controls and Procedures





Regulations under the Securities Exchange Act of 1934 require public companies to maintain “disclosure controls and procedures,” which are defined to mean a company’s controls and other procedures that are designed to ensure that information required to be disclosed in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms and is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.





We conducted an evaluation, with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the period covered by this report.  Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that as of March 31, 2010, our disclosure controls and procedures were not effective at the reasonable assurance level due to the material weaknesses described below.





A material weakness is a control deficiency (within the meaning of the Public Company Accounting Oversight Board (PCAOB) Auditing Standard No. 2) or combination of control deficiencies that result in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected.  Management has identified the following three material weaknesses in our disclosure controls and procedures:




17




1.           We do not have written documentation of our internal control policies and procedures.  Written documentation of key internal controls over financial reporting is a requirement of Section 404 of the Sarbanes-Oxley Act.  Management evaluated the impact of our failure to have written documentation of our internal controls and procedures on our assessment of our disclosure controls and procedures and has concluded that the control deficiency that resulted represented a material weakness.





2.           We do not have sufficient segregation of duties within accounting functions, which is a basic internal control.  Due to our size and nature, segregation of all conflicting duties may not always be possible and may not be economically feasible.  However, to the extent possible, the initiation of transactions, the custody of assets and the recording of transactions should be performed by separate individuals.  Management evaluated the impact of our failure to have segregation of duties on our assessment of our disclosure controls and procedures and has concluded that the control deficiency that resulted represented a material weakness.





3.           We do not have review and supervision procedures for financial reporting functions. The review and supervision function of internal control relates to the accuracy of financial information reported. The failure to review and supervise could allow the reporting of inaccurate or incomplete financial information. Due to our size and nature, review and supervision may not always be possible or economically feasible.  Management evaluated the impact of our significant number of audit adjustments and has concluded that the control deficiency that resulted represented a material weakness.





To address these material weaknesses, management performed additional analyses and other procedures to ensure that the financial statements included herein fairly present, in all material respects, our financial position, results of operations and cash flows for the periods presented.





(b) Changes in internal control over financial reporting





During the three months ended March 31, 2010, the Company has not made any changes to internal control over financial reporting that have materially affected, or are reasonably likely to affect, our internal control over financial reporting.




PART II - OTHER INFORMATION
 
 ITEM 1.  LEGAL PROCEEDINGS.





There have been no material developments during the quarter ended March 31, 2010 in any material pending legal proceedings to which the Company is a party or of which any of our property is the subject.





ITEM 1A.  RISK FACTORS.


As a smaller reporting company we are not required to provide this information.





ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.





During the six months ended March 31, 2010 we issued 440,000 shares of common stock to various noteholders in return for their agreement to extend the expiration of their notes. We relied on Section 4(2) of the Securities Act, and Regulation D promulgated thereunder, as providing an exemption from registering the sale of these shares of common stock under the Securities Act.




ITEM 3. DEFAULTS UPON SENIOR SECURITIES





None.




18




ITEM 4.  RESERVED.




ITEM 5.  OTHER INFORMATION.





(a) None.





(b) There were no changes to the procedures by which security holders may recommend nominees to our board of directors.





ITEM 6.  EXHIBITS.





Exhibit No.

Description of Exhibit3.1

Articles of Incorporation (1)3.2

Bylaws (1)31.1

Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*31.2

Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*32.1

Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*32.2

Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*





* Filed herewith.


(1) Incorporated by reference from our Current Report on Form 8-K filed with the Securities and Exchange Commission on July 15, 2003 as file number 002-95626-D.





19





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.





Date: May 24, 2010




SIONIX CORPORATION/s/ David R. WellsDavid R. WellsPresident, Chief Financial Officer, Secretary/Treasurer, and 
Principal Financial and Accounting Officer







20