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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
   FORM 10-QSB   þ
    
    QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 2005 o
    
    TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to Commission file number: 0-50775 XENONICS HOLDINGS, INC.  
 Nevada
(State or other jurisdiction of
incorporation or organization)
    
    84-1433854
(I.R.S. Employer
Identification Number)2236 Rutherford Road, Suite 123
Carlsbad, California
(Address of principal executive offices)
    
    92008-7297
(Zip Code)
 Issuers telephone number: (760) 438-4004 Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the
Exchange Act during the past 12 months (or for such shorter period that the issuer was required to
file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ   No o As of May 10, 2005, the registrant had outstanding 15,211,878 shares of its $.001 par value Common
Stock. Transitional Small Business Disclosure Format: Yes o No þ




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TABLE OF CONTENTS PART I. FINANCIAL INFORMATIONItem 1. Financial StatementsCondensed Consolidated Balance Sheets as of March 31, 2005 (unaudited) and September 30, 2004
    
    
    1Condensed Consolidated Statements of Operations for the Three and Six Months ended March 31, 2005 and 2004 (unaudited)
    
    
    2Condensed Consolidated Statements of Cash Flows for the Six Months ended March 31, 2005 and 2004 (unaudited)
    
    
    3Notes to Condensed Consolidated Financial Statements (unaudited)
    
    
    4Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    9Item 3. Controls and Procedures
    
    
    12PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    14Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    14Item 5. Other Information
    
    
    15Item 6. Exhibits
    
    
    15SIGNATURE PAGE
    
    
    16EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1
  i




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PART I. FINANCIAL INFORMATION 
 ITEM 1. Financial Statements 
 CONDENSED CONSOLIDATED BALANCE SHEETS March 31,
    
    
    September 30,2005
    
    
    2004$ in thousands, except share amounts
    
    (unaudited)AssetsCurrent assets:Cash
    
    $
    1,688
    
    
    $
    3,269Accounts receivable, net of allowance for doubtful accounts of $0
    
    
    6
    
    
    
    253Inventories, net
    
    
    4,048
    
    
    
    922Other current assets
    
    
    143
    
    
    
    189Total Current Assets
    
    
    5,885
    
    
    
    4,633Equipment, furniture and fixtures at cost, less accumulated
depreciation of $65 and $59
    
    
    45
    
    
    
    35Other non-current assets
    
    
    25
    
    
    
    24Total Assets
    
    $
    5,955
    
    
    $
    4,692Liabilities and Shareholders EquityCurrent liabilities:Accounts payable
    
    $
    1,681
    
    
    $
    1,126Accrued royalty
    
    
    
    
    
    
    400Accrued payroll and related taxes
    
    
    117
    
    
    
    93Other current liabilities
    
    
    3
    
    
    
    Total Current Liabilities
    
    
    1,801
    
    
    
    1,619Commitments and contingencies (Note 13)Minority interest
    
    
    24
    
    
    
    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 and 20,000,000
shares authorized as of 2005 and 2004, respectively; 14,961,878
shares issued and 14,166,878 issued and outstanding in 2005 and
2004, respectively
    
    
    15
    
    
    
    14Additional paid-in capital
    
    
    13,425
    
    
    
    10,540Accumulated deficit
    
    
    (9,310
    )
    
    
    (7,481
    )Total Shareholders Equity
    
    
    4,130
    
    
    
    3,073Total Liabilities and Shareholders Equity
    
    $
    5,955
    
    
    $
    4,692
 See notes to unaudited condensed consolidated financial statements. 1




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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS Three months ended
    
    
    Six months endedMarch 31,
    
    
    March 31,2005
    
    
    2004
    
    
    2005
    
    
    2004$ in thousands, except share amounts
    
    (unaudited)
    
    
    (unaudited)
    
    
    (unaudited)
    
    
    (unaudited)Revenues
    
    $
    80
    
    
    $
    4,165
    
    

    $
    830
    
    
    $
    6,866Cost of goods sold
    
    
    61
    
    
    
    2,362
    
    
    
    486
    
    
    
    4,075Gross profit
    
    
    19
    
    
    
    1,803
    
    
    
    344
    
    
    
    2,791Selling, general and administrative
    
    
    1,091
    
    
    
    704
    
    
    
    1,972
    
    
    
    1,323Engineering, research and development
    
    
    118
    
    
    
    19
    
    
    
    224
    
    
    
    76(Loss) / income from operations
    
    
    (1,190
    )
    
    
    1,080
    
    
    
    (1,852
    )
    
    
    1,392Other income/(expense), net:Interest income
    
    
    6
    
    
    
    1
    
    
    
    13
    
    
    
    1Interest expense
    
    
    
    
    
    
    (14
    )
    
    
    
    
    
    
    (29
    )(Loss) / income before provision for income
taxes
    
    
    (1,184
    )
    
    
    1,067
    
    
    
    (1,839
    )
    
    
    1,364Income tax provision
    
    
    230
    
    
    
    63
    
    
    
    
    
    
    
    106Net (loss) / income before minority interest
    
    $
    (1,414
    )
    
    $
    1,004
    
    
    $
    (1,839
    )
    
    $
    1,258Minority interest
    
    
    (10
    )
    
    
    
    
    
    
    (10
    )
    
    
    Net (loss) / income
    
    $
    (1,404
    )
    
    $
    1,004
    
    
    $
    (1,829
    )
    
    $
    1,258Net (loss) / income per share:Basic
    
    
    (.10
    )
    
    
    .08
    
    
    
    (.13
    )
    
    
    .10Diluted
    
    
    (.10
    )
    
    
    .06
    
    
    
    (.13
    )
    
    
    .07Weighted average shares outstandingBasic
    
    
    14,793
    
    
    
    12,948
    
    
    
    14,519
    
    
    
    12,875Diluted
    
    
    14,793
    
    
    
    16,580
    
    
    
    14,519
    
    
    
    17,178
 See notes to unaudited condensed consolidated financial statements. 2




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CONDENSED CONSOLIDATED
STATEMENTS OF CASH FLOWS Six months endedMarch 31,2005
    
    
    2004$ in thousands
    
    (unaudited)
    
    
    (unaudited)Cash flows from operating activities:Net (loss) / income
    
    $
    (1,829
    )
    
    $
    1,258Adjustments to reconcile net (loss) / income to net cash (used in) provided by operating
activities:Depreciation and amortization
    
    
    6
    
    
    
    3Compensation to employees and directors paid with stock
options
    
    
    162
    
    
    
    96Interest expense converted to common stock
    
    
    
    
    
    
    17Issuance of common stock for services
    
    
    
    
    
    
    50Minority interest in net loss of subsidiary
    
    
    (10
    )
    
    
    Changes in operating assets and liabilities:Accounts receivable
    
    
    247
    
    
    
    (2,736
    )Inventories, net
    
    
    (3,126
    )
    
    
    (21
    )Other assets
    
    
    45
    
    
    
    (97
    )Accounts payable
    
    
    555
    
    
    
    1,226Accrued payroll and related taxes
    
    
    24
    
    
    
    109Accrued interest
    
    
    
    
    
    
    (86
    )Other liabilities
    
    
    4
    
    
    
    Net cash (used in) provided by operating activities
    
    
    (3,922
    )
    
    
    (181
    )Cash flows from investing activities:Purchases of equipment, furniture and fixtures
    
    
    (16
    )
    
    
    (13
    )Net cash used in investing activities
    
    
    (16
    )
    
    
    (13
    )Cash flows from financing activities:Repayments on notes payable
    
    
    
    
    
    
    (184
    )Repayment of short-term borrowings
    
    
    
    
    
    
    (400
    )Net proceeds from issuance of common stock net of expenses
    
    
    2,179
    
    
    
    1,500Proceeds in connection with the exercise of options and
warrants
    
    
    144
    
    
    
    2Proceeds in connection with the exercise of warrants in
subsidiary
    
    
    34
    
    

    
    Net cash provided by (used in) financing activities
    
    
    2,357
    
    
    
    918(Decrease) increase in cash
    
    
    (1,581
    )
    
    
    724Cash, beginning of period
    
    
    3,269
    
    
    
    126Cash, end of period
    
    $
    1,688
    
    
    $
    850Supplemental cash flow information:Cash paid during the year for income taxes
    
    $
    
    
    
    $
    106Cash paid during the year for interest
    
    $
    1
    
    
    $
    61Noncash transactions:Conversion of accrued royalties to common stock
    
    $
    400
    
    
    $
    Conversion of long-term debt to common stock
    
    
    
    
    
    $
    250Conversion of accrued interest to common stock
    
    
    
    
    
    $
    17
 See notes to unaudited condensed consolidated financial statements. 3




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NOTES TO UNUADITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(in thousands, except for share amounts)  1.
    BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of America for
interim financial information and pursuant to the rules and regulations of the Securities and
Exchange Commission (SEC). Accordingly, they do not include all of the information and footnotes
required by accounting principles generally accepted in the United States of America for complete
financial statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been included. These
financial statements and notes thereto should be read in conjunction with the financial statements
and notes thereto for the year ended September 30, 2004 included in the Xenonics Holdings, Inc.
(the Holdings) Form 10-KSB filing. The results for the interim period are not necessarily
indicative of the results for the full fiscal year. The condensed consolidated financial statements include the accounts of Holdings and its
subsidiary Xenonics, Inc. (Xenonics), collectively, the Company. On December 14, 2004, one
warrant holder of Xenonics exercised his warrant to purchase 125,000 shares of Xenonics, Inc. As a
result, the Company currently owns 98.6% of the issued and outstanding capital stock of Xenonics.
The minority interest in the condensed consolidated financial statements represents the minority
stockholders proportionate share of equity in Xenonics. All significant inter-company items have
been eliminated upon consolidation. The
accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. As reflected in the
accompanying financial statements, the Company experienced a net loss
for the six months ended March 31, 2005 and has a capital
deficit. In addition, the Company expected to receive significant
orders from the United States Department of Defense in the three
months ended March 31, 2005 to fund its operations. These
factors raise substantial doubt about the Companys ability to
continue as a going concern. The Companys continued existence
is dependent on its ability to obtain orders from the Department of
Defense or additional equity and/or debt financing to support planned
operations and satisfy obligations. There is no assurance that the
Company will be able to obtain enough orders of its products or
additional financing or support the Companys current
operations. The financial statements do not include any adjustments
relating to the recoverability or classification of recorded asset
amounts or the amount and classification of liabilities that might be
necessary as a result of this going-concern uncertainty. Certain reclassifications have been made to prior period financial statements to conform to
the current period presentation.  2.
    REVENUE RECOGNITION The Company recognizes revenue net of discounts upon shipment and when it has evidence that
arrangements exist and the price to the buyer is fixed through signed contracts or purchase orders.
Collectibility is reasonably assured through one or more of the following: government purchase,
historical payment practices or review of new customer credit. Customers do not have the right to
return product unless it is damaged or defective.  3.
    NET EARNINGS PER SHARE Basic earnings per share is computed by dividing the income / loss available to common
shareholders by the weighted average number of common shares outstanding. For the three and six
month periods ended March 31, 2005, diluted earnings per share does not include the dilutive
effect, if any, from the potential exercise of stock options and warrants using the treasury stock
method, because the effect would have been anti-dilutive. For the three and six month periods
ended March 31, 2004, diluted earnings per share includes the dilutive effect, if any, from the
potential exercise of stock options and warrants using the treasury stock method. 4




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4.
    INVENTORIES March 31,
    
    
    September 30,Inventories were comprised of :
    
    2005
    
    
    2004Raw materials
    
    $
    158
    
    
    $
    78Work in process
    
    
    193
    
    
    
    87Finished goods
    
    
    3,709
    
    
    
    767Reserve for obsolescence
    
    
    (11
    )
    
    
    (10
    )$
    4,048
    
    
    $
    922
  5.
    NEW ACCOUNTING PRONOUNCEMENTS In
November of 2004, the FASB issued SFAS No. 151, Inventory Costs.
SFAS No. 151 clarifies the accounting for abnormal amounts of
idle facility expense, freight, handling costs, and wasted material.
SFAS No. 151 requires that these items be recognized as
current-period charges. In addition SFAS No. 151 requires that
allocation of fixed production overhead to the costs of conversion be
based on the normal capacity of the production facilities. This statement is
effective for inventory costs incurred during fiscal years beginning
after June 15, 2005. The Company does not believe that the
adoption of SFAS No. 151 will have a material effect on its
consolidated financial position, results of operations or cash flows. In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 123R, Share Based Payment: An Amendment of FASB
Statements No. 123 and 95. This statement requires that the cost resulting from all share-based
payment transactions be recognized in the consolidated financial statements. This statement is
effective as of the beginning of the first interim or annual reporting period that begins after
June 15, 2005. The Company has adopted SFAS No. 123R.  6.
    ACCOUNTS PAYABLE AND ACCRUED EXPENSES The components of accounts payable and accrued expenses
    
    March 31,
    
    
    September 30,consist of the following :
    
    2005
    
    
    2004Accounts payable
    
    $
    1,584
    
    
    $
    101Accrued expenses
    
    
    97
    
    
    
    1,025$
    1,681
    
    
    $
    1,126
  7.
    ACCRUED ROYALTIES On December 3, 2004, Lightrays and the Company came to an agreement where the $400 liability
will be satisfied through the issuance of 97,000 shares of the Companys common stock, Xenonics
10% ownership in Lightrays was returned and the patent was assigned to Xenonics Holdings, Inc. The
Company has not used, and is not currently using, the patented technology licensed from Lightrays.
The Companys ownership interest had no book
value. 5




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Robert Buie, the current general partner of Lightrays, became a member of the Board as
stipulated in the amended agreement in April 1998. He is also a shareholder.  8.
    SHAREHOLDERS EQUITY In January 2005, the Company and certain of its stockholders closed a private placement of an
aggregate total of 820,800 shares of the Companys common stock to institutional investors. The
shares were sold at a price of $5.00 per share. Of the shares sold in the private placement,
500,000 were sold by the Company, and the balance was sold by stockholders of the Company. As a
result, the Company received approximately $2.3 million in proceeds. Roth Capital Partners,
Newport Beach, California and Bryant Park Capital, New York, New York, acted as co-placement agents
in this transaction. We paid a cash fee of $150 along with warrants to purchase 40,000 shares of
common stock to Roth Capital and a cash fee of $50 along with warrants to purchase 10,000 shares of
common stock to Bryant Park Capital (BPC). The warrants have an exercise price of $5.50 and an
expiration date of January 27, 2010. The principal of BPC is the son of our Chairman of the Board.  9.
    USE OF ESTIMATES The preparation of financial statements, in conformity with accounting principles generally
accepted in the United States of America, requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and
liabilities, at the date of the financial statements, and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those estimates.  10.
    STOCK BASED COMPENSATION Stock Options- The Company uses the fair value based method of accounting for share-based
compensation provided to our employees in accordance with SFAS No. 123, Accounting for Stock-Based
Compensation. We value stock options issued based upon an option-pricing model and recognize this
fair value as an expense over the period in which the options vest. Options granted in the first quarter of fiscal year 2005 under the 2003 Option Plan totaled
245,000. The fair value of each option was estimated on the date of issuance using the
Black-Scholes option-pricing model, with the following weighted-average assumptions: dividend yield
of 0%; expected volatility of 65%; risk-free interest rate of 2.78%  2.84%; and expected lives of
three years from the date of grant. No options were granted in the second quarter of fiscal year
2005. Total compensation expense for outstanding options for the three and six months ended March
31, 2005 was $86 and $162, respectively. Options granted in the first quarter of fiscal year 2004 under the 2003 Option Plan totaled
100,000. The fair value of each option was estimated on the date of issuance using the
Black-Scholes option-pricing model, with the following weighted-average assumptions: dividend yield
of 0%; 6




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expected volatility of 65%; risk-free interest rate of 2.36%  2.42%; and expected lives of
three years from the date of grant. No options were granted in the second quarter of fiscal year
2004. Total compensation expense for outstanding options for the three and six months ended March
31, 2004 was $44 and $96, respectively. Options for 10,000 shares were exercised during the quarter ended December 31, 2003. On
December 7, 2004, our board of directors adopted a 2004 stock
incentive plan. Our stockholders approved the plan at our annual
meeting on February 25, 2005. The Company may issue up to 1,500,000 shares of common stock under the 2004 plan and no person may be granted awards during any twelve-month period that cover more than
300,000 shares of common stock. There were no options granted
from the 2004 Option Plan for the period ended March 31, 2005.
See Note 14.  11.
    STOCK WARRANTS At March 31, 2005, 2,374,465 warrants were outstanding. During the quarter ended March 31,
2005, the Company issued 50,000 warrants to two placement agents as fees in a private sale of
common stock. One placement agent, Bryant Park Capital, a related party, received 10,000 of 50,000
warrants. No warrants were issued in the three months ended
March 31, 2004. There were no warrants exercised during the quarter ended March 31, 2005. During the quarter
ended December 31, 2004, four warrant holders exercised 198,000 warrants. The exercise prices
ranged from $0.60 to $1.05. There were no warrants exercised during the quarter ended March
31, 2004. As of December 31, 2004, all warrants were vested and exercisable.  12.
    MINORITY INTEREST On December 14, 2004, one warrant holder exercised his warrant to purchase 125,000 shares of
Xenonics, Inc. As a result, Xenonics Holdings, Inc. currently owns 98.6% of the issued and
outstanding capital stock of Xenonics, Inc. The calculated minority interest in net loss from
December 14, 2004 thru March 31, 2005 was $10.  13.
    CONTINGENCIES AND OTHER MATTERS For the six months ended March 31, 2005, the Company sold to two customers which accounted for
48.2% and 20.1% of sales. There were no trade receivables for these two customers at March 31,
2005. As
of March 31, 2005, 71.7% of accounts payable was due to one
vendor compared to March 31, 2004 when 51.6% was due to one
vendor. The Company is involved in legal actions arising in the normal course of business. After
taking into consideration legal counsels evaluation of such actions, management is of the opinion
that their outcome will not have a significant effect on the Companys financial position or
results of operations. On July 2, 2004, we filed a complaint for cancellation of a stock certificate and rescission
of a contract against a former officer, director and consultant and a company purportedly owned by
such individual in the Superior Court of California, County of San Diego. The suit alleges a
failure to perform contractual obligations under a written contract to provide lighting equipment
valued at $250 to our subsidiary, Xenonics, Inc., in exchange for 250,000 shares of Xenonics,
Inc.s common stock. We allege that the stock certificate is void or voidable. In our complaint,
we requested that the 250,000 shares be declared void or the defendants be ordered to pay us
$1,250, or the current value of the 250,000 shares of our common stock plus interest at the rate of
10% per year. We have also asked the court to award us costs of the lawsuit. The foregoing 250,000
shares are currently treated as outstanding shares and are included in the
financial statements. 7




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An answer to our complaint was filed on August 11, 2004 in which the defendants denied our
allegations, and asserted a number of affirmative defenses. On the same day, a cross complaint was
also filed against us and our subsidiary, Xenonics, Inc. The cross complaint asks the court to (i)
rescind the assignment of the NightHunterII patent application that one of the defendants assigned
to us in November 2003, (ii) declare that one of the defendants is the sole owner of the
NightHunterII patent application and that he is the inventor of an unrelated xenon illumination
and television camera system, (iii) enjoin us form further exploitation of the NightHunterII and
the xenon illumination and television camera system, and (iv) account for all profits that we have
earned on the NightHunterII from November 25, 2003. The defendant alleges that we purportedly have
not provided the agreed upon consideration for assignment of the NightHunterII patent application,
and that we have not recognized the defendant as the inventor of the xenon illumination and
television camera system. On September 23, 2004, the Company filed an answer to Mr. Jigamians cross complaint, in which
it denied Mr. Jigamians allegations and asserted a number of affirmative defenses. Mr. Jigamian
has advised the Companys attorneys that he intends to seek to amend his cross complaint. On January 26, 2005, the Company amended its complaint. The amended complaint adds causes of
action for misappropriation of trade secrets and breach of fiduciary duty against Mr. Jigamian.
The new causes of action are based on allegations that Mr. Jigamian, while working for the Company
and thereafter, revealed the Companys trade secrets in violation of California law and in breach
of his fiduciary duties. In addition to the relief sought in the original complaint, the amended
complaint also seeks compensatory and punitive damages, attorneys fees, and injunctive relief to
prevent Mr. Jigamian and anyone working with him from using the Companys trade secrets. The Court has set September 2, 2005 as the trial date for the foregoing matter. At the
present time, the Company based on advice of counsel cannot reasonably assess the ultimate outcome. We are occasionally subject to legal proceedings and claims that arise in the ordinary course
of our business. It is impossible for us to predict with any certainty the outcome of pending
disputes, and we cannot predict whether any liability arising from pending claims and litigation
will be material in relation to our consolidated financial position or results of operations.  14.
    SUBSEQUENT EVENTS The Companys common stock was approved for listing on the American Stock Exchange (AMEX)
and began trading on the AMEX on Tuesday, April 5, 2005, under the symbol XNN. In April, 2005, Vice Admiral Richard J. Naughton, USN (Ret), a member of the Companys Board
of Directors since May 2004, was named Chief Executive Officer of the Company. Naughton succeeded
Alan Magerman, who remains Chairman of the Board and will serve as Chairman of the newly created
Executive Committee, which consists of Messrs. Magerman, Naughton, and Chief Operating Officer
Jeffrey Kennedy. Admiral Naughton will receive an annual base salary of $200 and an annual bonus in
the discretion of the Compensation Committee. On April 15, 2005, Admiral Naughton received options
to purchase 250,000 shares of Xenonics Holdings, Inc. common stock at an exercise price of $3.80
per share. One-third of the options vested on the grant date and the remaining two-thirds of the
option vests in two equal annual installments starting one year after the grant date. The options
have a term of five years. 8




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Also in April, 2005, Michael Magerman resigned as a director of Xenonics Holdings, Inc., and
the Board of Directors appointed Robert E. Petersen to the Board of Directors. Mr. Petersen will
also serve as Chairman of the Audit Committee. Mr. Petersen will receive an annual directors fee
of $5, and he will receive $1 for each Board meeting attended in person and $0.5 for each Board
meeting attended telephonically. For his services as Chairman of the Audit Committee, Mr. Petersen
will receive an annual fee of $10 plus $0.5 for each committee meeting attended in person or
telephonically. On April 15, 2005, Mr. Petersen received options to purchase 15,000 shares of our
common stock at an exercise price of $3.80 per share. The options are fully vested and are
exercisable over a term of five years. On April 15, 2005, the Board of Directors granted to Alan Magerman options to purchase 200,000
shares of our common stock and granted to Jeffrey Kennedy, our Chief Operating Officer, options to
purchase 125,000 shares of our common stock. The options have an exercise price of $3.80 per share,
vest in three equal annual installments starting one year after the grant date, and has a term of
five years. In April and May 2005, 95,000 options were exercised at an exercise price of $0.25 per share. In April 2005, 155,000 warrants were exercised at an exercise price of $0.60. 9




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ITEM 2. Managements Discussion and Analysis
of Financial Condition and Results of Operations The following discussion and analysis should be read in conjunction with the condensed
consolidated financial statements and accompanying notes filed as part of this report. Forward-Looking Statements The following Managements Discussion and Analysis of Financial Condition and Results of
Operations, as well as information contained elsewhere in this report, contain statements that
constitute forward-looking statements within the meaning of Section 27A of the Securities Act of
1933, and Section 21E of the Securities Exchange Act of 1934. These statements include statements
regarding the intent, belief or current expectations of us, our directors or our officers with
respect to, among other things: anticipated financial or operating results, financial projections,
business prospects, future product performance and other matters that are not historical facts. The
success of our business operations is dependent on factors such as the impact of competitive
products, product development, commercialization and technology difficulties, the results of
financing efforts and the effectiveness of our marketing strategies, general competitive and
economic conditions. Forward-looking statements are not guarantees of future performance and
involve risks and uncertainties. Actual results may differ materially from those projected in the
forward-looking statements as a result of various factors. Results of Operations Three-months ended March 31, 2005 compared to the three-months ended March 31, 2004 Revenues:We operate in one industry segment, the security lighting systems industry, and all
of our revenues are derived from sales of our illumination products to various customers in that
segment. Revenues for the three-months ended March 31, 2005 were $80,000 compared to revenues of
$4,165,000 for the three-months ended March 31, 2004. A large order that is still expected, was
not received in this period. The timing of the release of funds from the armed services has
negatively impacted revenue targets for the three months ended March 31, 2005. In the three-months ended March 31, 2005, the Company sold $60,000 or 75% of revenue to the
military market which includes both direct sales (U.S. Army, U.S. Navy and U.S. Marines) as well as
sales to military resellers. This compares to $4,070,000 or 94% of revenue to the military market
(U.S. Army, U.S. Navy, U.S. Marines and military resellers) in the same three months of the prior
period. The Company has increased its marketing activity in this segment to increase awareness of
the product. The feedback regarding the product from current customers and those who are
introduced to the product is overwhelming and substantiates a demand. The Company continues to work
with current and prospective customers to improve the procurement process for the availability of
funds. The Company believes that it has made substantial efforts in this regard and that the
benefits will be seen in the near future. There were no sales to U.S. government agencies in the three months ended March 31, 2005.
This compares to $45,000 or 5% of revenue for the same period in the prior year. The Company is
expanding its distribution channels and expects to see more activity in this segment in the future. The Company sold $16,000 or 20% to various international customers compared to $2,000 or less
than 1% for the three months ended March 31, 2005 and 2004, respectively. This is another segment
where expanded distribution channels are expected to result in increased activity. 10




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The balance of this periods sales of approximately $4,000 or 5% of revenue was generated with
small orders from other customers compared to less than $54,000 or 1% of revenue for the same
period in the prior period. Although our plan is to expand our customer base to more commercial and international clients,
we anticipate that the U.S. military will continue to be our largest customer in the fiscal year
ending September 30, 2005. Cost of Goods and Gross Profit:Cost of goods consist of our cost of manufacturing our
NightHunter products and the price that we pay to PerkinElmer for NightHunterII products that
PerkinElmer manufactures for us under our manufacturing agreement. The gross profit percentage on
revenue was 24% and 43% for the three-months ended March 31, 2005 and 2004, respectively. The
revenue level in this period is not sufficient to support the level of direct and indirect
production costs and therefore the gross profit percentage has dropped. Management believes the
current revenue level is an anomaly and therefore has not reduced the number of employees in this
area. Selling, General and Administrative:Selling, general and administrative expenses increased by
$387,000 to $1,091,000 for the three-months ended March 31, 2005 compared to $704,000 for the
three-months ended March 31, 2004. The incremental expenses consisted primarily of increases in
regulatory expenses of $131,000, legal expenses of $126,000, option expense of $42,000, marketing
materials of $29,000, accounting fees of $18,000, salaries and wages of $16,000, and D&O insurance
of $16,000 with the remaining $9,000 from various other expenses. The Company became a reporting
company in September of 2004 and most increases are related to higher levels of reporting
requirements. There also are expenses related to the two registrations statements the Company must
maintain. The Company is making every effort to meet its reporting requirements as efficiently as
possible. Engineering,
Research & Development:Engineering, research and development expenses increased
by $99,000 for the three-months ended March 31, 2005 compared to the three- months ended March 31,
2004. Increased number of employees impacted spending for the period by $60,000 along with $17,000
for consulting. With concentrated efforts in this area, other related engineering costs have also
increased. Engineering, research and development spending levels are expected to continue to
increase in the future as we develop new products and make improvements to our existing products. Net Income
(Loss):The Company experienced a loss of $1,404,000 for the three-months ended
March 31, 2005 compared to profit of $1,004,000 for the
three-months ended March 31, 2004. The Company reversed the tax benefit from the prior
quarter because of the lower than expected revenue in the current
quarter and because management believes it will not realize the
benefits in the current year. The reversal negatively impacted results by $230,000. The
remainder of the
variance is the result of the revenue shortfall in the period. Six-months ended March 31, 2005 compared to the six-months ended
March 31, 2004 Revenues:We operate in one industry segment, the security lighting systems industry, and all
of our revenues are derived from sales of our illumination products to various customers in that
segment. Revenues for the six-months ended March 31, 2005 were $830,000 compared to revenues of
$6,866,000 for the six-months ended March 31, 2004. A large order that is still expected, was not
received in the first half of the year. The timing of the release of funds from the armed services
has negatively impacted revenue targets for the six months ended March 31, 2005. In the six-months ended March 31, 2005, the Company sold $568,000 or 69% of revenue to the
military market which includes both direct sales (U.S. Army, U.S. Navy and U.S. Marines) as well as
sales to military resellers. This compares to $6,688,000 or 97% of revenue to the military market
(U.S. Army, U.S. Navy, U.S. Marines and military resellers) in the same six months of the 11




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prior period. The Company has increased its marketing activity in this segment to increase
awareness of the product. The feedback regarding the product from current customers and those who
are introduced to the product is overwhelming and substantiates a demand. The Company continues to
work with current and prospective customers to improve the procurement process for the availability
of funds. The Company believes that it has made substantial efforts in this regard and that the
benefits will be seen in the near future. Sales to the U.S. government agencies contributed $151,000 or 18% of revenue in the six months
ended March 31, 2005. This compares to $53,000 or 1% of revenue for the same period in the prior
year. The Company is expanding its distribution channels and expects to see more activity in this
segment in the future. The Company sold $51,000 or 6% to various international customers compared to $76,000 or 1%
for the six months ended March 31, 2005 and 2004, respectively. This is another segment where
expanded distribution channels are expected to result in increased activity. The balance of this periods sales of approximately $60,000 or 7% of revenue was generated
with small orders from other customers compared to less than $58,000 or 1% of revenue for the same
period in the prior period. Although our plan is to expand our customer base to more commercial and international clients,
we anticipate that the U.S. military will continue to be our largest customer in the fiscal year
ending September 30, 2005. Cost of Goods and Gross Profit:Cost of goods consist of our cost of manufacturing our
NightHunter products and the price that we pay to PerkinElmer for NightHunterII products that
PerkinElmer manufactures for us under our manufacturing agreement. The gross profit percentage on
revenue was 41% for both the six-months ended March 31, 2005 and 2004. Selling, General and Administrative:Selling, general and administrative expenses increased by
$649,000 to $1,972,000 for the six-months ended March 31, 2005
compared to $1,323,000 for the
six-months ended March 31, 2004. The incremental expenses consisted primarily of increases in
legal expenses of $200,000, accounting fees of $114,000, salaries and wages of $106,000, regulatory
expenses of $82,000, option expense of $67,000 and D&O insurance of $47,000 with the remaining
$33,000 from various other expenses. The Company became a reporting company in September of 2004
and most increases are related to higher levels of reporting requirements. There also are expenses
related to the two registrations statements the company must maintain. The Company is making every
effort to meet its reporting requirements as efficiently as possible. Engineering, Research & Development:Engineering, research and development expenses increased
by $148,000 for the six-months ended March 31, 2005 compared to the six- months ended March 31,
2004. Increased number of employees impacted spending for the period by $97,000 along with $26,000
for consulting. With concentrated efforts in this area, other related engineering costs have also
increased. Engineering, research and development spending levels are expected to continue to
increase in the future as we develop new products and make improvements to our existing products. 12




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Net Income
(Loss):The Company experienced a loss of $1,829,000 for the six-months ended
March 31, 2005 compared to profit of $1,258,000 for the six-months ended March 31, 2004. The
variance is the result of the revenue shortfall in the first half of the year. Liquidity
and Capital Resources As of March 31,
2005, the Company had working capital of $4,084,000 and a current ratio
of 3.3-to-1 as compared to working capital of $3,014,000 and a current ratio of 2.9-to-1 as of
September 30, 2004. Our net loss of
$1,829,000 for the six months ended March 31, 2005 negatively impacted cash in
addition to an increase in inventory of $3,126,000, and
$10,000 related to the minority interest in the net loss of the subsidiary for a combined use of
cash of $4,965,000. This was partially offset by an increase in accounts payable of $555,000,
increase in compensation expense related to options of $162,000, decrease in accounts receivables
balance of $247,000 and other sources of $79,000 for a combined sources of cash of $1,043,000.
These changes created net cash used for operations of $3,922,000 for the six months ended March 31,
2005. Net cash
provided by financing activities for the six months ended March 31, 2005 included
$144,000 from the exercise of warrants to purchase common stock in Xenonics Holdings, Inc. and
$34,000 from the exercise of warrants to purchase common stock in Xenonics, Inc. See Note 12 to the
condensed consolidated financial statements. In addition, the Company closed a private placement
on January 28, 2005 that provided $2,179,000 million in cash. The
Company is dependent on its ability to obtain sales orders and/or additional
equity or debt financing to continue to support planned operations
and satisfy obligations. The Companys marketing activity has been
intensified and management remains optimistic about our growth
opportunity. However, due to the nature of our business, there is no
assurance that we will receive new orders during the quarters that we
expect them. Although management believes it can obtain additional
financing, there is no certainty that it can. Seasonality During
our limited operating history, we have experienced stronger sales in the second
and third fiscal quarters (January through June) compared to sales during the first and fourth
quarters (July through December). We believe that this seasonal pattern of sales primarily reflects
the customary timing of purchases by our military customers. However, in the current year, the
timing of the release of discretionary deployment funds has shifted. In addition, we expect that
the seasonal pattern of revenue generation may change if our plans to enter additional,
non-governmental market segments are successful. 13




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ITEM 3. CONTROLS AND PROCEDURES We maintain disclosure controls and procedures that are designed to ensure that information
required to be disclosed in our Exchange Act reports is recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange Commissions rules and
forms and that such information is accumulated and communicated to this companys management,
including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for
timely decisions regarding required disclosure. In designing and evaluating the disclosure controls
and procedures, management recognizes that any controls and procedures, no matter how well designed
and operated, can provide only reasonable assurance of achieving the desired control objectives,
and management is required to apply its judgment in evaluating the cost-benefit relationship of
possible controls and procedures. As required by Securities and Exchange Commission Rule 13a-15(b), we carried out an
evaluation, under the supervision and with the participation of the Companys management, including
our Chief Executive Officer and the Companys Chief Financial Officer, of the effectiveness of the
design and operation of our disclosure controls and procedures as of the end of the quarter covered
by this report. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer
concluded that our disclosure controls and procedures are effective in ensuring that the
information required to be disclosed in our reports filed or submitted under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified in the Securities
and Exchange Commission rules and forms. There has been no change in our internal control over financial reporting during our most
recent fiscal quarter that has materially affected, or is reasonably likely to materially affect,
our internal control over financial reporting. 14




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PART II. OTHER INFORMATION 
 ITEM 1. Legal Proceedings On July 2, 2004, we filed a complaint for cancellation of a stock certificate and rescission
of a contract against a former officer, director and consultant and a company purportedly owned by
such individual in the Superior Court of California, County of San Diego. The suit alleges a
failure to perform contractual obligations under a written contract to provide lighting equipment
valued at $250,000 to our subsidiary, Xenonics, Inc., in exchange for 250,000 shares of Xenonics,
Inc.s common stock. We allege that the stock certificate is void or voidable. In our complaint,
we requested that the 250,000 shares be declared void or the defendants be ordered to pay us
$1,250,000 or the current value of the 250,000 shares of our common stock plus interest at the
rate of 10% per year. We have also asked the court to award us costs of the lawsuit. The foregoing
250,000 shares are currently treated as outstanding shares for all purposes, and is included in the
financial statements. An answer to our complaint was filed on August 11, 2004 in which the defendants denied our
allegations, and asserted a number of affirmative defenses. On the same day, a cross complaint was
also filed against us and our subsidiary, Xenonics, Inc. The cross complaint asks the court to (i)
rescind the assignment of the NightHunterII patent application that one of the defendants assigned
to us in November 2003, (ii) declare that one of the defendants is the sole owner of the
NightHunterII patent application and that he is the inventor of an unrelated xenon illumination
and television camera system, (iii) enjoin us form further exploitation of the NightHunterII and
the xenon illumination and television camera system, and (iv) account for all profits that we have
earned on the NightHunterII from November 25, 2003. The defendant alleges that we purportedly have
not provided the agreed upon consideration for assignment of the NightHunterII patent application,
and that we have not recognized the defendant as the inventor of the xenon illumination and
television camera system. On September 23, 2004, the Company filed an answer to Mr. Jigamians cross complaint, in which
it denied Mr. Jigamians allegations and asserted a number of affirmative defenses. Mr. Jigamian
has advised the Companys attorneys that he intends to seek to amend his cross complaint. On January 26, 2005, the Company amended its complaint. The amended complaint adds causes of
action for misappropriation of trade secrets and breach of fiduciary duty against Mr. Jigamian.
The new causes of action are based on allegations that Mr. Jigamian, while working for the Company
and thereafter, revealed the Companys trade secrets in violation of California law and in breach
of his fiduciary duties. In addition to the relief sought in the original complaint, the amended
complaint also seeks compensatory and punitive damages, attorneys fees, and injunctive relief to
prevent Mr. Jigamian and anyone working with him from using the Companys trade secrets. The Court has set September 2, 2005 as the trial date for the foregoing matter. At the
present time, the Company based on advice of counsel cannot reasonably assess the ultimate outcome. We are occasionally subject to legal proceedings and claims that arise in the ordinary course
of our business. It is impossible for us to predict with any certainty the outcome of pending
disputes, and we cannot predict whether any liability arising from pending claims and litigation
will be material in relation to our consolidated financial position or results of operations. 15




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ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds On December 14, 2004, one warrant holder exercised his warrant to purchase 125,000 shares of
Xenonics, Inc. for an aggregate purchase price of $34,375. As a result, Xenonics Holdings, Inc.
currently owns 98.6% of the issued and outstanding capital stock of Xenonics, Inc. No underwriter
was involved in the warrant exercise described in this paragraph, and the share issuance was made
without any public solicitation or the payment of any commissions in reliance on exemptions under
Section 3(a)(9) and 4(2) of the Securities Act. In January 2005, the Company and certain of its stockholders closed a private placement of an
aggregate of 820,800 shares of our common stock to institutional investors. The shares were sold
at a price of $5.00 per share. Of the shares sold in the private placement, 500,000 were sold by
us, and the balance was sold by stockholders of Xenonics Holdings, Inc. As a result, we received
approximately $2.1 million in net proceeds. Roth Capital Partners, Newport Beach, California, and Bryant Park Capital, New York, New York,
acted as co-placement agents in this transaction. We paid a cash fee of $150,000 along with
warrants to purchase 40,000 shares of common stock to Roth Capital and a cash fee of $50,000 along
with warrants to purchase 10,000 shares of common stock to Bryant Park Capital (BPC). The principal
of BPC is Joel Magerman, a son of Alan P. Magerman (our Chairman of the Board) and brother of
Michael Magerman (a director of Xenonics Holdings, Inc. until April 2005). The warrants were
issued at $5.50 for a five-year term. Our sale of 500,000 shares to the investors and issuance of warrants to RCP and BPC were not
registered under the Securities Act. The securities were issued in reliance upon the exemption
from registration contained in Section 4(2) of the Securities Act and Regulation D promulgated
thereunder because, among other things, the transaction did not involve a public offering, all of
the investors and placement agents are accredited institutional buyers, the investors and placement
agents had access to information about the Company, and we took appropriate measures to restrict
the transfer of the securities. Subsequent to the end of the quarter, 95,000 options were exercised at a price of $0.25 per
share and 155,000 warrants were exercised at a price of $0.60 per share. No underwriter was involved
in the warrant exercise described in this paragraph, and the share issuance was made without any
public solicitation or the payment of any commissions in reliance on exemptions under Section
3(a)(9) and 4(2) of the Securities Act. We did not repurchase any shares of our common stock during the first six months of fiscal
year 2005. 16




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ITEM 5. Other Information None. 
 ITEM 6. Exhibits ExhibitNumber
    
    Description31.1
    
    Certification of the Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act31.2
    
    Certification of the Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act32.1
    
    Certifications pursuant to Section 906 of the Sarbanes-Oxley Act
 17




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SIGNATURES In accordance with the requirements of the Exchange Act, the registrant caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized. XENONICS HOLDINGS, INC.By:
    
    /s/ RICHARD J. NAUGHTONDate: May 16, 2005
    
    
    
    Richard J. Naughton
Chief Executive OfficerBy:
    
    /s/ DONNA G. LEEDate: May 16, 2005
    
    
    
    Donna G. Lee
Chief Financial Officer
 18