##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended December 31, 2008
 or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission file number: 001-32469
 XENONICS HOLDINGS, INC.
  Nevada
(State or other jurisdiction of incorporation or organization)
    
    84-1433854
(I.R.S. Employer Identification No.)3186 Lionshead Avenue 
Carlsbad, California
(Address of principal executive offices)
    
    92010
(Zip code)
 (760) 477-8900
 2236 Rutherford Road, Suite 123
Carlsbad, California 92008
 þ o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer o
    
    Smaller Reporting Company þ
 Yes o No þ




---



##### 



TABLE OF CONTENTS
 PART I. FINANCIAL INFORMATIONItem 1. Financial StatementsCondensed Consolidated Balance Sheets as of December 31, 2008 (unaudited) and September 30, 2008
    
    
    1Condensed Consolidated Statements of Operations for the Three Months ended December 31, 2008 and 2007 (unaudited)
    
    
    2Condensed Consolidated Statements of Cash Flows for the Three Months ended December 31, 2008 and 2007 (unaudited)
    
    
    3Notes to Unaudited Condensed Consolidated Financial Statements
    
    
    4Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    13Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    15Item 4T. Controls and Procedures
    
    
    15PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    16Item 5. Other Information
    
    
    16Item 6. Exhibits
    
    
    16SIGNATURE PAGE
    
    
    17Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2
   i




---



##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 ITEM 1. Financial Statements
 
  December 31,
    
    
    September 30,Rounded in thousands, except par value
    
    2008
    
    
    2008(unaudited)AssetsCurrent Assets:Cash
    
    $
    738,000
    
    
    $
    325,000Accounts receivable, net
    
    
    98,000
    
    
    
    954,000Inventories
    
    
    3,044,000
    
    
    
    1,745,000Other current assets
    
    
    424,000
    
    
    
    375,000Total Current Assets
    
    
    4,304,000
    
    
    
    3,399,000Investments in marketable securities
    
    
    1,000,000
    
    
    
    1,000,000Equipment, furniture and fixtures at cost, less accumulated
depreciation of $175,000 and $162,000
    
    
    148,000
    
    
    
    161,000Goodwill
    
    
    375,000
    
    
    
    Total Assets
    
    $
    5,827,000
    
    
    $
    4,560,000Liabilities and Shareholders EquityCurrent Liabilities:Accounts payable
    
    $
    1,635,000
    
    
    $
    539,000Accrued expenses
    
    
    269,000
    
    
    
    94,000Accrued payroll and related taxes
    
    
    237,000
    
    
    
    173,000Total Current Liabilities
    
    
    2,141,000
    
    
    
    806,000Long-term LiabilitiesBank note payable
    
    
    1,000,000
    
    
    
    Commitments and contingencies (Note 11)Shareholders Equity:Preferred shares, $0.001 par value, 5,000,000 shares
authorized, 0 shares issued and outstanding
    
    
    
    
    
    
    Common shares, $0.001 par value, 50,000,000 shares
authorized as of December 31, 2008 and September
30, 2008; 20,572,000 shares issued as of December 31, 2008
and 20,296,000 as of September 30, 2008; 20,459,000 shares
outstanding as of December 31, 2008 and 20,184,000 as of
September 30, 2008
    
    
    20,000
    
    
    
    20,000Additional paid-in capital
    
    
    23,972,000
    
    
    
    23,744,000Accumulated deficit
    
    
    (21,000,000
    )
    
    
    (19,704,000
    )2,992,000
    
    
    
    4,060,000Less treasury stock, at cost, 113,000 shares as of
December 31, 2008 and September 30, 2008
    
    
    (306,000
    )
    
    
    (306,000
    )Total Shareholders Equity
    
    
    2,686,000
    
    
    
    3,754,000Total Liabilities and Shareholders Equity
    
    $
    5,827,000
    
    
    $
    4,560,000
 See
notes to unaudited condensed consolidated financial statements.
  1




---



##### Table of Contents



CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 Three months endedDecember 31,Rounded in thousands, except per share amounts
    
    2008
    
    
    2007(unaudited)Revenues
    
    $
    354,000
    
    
    $
    3,561,000Cost of goods sold
    
    
    194,000
    
    
    
    1,806,000Gross profit
    
    
    160,000
    
    
    
    1,755,000Selling, general and administrative
    
    
    1,209,000
    
    
    
    1,317,000Research and development
    
    
    188,000
    
    
    
    139,000Income (loss) from operations
    
    
    (1,237,000
    )
    
    
    299,000Other income/(expense):Loss on derivative revaluation
    
    
    (63,000
    )
    
    
    Interest income
    
    
    8,000
    
    
    
    13,000Interest expense
    
    
    (2,000
    )
    
    
    Income (loss) before provision for income taxes
    
    
    (1,294,000
    )
    
    
    312,000Income tax provision
    
    
    2,000
    
    
    
    Net income (loss)
    
    $
    (1,296,000
    )
    
    $
    312,000Net income (loss) per share:Basic
    
    $
    (0.06
    )
    
    $
    0.02Diluted
    
    $
    (0.06
    )
    
    $
    0.01Weighted average shares outstanding:Basic
    
    
    20,247,000
    
    
    
    19,839,000Diluted
    
    
    20,247,000
    
    
    
    20,997,000
 See notes to unaudited condensed consolidated financial statements.
  2




---



##### Table of Contents



CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 Three months endedDecember 31,Rounded in thousands
    
    2008
    
    
    2007(unaudited)Cash flows from operating activities:Net income (loss)
    
    $
    (1,296,000
    )
    
    $
    312,000Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:Depreciation and amortization
    
    
    13,000
    
    
    
    13,000Provision for bad debts
    
    
    2,000
    
    
    
    (21,000
    )Non-cash compensation to employees and directors
    
    
    13,000
    
    
    
    84,000Non-cash compensation to consultants
    
    
    
    
    
    
    2,000Loss on derivative revaluation
    
    
    63,000
    
    
    
    Changes in operating assets and liabilities:Accounts receivable
    
    
    854,000
    
    
    
    (3,000,000
    )Inventories, net
    
    
    (1,299,000
    )
    
    
    711,000Other current assets
    
    
    (49,000
    )
    
    
    (44,000
    )Accounts payable
    
    
    1,097,000
    
    
    
    (120,000
    )Accrued expenses
    
    
    (49,000
    )
    
    
    (18,000
    )Accrued payroll and related taxes
    
    
    64,000
    
    
    
    27,000Net cash (used in) operating activities
    
    
    (587,000
    )
    
    
    (2,054,000
    )Cash flows from financing activities:Proceeds from bank note payable
    
    
    1,000,000
    
    
    
    Net cash provided by financing activities
    
    
    1,000,000
    
    
    
    Net increase (decrease) in cash
    
    
    413,000
    
    
    
    (2,054,000
    )Cash, beginning of period
    
    
    325,000
    
    
    
    2,388,000Cash, end of period
    
    $
    738,000
    
    
    $
    334,000Supplemental cash flow information:Cash paid during the period for income taxes
    
    $
    
    
    
    $
    Cash paid during the period for interest
    
    $
    2,000
    
    
    $
    Supplemental schedule of non-cash financing activities:The Company repurchased 125,000 shares of the
non-controlling interest in a subsidiary through the issuance of 275,000
shares of common stock worth $214,000 and recording an accrual of $161,000
(Note 10)
    
    $
    375,000
    
    
    $
    
 See notes to unaudited condensed consolidated financial statements.
  3




---



##### Table of Contents



NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (rounded in thousands)
 1. BASIS OF PRESENTATION
   2. RECENTLY ADOPTED AND ISSUED ACCOUNTING PRONOUNCEMENTS
 Recently Adopted:
 Fair Value Measurements
  The Fair Value Option for Financial Assets and
Financial Assets and Liabilities  Including an Amendment of FASB Statement No. 115 Accounting for Certain Investments in Debt and Equity Securities,
  4




---



##### Table of Contents



Recently Issued:
      5




---



##### Table of Contents



3. ACCOUNTING POLICY FOR INVESTMENTS IN MARKETABLE SECURITIES
  Investments in marketable securities Investments in marketable securities
   6




---



##### Table of Contents



4. EARNINGS (LOSS) PER SHARE
   Three Months EndedDecember 31, 2007(unaudited)Numerator: Net income
    
    $
    312,000Denominator:Denominator for basic earnings per share  weighted average shares
    
    
    19,839,000Effect of dilutive securities
Employee stock options
    
    
    1,158,000Denominator for diluted earnings per share  adjusted weighted
average shares and assumed conversion
    
    
    20,997,000Basic earnings per share
    
    $
    0.02Diluted earnings per share
    
    $
    0.01
   5. INVENTORIES
 December 31,
    
    
    September 30,Inventories were comprised of:
    
    2008
    
    
    2008(unaudited)Raw materials
    
    $
    1,703,000
    
    
    $
    1,371,000Work in process
    
    
    258,000
    
    
    
    149,000Finished goods
    
    
    1,083,000
    
    
    
    225,000$
    3,044,000
    
    
    $
    1,745,000
  7




---



##### Table of Contents



6. USE OF ESTIMATES
  7. STOCK BASED COMPENSATION
 Stock Options Accounting for Stock-Based Compensation,
    For the Three MonthsEnded December 31,2008
    
    
    2007Risk-free interest rate
    
    
    2.37
    %
    
    
    4.16
    %Expected life (in years)
    
    
    4
    
    
    
    4Dividend yield
    
    
    0.0
    %
    
    
    0.0
    %Expected volatility
    
    
    101
    %
    
    
    105
    %Weighted-average volatility
    
    
    101
    %
    
    
    105
    %
   8




---



##### Table of Contents



WeightedWeighted
    
    
    AverageStock
    
    
    Average
    
    
    Contractual
    
    
    AggregateOptions
    
    
    Exercise Price
    
    
    Term (Years)
    
    
    Intrinsic Value*Outstanding at October 1, 2008
    
    
    1,443,000
    
    
    $
    2.77
    
    
    
    2.74Granted
    
    
    450,000
    
    
    $
    0.73
    
    
    
    4.42Exercised
    
    
    
    
    
    
    
    
    
    
    Forfeited or Expired
    
    
    (50,000
    )
    
    $
    0.88Outstanding at December 31,
2008
    
    
    1,843,000
    
    
    $
    2.33
    
    
    
    3.00
    
    
    $
    -0-Exercisable at December 31,
2008
    
    
    1,360,000
    
    
    $
    2.87
    
    
    
    2.37
    
    
    $
    -0-
    *
 *
    
    The aggregate intrinsic value of a stock option is the amount by which the market value of the
underlying stock exceeds the exercise price of the option. The market value of our stock was $0.55
at December 31, 2008.  Weighted AverageGrant-DateStock Options
    
    
    Fair ValueNon-vested at October 1, 2008
    
    
    45,000
    
    
    $
    1.27Granted
    
    
    450,000
    
    
    $
    0.51Forfeited or Expired
    
    
    
    
    
    
    Vested
    
    
    (12,000
    )
    
    $
    1.20Non-vested at December 31, 2008 31,202007
    
    
    483,000
    
    
    $
    0.56
    Stock warrants 
    9




---



##### Table of Contents



8. INCOME TAXES
  Accounting for Income Taxes,
 9. FAIR VALUE OF MEASUREMENTS
        10




---



##### Table of Contents



December 31, 2008 (unaudited)Portion ofCarrying ValueMeasured at FairItems measured at fair value on a recurring basis
    
    Value
    
    
    Level 1
    
    
    Level 3Cash equivalents: Money Market funds
    
    $
    738,000
    
    
    $
    738,000
    
    
    $
    Long-term investment: Auction Rate Securities
    
    
    1,000,000
    
    
    
    
    
    
    
    1,000,000$
    1,738,000
    
    
    $
    738,000
    
    
    $
    1,000,000
 10. CONTINGENCIES AND OTHER MATTERS
 Litigation
  11. GOODWILL
   11




---



##### Table of Contents



12. DERIVATIVE LIABILITY
 Accounting for Derivative Instruments and Hedging
Activities
 13. SUBSEQUENT EVENTS
        12




---



##### Table of Contents



ITEM 2.

    Managements Discussion and Analysis of Financial Condition and Results of Operations
(rounded in thousands)
  Forward-Looking Statements
  Results of Operations
 Three-months ended December 31, 2008 compared to the three-months ended December 31, 2007
  Revenues:
 Cost of Goods and Gross Profit:
  Selling, General and Administrative:
 Research & Development:
  13




---



##### Table of Contents



Other Income (Expense):
 Net Income (Loss):
 Liquidity and Capital Resources
    14




---



##### Table of Contents



ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
  
 ITEM 4T. Controls and Procedures
    15




---



##### Table of Contents



PART II. OTHER INFORMATION
 
 ITEM 1. Legal Proceedings
  ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 ITEM 5. Other Information
  
 ITEM 6. Exhibits
 ExhibitNumber
    
    Description31.1
    
    
    Certification of the Chairman of the Executive Committee and
Principal Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act31.2
    
    
    Certification of the Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act32.1
    
    
    Certification pursuant to Section 906 of the Sarbanes-Oxley Act32.2
    
    
    Certification pursuant to Section 906 of the Sarbanes-Oxley Act
  16




---



##### Table of Contents



SIGNATURES
  XENONICS HOLDINGS, INC.Date: February 13, 2009
    By:
    /s/ Alan P. MagermanAlan P. MagermanChairman of the Executive Committee
Principal Executive OfficerDate: February 13, 2009
    By:
    /s/ Richard S. KayRichard S. KayChief Financial Officer  17




---



##### Table of Contents



EXHIBIT INDEX
 ExhibitNumber
    
    Description31.1
    
    
    Certification of the Chairman of the Executive Committee and
Principal Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act31.2
    
    
    Certification of the Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act32.1
    
    
    Certification pursuant to Section 906 of the Sarbanes-Oxley Act32.2
    
    
    Certification pursuant to Section 906 of the Sarbanes-Oxley Act
  18