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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, 2009
 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
    
    84-1433854(State or other jurisdiction of incorporation or organization)
    
    (I.R.S. Employer Identification No.)3186 Lionshead AvenueCarlsbad, California
    
    92010(Address of principal executive offices)
    
    (Zip code)
 (760) 477-8900
 (Former name, former address and former fiscal year, if changed since last report)
 Yes
þ No
o
 Yes o No o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer o
    
    Smaller reporting company þ
 Yes o No þ




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TABLE OF CONTENTS
 PART I. FINANCIAL INFORMATIONItem 1. Financial StatementsCondensed Consolidated Balance Sheets as of December 31, 2009 (unaudited)
and September 30, 2009
    
    
    1Condensed Consolidated Statements of Operations for the Three Months
ended December 31, 2009 and 2008 (unaudited)
    
    
    2Condensed Consolidated Statements of Cash Flows for the Three Months
ended December 31, 2009 and 2008 (unaudited)
    
    
    3Notes to Unaudited Condensed Consolidated Financial Statements
    
    
    4Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    12Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    14Item 4T. Controls and Procedures
    
    
    14PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    15Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    15Item 5. Other Information
    
    
    15Item 6. Exhibits
    
    
    15SIGNATURE PAGE
    
    
    16Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2
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PART I. FINANCIAL INFORMATION
 
 ITEM 1. Financial Statements
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 December 31,
    
    
    September 30,Rounded in thousands, except par value
    
    2009
    
    
    2009(unaudited)AssetsCurrent Assets:Cash
    
    $
    666,000
    
    
    $
    126,000Accounts receivable, net
    
    
    615,000
    
    
    
    1,634,000Inventories
    
    
    2,278,000
    
    
    
    2,069,000Other current assets
    
    
    163,000
    
    
    
    119,000Total Current Assets
    
    
    3,722,000
    
    
    
    3,948,000Equipment, furniture and fixtures at cost, less accumulated
depreciation of $161,000 and $148,000
    
    
    117,000
    
    
    
    130,000Goodwill
    
    
    375,000
    
    
    
    375,000Other assets
    
    
    142,000
    
    
    
    Total Assets
    
    $
    4,356,000
    
    
    $
    4,453,000Liabilities and Shareholders EquityCurrent Liabilities:Accounts payable
    
    $
    796,000
    
    
    $
    1,000,000Accrued expenses
    
    
    96,000
    
    
    
    157,000Accrued payroll and related taxes
    
    
    115,000
    
    
    
    156,000Accrued derivative liability
    
    
    161,000
    
    
    
    199,000Total Current Liabilities
    
    
    1,168,000
    
    
    
    1,512,000Notes payable
    
    
    313,000
    
    
    
    292,000Total Liabilities
    
    
    1,481,000
    
    
    
    1,804,000Commitments and contingencies (Note 9)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, 2009 and September 30, 2009; 20,997,000 shares issued as of December 31, 2009 and 20,571,000 as of September 30, 2009; 20,884,000 shares outstanding as of December 31, 2009 and 20,459,000 as of September 30, 2009
    
    
    21,000
    
    
    
    20,000Additional paid-in capital
    
    
    25,108,000
    
    
    
    24,478,000Accumulated deficit
    
    
    (21,948,000
    )
    
    
    (21,543,000
    )3,181,000
    
    
    
    2,955,000Less treasury stock, at cost, 113,000 shares as of December 31, 2009 and September 30, 2009
    
    
    (306,000
    )
    
    
    (306,000
    )Total Shareholders Equity
    
    
    2,875,000
    
    
    
    2,649,000Total Liabilities and Shareholders Equity
    
    $
    4,356,000
    
    
    $
    4,453,000
 See notes to unaudited condensed consolidated financial statements .
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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 Three months endedDecember 31,Rounded in thousands, except per share amounts
    
    2009
    
    
    2008(unaudited)Revenues
    
    $
    1,255,000
    
    
    $
    354,000Cost of goods sold
    
    
    671,000
    
    
    
    194,000Gross profit
    
    
    584,000
    
    
    
    160,000Selling, general and administrative
    
    
    794,000
    
    
    
    1,209,000Research and development
    
    
    195,000
    
    
    
    188,000Income (loss) from operations
    
    
    (405,000
    )
    
    
    (1,237,000
    )Other income/(expense):Gain (loss) on derivative revaluation
    
    
    38,000
    
    
    
    (63,000
    )Interest income
    
    
    2,000
    
    
    
    8,000Interest (expense)
    
    
    (38,000
    )
    
    
    (2,000
    )Income (loss) before provision for income taxes
    
    
    (403,000
    )
    
    
    (1,294,000
    )Income tax provision
    
    
    2,000
    
    
    
    2,000Net income (loss)
    
    $
    (405,000
    )
    
    $
    (1,296,000
    )Net income (loss) per share:Basic and fully-diluted
    
    $
    (0.02
    )
    
    $
    (0.06
    )Weighted average shares outstanding:Basic and fully-diluted
    
    
    20,816,000
    
    
    
    20,247,000
 See notes to unaudited condensed consolidated financial statements.
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 Three months endedDecember 31,Rounded in thousands
    
    2009
    
    
    2008(unaudited)Cash flows from operating activities:Net income (loss)
    
    $
    (405,000
    )
    
    $
    (1,296,000
    )Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:Depreciation
    
    
    13,000
    
    
    
    13,000Provision for bad debts
    
    
    (5,000
    )
    
    
    2,000Non-cash compensation to employees and directors
    
    
    32,000
    
    
    
    13,000Non-cash compensation for warrants issued
    
    
    72,000
    
    
    
    Non-cash compensation to consultants
    
    
    18,000
    
    
    
    (Gain) loss on derivative revaluation
    
    
    (38,000
    )
    
    
    63,000Amortization of warrants for notes payable
    
    
    21,000
    
    
    
    Changes in operating assets and liabilities:Accounts receivable
    
    
    1,023,000
    
    
    
    854,000Inventories
    
    
    (209,000
    )
    
    
    (1,299,000
    )Other current assets
    
    
    36,000
    
    
    
    (49,000
    )Accounts payable
    
    
    (204,000
    )
    
    
    1,097,000Accrued expenses
    
    
    (61,000
    )
    
    
    (49,000
    )Accrued payroll and related taxes
    
    
    (41,000
    )
    
    
    64,000Net cash provided by (used in) operating activities
    
    
    252,000
    
    
    
    (587,000
    )Cash flows from financing activities:Proceeds from bank note payable
    
    
    
    
    
    
    1,000,000Proceeds from sale of common stock
    
    
    288,000
    
    
    
    Net cash provided by financing activities
    
    
    288,000
    
    
    
    1,000,000Net increase (decrease) in cash
    
    
    540,000
    
    
    
    413,000Cash, beginning of period
    
    
    126,000
    
    
    
    325,000Cash, end of period
    
    $
    666,000
    
    
    $
    738,000Supplemental cash flow information:Cash paid during the period for income taxes
    
    $
    
    
    
    $
    Cash paid during the period for interest
    
    $
    17,000
    
    
    $
    2,000Supplemental 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 initial accrual of $161,000 (Note 9)
    
    $
    
    
    
    $
    375,000The Company issued 300,000 shares of common stock for a three-year financial advisory service agreement at $0.80 per share
    
    $
    240,000
    
    
    $
    
 See notes to unaudited condensed consolidated financial statements.
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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Rounded in thousands)
 1. BASIS OF PRESENTATION
   2. RECENTLY ADOPTED AND ISSUED ACCOUNTING PRONOUNCEMENTS
 Recently Adopted:
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Consolidation (Topic 810): Accounting and Reporting for Decreases in
Ownership of a Subsidiary  a Scope Clarification
  Fair Value Measurements and
Disclosures (Topic 820)Measuring Liabilities at Fair Value
 Recently Issued:
 Transfers and Servicing
(Topic 860): Accounting for Transfers of Financial Assets.
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Consolidation (Topic 810): Improvements to
Financial Reporting by Enterprises Involved with Variable Interest Entities.
 Revenue Recognition (Topic 605):
Multiple-Deliverable Revenue Arrangementsa consensus of the FASB Emerging Issues Task Force
 3. EARNINGS (LOSS) PER SHARE
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4. INVENTORIES
 December 31,
    
    
    September 30,Inventories were comprised of:
    
    2009
    
    
    2009(unaudited)Raw materials
    
    $
    1,457,000
    
    
    $
    1,338,000Work in process
    
    
    169,000
    
    
    
    218,000Finished goods
    
    
    652,000
    
    
    
    513,000$
    2,278,000
    
    
    $
    2,069,000
 5. USE OF ESTIMATES
  6. STOCK BASED COMPENSATION
 Stock Options
    7




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For the Three MonthsEnded December 31,2009
    
    
    2008Risk-free interest rate
    
    
    1.76
    %
    
    
    2.37
    %Expected life (in years)
    
    
    4
    
    
    
    4Dividend yield
    
    
    0.0
    %
    
    
    0.0
    %Expected volatility
    
    
    103
    %
    
    
    101
    %Weighted-average volatility
    
    
    103
    %
    
    
    101
    %
   WeightedWeighted
    
    
    AverageStock
    
    
    Average
    
    
    Contractual
    
    
    AggregateOptions
    
    
    Exercise Price
    
    
    Term (Years)
    
    
    Intrinsic Value *Outstanding at October 1, 2009
    
    
    2,233,000
    
    
    $
    1.46
    
    
    
    3.57Granted
    
    
    45,000
    
    
    $
    0.80
    
    
    
    4.77Exercised
    
    
    
    
    
    
    Forfeited, Expired or Cancelled
    
    
    (154,000
    )
    
    $
    3.75Outstanding at December 31, 2009
    
    
    2,124,000
    
    
    $
    1.16
    
    
    
    3.60
    
    
    $
    571,000Exercisable at December 31, 2009
    
    
    1,224,000
    
    
    $
    1.50
    
    
    
    3.14
    
    
    $
    256,000
    *
 
 *
    
    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
$1.04 at December 31, 2009.  Weighted AverageGrant-DateStock Options
    
    
    Fair ValueNon-vested at October 1, 2009
    
    
    900,000
    
    
    $
    0.45Granted
    
    
    45,000
    
    
    $
    0.57Forfeited or Expired
    
    
    
    
    
    
    Vested
    
    
    (45,000
    )
    
    $
    ( 0.57
    )Non-vested at December 31, 2009
    
    
    900,000
    
    
    $
    0.45
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Stock warrants 
    Common stock 
   9




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7. INCOME TAXES
   8. FAIR VALUE OF MEASUREMENTS
  9. COMMITMENTS AND CONTINGENCIES
 Litigation
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10. GOODWILL
  11. DERIVATIVE LIABILITY
  12. SUBSEQUENT EVENTS
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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, 2009 compared to the three-months ended December 31, 2008
  Revenues:
 Cost of Goods and Gross Profit:
  Selling, General and Administrative:
  12




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Research & Development:
 Other Income (Expense):
 Net Income (Loss):
 Liquidity and Capital Resources
     13




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ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
  
 ITEM 4T. Controls and Procedures
    14




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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 Board and Chief 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
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SIGNATURES
  XENONICS HOLDINGS, INC.Date:  February 16, 2010
    By:
    /s/ Alan P. MagermanAlan P. MagermanChairman of the Board
Chief Executive OfficerDate:  February 16, 2010
    By:
    /s/ Richard S. KayRichard S. KayChief Financial Officer  16