SECURITIES PURCHASE AGREEMENT
SECURITIES
PURCHASE AGREEMENT
(the
“Agreement”),
dated
as of _____________, among SIONIX CORPORATION, a corporation organized under
the
laws of the State of Nevada (“Sionix”),
and
[investors
to be identified by Southridge Investment Group, LLC] (collectively,
“Purchaser”).
WHEREAS,
Purchaser and Sionix are executing and delivering this Agreement in reliance
upon the exemption from securities registration afforded by Section 4(2) of
the
Securities Act of 1933, as amended (the “1933
Act”);
WHEREAS,
Purchaser desires to purchase, and Sionix desires to issue, upon the terms
and
conditions set forth in this Agreement, a subordinated debenture and a common
stock warrant of Sionix in consideration for the payment by Purchaser to Sionix
of $___________in
cash;
and
NOW
THEREFORE,
in
consideration of the premises and the mutual covenants contained herein and
other good and valuable consideration, the receipt and sufficiency of which
are
hereby acknowledged, the parties agree as follows:
1. PURCHASE
AND SALE OF SUBORDINATED DEBENTURE.
a. Purchase
of Subordinated Debenture.
On the
Closing Date (as defined below), Sionix shall issue and deliver to Purchaser,
and Purchaser agrees to purchase from Sionix, (i) a duly executed 10%
subordinated debenture in the principal amount of $_________,
in
the
form attached hereto as Exhibit
A
(the
“Debenture”)
and
(ii) a six year warrant to purchase __________ shares of Sionix common stock
at
an exercise price of $0.40 per share, in the form attached hereto as Exhibit
B
(the “Warrant”)
in
consideration for $_____________ cash (the “Purchase
Price”).
For
every $25,000 in principal amount of the Debenture, Purchase will receive a
Warrant for 50,000 shares.
b. Closing
Date.
Subject
to the satisfaction (or waiver) of the conditions thereto set forth in Section
5
and Section 6 below, the date and time of the sale of the Debenture pursuant
to
this Agreement (the “Closing
Date”)
shall
be 12:00 noon New York City Time on ______________ or such other mutually agreed
upon time. The closing of the transactions contemplated by this Agreement (the
“Closing”)
shall
occur on the Closing Date at such location as may be agreed to by the
parties.
c. Form
of Payment.
On the
Closing Date, (i) Purchaser shall pay the Purchase Price in United States
dollars by wire transfer of immediately available funds to an account designated
in writing by Sionix for such purpose, against delivery of the Debenture and
the
Warrant, and (ii) Sionix shall deliver to Purchaser the Debenture and Warrant
duly executed on behalf of Sionix, against delivery of the Purchase
Price.
2. PURCHASER’S
REPRESENTATIONS AND WARRANTIES.
Purchaser represents and warrants to Sionix that:
a. Accredited
Purchaser; Investment Purpose.
Purchaser represents that it is an “Accredited Investor” as defined in
Regulation D under the 1933 Act. Purchaser is purchasing the Debenture and
the
Warrant for its own account for investment purposes only and not with a view
toward, or for resale in connection with, the public sale or distribution
thereof, except pursuant to sales registered or exempted under the 1993 Act
and
applicable state securities laws; provided,
however,
that by
making the representations herein, Purchaser does not agree to hold the
Debenture or the Warrant for any minimum or other specific term and reserves
the
right to dispose of the Debenture at any time in accordance with or pursuant
to
a registration statement or an exemption under the 1933 Act and applicable
state
securities laws.
b. Reliance
on Exemptions.
Purchaser understands that the Debenture and the Warrant are being offered
and
sold to it in reliance upon specific exemptions from the registration
requirements of United States federal and state securities laws and that Sionix
is relying upon the truth and accuracy of, and Purchaser’s compliance with, the
representations, warranties, agreements, acknowledgments and understandings
of
Purchaser set forth herein in order to determine the availability of such
exemptions and the eligibility of the Purchaser to acquire the Debenture and
the
Warrant.
c. Information.
Purchaser and its advisors, if any, have been furnished with materials relating
to the business, finances and operations of Sionix and materials relating to
the
offer and sale of the Debenture and the Warrant which have been requested by
Purchaser or its advisors. Neither such inquiries nor any other due diligence
investigation conducted by Purchaser or any of its advisors or representatives
shall modify, amend or affect Purchaser’s right to rely on Sionix’s
representations and warranties contained in Section 3 below. Purchaser
understands that its investment in the Debenture and the Warrant involves a
significant degree of risk, including, without limitation, the risk factors
set
forth on Exhibit
C
attached
hereto and incorporated herein.
d. Governmental
Review.
Purchaser understands that no United States federal or state agency or any
other
government or governmental agency has passed upon or made any recommendation
or
endorsement of the Debenture.
e. Transfer
or Resale.
Purchaser understands that (i) the sale or resale of the Debenture and the
Warrant and any underlying conversion shares of common stock has not been and
is
not being registered under the 1933 Act or any applicable state securities
laws,
and the Debenture and the Warrant may not be transferred unless (a) the
Debenture, the Warrant and the common stock, par value $0.001 per share, of
Sionix, issuable upon exercise of the Warrant (the “Warrant
Shares”)
are
sold pursuant to an effective registration statement under the 1933 Act, (b)
the
Debenture, the Warrant, and the Warrant Shares are sold or transferred pursuant
to an exemption from such registration, (c) the Debenture, the Warrant, and
the
Warrant Shares are sold or transferred to an “affiliate” (as defined in Rule 144
promulgated under the 1933 Act (or a successor rule) (“Rule
144”))
of
Purchaser who agrees to sell or otherwise transfer the Debenture or the Warrant
only in accordance with this Section 2(e) and who is an Accredited Investor,
or
(d) the Debenture, the Warrant, and the Warrant Shares are sold pursuant to
Rule
144, if such Rule is available; (ii) any sale of such Debenture, Warrant, and
Warrant Shares made in reliance on Rule 144 may be made only in accordance
with
the terms of said Rule and further, if said Rule is not applicable, any resale
of such Debenture, Warrant, and Warrant Shares under circumstances in which
the
seller (or the person through whom the sale is made) may be deemed to be an
underwriter (as that term is defined in the 0000 Xxx) may require compliance
with some other exemption under the 1933 Act or the rules and regulations of
the
SEC thereunder; and (iii) neither Sionix nor any other person is under any
obligation to comply with the terms and conditions of any exemption under the
1933 Act.
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f. Legends.
Purchaser understands that the Debenture, the Warrantand the Warrant Shares
shall bear a restrictive legend in the following form:
“NEITHER
THIS SECURITY NOR THE SECURITIES ISSUABLE UPON CONVERSION HEREOF HAVE BEEN
REGISTERED WITH THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION OR THE
SECURITIES COMMISSION OF ANY STATE OR UNDER THE SECURITIES ACT OF 1933, AS
AMENDED. THE SECURITIES ARE RESTRICTED AND MAY NOT BE OFFERED, RESOLD, PLEDGED
OR TRANSFERRED EXCEPT AS PERMITTED UNDER THE ACT PURSUANT TO REGISTRATION OR
EXEMPTION OR SAFE HARBOR THEREFROM.”
g. Authorization;
Enforcement.
This
Agreement has been duly and validly authorized by Purchaser. This Agreement
has
been duly executed and delivered on behalf of Purchaser, and this Agreement
constitutes a valid and binding agreement of Purchaser enforceable in accordance
with its terms, except as such enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium, liquidation or similar
laws
relating to, or affecting generally, the enforcement of creditors’ rights and
remedies or by other equitable principles of general application.
h. No
Brokers.
Purchaser has taken no action which would give rise to any claim by any person
for brokerage commissions, finder’s fees or similar payments relating to this
Agreement or the transactions contemplated hereby.
i. Sionix
SEC Reports.
Purchaser has read Sionix’ periodic and current reports filed with the SEC on
and after June 8, 2007, including, without limitation, its annual report on
Form
10-KSB for the fiscal year ended September 30, 2006, which are available for
review on the SEC’s website at xxx.xxx.xxx.
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3. REPRESENTATIONS
AND WARRANTIES OF SIONIX.
Sionix
represents and warrants to Purchaser that:
a. Authorization;
Enforcement.
(i)
Sionix has all requisite corporate power and authority to enter into and perform
this Agreement and to consummate the transactions contemplated hereby and to
sell the Debenture and the Warrant in accordance with the terms hereof, (ii)
the
execution and delivery of this Agreement by Sionix and the consummation by
it of
the transactions contemplated hereby (including without limitation, the sale
of
the Debenture to Purchaser) have been duly authorized by Sionix and no further
consent or authorization of Sionix or its shareholders is required, (iii) this
Agreement has been duly executed and delivered by Sionix, and (iv) this
Agreement constitutes a legal, valid and binding obligation of Sionix
enforceable against Sionix in accordance with its terms, except as such
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium, liquidation or similar laws relating to, or
affecting generally, the enforcement of creditors’ rights and remedies or by
other equitable principles of general application
b. No
Conflicts.
The
execution, delivery and performance of this Agreement by Sionix and the
consummation by Sionix of the transactions contemplated hereby (including,
without limitation, the sale of the Debenture and Warrant to Purchaser) will
not
(i) conflict with or result in a violation of any provision of its certificate
of formation or other organizational documents, or (ii) violate or conflict
with, or result in a breach of any provision of, or constitute a default (or
an
event which with notice or lapse of time or both could become a default) under,
or give to others any rights of termination, amendment, acceleration or
cancellation of, any agreement, note, bond, indenture or other instrument to
which Sionix is a party, or (iii) result in a violation of any law, rule,
regulation, order, judgment or decree (including federal and state securities
laws and regulations and regulations of any self-regulatory organizations to
which Sionix is subject) applicable to Sionix or by which any property of Sionix
are bound or affected. Except as specifically contemplated by this Agreement
and
as required under the 1933 Act and any applicable federal and state securities
laws, Sionix is not required to obtain any consent, authorization or order
of,
or make any filing or registration with, any court, governmental agency,
regulatory agency, self regulatory organization or stock market or any third
party in order for it to execute, deliver or perform any of its obligations
under this Agreement in accordance with the terms hereof. Except for filings
that may be required under applicable federal and state securities laws in
connection with the issuance and sale of the Debenture and the Warrant, all
consents, authorizations, orders, filings and registrations which Sionix is
required to obtain pursuant to the preceding sentence have been obtained or
effected on or prior to the date hereof.
c. No
Brokers.
Sionix
has taken no action which would give rise to any claim by any person for
brokerage commissions, finder’s fees or similar payments relating to this
Agreement or the transactions contemplated hereby except as disclosed in this
Section 3(c):
Southridge
Investment Group LLC is entitled to those cash and equity fees as provided
for
in that certain Investment Banking Engagement Letter dated as of February 12,
2007, as modified by that certain Investment Banking Engagement Letter Addendum
dated as of May 29, 2007.
d. Issuance
of Securities.
The
issuance of the Debenture and the Warrant are duly authorized and upon issuance
in accordance with the terms hereof shall be free from all taxes, liens and
charges with respect to the issue thereof. As soon as commercially practicable
following the Closing, Sionix will increase its authorized shares of Common
Stock to a sufficient number in order to provide that a number of shares of
Common Stock shall have been duly authorized and reserved for issuance which
equals or exceeds 130% of the aggregate of the maximum number of shares of
Common Stock issuable upon exercise of the Warrant. The Warrant and, upon
exercise, the Warrant Shares, will be validly issued, fully paid and
nonassessable and free from all preemptive or similar rights, taxes, liens
and
charges with respect to the issue thereof, with the holders being entitled
to
all rights accorded to a holder of Common Stock. Assuming the accuracy of each
of the representations and warranties set forth in Section 2 of this Agreement,
the offer and issuance by the Company of the Debenture and the Warrant is exempt
from registration under the 1933 Act.
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4. COVENANTS.
a. Best
Efforts.
The
parties shall use their best efforts to satisfy timely each of the conditions
described in Section 5 and Section 6 of this Agreement.
b. Financial
Reporting. Subsequent
to Closing Date, Sionix will take no action which would adversely affect
Purchaser’s ability to use Rule 144. Sionix shall make
and
keep public information available, as those terms are understood and defined
in
Rule 144 and shall file with the SEC in a timely manner all reports and other
documents required of Sionix
under
the 1933 Act and the Securities Exchange Act of 1934, as amended.
c. Reservation
of Shares.
Following its receipt of shareholder approval of a sufficient increase in its
authorized shares in accordance with applicable federal securities laws, as
provided in Section 3(d) above, Sionix shall
take
all action necessary to at all times have authorized, and reserved for the
purpose of issuance, no less than 130% of the sum of the number of shares of
Common Stock issuable upon exercise of the Warrant issued at the Closing
(without taking into account any limitations on exercise of the Warrant set
forth in the Debenture and Warrant, respectively).
5. CONDITIONS
TO SIONIX’S OBLIGATION TO SELL.
The
obligation of Sionix hereunder to sell and deliver the Debenture and the Warrant
to Purchaser at the Closing is subject to the satisfaction, at or before the
Closing Date of each of the following conditions thereto, provided that these
conditions are for Sionix’s sole benefit and may be waived by Sionix at any time
in its sole discretion:
a. Purchaser
shall have executed this Agreement and delivered the same to
Sionix.
b. Purchaser
shall have delivered the Purchase Price in accordance with Section 1(c)
above.
c. The
representations and warranties of Purchaser shall be true and correct in all
material respects as of the date when made and as of the Closing Date as though
made at that time (except for representations and warranties that speak as
of a
specific date), and Purchaser shall have performed, satisfied and complied
in
all material respects with the covenants, agreements and conditions required
by
this Agreement to be performed, satisfied or complied with by Purchaser at
or
prior to the Closing Date.
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d. No
litigation, statute, rule, regulation, executive order, decree, ruling or
injunction shall have been enacted, entered, promulgated or endorsed by or
in
any court or governmental authority of competent jurisdiction or any
self-regulatory organization having authority over the matters contemplated
hereby which prohibits the consummation of any of the transactions contemplated
by this Agreement.
6. CONDITIONS
TO PURCHASER’S OBLIGATION TO PURCHASE.
The
obligation of Purchaser hereunder to purchase the Debenture at the Closing
is
subject to the satisfaction, at or before the Closing Date of each of the
following conditions, provided that these conditions are for Purchaser’s sole
benefit and may be waived by Purchaser at any time in its sole
discretion.
a. Sionix
shall have executed this Agreement and delivered the same to
Purchaser.
b. Sionix
shall have delivered to Purchaser duly executed Debenture and Warrant (in such
denominations as Purchaser shall reasonably request) in accordance with Section
1(c) above.
c. The
representations and warranties of Sionix shall be true and correct in all
material respects as of the date when made and as of the Closing Date as though
made at such time (except for representations and warranties that speak as
of a
specific date) and Sionix shall have performed, satisfied and complied in all
material respects with the covenants, agreements and conditions required by
this
Agreement to be performed, satisfied or complied with by Sionix at or prior
to
the Closing Date.
d. No
litigation, statute, rule, regulation, executive order, decree, ruling or
injunction shall have been enacted, entered, promulgated or endorsed by or
in
any court or governmental authority of competent jurisdiction or any
self-regulatory organization having authority over the matters contemplated
hereby which prohibits the consummation of any of the transactions contemplated
by this Agreement.
7. GOVERNING
LAW; MISCELLANEOUS.
a. Governing
Law; Jurisdiction.
THIS
AGREEMENT SHALL BE ENFORCED, GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE
LAWS OF THE STATE OF NEW YORK APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED
ENTIRELY WITH SUCH STATE, WITHOUT REGARD TO THE PRINCIPLES OF CONFLICT OF LAWS.
THE PARTIES HERETO HEREBY SUBMIT TO THE EXCLUSIVE JURISDICTION OF THE UNITED
STATES FEDERAL COURTS LOCATED IN THE CITY OF NEW YORK, NEW YORK WITH RESPECT
TO
ANY DISPUTE ARISING UNDER THIS AGREEMENT, THE AGREEMENTS ENTERED INTO IN
CONNECTION HEREWITH OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY. BOTH
PARTIES IRREVOCABLY WAIVE THE DEFENSE OF AN INCONVENIENT FORUM TO THE
MAINTENANCE OF SUCH SUIT OR PROCEEDING. BOTH PARTIES FURTHER AGREE THAT SERVICE
OF PROCESS UPON A PARTY MAILED BY FIRST CLASS MAIL SHALL BE DEEMED IN EVERY
RESPECT EFFECTIVE SERVICE OF PROCESS UPON THE PARTY IN ANY SUCH SUIT OR
PROCEEDING. NOTHING HEREIN SHALL AFFECT ANY PARTY’S RIGHT TO SERVE PROCESS IN
ANY OTHER MANNER PERMITTED BY LAW. THE PARTIES AGREE THAT A FINAL NON-APPEALABLE
JUDGMENT IN ANY SUCH SUIT OR PROCEEDING SHALL BE CONCLUSIVE AND MAY BE ENFORCED
IN OTHER JURISDICTIONS BY SUIT ON SUCH JUDGMENT OR IN ANY OTHER LAWFUL MANNER.
THE PARTIES HEREBY WAIVE A TRIAL BY JURY IN ANY ACTION, PROCEEDING OR
COUNTERCLAIM BROUGHT BY EITHER OF THE PARTIES HERETO AGAINST THE OTHER IN
RESPECT OF ANY MATTER ARISING OUT OF OR IN CONNECTION WITH THIS
AGREEMENT.
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b. Counterparts;
Signatures by Facsimile.
This
Agreement may be executed in one or more counterparts, each of which shall
be
deemed an original but all of which shall constitute one and the same agreement
and shall become effective when counterparts have been signed by each party
and
delivered to the other party. This Agreement, once executed by a party, may
be
delivered to the other party hereto by facsimile transmission or electronic
mail
transmission of a copy of this Agreement bearing the signature of the party
so
delivering this Agreement. A
facsimile or electronic mail transmission of this signed Agreement shall be
legal and binding on all parties hereto.
c. Headings.
The
headings of this Agreement are for convenience of reference only and shall
not
form part of, or affect the interpretation of, this Agreement.
d. Severability.
In the
event that any provision of this Agreement is invalid or enforceable under
any
applicable statute or rule of law, then such provision shall be deemed
inoperative to the extent that it may conflict therewith and shall be deemed
modified to conform with such statute or rule of law. Any provision hereof
which
may prove invalid or unenforceable under any law shall not affect the validity
or enforceability of any other provision hereof.
e. Entire
Agreement; Amendments.
This
Agreement and the instruments referenced herein contain the entire understanding
of the parties with respect to the matters covered herein and therein and,
except as specifically set forth herein or therein, neither Sionix nor Purchaser
makes any representation, warranty, covenant or undertaking with respect to
such
matters. No provision of this Agreement may be waived or amended other than
by
an instrument in writing signed by the party to be charged with
enforcement.
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f. Notices.
Any
notices required or permitted to be given under the terms of this Agreement
shall be sent by certified or registered mail (return receipt requested) or
delivered personally or by courier (including a recognized overnight delivery
service) or by facsimile or by electronic mail either in the text of an email
message or attached in a commonly readable format, and shall be effective five
days after being placed in the mail, if mailed by regular United States mail,
or
upon receipt, if delivered personally, by courier (including a recognized
overnight delivery service) or by facsimile, or one day after electronically
mailed if the sender has received no generated notice that the email message
has
not been successfully delivered, in each case addressed to a party. The
addresses for such communications shall be:
If
to
Sionix:
0000
Xxxxxxxxx Xxxxx, Xxxxx 000
Xxxxxx,
XX 00000
Attention:
_______________
Facsimile:
(000)
000-0000
Email:
with
a
copy to:
Xxxxxxxxxx
& Xxxxx, LLP
000
Xxxxxxxxx Xxxxxx, 00xx
Xxxxx
Xxx
Xxxx,
XX 00000
Attention:
Xxxxx Xxxxxxxxx, Esq.
Facsimile:
000-000-0000
Email:
xxxxxxxxxx@xxxxxxxxxxxxxxx.xxx
If
to
Purchaser:
____________________
____________________
____________________
Attention:
Facsimile:
Email:
with
a
copy to:
____________________
____________________
Attention:
Facsimile:
Email:
Each
party shall provide notice to the other party of any change in
address.
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h. Successors
and Assigns.
This
Agreement shall be binding upon and inure to the benefit of the parties and
their successors and assigns. Neither Sionix nor Purchaser shall assign this
Agreement or any rights or obligations hereunder without the prior written
consent of the other. Notwithstanding the foregoing, subject to Section 2(e),
Purchaser may assign its rights hereunder to any person that purchases the
Debenture, the Warrant, or any Warrant Shares in a private transaction from
Purchaser or to any of its “affiliates,” as that term is defined under the 1933
Act, without the consent of Sionix.
i. Third
Party Beneficiaries.
This
Agreement is intended for the benefit of the parties hereto and their respective
permitted successors and assigns, and is not for the benefit of, nor may any
provision hereof be enforced by, any other person.
j. Further
Assurances.
Each
party shall do and perform, or cause to be done and performed, all such further
acts and things, and shall execute and deliver all such other agreements,
certificates, instruments and documents, as the other party may reasonably
request in order to carry out the intent and accomplish the purposes of this
Agreement and the consummation of the transactions contemplated
hereby.
k. No
Strict Construction.
The
language used in this Agreement will be deemed to be the language chosen by
the
parties to express their mutual intent, and no rules of strict construction
will
be applied against any party.
[Remainder
of page intentionally left blank.]
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IN
WITNESS WHEREOF,
Purchaser and Sionix have caused this Securities Purchase Agreement to be duly
executed as of the date first above written.
| PURCHASER: | ||
| |
|
[_________________] |
| By: | ||
|
Name: |
||
| Title: | ||
| SIONIX: | ||
|
SIONIX
CORPORATION
|
||
| By: | ||
|
Name: Xxxxxxx X. Xxxxxxxx |
||
| Title: Chief Executive Officer | ||
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Exhibit
A
Form
of
Debenture
A-1
Exhibit
B
Form
of
Warrant
B-1
Exhibit
C
As
used
herein, the words “we”, “us” and “our” refer to Sionix Corporation.
An
investment in shares of our Common Stock is highly speculative and involves
a
high degree of risk. We face a variety of risks that may affect our operations
or financial results and many of those risks are driven by factors that we
cannot control or predict. The following discussion addresses those risks that
management believes are the most significant, although there may be other risks
that could arise, or may prove to be more significant than expected, that may
affect our operations or financial results. Only those investors who can bear
the risk of loss of their entire investment should participate in this offering.
Prospective investors should carefully consider the following risk factors
in
evaluating an investment in our Common Stock.
RISKS
RELATED TO OUR COMPANY
We
have never generated any revenues.
Although
we have been in business for more than ten years, we have never generated any
revenues from operations. We have been in a development stage since inception,
and have yet to manufacture products for sale to customers. All of our working
capital has been generated by sales of securities and loans from
affiliates.
We
have a history of operating losses, which may
continue.
We
have a
history of losses and may continue to incur operating and net losses for the
foreseeable future. We incurred a net loss of approximately $775,000 for the
fiscal year ended September 30, 2006 and a net loss of approximately $950,000
for the nine months ended June 30, 2007. As of June 30, 2007 our accumulated
deficit was approximately $16,400,000. We have not achieved profitability on
a
quarterly or on an annual basis. We may not be able to generate revenues or
reach a level of revenue to achieve profitability.
Our
future financial results, including our expected revenues, are unpredictable
and
difficult to forecast.
If
we
begin to generate revenues, it is likely that our revenues, expenses and
operating results will fluctuate from quarter to quarter, which could increase
the volatility of the price of our Common Stock. We expect that our operating
results will continue to fluctuate in the future due to a number of factors,
some of which are beyond our control. These factors include:
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Our
ability, thus far unproven, to sell our products.
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If
we receive orders for products, our ability to complete those orders
in a
timely fashion.
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The
costs we will incur in manufacturing products.
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The
costs of marketing our products, including customer relations and
warranty
repairs
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C-1
Due
to
all of these factors, our operating results may fall below the expectations
of
investors, which could cause a decline in the price of our Common
Stock.
We
will need to raise additional capital to meet our business requirements in
the
future and such capital raising may be costly or difficult to obtain and could
dilute current stockholders’ ownership interests.
We
will
need to raise additional capital in the future, which may not be available
on
reasonable terms or at all. The raising of additional capital may dilute our
current stockholders’ ownership interests. Our income from operations will not
be sufficient to achieve our business plan. We will need to raise additional
funds through public or private debt or equity financings to meet various
objectives including, but not limited to:
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pursuing
growth opportunities, including more rapid
expansion;
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acquiring
complementary businesses;
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making
capital improvements to improve our
infrastructure;
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hiring
qualified management and key
employees;
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developing
new products, accessories and
services;
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responding
to competitive pressures; and
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complying
with regulatory requirements.
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Any
additional capital raised through the sale of equity or equity backed securities
may dilute current stockholders’ ownership percentages and could also result in
a decrease in the fair market value of our equity securities, because our assets
would be owned by a larger pool of outstanding equity. The terms of those
securities issued by us in future capital transactions may be more favorable
to
new investors, and may include preferences, superior voting rights and the
issuance of warrants or other derivative securities, which may have a further
dilutive effect.
Furthermore,
any additional debt or equity financing that we may need may not be available
on
terms favorable to us, or at all. The registration rights agreements we
entered into in connection with a 2006 private placement and a 2007 private
placement provide that we will not, without the prior written consent of the
majority of registered holders, file or request the acceleration of any other
registration statement filed with the SEC, subject to certain exceptions, until
the SEC has declared the registration statement contemplated by those
registration rights agreements effective. In addition, negative covenants in
those purchase agreements limit our ability to raise additional capital,
including through the incurrence of debt or liens on our properties or the
issuance of equity securities that include registration rights. These negative
covenants may impair our ability to raise additional capital. If we are unable
to obtain required additional capital, we may have to curtail our growth plans
or cut back on existing business and, further, we may not be able to continue
operating if we do not generate sufficient revenues from operations needed
to
stay in business.
C-2
We
may
incur substantial costs in pursuing future capital financing, including
investment banking fees, legal fees, accounting fees, securities law compliance
fees, printing and distribution expenses and other costs. We may also be
required to recognize non-cash expenses in connection with certain securities
we
issue, such as convertible notes and warrants, which may adversely impact our
financial condition.
We
may be required to pay liquidated damages to certain of our investors under
certain circumstances.
We
entered into registration rights agreements in connection with our 2006 private
placement and our 2007 private placement. These registration rights agreements
require us to pay partial liquidated damages under certain circumstances if
we
do not satisfy our obligations under such registration rights agreements,
including our obligations to file or obtain or maintain the effectiveness of
registration statements as required under these registration rights agreements.
If we are unable to satisfy our obligations under these registration rights
agreements and we are obligated to pay partial liquidated damages, it may
adversely impact our financial condition.
Our
auditors have indicated that our inability to generate sufficient revenue raises
substantial doubt as to our ability to continue as a going
concern.
Our
audited financial statements for the fiscal year ended September 30, 2006 were
prepared on a going concern basis in accordance with United States generally
accounting principles. The going concern basis of presentation assumes that
we
will continue in operation for the foreseeable future and will be able to
realize our assets and discharge our liabilities and commitments in the normal
course of business. However, our auditors have indicated that our inability
to
generate sufficient revenue raises substantial doubt as to our ability to
continue as a going concern. In the absence of significant revenues and profits,
we are seeking to raise additional funds to meet our working capital needs
principally through the additional sales of our securities or debt financings.
However, we cannot guarantee that will be able to obtain sufficient additional
funds when needed or that such funds, if available, will be obtainable on terms
satisfactory to us. In the event that these plans can not be effectively
realized, there can be no assurance that we will be able to continue as a going
concern.
C-3
We
intend to expand our operations and increase our expenditures in an effort
to
grow our business. If we are unable to achieve or manage significant growth
and
expansion, or if our business does not grow as we expect, our operating results
may suffer.
Our
business plan anticipates continued additional expenditures on development,
manufacturing and other growth initiatives. We may not achieve significant
growth. If achieved, significant growth would place increased demands on our
management, accounting systems, network infrastructure and systems of financial
and internal controls. We may be unable to expand associated resources and
refine associated systems fast enough to keep pace with expansion, especially
to
the extent we expand into multiple facilities at distant locations. If we fail
to ensure that our management, control and other systems keep pace with growth,
we may experience a decline in the effectiveness and focus of our management
team, problems with timely or accurate reporting, issues with costs and quality
controls and other problems associated with a failure to manage rapid growth,
all of which would harm our results of operations.
We
may be
unable to maintain sufficient insurance as a public company to cover liability
claims made against our officers and directors. If we are unable to adequately
insure our officers and directors, we may not be able to retain or recruit
qualified officers and directors to manage us.
Losing
key personnel or failing to attract and retain other highly skilled personnel
could affect our ability to successfully grow our
business.
Our
future performance depends substantially on the continued service of our senior
management and other key personnel. We do not currently maintain key person
life
insurance. If our senior management were to resign or no longer be able to
serve
as our employees, it could impair our revenue growth, business and future
prospects.
To
meet
our expected growth, we believe that our future success will depend upon our
ability to hire, train and retain other highly skilled personnel. We
cannot be sure that we will be successful in hiring, assimilating or retaining
the necessary personnel, and our failure to do so could cause our operating
results to fall below our growth and profit targets.
Rules
issued under the Xxxxxxxx-Xxxxx Act of 2002 may make it difficult for us to
retain or attract qualified officers and directors, which could adversely affect
the management of our business and our ability to obtain or retain listing
of
our Common Stock.
We
may be
unable to attract and retain those qualified officers, directors and members
of
board committees required to provide for our effective management because of
rules and regulations that govern publicly held companies, including, but not
limited to, certifications by principal executive officers. The enactment of
the
Xxxxxxxx-Xxxxx Act has resulted in the issuance of rules and regulations and
the
strengthening of existing rules and regulations by the SEC, as well as the
adoption of new and more stringent rules by the stock exchanges and NASDAQ.
The
perceived increased personal risk associated with these recent changes may
deter
qualified individuals from accepting roles as directors and executive
officers.
C-4
Further,
some of these recent changes heighten the requirements for board or committee
membership, particularly with respect to an individual’s independence from the
corporation and level of experience in finance and accounting matters. We may
have difficulty attracting and retaining directors with the requisite
qualifications. If we are unable to attract and retain qualified officers and
directors, the management of our business and our ability to obtain or retain
listing of our shares of Common Stock on any stock exchange or NASDAQ (assuming
we elect to seek and are successful in obtaining such listing) could be
adversely affected.
Many
of our competitors are large, diversified manufacturing companies with
significant expertise in the water quality business and contacts with water
utilities and industrial water consumers. These competitors have significantly
greater name recognition and financial and other resources. We cannot assure
you
that we will succeed in the face of strong competition from other water
treatment companies.
Certain
Aspects of Our Industry Are Subject To Government
Regulation
Treatment
of domestic drinking water and wastewater is regulated by a number of federal
state and local agencies, including the U.S. Environmental Protection Agency.
The changing regulatory environment, including changes in water quality
standards, could adversely affect our business or make our products
obsolete.
We,
like
any other manufacturer of products that are designed to treat food or water
that
will be ingested, face an inherent risk of exposure to product liability claims
in the event that the use of our products results in injury. Such claims may
include, among others, that our products fail to remove harmful contaminants
or
bacteria, or that our products introduce other contaminants into the water.
While we intend to obtain product liability insurance, there can be no assurance
that such insurance will continue to be available at a reasonable cost, or,
if
available, will be adequate to cover liabilities. We do not anticipate obtaining
contractual indemnification from parties acquiring or using our products. In
any
event, any such indemnification if obtained will be limited by our terms and,
as
a practical matter, to the creditworthiness of the indemnifying party. In the
event that we do not have adequate insurance or contractual indemnification,
product liabilities relating to defective products could have a material adverse
effect on our operations and financial conditions.
C-5
Our
water treatment system and the related technology is unproven and may not
achieve widespread market acceptance among our prospective
customers.
Although
we have installed a water treatment system on a pilot basis, our products have
not been proven in a commercial context over any significant period of time.
We
have developed our proprietary technology and processes for water treatment
based on dissolved air flotation technology, which competes with other forms
of
water treatment technologies that currently are in operation throughout the
United States. Our water treatment system and the technology on which it is
based may not achieve widespread market acceptance. Our success will depend
on
our ability to market our system and services to businesses and water providers
on terms and conditions acceptable to us and to establish and maintain
successful relationships with various water providers and state regulatory
agencies.
We
believe that market acceptance of our system and technology and our related
success will depend on many factors including:
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the
perceived advantages of our system over competing water treatment
solutions;
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the
actual and perceived safety and efficacy of our
system;
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the
availability and success of alternative water treatment
solutions;
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the
pricing and cost effectiveness of our
system;
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our
ability to access businesses and water providers that may use our
system;
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the
effectiveness of our sales and marketing
efforts;
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publicity
concerning our system and technology or competitive
solutions;
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timeliness
in assembling and installing our system on customer
sites;
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our
ability to respond to changes in the regulatory standards
for levels of various contaminants;
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our
ability to provide effective service and maintenance of our systems
to our
customers’ satisfaction.
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If
our
system or technology fails to achieve or maintain market acceptance or if new
technologies are introduced by others that are more favorably received than
our
technology, are more cost effective or otherwise render our technology obsolete,
we may experience a decline in demand for our system. If we are unable to market
and sell our system and services successfully, our revenues would decline and
our operating results and prospects would suffer.
We
have only recently leased a manufacturing facility for our
products.
In
September of 2007 we leased a 60,000 square foot manufacturing facility in
Garden Grove, California. We are currently acquiring and assembling the
necessary equipment and machinery for manufacturing our products, but have
yet
to commence manufacturing at the facility. We may encounter unexpected problems
and expenses in making the facility ready to commence
manufacturing.
C-6
We
must meet evolving customer requirements for water treatment and invest in
the
development of our water treatment technologies.
If
we are
unable to develop or enhance our system and services to satisfy evolving
customer demands, our business, operating results, financial condition and
prospects will be harmed significantly. The market for water treatment is
characterized by changing technologies, periodic new product introductions
and
evolving customer and industry standards. For instance, competitors in the
water
treatment industry are continuously searching for methods of water treatment
that are more cost-effective and more efficient. Our current and prospective
customers may choose water treatment systems that are offered at a lower price
than our system. To achieve market acceptance for our system, we must
effectively and timely anticipate and adapt to customer requirements and offer
products and services that meet customer demands. This may cause us to pursue
other technologies or capabilities through acquisitions or strategic alliances.
Our customers may require us to provide water treatment systems for many
different contaminants or higher volumes of water or to decrease the presence
of
contaminants. We also may experience design, engineering and other difficulties
that could delay or prevent the development, introduction or marketing of any
modifications to our system or our new services. Our failure to develop
successfully and offer a system or services that satisfy customer requirements
would significantly weaken demand for our system or services, which would likely
cause a decrease in our revenues and harm our operating results. In addition,
if
our competitors introduce solutions and/or services based on new or alternative
water treatment technologies, our existing and future system and/or services
could become obsolete, which would also weaken demand for our system, thereby
decreasing our revenues and harming our operating results.
Failure
to protect our intellectual property rights could impair our competitive
position.
Our
water
treatment systems utilize a variety of proprietary rights that are important
to
our competitive position and success. Because the intellectual property
associated with our technology is evolving and rapidly changing, our current
intellectual property rights may not protect us adequately. We rely on a
combination of patents, trademarks, trade secrets and contractual restrictions
to protect the intellectual property we use in our business. In addition, we
generally enter into confidentiality or license agreements, or have
confidentiality provisions in agreements, with our employees, consultants,
strategic partners and customers and control access to, and distribution of,
our
technology, documentation and other proprietary information.
Because
legal standards relating to the validity, enforceability and scope of protection
of patent and intellectual property rights in new technologies are uncertain
and
still evolving, the future viability or value of our intellectual property
rights is uncertain. Furthermore, our competitors independently may develop
similar technologies that limit the value of our intellectual property or design
around patents issued to us. If competitors or third parties are able to use
our
intellectual property or are able to successfully challenge, circumvent,
invalidate or render unenforceable our intellectual property, we likely would
lose any competitive advantage we might develop. We may not be successful in
securing or maintaining proprietary or patent protection for the technology
used
in our system or services, and protection that is secured may be challenged
and
possibly lost.
C-7
Risks
Related to Our Industry
Changes
in governmental regulation and other legal uncertainties could adversely affect
our customers or decrease demand for our systems, and thus harm our business,
operating results and prospects.
In
the
United States, many different federal, state and local laws and regulations
govern the treatment and distribution of water, as well as and
disposal of attendant wastes. The increased interest in the treatment of
contaminated water due to increased media attention on the adverse health
effects from contaminated drinking water may result in intervention by the
EPA
or state regulatory agencies under existing or newly enacted legislation and
in
the imposition of restrictions, fees or charges on users and providers of
products and services in this area. These restrictions, fees or charges could
adversely affect our potential customers, which could negatively affect our
revenues. Conversely, the failure of the EPA or state regulatory agencies to
act
on a timely basis to set interim or permanent standards for pollutants, or
to
delay effective dates for standards for pollutants, grant waivers of compliance
with such standards or take other discretionary actions not to enforce these
standards, may decrease demand for our system if water utilities and agencies
are not required to bring their water into compliance with such regulatory
standards. While we are not aware of any currently proposed federal regulation
directly affecting our business, we cannot predict whether there will be future
legislation regarding the treatment and distribution of water and the disposal
of attendant wastes.
Water
treatment systems in the United States must generally be permitted by a
regulatory agency prior to its use by our customers, and changing drinking
water
standards and other factors could affect the approval process with respect
to
our systems by such regulatory agencies.
In
general, water treatment systems must be permitted by applicable state or local
regulatory agencies prior to commencement of operations. We cannot assure you
when or whether the various regulatory agencies will approve our system for
use
by our customers. The application process can be time consuming and often
involves several information requests by the regulatory agencies with respect
to
the system. Any long waiting periods or difficulties faced by our customers
in
the application process could cause some of our customers to use competing
technologies, products, services or sources of drinking water, rather than
use
our technology.
C-8
Demand
for our products could be adversely affected by a downturn in government
spending related to water treatment, or in the cyclical residential or
non-residential building markets.
Our
business will be dependent upon spending on water treatment systems by
utilities, municipalities and other organizations that supply water, which
in
turn is often dependent upon residential construction, population growth,
continued contamination of water sources and regulatory responses to this
contamination. As a result, demand for our water treatment systems could be
impacted adversely by general budgetary constraints on governmental or regulated
customers, including government spending cuts, the inability of government
entities to issue debt to finance any necessary water treatment projects,
difficulty of customers in obtaining necessary permits or changes in regulatory
limits associated with the contaminants we seek to address with our water
treatment system. A slowdown of growth in residential and non-residential
building would reduce demand for drinking water and for water treatment systems.
The residential and non-residential building markets are generally cyclical,
and, historically, down cycles have typically lasted a number of years. Any
significant decline in the governmental spending on water treatment systems
or
residential or non-residential building markets could weaken demand for our
systems.
We
operate in a competitive market, and if we are unable to compete effectively,
our business, operating results and prospects could
suffer.
The
market environment in which we operate is very dynamic and is characterized
by
evolving standards, the development of new technology, regulations which
continually reduce the acceptable levels for contaminants and affect the means,
methods and costs of disposing of wastes derived from water
treatment.
We
will
compete with large water treatment companies, such as USFilter Corporation,
a subsidiary of Siemens AG. Our competition may vary according to the
contaminant being removed. Many of our current and potential competitors have
technical and financial resources, marketing and service organizations, and
market expertise significantly greater than ours. Many of our competitors also
have longer operating histories, greater name recognition and large customer
bases. Moreover, our competitors may forecast the course of market developments
more accurately and could in the future develop new technologies that compete
with our system and/or services or even render our system and/or services
obsolete. Due to the evolving markets in which we compete, additional
competitors with significant market presence and financial resources may enter
those markets, thereby further increasing competition. These competitors may
be
able to reduce our market share by adopting more aggressive pricing policies
than we can or by developing technology and services that gain wider market
acceptance than our system and/or services. Existing and potential competitors
also may develop relationships with distributors of our system and services
or
third parties with whom we have strategic relationships in a manner that could
harm our ability to sell, market and develop our system and services
significantly. If we do not compete successfully we may never achieve
significant market penetration and we may be unable to maintain or increase
our
business or revenues, causing our operating results and prospects to suffer.
C-9
RISKS
RELATED TO OUR COMMON STOCK
You
may have difficulty trading our Common Stock as there is a limited public market
for shares of our Common Stock.
Our
Common Stock is currently quoted on the NASD’s OTC Bulletin Board under the
symbol “SINX.OB.”
Our
Common Stock is not actively traded and there is a limited public market for
our
Common Stock. As a result, a stockholder may find it difficult to dispose of,
or
to obtain accurate quotations of the price of, our Common Stock. This severely
limits the liquidity of our Common Stock, and would likely have a material
adverse effect on the market price for our Common Stock and on our ability
to
raise additional capital. An active public market for shares of our Common
Stock
may not develop, or if one should develop, it may not be sustained.
Applicable
SEC rules governing the trading of “xxxxx stocks” may limit the trading and
liquidity of our Common Stock which may affect the trading price of our Common
Stock.
Our
Common Stock is currently quoted on the NASD’s OTC Bulletin
Board. Stocks such as ours which trade below $5.00 per share are
considered “xxxxx
stocks”
and
subject to SEC rules and regulations which impose limitations upon the manner
in
which such shares may be publicly traded. These regulations require the
delivery, prior to any transaction involving a xxxxx stock, of a disclosure
schedule explaining the xxxxx stock market and the associated risks. Under
these
regulations, certain brokers who recommend such securities to persons other
than
established customers or certain accredited investors must make a special
written suitability determination regarding such a purchaser and receive such
purchaser’s written agreement to a transaction prior to sale. These regulations
have the effect of limiting the trading activity of our Common Stock and
reducing the liquidity of an investment in our Common Stock.
A
dividend has never been declared or paid in cash on our Common Stock, and we
do
not anticipate such a declaration or payment for the foreseeable future. We
expect to use future earnings, if any, to fund business growth. Therefore,
stockholders will not receive any funds absent a sale of their shares. We cannot
assure stockholders of a positive return on their investment when they sell
their shares, nor can we assure that stockholders will not lose the entire
amount of their investment.
In
the
future, we may issue our authorized but previously unissued equity securities,
resulting in the dilution of the ownership interests of our present
stockholders. We are currently authorized to issue an aggregate of
150,000,000 shares of Common Stock and plan to increase our authorized shares
as
soon as commercially practicable to 300,000,000 shares of Common Stock, or
such
lower number as our board of directors deems advisable. As of
September 30, 2007, we had 106,635,201 shares of Common Stock issued and
outstanding. As of December 21, 2007, we have approximately 170,786,241 shares
of Common Stock outstanding on a fully diluted basis. We may also issue
additional shares of our Common Stock or other securities that are convertible
into or exercisable for Common Stock in connection with hiring or retaining
employees, future acquisitions, future sales of our securities for capital
raising purposes, or for other business purposes. The future issuance of
any such additional shares of our Common Stock or other securities may create
downward pressure on the trading price of our Common Stock. There can be
no assurance that we will not be required to issue additional shares, warrants
or other convertible securities in the future in conjunction with any capital
raising efforts, including at a price (or exercise prices) below the price
at
which shares of our Common Stock are currently quoted on the OTC Bulletin
Board.
C-10
Even
though we are not a California corporation, our Common Stock could still be
subject to a number of key provisions of the California General Corporation
Law.
Under
Section 2115 of the California General Corporation Law (the “CGCL”),
corporations not organized under California law may still be subject to a number
of key provisions of the CGCL. This determination is based on whether the
corporation has significant business contacts with California and if more than
50% of its voting securities are held of record by persons having addresses
in
California. In the immediate future, we will continue the business and
operations of Sionix in California, and a majority of our business operations,
revenue and payroll will be conducted in, derived from, and paid to residents
of
California. Therefore, depending on our ownership, we could be subject to
certain provisions of the CGCL. Among the more important provisions are those
relating to the election and removal of directors, cumulative voting, standards
of liability and indemnification of directors, distributions, dividends and
repurchases of shares, shareholder meetings, approval of certain corporate
transactions, dissenters' and appraisal rights, and inspection of corporate
records.
C-11
