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: June 30, 2010





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


For the transition period from:_____________ to ___________





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 August 17, 2010 the number of shares of the registrant’s classes of common stock outstanding was 177,372,055.











Table of Contents





PART I - FINANCIAL INFORMATION

3Item 1. Financial Statements

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

3Statements of Income (Unaudited) for the three and nine months ended June 30, 2010 and  2009

4Statements of Cash Flows (Unaudited) for the nine months ended June 30, 2010 and 2009

5Notes to Unaudited Condensed Financial Statements

6Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

16Item 3. Quantitative and Qualitative Disclosures About Market Risk

18Item 4. Controls and Procedures

18PARTII- OTHER INFORMATION

20Item 1. Legal Proceedings

20Item 1A. Risk Factors

20Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

20Item 3. Defaults Upon Senior Securities

20Item 4. Reserved

21Item 5. Other Information

21Item 6. Exhibits

21Signatures

22





2


PART I, ITEM 1.  FINANCIAL STATEMENTS.


Sionix Corporation Condensed Balance Sheets (Unaudited)
 June 30,


September 30,2010


2009ASSETSCurrent assetsCash and cash equivalents

$
3,046


$
22,982Other receivable


205,000


$
155,000Inventory


194,056



1,069,460Other current assets


60,500



40,698Total current assets


462,602



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


34,702



64,203Deposits


2,545



28,495Total assets

$
499,849


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

$
556,599


$
611,693Accrued expenses


3,242,192



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 $78,774 and $0 respectively


2,099,004



1,738,19410% subordinated convertible notes


482,492



482,492Warrant and option liability


-



7,937,620Beneficial conversion liability


-



2,001,143Shares to be issued


1,219,157



400Total current liabilities


7,785,194



18,033,398Stockholders' deficitPreferred stock, $0.001 par value, 10,000,000 shares authorized at June 30, 2010


-



-Common stock, $0.001 par value (600,000,000 and 150,000,000 shares authorized at June 30, 2010 and September 30, 2009,

respectively; 164,079,129 shares issued and outstanding at June 30, 2010; 148,795,946 shares issued and 148,314,046

shares outstanding at September 30, 2009)


164,079



148,313Additional paid-in capital


18,745,358



12,089,664Accumulated deficit


(26,194,782
)


(28,890,537
)Total stockholders' deficit


(7,285,345
)


(16,652,560
)Total liabilities and stockholders'  deficit

$
499,849


$
1,380,838





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




3





Sionix Corporation Condensed Statements of Operations (Unaudited)


Three Months Ended June 30,


Nine Months Ended June 30,2010


2009


2010


2009Net revenues

$
-


$
-


$
1,620,000


$
-Cost of sales


-



-



1,091,500



-Gross profit


-



-



528,500



-Operating expensesGeneral and administrative


580,095



179,219



1,273,969



1,006,935Sales and marketing


80,255



-



138,101



137,177Research and development


74,662



210,561



192,928



567,790Depreciation and amortization


5,708



22,300



18,284



37,404Total operating expenses


740,720



412,080



1,623,282



1,749,306Loss from operations


(740,720
)


(412,080
)


(1,094,782
)


(1,749,306
)Other income (expense)Interest income


-



2



-



3,870Interest expense and financing costs


(290,910
)


(63,423
)


(740,507
)


(221,947
)Gain (loss) on change in fair value of:Warrant and option liability


-



(4,432,889
)


4,359,957



(1,311,309
)Beneficial conversion liability


-



(7,100,677
)


959,985



(2,332,055
)Impairment of property and equipment


-



-



(11,217
)


-Gain (loss) on settlement of debt


(608,625
)


19,800



(578,625
)


3,616Loss on lease termination


-



-



(197,455
)


-Total other income (expense)


(899,535
)


(11,577,187
)


3,792,138



(3,857,825
)Income (loss) before income taxes


(1,640,255
)


(11,989,267
)


2,697,356



(5,607,131
)Income taxes


(1,600
)


(4,800
)


(1,600
)


(4,800
)Net income (loss) available to common shareholders

$
(1,641,855
)

$
(11,994,067
)

$
2,695,756


$
(5,611,931
)Basic income (loss) per share

$
(0.01
)

$
(0.08
)

$
0.02


$
(0.04
)Diluted income (loss) per share

$
(0.01
)

$
(0.08
)

$
0.01


$
(0.04
)Basic weighted average number of shares of common stock outstanding


151,655,634



142,281,820



149,677,378



138,329,293Diluted weighted average number of shares of common stock outstanding


151,655,634



142,281,820



180,710,139



138,329,293


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





4




Sionix Corporation
 Statements of Cash Flows Nine Months Ended June 30, 2010 and 2009 (Unaudited)
 2010


2009Cash flows from operating activitiesNet income (loss)

$
2,695,756


$
(5,611,931
)Adjustments to reconcile net income (loss) to net cash used by operating activities:Depreciation


18,284



37,404Amortization of beneficial conversion feature and debt discounts


477,203



2,890Stock based compensation expense - employee


433,456



187,844Common stock issued for services


588,732



238,244(Gain) loss on change in fair value of:Warrant and option liability


(4,359,957
)


1,319,838Beneficial conversion liability


(959,985
)


2,332,055(Gain) loss on settlement of debt


578,625



(19,800
)Impairment of property and equipment


11,217



-(Increase) decrease in:Inventory


875,404



(833,594
)Other current assets


(69,802
)


17,730Deposits


25,950



(131,347
)Increase (decrease) in:Accounts payable


(55,094
)


197,604Accrued expenses


380,275



451,603Customer deposits


(1,620,000
)


360,000Net cash used by operating activities


(979,936
)


(1,451,460
)Cash flows from investing activities:Purchase of property and equipment


-



(5,546
)Cash flows from financing activities:Borrowings


510,000



240,000Common stock issued for cash


450,000



5,000Net cash provided by financing activities


960,000



245,000Net decrease in cash


(19,936
)


(1,212,006
)Cash, beginning of period


22,982



1,220,588Cash, end of period

$
3,046


$
8,582SUPPLEMENTARY 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 Unaudited Condensed 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 June 30, 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 June 30, 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.




6





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:





·
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 June 30, 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 June 30, 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

June 30, 2010

(Unaudited)

Fair Value Measurements at June 30, 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 (loss) on the fair value of the warrant and option liability of $0 and ($4,432,889) for the three months ended June 30, 2010 and 2009, respectively, and $4,359,957 and ($1,311,309) for the nine months ended June 30, 2010 and 2009, respectively. The Company recognized a gain (loss) on the change in fair value of the beneficial conversion liability of $0 and ($7,100,677) for the three months ended June 30, 2010 and 2009, respectively, and $959,985 and ($2,332,055) for the nine months ended June 30, 2010 and 2009, respectively.





As described in Notes 12 and 13, the warrant and option liability and the beneficial conversion liability were both eliminated in March, 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 June 30, 2010 and earned revenues of $1,620,000 for the nine months ended June 30, 2010. The Company did not earn revenue for the three or nine months ended June 30, 2009.




7





Research and Development





The cost of research and development is expensed as incurred. Total research and development costs were $74,662 and $210,561 for the three months ended June 30, 2010 and 2009, respectively and $192,928 and $567,790 for the nine months ended June 30, 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 nine months ended June 30, 2010. There was no difference between the basic and diluted weighted average shares or earnings for any other periods presented.





For the Nine Months Ended June 30, 2010Income

(Numerator)


Weighted

Average Number of Shares (Denominator)


Amount per

ShareBasic Earnings Per ShareIncome available to common stockholders

$
2,695,756



149,677,378


$
0.02Effect of Dilutive SecuritiesStock options


-



632,193Warrants


-



864,793Convertible debt


684,370



29,535,774Diluted earnings per shareAdjusted income available to common  stockholders

$
3,380,126



180,710,139


$
0.02
  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 Receivables.





Other receivables consisted of the following at:


June 30,


September 30,2010


2009Amounts due from former officer

$
155,000


$
155,000Amount due from escrow


50,000



-$
205,000


$
155,000





Note 4 – Property and Equipment





Property and equipment consisted of the following at:





June 30,


September 30,2010


2009Machinery and equipment

$
115,010


$
271,972Furniture and fixtures


12,597



41,176Leasehold improvements


-



1,695Total property and equipment at cost


127,607



314,843Less accumulated depreciation


(92,905
)


(250,640
)Property and equipment, net

$
34,702


$
64,203


Depreciation expense for the three months ended June 30, 2010 and 2009 was $5,708 and $22,300, respectively, and for the nine months ended June 30, 2010 and 2009 was $18,284 and $37,404, respectively.





9




Note 5 – Accrued Expenses
 
 Accrued expenses consisted of the following at:


June 30,


September 30,2010



2009Accrued salaries

$
1,730,461


$
1,652,174Advisory board compensation


576,000



576,000Auto allowance accruals


104,785



104,785Interest payable


442,999



407,005Accrued lease liability


171,505



-Other accrued expenses


216,442



326,142Total accrued expenses

$
3,242,192


$
3,066,106
 During the nine months ended June 30, 2010, common stock valued at $53,802 was issued in settlement of certain accrued salaries, and $45,528 of accrued interest was included in the conversion of notes payable into common stock described in Note 11.
 
 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 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 June 30, 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 both June 30, 2010 and September 30, 2009, such notes payable amounted to $107,000. Accrued interest on the notes amounted to $91,905 and $84,016 at June 30, 2010 and September 30, 2009, respectively, and is included in accrued expenses. Interest expense on these notes for the three months ended June 30, 2010 and 2009 amounted to $2,517 and $2,954, respectively. For the nine months ended June 30, 2010 and 2009, interest expense amounted to $7,888 and $9,647, respectively.
 
 No demand for payment has been made as of June 30, 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 nine months ended June 30, 2010, such notes have been reclassified as convertible notes due to amendments made during the period.
 
 Note 9 – Convertible Notes
 
 At June 30, 2010 and September 30, 2009, convertible notes payable amounted to $2,099,004 and $1,738,194, respectively, net of discounts of $78,774 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 July, 2011 and are unsecured.
 
 During the nine months ended June 30, 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 12, 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 nine months ended June 30, 2010. The discounts are being amortized over the extended terms of the related notes.
 
 During the nine months ended June 30, 2010, the Company issued 798,680 shares of common stock valued at $163,668 in connection with the extension of the due dates for short-term promissory notes. Such shares have been recorded as a debt discount and are being amortized over the extended terms of the related notes.
 
 As more fully described in Note 11, convertible note-holders owed $687,725 (including interest) accepted the Company’s offer to convert their debt into 10,913,418 shares of common stock during the three months ended June 30, 2010.
 
 10
 
 Note 10 – 10% Subordinated Notes
 
 At both June 30, 2010 and September 30, 2009, subordinated notes amounted to $482,492. Such Subordinated Debentures (which are unsecured) matured on December 31, 2008, 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 – Note Conversions
 
 During the nine months ended June 30, 2010, the Company issued 360,013 shares of common stock for conversion of debt in the amount of $54,518 (including interest).
 
 During the three months ended June 30, 2010, the Company extended an offer to substantially all of its note-holders to convert their outstanding notes, plus accrued interest, into common stock of the Company at a conversion price of $0.06 per share. As of June 30, 2010, note-holders with outstanding debt of $633,205 (including interest) have agreed to the conversion, which would result in the issuance of 10,553,405 shares of common stock. Such shares are classified as ‘shares to be issued’ in the accompanying condensed balance sheet. In connection with the conversion of such debt, the Company recognized a loss of $585,504.
 
 Note 12 – 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 June 30, 2010 and September 30, 2009, respectively.  The fair value was determined using the Black-Scholes option pricing model under the following assumptions:
  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
 In March, 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 – 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 of convertible notes (including interest) 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
  In March, 2010, the Company received shareholder approval to increase the authorized number of commons shares which had the effect of eliminating the derivative liability.
   11
   Note 14 – 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 nine months ended June 30, 2010, the accompanying Condensed Statements of Income reflect net income that is largely comprised of items that do not represent taxable income. For the nine months ended June 30, 2009, the provision for income taxes represent minimum franchise taxes.
 
 Note 15 – 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 June 30, 2010 and September 30, 2009, the Company had 164,079,129 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.
 
 During the nine months ended June 30, 2010, the Company issued 6,813,057 shares of common stock (valued at $1,114,712 based on closing market prices), for services and for the extension of due dates for debt described in Notes 8 through 10. The Company also issued 360,013 shares of common stock for conversion of debt in the amount of $54,518 (including interest) and agreed to issue 10,456,242 shares of common stock for the conversion of notes payable as described in Note 11, which is shown as ‘shares to be issued’ in the accompanying Condensed Balance Sheet as of June 30, 2010.
 
 During the nine months ended June 30, 2010, the Company issued 8,333,333 shares of common stock together with warrants to purchase 8,333,333 shares of common stock, for gross proceeds of $500,000 ($0.06 per share). The Company paid finders’ fees of $50,000 in connection with this investment. The warrants issued are exercisable at $0.17 per share and expire five years from the date of issuance.
 
 Stock Options
 
 A summary of the Company’s stock option activity:
 
 WeightedWeighted





AverageAverage


Aggregate


RemainingNumber


Exercise


Intrinsic


Contractualof Options


Price


Value


LifeOutstanding at October 1, 2009


19,301,336


$
0.18


$
287,356



3.02Granted


4,400,000



0.09Expired


-



-Forfeited


-



-Exercised


-



-Outstanding at June 30, 2010


23,701,336


$
0.16


$
58,000



2.73Exercisable at June 30, 2010


23,701,316


$
0.16


$
58,000



2.73
  12
 Options outstanding and exercisable as of June 30, 2010:
 
 Weighted



WeightedAverage



AverageRemaining



RemainingExercise

Options

Contractual

Options

ContractualPrice

Outstanding

Life

Exercisable
Life$0.06

2,900,000

4.63

2,900,000

4.63$0.15

15,867,790

2.10

15,867,790

2.47$0.25

4,933,526

2.46

4,933,526

2.4623,701,316

2.73

23,701,316

2.73
 
 During the nine months ended June 30, 2010, the Company granted a total of 4,400,000 options to certain officer and directors. The options vested immediately upon grant and have a term of five years. The weighted average grant-date fair value of these options was $384,369.   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 2.09 – 2.59%;
 ·
volatility of 211 – 219%;
 ·
dividend yield of 0%; and
 ·
expected term of 5 years.
 
 During the three months ended June 30, 2010, the Company amended the terms of 2,400,000 options granted to its Chief Executive Officer and Chief Financial Officer. Such options had an original exercise price of $0.15 per share, and were re-priced to $0.06 per share. The Company compared the fair value of the options immediately before and immediately after the amendment, and determined that the excess fair value of $2,116 should be recorded as compensation expense.
 
 Stock Warrants
 
 A summary of the Company’s warrant activity:
  WeightedAverage


AggregateNumber


Exercise


Intrinsicof Warrants


Price


ValueOutstanding at October 1, 2009


39,699,099


$
0.18


$
850,320Granted


10,600,000



0.17Expired


-



-Forfeited


-



-Exercised


-



-Outstanding as of June 30, 2010


50,299,099


$
0.20


$
-Exercisable as of June 30, 2010


50,299,099


$
0.20


$
-
 Warrants outstanding and exercisable as of June 30, 2010:
  WeightedAverageRemaining


Weighted AverageExercise


Warrants


Warrants


Contractual


Exercise PricePrice


Outstanding


Exercisable


Life


Outstanding


Exercisable$
0.10



11,850,000



11,850,000



1.14


$
0.10


$
0.10$
0.15



2,107,667



2,107,667



4.33


$
0.15


$
0.15$
0.17



8,333,333



8,333,333



4.88


$
0.17


$
0.17$
0.18



850,000



850,000



2.54


$
0.18


$
0.18$
0.25



21,029,312



21,029,312



2.63


$
0.25


$
0.25$
0.30



6,128,787



6,128,787



2.59


$
0.30


$
0.30
 During the nine months ended June 30, 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. As described above, the Company also issued warrants to purchase 8,333,333 shares of common stock at an exercise price of $0.17 per share in connection with equity financing.
 
 13
 Note 16 – 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 June 30, 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 $0 and $29,640 for the three months ended June 30, 2010 and 2009, respectively. For the nine months ended June 30, 2010 and 2009, rent expense under this operating lease amounted to $30,495 and $87,210, respectively.
 
 Note 17 – Going Concern
 
 The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. This basis of accounting contemplates the recovery of the Company’s assets and the satisfaction of its liabilities in the normal course of business. Through June 30, 2010, the Company has incurred cumulative losses of $26,194,782 including net income for the nine months ended June 30, 2010 of $2,695,756. 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 products, 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 has also made changes to its manufacturing capabilities and believes that it can effectively outsource most if not all of its engineering, design, production and service to contract manufacturers and other professional firms. 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 18 – 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 nine months ended June 30, 2010.
 
 During the nine months ended June 30, 2010, the Company issued 600,000 shares of common stock, valued at $60,000, to settle an outstanding accounts payable balance of $90,000. As a result, the Company recognized a gain of $30,000 on the settlement.
  14
 
 During the nine months ended June 30, 2010, the Company issued 360,013 shares of common stock for conversion of debt in the amount of $54,518 (including interest). In addition, the Company agreed to issue 10,553,405 shares of common stock for conversion of debt in the amount of $633,205 (including interest).
 
 In October, 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 19 – 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 20 – Subsequent Events
 
 Sale of Common Stock
 
 Subsequent to June 30, 2010 the Company entered into a financing with nine (9) investors for the purchase and sale of an aggregate of 6,833,331 units at a purchase price of $0.06 per unit for a total financing of $410,000 (the “Financing”).  The Financing closing took place on August 4, 2010, with the nine (9) investors for the purchase and sale of 6,833,331 units at a price of $0.06 per unit.  Each unit consisted of one (1) restricted share of common stock of the Company and a warrant to purchase the number of shares of Common Stock equal to the number of units purchased by the investor multiplied by fifty percent (50%), for a total of 3,416,664 shares available for purchase through the warrants. The warrants are valid for a period of 5 years from the respective closing date and are exercisable at a price of $0.17 per share.  The investors are accredited investors with no relationship to the Company other than as an investor in the Financing.
 
 The Company paid a commission related to the Financing consisting of (a) a cash payment of $42,500, and (b) a five-year warrant to purchase up to 708,333 shares of the Company’s common stock at an exercise price of $0.17 per share.
 
 The issuance of the restricted shares of the Company’s common stock to the nine (9) investors in the Financing, and the issuance of the warrants in connection therewith to the investors and the broker, were exempt from registration under the Securities Act of 1933, as amended, pursuant to Section 4(2) promulgated thereunder, as a transaction by an issuer not involving a public offering.
  MWTS Purchase Agreement
 
 Subsequent to June 30, 2010 the Company entered into a Purchase Agreement (“System Purchase Agreement”) with Wenning Poultry, Inc. (“Wenning”) for the sale and installation of a Sionix Mobile Water Treatment System (the “MWTS”).  The Company previously signed a non-binding letter of intent on May 22, 2010 with Wenning which contemplated, among other things, sale of an MWTS to Wenning. The total purchase price for the sale and installation of the MWTS is $1,453,500, payable in four installments based on a schedule, the last of which is due upon completion of installation and acceptance of the product.  The first installment of $300,000 has been received by the Company.
 
 Settlement of an Obligation
 
 Subsequent to June 30, 2010, Ascendiant Capital Group, LLC (the “Claim Holder”) sued the Company in Orange County Superior Court (the “Litigation”) for failure to repay approximately $520,000 in debt owed by the Company to the Claim Holder. On August 9, 2010, the Litigation was moved to Los Angeles County Superior Court.  This debt was incurred by the Company in the ordinary course of its business and was subsequently acquired from the original creditors by the Claim Holder.  On August 18, 2010, the Company and the Claim Holder entered into a Settlement Agreement pursuant to which the Company agreed to issue 4,000,000 shares of its common stock to the Claim Holder in exchange for extinguishment of the claims against the Company and dismissal of the Litigation. On August 20, 2010, the presiding judge in the Litigation entered an Order Approving Settlement of Claim (the “Order”), pursuant to which the Settlement Agreement became binding on the Company and the Claim Holder, and, on August 23, 2010, the Settlement Shares were issued to the Claim Holder.
 
 The terms and conditions of the issuance of the Settlement Shares were approved, after a hearing upon the fairness of such terms and conditions at which the Claim Holder had the right to appear.  The issuance of the Settlement Shares was exempt from the registration requirements of the Securities Act of 1933 pursuant to Section 3(a)(10) of such Act.
  15
 
 PART I, ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
 
 The information in this quarterly report on Form 10-Q contains forward-looking statements.  These forward-looking statements involve risks and uncertainties, including statements regarding our capital needs, business strategy and expectations.  Any statements contained in this report that are not statements of historical facts may be deemed to be forward-looking statements.  In some cases, you can identify forward-looking statements by terminology such as may, 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-based water treatment system to potential domestic and international customers. We believe that the operation of the units at Villa Park Dam ("VPD") and Arkansas, and our newest customer once completed and installed, 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 have contracted 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 June 30, 2010 Compared to Three Months Ended June 30, 2009
 
 Revenues for the three months ended June 30, 2010 and 2009 were $0 with no new sales during either of these periods.
 
 Our total operating expenses were $742,320 during the three months ended June 30, 2010, an increase of $330,240 or 80%, as compared to $412,080 for the three months ended June 30, 2009.  General and administrative expenses were $580,095 during the three months ended June 30, 2010, an increase of $400,876 or 224%, as compared to $179,219 for the three months ended June 30, 2009.  The increase in general and administrative expenses was due to increased wage accruals and stock-related compensation related to new management personnel. Sales and marketing expenses of $80,255 for the three months ended June 30, 2010 (compared to zero for the prior period) are related to payment to certain vendors for sales support, as well as travel and related expenses. Research and development expenses were $74,662 during the three months ended June 30, 2010, a decrease of $135,899 or 64.5%, as compared to $210,561 for the three months ended June 30, 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 $290,910; this is an increase of $227,487 from the prior period when we reported interest costs of $63,423. Our normal operations were severely limited by the lack of available cash.
  16
 
 Nine Months Ended June 30, 2010 Compared to Nine Months Ended June 30, 2009
 
 Revenues for the nine months ended June 30, 2010 and 2009 were $1,620,000 and $0, respectively.  As of June 30, 2010, we completed the delivery of the filtration systems and recognized the contract into revenue during the nine months ended June 30, 2010. As of June 30, 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.
 
 Our total operating expenses were $1,624,882 during the nine months ended June 30, 2010, a decrease of $124,424 or 7.0%, as compared to $1,749,306 for the nine months ended June 30, 2009.  General and administrative expenses were $1,273,969 during the nine months ended June 30, 2010, an increase of $267,034 or 26.5%, as compared to $1,006,935 for the nine months ended June 30, 2009.  The increase in general and administrative expenses was due to increased wage accruals and stock-related compensation related to new management personnel, offset by the reduction in rent costs associated with the closure of the Anaheim facility. Sales and marketing expenses of $138,101 represent no change from the prior period costs of $137,177, and  are related to payment to certain vendors for sales support, as well as travel and related expenses. Research and development expenses were $192,928 during the nine months ended June 30, 2010, a decrease of $374,862 or 66.0%, as compared to $567,790 for the nine months ended June 30, 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 $3,046 and $22,982 and at June 30, 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 has received an order for a new unit, and expects to receive additional orders for water treatment systems. 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 order it received subsequent to June 30, 2010, no additional orders for the sale of water treatment systems currently exist.  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 June 30, 2010, approximately $3,210,269 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 nine months ended June 30, 2010, the Company used $979,936 of cash in operating activities. Non-cash adjustments included $18,284 for depreciation, $461,203 for the amortization of beneficial conversion feature and debt discounts, $1,038,188 for share-based payments to consultants and employees, $11,217 for the impairment of property and equipment, $578,625 loss on settlement of debt, and $197,455 for loss on the termination of a lease. Cash provided by operating activities included $875,404 in inventory, $25,950 in deposits, and $380,275 in accrued expenses. Cash used in operating activities included $1,620,000 in customer deposits, $69,802 in other current assets, $55,094 in accounts payable, $4,359,957 for warrant and option liability, and $959,985 in beneficial conversion liability.
 
 During the nine months ended June 30, 2009, the Company used $1,451,460 of cash in operating activities.  Non-cash adjustments included $37,404 for depreciation, $2,890 for the amortization of beneficial conversion feature and debt discounts, and $426,088 for share-based payments to consultants and employees. Cash provided by operating activities included $1,319,838 for warrant and option liability, $2,332,055 for beneficial conversion liability, $17,730 in other current assets, $197,604 in accounts payable, $451,603 in accrued expenses, and $360,000 in customer deposits. Cash used in operating activities included $833,594 for inventory, $131,347 for deposits, and $19,800 for gain on settlement of debt.
 
 Investing Activities
 
 During the nine months ended June 30, 2010, the Company acquired property and equipment totaling $0, as compared to $5,546 during the nine months ended June 30, 2009.
 
 Financing Activities
 
 Financing activities provided $510,000 to the Company during the nine months ended June 30, 2010 and related to proceeds received from convertible debentures and $450,000 net proceeds from the sale of common stock.  During the nine months ended June 30, 2009, cash of $5,000 was provided by financing activities from the sale of common stock and $240,000 was received from short-term promissory notes.
 
 As of June 30, 2010, the Company had an accumulated deficit of $26,194,782. 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.
  17
 
 Material Trends, Events or Uncertainties
 
 The Company is not certain how the current economic downturn may affect its business.  Because of the global recession, government agencies and private industry may not have the funds to purchase its water treatment systems.  It may also be more difficult for the Company to raise capital in the current economic environment. Other than as discussed herein, the Company does not know of any material trends, events or uncertainties that may impact its operations in the future.
 
 Going Concern
 
 The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. This basis of accounting contemplates the recovery of the Company’s assets and the satisfaction of its liabilities in the normal course of business. Through June 30, 2010, the Company has incurred cumulative losses of $26,194,782 including net income for the nine months ended June 30, 2010 of $2,695,756. 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 or to convert these notes into common stock. 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.
  PART I, ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
 
 As a smaller reporting company, we are not required to provide this disclosure.
 
 PART I, ITEM 4.  CONTROLS AND PROCEDURES.
 
 (a) Disclosure Controls and Procedures
 
 Regulations under the Securities Exchange Act of 1934 require public companies to maintain “disclosure controls and procedures,” which are defined to mean a company’s controls and other procedures that are designed to ensure that information required to be disclosed in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms and is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.
  18
 
 We conducted an evaluation, with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the period covered by this report.  Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that as of June 30, 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 deficiency, (within the meaning of the Public Company Accounting Oversight Board (PCAOB) Auditing Standard No. 5) or combination of deficiencies,in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis.  Management has identified the following three material weaknesses in our disclosure controls and procedures:
 
 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 June 30, 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.
  19
 
 PART II, ITEM 1.  LEGAL PROCEEDINGS.
 
 Subsequent to June 30, 2010, Ascendiant Capital Group, LLC (the “Claim Holder”) sued the Company in Orange County Superior Court (the “Litigation”) for failure to repay approximately $520,000 in debt owed by the Company to the Claim Holder. On August 9, 2010, the Litigation was moved to Los Angeles County Superior Court.  This debt was incurred by the Company in the ordinary course of its business and was subsequently acquired from the original creditors by the Claim Holder.  On August 18, 2010, the Company and the Claim Holder entered into a Settlement Agreement pursuant to which the Company agreed to issue 4,000,000 shares of its common stock to the Claim Holder in exchange for extinguishment of the claims against the Company and dismissal of the Litigation. On August 20, 2010, the presiding judge in the Litigation entered an Order Approving Settlement of Claim (the “Order”), pursuant to which the Settlement Agreement became binding on the Company and the Claim Holder, and, on August 23, 2010, the Settlement Shares were issued to the Claim Holder.
 
 The terms and conditions of the issuance of the Settlement Shares were approved, after a hearing upon the fairness of such terms and conditions at which the Claim Holder had the right to appear.  The issuance of the Settlement Shares was exempt from the registration requirements of the Securities Act of 1933 pursuant to Section 3(a)(10) of such Act.
 
 PART II, ITEM 1A.  RISK FACTORS.
 
 As a smaller reporting company we are not required to provide this information.
  PART II, ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
 
 During the nine months ended June 30, 2010, we:
 
 ·
Issued 798,680 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.
 
 ·
Issued 360,013 shares of common stock for conversion of debt in the amount of $54,518 (including interest). 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.
 
 ·
Issued 8,333,333 shares of common stock together with warrants to purchase 8,333,333 shares of common stock, for gross proceeds of $500,000 ($0.06 per share). 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.
  PART II, ITEM 3. DEFAULTS UPON SENIOR SECURITIES
 
 None.
  20
  PART II, ITEM 4.  RESERVED.
  PART II, 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.
 
 PART II, 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.
 
 21
 
  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.
 
  SIONIX CORPORATIONDate: August 23, 2010
By:
/s/ David R. WellsDavid R. WellsPresident, Chief Financial Officer, Secretary/Treasurer, and Principal Financial and Accounting Officer