XNN Xenonics Holdings,

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2010
or

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission file number: 001-32469

XENONICS HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

Nevada		84-1433854
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
3186 Lionshead Avenue Carlsbad, California		92010
(Address of principal executive offices)		(Zip code)

(760) 477-8900
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,“and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one):

Large accelerated filer o		Accelerated filer o		Non-accelerated filer o		Smaller Reporting Company þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

The registrant had 25,509,458 shares of common stock outstanding as of August 2, 2010.

 

 

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 2010 (unaudited) and September 30, 2009			1
Condensed Consolidated Statements of Operations for the Three and Nine Months ended June 30, 2010 and 2009 (unaudited)			2
Condensed Consolidated Statements of Cash Flows for the Nine Months ended June 30, 2010 and 2009 (unaudited)			3
Notes to Unaudited Condensed Consolidated Financial Statements			4
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			12
Item 3. Quantitative and Qualitative Disclosures About Market Risk			15
Item 4. Controls and Procedures			15
PART II. OTHER INFORMATION
Item 1A. Risk Factors			16
Item 6. Exhibits			22
SIGNATURE PAGE			23
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements

CONDENSED CONSOLIDATED BALANCE SHEETS

		June 30,				September 30,
		2010				2009
Rounded in thousands, except par value		(unaudited)
Assets
Current Assets:
Cash		$	502,000			$	126,000
Accounts receivable, net			1,277,000				1,634,000
Inventories, net			2,022,000				2,069,000
Other current assets			216,000				119,000
Total Current Assets			4,017,000				3,948,000
Equipment, furniture and fixtures at cost, less accumulated depreciation of $188,000 and $148,000			90,000				130,000
Goodwill			375,000				375,000
Other assets			199,000				—
Total Assets		$	4,681,000			$	4,453,000
Liabilities and Shareholders’ Equity
Current Liabilities:
Accounts payable		$	537,000			$	1,000,000
Accrued expenses			77,000				157,000
Accrued payroll and related taxes			138,000				156,000
Accrued derivative liability			—				199,000
Total Current Liabilities			752,000				1,512,000
Notes payable			355,000				292,000
Total Liabilities			1,107,000				1,804,000
Commitments and contingencies (Note 9)
Shareholders’ Equity:
Preferred shares, $0.001 par value, 5,000,000 shares authorized, 0 shares issued and outstanding			—				—
Common shares, $0.001 par value, 50,000,000 shares authorized as of June 30, 2010 and September 30, 2009; 25,622,000 shares issued as of June 30, 2010 and 20,571,000 as of September 30, 2009; 25,509,000 shares outstanding as of June 30, 2010 and 20,459,000 as of September 30, 2009			26,000				20,000
Additional paid-in capital			26,941,000				24,478,000
Accumulated deficit			(23,087,000	)			(21,543,000	)
			3,880,000				2,955,000
Less treasury shares, at cost, 113,000 shares as of June 30, 2010 and September 30, 2009			(306,000	)			(306,000	)
Total Shareholders’ Equity			3,574,000				2,649,000
Total Liabilities and Shareholders’ Equity		$	4,681,000			$	4,453,000

See notes to unaudited condensed consolidated financial statements .

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

		Three months ended								Nine months ended
		June 30,								June 30,
		2010				2009				2010				2009
Rounded in thousands, except per share amounts		(unaudited)								(unaudited)
Revenues		$	1,421,000			$	2,132,000			$	2,786,000			$	5,288,000
Cost of goods sold			692,000				1,142,000				1,433,000				2,918,000
Gross profit			729,000				990,000				1,353,000				2,370,000
Selling, general and administrative			709,000				1,049,000				2,198,000				3,629,000
Research and development			171,000				158,000				625,000				501,000
Loss from operations			(151,000	)			(217,000	)			(1,470,000	)			(1,760,000	)
Other income/(expense):
Gain (loss) on derivative revaluation			—				(33,000	)			38,000				(52,000	)
Other income			—				6,000				—				10,000
Interest income			1,000				4,000				3,000				14,000
Interest (expense)			(38,000	)			—				(113,000	)			(7,000	)
Loss before provision for income taxes			(188,000	)			(240,000	)			(1,542,000	)			(1,795,000	)
Income tax provision			—				—				2,000				2,000
Net loss		$	(188,000	)		$	(240,000	)		$	(1,544,000	)		$	(1,797,000	)
Net loss per share:
Basic and fully-diluted		$	(0.01	)		$	(0.01	)		$	(0.07	)		$	(0.09	)
Weighted average shares outstanding:
Basic and fully-diluted			24,719,000				20,459,000				22,247,000				20,387,000

See notes to unaudited condensed consolidated financial statements.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

		Nine months ended
		June 30,
		2010				2009
Rounded in thousands		(unaudited)
Cash flows from operating activities:
Net (loss)		$	(1,544,000	)		$	(1,797,000	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation			40,000				43,000
Provision for bad debts			(80,000	)			(7,000	)
Non-cash compensation to employees and directors			35,000				251,000
Non-cash compensation for warrants issued			103,000				—
Non-cash compensation to consultants			65,000				30,000
(Gain) loss on derivative revaluation			(38,000	)			52,000
Amortization of warrants for notes payable			63,000				—
Changes in operating assets and liabilities:
Accounts receivable			437,000				(267,000	)
Inventories			47,000				(226,000	)
Other current assets			26,000				263,000
Accounts payable			(453,000	)			811,000
Accrued expenses			(80,000	)			37,000
Accrued payroll and related taxes			(18,000	)			35,000
Accrued derivative liability			(161,000	)			—
Net cash provided by (used in) operating activities			(1,558,000	)			(775,000	)
Cash flows from investing activities:
Purchases of equipment, furniture and fixtures			—				(36,000	)
Proceeds from and (purchases) of investments in marketable securities			—				1,000,000
Net cash provided by (used in) investing activities			—				964,000
Cash flows from financing activities:
Proceeds from sales of common stock, net			1,928,000				—
Proceeds from exercise of stock options			6,000				—
Proceeds from bank note payable			—				1,000,000
Repayment of bank note payable			—				(1,000,000	)
Net cash provided by (used in) financing activities			1,934,000				—
Net increase in cash			376,000				189,000
Cash, beginning of period			126,000				325,000
Cash, end of period		$	502,000			$	514,000
Supplemental cash flow information:
Cash paid during the period for income taxes		$	2,000			$	2,000
Cash paid during the period for interest		$	51,000			$	7,000
Supplemental schedule of non-cash financing activities:
The Company repurchased 125,000 shares of the non-controlling interest in a subsidiary through the issuance of 275,000 shares of common stock worth $214,000 and recording an initial accrual of $161,000 (Note 9)		$	—			$	375,000
The Company issued 25,000 shares of common stock for the exercise of stock options and received $6,000 in cash plus consulting services		$	10,000			$	—
The Company issued 300,000 shares of common stock for a three-year financial advisory service agreement at $0.80 per share		$	240,000			$	—
The Company issued 300,000 shares of common stock for a one-year extension of the financial advisory service agreement at $0.49 per share		$	147,000			$	—

See notes to unaudited condensed consolidated financial statements.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Rounded in thousands)

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, 2009 included in the Xenonics Holdings, Inc. (“Holdings”) Form 10-K 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 wholly-owned subsidiary, Xenonics, Inc. (“Xenonics”), collectively, the “Company”.

2. RECENTLY ADOPTED AND ISSUED ACCOUNTING PRONOUNCEMENTS

Recently Adopted:

On October 1, 2009, we adopted a new FASB rule that revises existing business combination rules. The new rule requires most identifiable assets, liabilities, non-controlling interests, and goodwill acquired in a business combination to be recorded at “full fair value.” The new rule applies to all business combinations, including combinations among mutual entities and combinations by contract alone. Additionally, all business combinations will be accounted for by applying the acquisition method. The new rule was effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The adoption of this standard did not have an impact on our consolidated financial statements.

On October 1, 2009, we adopted new FASB rules related to accounting for assets acquired and liabilities assumed in a business combination that arise from contingencies. The new rules apply to all assets acquired and liabilities assumed in a business combination that arise from certain contingencies as defined by the FASB and requires (i) an acquirer to recognize at fair value, at the acquisition date, an asset acquired or liability assumed in a business combination that arises from a contingency if the acquisition-date fair value of that asset or liability can be determined during the measurement period, otherwise the asset or liability should be recognized at the acquisition date if certain defined criteria are met; (ii) contingent consideration arrangements of an acquiree assumed by the acquirer in a business combination be recognized initially at fair value; (iii) subsequent measurements of assets and liabilities arising from contingencies be based on a systematic and rational method depending on their nature and contingent consideration arrangements be measured subsequently; and (iv) disclosures of the amounts and measurement basis of such assets and liabilities and the nature of the contingencies. The new rules were effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The adoption of this standard did not have an impact on our consolidated financial statements.

On October 1, 2009, we adopted new FASB rules related to determining the useful life of intangible assets. The new rules amend the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under existing FASB rules for goodwill and other intangible assets. This change is intended to improve the consistency between the useful life of a recognized intangible asset outside a business combination and the period of expected cash flows used to measure the fair value of an intangible asset in a business combination. The new rules were effective for the financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. The requirement for determining useful lives must be applied prospectively to intangible assets acquired after the effective date and the disclosure requirements must be applied prospectively to all intangible recognized as of, and subsequent to, the effective date. The adoption of this standard did not have an impact on our consolidated financial statements.

On October 1, 2009, we adopted a new FASB rule related to non-controlling interests in consolidated financial statements. The new rule requires the ownership interests in subsidiaries held by parties other than the parent to be treated as a separate component of equity and be clearly identified, labeled, and presented in the consolidated financial statements. The new rule was effective for fiscal years beginning on or after December 15, 2008 and interim periods within those fiscal years. Earlier adoption was prohibited. The adoption of this standard did not have an impact on our consolidated financial statements. On October 1, 2009, we also adopted related guidance, FASB ASU No. 2010-2, Consolidation (Topic 810): Accounting and Reporting for Decreases in Ownership of a Subsidiary — a Scope Clarification , which amended certain provisions of the preceding new guidance for non-controlling interests and changes in ownership interests of a subsidiary, specifically related to an entity that experiences a decrease in ownership in a subsidiary. The new guidance clarifies the scope of the decrease in ownership provisions. The adoption of this standard did not have an impact on our consolidated financial statements.

On October 1, 2009, we adopted new FASB rules related to determining whether an instrument (or embedded feature) is indexed to an entity’s own stock. Existing accounting for derivatives and hedging activities, specifies that a contract that would otherwise meet the definition of a derivative but is both (a) indexed to the Company’s own stock and (b) classified in shareholders’ equity in the statement of financial position would not be considered a derivative financial instrument. The new rules provide a new two-step model to be applied in determining whether a financial instrument or an embedded feature is indexed to an issuer’s own stock and thus able to qualify for the existing scope exception. The new rules were effective for the first annual reporting period beginning after December 15, 2008, and early adoption is prohibited. The adoption of this standard did not have an impact on our consolidated financial statements.

On October 1, 2009, we adopted the FASB ASU No. 2009-5, Fair Value Measurements and Disclosures (Topic 820)—Measuring Liabilities at Fair Value , which changed the fair value accounting for liabilities. These changes clarify existing guidance that in circumstances in which a quoted price in an active market for the identical liability is not available, an entity is required to measure fair value using either a valuation technique that uses a quoted price of either a similar liability or a quoted price of an identical or similar liability when traded as an asset, or another valuation technique that is consistent with the principles of fair value measurements, such as an income approach (e.g., present value technique) or a market approach. This guidance also states that both a quoted price in an active market for the identical liability and a quoted price for the identical liability when traded as an asset in an active market when no adjustments to the quoted price of the asset are required, are Level 1 fair value measurements. The adoption of this standard did not have an impact on our consolidated financial statements.

Recently Issued:

In June 2009, the FASB issued new rules related to accounting for transfers of financial assets. These new rules were incorporated into the Accounting Standards Codification in December 2009 as discussed in FASB Accounting Standards Update (ASU) No. 2009-16, Transfers and Servicing (Topic 860): Accounting for Transfers of Financial Assets. The new rules amend various provisions related to accounting for transfers and servicing of financial assets and extinguishments of liabilities, by removing the concept of a qualifying special-purpose entity and removes the exception from applying FASB rules related to variable interest entities that are qualifying special-purpose entities; limits the circumstances in which a transferor derecognizes a portion or component of a financial asset; defines a participating interest; requires a transferor to recognize and initially measure at fair value all assets obtained and liabilities incurred as a result of a transfer accounted for as a sale; and requires enhanced disclosure; among others. The new rules become effective for the Company on October 1, 2010, earlier application is prohibited. The adoption of this standard is not expected to have a material impact on our consolidated financial statements.

In June 2009, the FASB issued new rules to amend certain accounting for variable interest entities (VIE). These new rules were incorporated into the Accounting Standards Codification in December 2009 as discussed in FASB ASU No. 2009-17, Consolidation (Topic 810): Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities. The new rules require an enterprise to perform an analysis to determine whether the enterprise’s variable interest or interests give it a controlling financial interest in a VIE; to require ongoing reassessments of whether an enterprise is the primary beneficiary of a VIE; to eliminate the quantitative approach previously required for determining the primary beneficiary of a VIE; to add an additional reconsideration event for determining whether an entity is a VIE when any changes in facts and circumstances occur such that holders of the equity investment at risk, as a group, lose the power from voting rights or similar rights of those investments to direct the activities of the entity that most significantly impact the entity’s economic performance; and to require enhanced disclosures that will provide users of financial statements with more transparent information about an enterprise’s involvement in a VIE. The new rules become effective for the Company on October 1, 2010; earlier application is prohibited. The adoption of this standard is not expected to have a material impact on our consolidated financial statements.

In October 2009, the FASB issued ASU No. 2009-13, Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements—a consensus of the FASB Emerging Issues Task Force (ASU 2009-13). ASU 2009-13 amends accounting for revenue arrangements with multiple deliverables, to eliminate the requirement that all undelivered elements have Vendor-Specific Objective Evidence (VSOE) or Third-Party Evidence (TPE) before an entity can recognize the portion of an overall arrangement fee that is attributable to items that already have been delivered. In the absence of VSOE or TPE of the standalone selling price for one or more delivered or undelivered elements in a multiple-element arrangement, entities will be required to estimate the selling prices of those elements. The overall arrangement fee will be allocated to each element (both delivered and undelivered items) based on their relative selling prices, regardless of whether those selling prices are evidenced by VSOE or TPE or are based on the entity’s estimated selling price. Application of the “residual method” of allocating an overall arrangement fee between delivered and undelivered elements will no longer be permitted upon adoption of ASU 2009-13. Additionally, the new guidance will require entities to disclose more information about their multiple-element revenue arrangements. ASU 2009-13 is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Early adoption is permitted. If a vendor elects early adoption and the period of adoption is not the beginning of the entity’s fiscal year, the entity will be required to apply the amendments in this Update retrospectively from the beginning of the entity’s fiscal year. Additionally, vendors electing early adoption will be required to disclose the following information at a minimum for all previously reported interim periods in the fiscal year of adoption: revenue, income before income taxes, net income, earnings per share and the effect of the change for the appropriate captions presented. The adoption of this standard is not expected to have a material impact on our consolidated financial statements.

In January 2010, FASB issued ASU No. 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures About Fair Value Measurements . The ASU requires new disclosures about transfers into and out of Levels 1 and 2 and separate disclosures about purchases, sales, issuances, and settlements relating to Level 3 measurements. It also clarifies existing fair value disclosures about the level of disaggregation of disclosed assets and liabilities, and about inputs and valuation techniques used to measure fair value for both recurring and nonrecurring fair value measurements that fall in either Level 2 or Level 3. The new disclosures and clarifications of existing disclosures were effective, and adopted, during the Company’s second quarter ended March 31, 2010, however the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 measurements, will be effective for the Company’s first quarter ending December 31, 2011. Other than requiring additional disclosures, the full adoption of this new guidance will not have an impact on our consolidated financial statements.

3. EARNINGS (LOSS) PER SHARE

Earnings (loss) per share is computed by dividing the income available to common shareholders by the weighted average number of common shares outstanding. Diluted earnings per share is computed similarly to basic earnings per share, except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential additional common shares that were dilutive had been issued. Common share equivalents are excluded from the computation if their effect is anti-dilutive. The Company’s common share equivalents consist of stock options and warrants.

The fully diluted loss per share did 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 nine months ended June 30, 2010, the number of options and warrants excluded was 8,066,000 and 3,486,000, respectively. For the three and nine months ended June 30, 2009, the number of options and warrants excluded was 5,349,000.

4. INVENTORIES

Inventories were comprised of:

		June 30,				September 30,
		2010				2009
		(unaudited)
Raw materials		$	1,264,000			$	1,338,000
Work in process			183,000				218,000
Finished goods			575,000				513,000
		$	2,022,000			$	2,069,000

5. 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.

6. STOCK BASED COMPENSATION

Stock Options — US GAAP requires that compensation cost relating to share-based payment arrangements be recognized in the financial statements. US GAAP requires measurement of compensation cost for all share-based awards at fair value on date of grant and recognition of compensation over the service period for awards expected to vest. The fair value of stock options is determined using the Black-Scholes valuation model. Such fair value is recognized as expense over the service period, net of estimated forfeitures.

US GAAP requires that equity instruments issued to non-employees in exchange for services be valued at the more accurate of the fair value of the services provided or the fair value of the equity instruments issued. For equity instruments issued that are subject to a required service period the expense associated with the equity instruments is recorded as the instruments vest or the services are provided. The Company has granted options and warrants to non-employees and recorded the fair value of these equity instruments on the date of issuance using the Black-Scholes valuation model. The Company has granted stock to non-employees for services and values the stock at the more reliable of the market value on the date of issuance or the value of the services provided. For grants subject to vesting or service requirements, expenses are deferred and recognized over the more appropriate of the vesting period, or as services are provided.

In July 2003, the Company’s board of directors adopted a stock option plan. Under the 2003 option plan, options to purchase up to 1,500,000 shares of common stock are available for employees, directors, and outside consultants.

In December 2004, the Company’s board of directors adopted a 2004 stock incentive plan. 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.

The fair value of each option award is estimated on the date of grant using the Black-Scholes valuation model. The following assumptions were used for options granted in the nine months ended June 30, 2010 and 2009:

		For the Nine Months
		Ended June 30,
		2010				2009
Risk-free interest rate			1.76	%			1.47% - 2.37	%
Expected life (in years)			4				4
Dividend yield			0.0	%			0.0	%
Expected volatility			103	%			101% - 103	%
Weighted-average volatility			103	%			103	%

Expected volatility is determined based on historical volatility. Expected life is determined based on historical experience of similar awards, giving consideration to the contractual terms of the stock-based awards and vesting schedules. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant. Share-based compensation expense recognized is based on the options ultimately expected to vest. US GAAP requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimated. Forfeitures were estimated based on the Company’s historical experiences.

A summary of the Company’s stock option activity as of June 30, 2010, and changes during the nine months then ended is presented below:

										Weighted
						Weighted				Average
		Stock				Average				Contractual				Aggregate
		Options				Exercise Price				Term (Years)				Intrinsic Value *
Outstanding at October 1, 2009			2,233,000			$	1.34				3.57
Granted			45,000			$	0.80				4.27
Exercised			(25,000	)		$	0.65
Forfeited, Expired or Cancelled			(610,000	)		$	2.83
Outstanding at June 30, 2010			1,643,000			$	0.78				3.59			$	—
Exercisable at June 30, 2010			918,000			$	0.86				3.42			$	—	*

A summary of the status of the Company’s non-vested stock options as of June 30, 2010, and changes during the nine months ended June 30, 2010, is presented below:

						Weighted Average
						Grant-Date
		Stock Options				Fair Value
Non-vested at October 1, 2009			900,000			$	0.45
Granted			45,000			$	0.57
Forfeited or Expired			(150,000	)		$	(0.45	)
Vested			(70,000	)		$	(0.53	)
Non-vested at June 30, 2010			725,000			$	0.44

As of June 30, 2010, there was $380,000 of total unrecognized compensation costs related to non-vested share-based compensation arrangements granted under the stock options plans. Those costs are not expected to be recognized because achievement of the revenue and profitability milestones are not deemed probable as of June 30, 2010. The total fair value of options vested during the nine months ended June 30, 2010 was $37,000.

In October 2008, the Company granted a total of 325,000 new stock options to the three current officers. These options would have vested only if certain revenue and profitability milestones were achieved for the fiscal year ending September 30, 2009. In March 2009, for these and an additional 125,000 stock options that were previously granted, the revenue and profitability milestones were extended to the fiscal year ending September 30, 2010. No expense has been recorded because achievement of the milestones is not deemed probable as of June 30, 2010.

In March 2009, the Company granted a total of 400,000 new stock options to two officers. These options would have vested only if certain revenue and profitability milestones are achieved for the fiscal year ending September 30, 2009. In September 2009 the revenue and profitability milestones for these options were extended to the fiscal year ending September 30, 2010. No expense has been recorded because achievement of the milestones is not deemed probable as of June 30, 2010.

In October 2009 the Company granted a total of 45,000 new stock options to two directors for $0.80 per share.

There was no compensation expense related to outstanding options for the three months ended June 30, 2010. Total compensation expense related to outstanding options for the three months ended June 30, 2009 was $13,000. For the nine months ended June 30, 2010 and 2009 total compensation expense was $35,000 and $251,000, respectively. Such amounts are included in selling, general and administrative expenses in the accompanying Condensed Consolidated Statements of Operations.

Stock warrants — The Company recognizes the value of stock warrants issued based upon an option-pricing model at their fair value as an expense over the period in which the grants vest from the measurement date, which is the date when the number of warrants, their exercise price and other terms became certain.

On November 11, 2009 the Company entered into an agreement with an independent firm to conduct institutional investor services for a period of one year. As part of this agreement the Company issued a five year Warrant, vested upon issuance, to purchase 100,000 shares of the Company’s common stock at $0.50 per share. Additionally, should the independent firm provide ancillary services such as meetings or teleconferences with potential institutional investors, an additional 50,000 warrants to purchase the Company’s common stock at $0.50 per share shall be issued.

At June 30, 2010 and 2009, 7,148,000 and 3,416,000 warrants were outstanding and 2,212,000 and 2,479,000 warrants were vested, respectively.

Compensation expense related to outstanding warrants for the three months ended June 30, 2010 was $18,000. For the nine months ended June 30, 2010 and 2009 total compensation expense related to outstanding warrants was $103,000 and $30,000, respectively.

Common stock — On October 10, 2009 the Company issued 300,000 shares of unregistered common stock to an independent firm for investor relations, financial public relations and marketing services for a period of three years. The total value of the common stock issued was $240,000, of which $80,000 was recorded in Other current assets and $142,000 was recorded in Other assets. On April 28, 2010 the Company issued 300,000 shares to the same independent firm for an additional year for investor relations, financial public relations and marketing services. The total value of the common stock issued was $147,000, of which $43,000 was recorded in Other current assets and $104,000 was recorded in Other assets. For the three and nine months ended June 30, 2010, $28,000 and $65,000, respectively, was recorded as selling, general and administrative expense.

On December 11, 2009 the Company sold 400,000 shares of common stock for $0.72 per share and granted warrants to purchase 100,000 shares for $0.90 per share.

On April 6, 2010 the Company sold 2,900,000 shares of common stock for $0.50 per share and granted warrants to purchase 2,900,000 shares for $0.65 per share.

On April 23, 2010 the Company sold 1,100,000 shares of common stock for $0.50 per share and granted warrants to purchase 1,100,000 shares for $0.65 per share.

The total issuance costs for the shares of common stock sold in December 2009 and April 2010 were $359,000. The net proceeds of these common stock sales were $1,929,000.

7. INCOME TAXES

The Company made a comprehensive review of its portfolio of uncertain tax positions in accordance with recognition standards established for certain tax positions. In this regard, an uncertain tax position represents the Company’s expected treatment of a tax position taken in a filed tax return, or planned to be taken in a future tax return, that has not been reflected in measuring income tax expense for financial reporting purposes. At the date of adoption, and as of June 30, 2010 and September 30, 2009, the Company does not have a liability for unrecognized tax benefits. The Company concluded that at this time there are no uncertain tax positions. There was no cumulative effect on retained earnings. As of June 30, 2010, the Company does not expect any material changes to unrecognized tax positions within the next twelve months.

The Company recognizes the amount of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in the Company’s financial statements or tax returns. Judgment is required in assessing the future tax consequences of events that have been recognized in our financial statements or tax returns. Fluctuations in the actual outcome of these future tax consequences could materially impact our financial position or our results of operations. For the nine months ended June 30, 2010, deferred income tax assets and the corresponding valuation allowance increased by $653,000.

8. FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amount of our cash and equivalents, accounts receivable, accounts payable and accrued expenses reported in the consolidated balance sheets approximates fair value because of the short maturity of those instruments. The fair value of the notes payable is estimated based on current rates offered to the Company for similar debt of the same remaining maturities.

9. COMMITMENTS AND CONTINGENCIES

Litigation — The Company received notice in February 2006 regarding a breach of contract action filed in the Delaware Superior Court by Steven M. Mizel against Xenonics, Inc. (“Xenonics”), a 98.6% owned subsidiary of the Company. Plaintiff, a former holder of warrants of Xenonics, alleged that prior to the effective date of a transaction on or about July 23, 2003 between Digital Home Theatre Systems, Inc. (“DHTS”) and Xenonics, plaintiff was not allowed to exercise his warrants and that Xenonics wrongfully refused to permit him to purchase the Company’s shares at the exercise price in his warrants for Xenonics shares. Effective December 10, 2008 the Company agreed to repurchase the minority interest pursuant to an Exchange Agreement between the Company and Mr. Mizel (the “Exchange Agreement”), whereby Mr. Mizel transferred to the Company 125,000 shares of common stock of Xenonics in exchange for 275,000 shares of common stock of the Company with a guaranteed market value (taking into account shares of common stock sold by Mr. Mizel before December 10, 2009) of at least $375,000 on December 10, 2009. In connection with this exchange, Mr. Mizel dismissed with prejudice the action in the Delaware Superior Court.

The Company is occasionally subject to legal proceedings and claims that arise in the ordinary course of business. It is impossible to predict with any certainty the outcome of pending disputes, and management cannot predict whether any liability arising from pending claims and litigation will be material in relation to the Company’s consolidated financial position or results of operations.

10. GOODWILL

The $375,000 recorded as goodwill represents the excess of the purchase price over the recorded minority interest of the Xenonics common stock repurchased as discussed in Note 9 above. The Company does not amortize goodwill. Instead, the Company evaluates goodwill annually in the fourth quarter and whenever events or changes in circumstances indicate that it is more likely than not that an impairment loss has been incurred. As of June 30, 2010, the Company determined that no such impairment indicators exist.

11. DERIVATIVE LIABILITY

In connection with the repurchase of the Company’s minority interest as discussed in Note 9, the Company issued 275,000 shares of common stock with a guaranteed market value of at least $375,000 as of December 10, 2009. A derivative liability of $161,000 was initially recorded as the difference between the stock price on December 10, 2008 and the guaranteed market value of $375,000. Accordingly, any gains or losses resulting from the change in fair value of the common stock are reported as other income or expense in the accompanying consolidated financial statements. On December 11, 2009 the Company was notified that the final liability for this obligation would be $161,000. On January 8, 2010 the final obligation was paid in full.

12. SUBSEQUENT EVENTS

Management evaluated all activity through the date that the consolidated financial statements were issued, and concluded that no subsequent events have occurred that would require recognition in the condensed consolidated financial statements or disclosure in the notes to the condensed consolidated financial statements.

In July 2010 the Company granted a total of 40,000 new stock options to two new directors for $0.65 per share.

ITEM 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations (rounded in thousands)

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, including as a result of the factors described in the “Risk Factors” section of our most recent Annual Report on Form 10-K. We do not undertake any obligation to update or revise any forward-looking statements contained in this report, whether as a result of new information, future events or otherwise.

Results of Operations

Three-months ended June 30, 2010 compared to the three-months ended June 30, 2009

We operate in the security lighting systems and night vision industries, and the majority of our revenues are derived from sales of our illumination products and our SuperVision night vision product to various customers.

Revenues: Revenues for the quarter ended June 30, 2010 were $1,421,000 compared to revenues of $2,132,000 for the quarter ended June 30, 2009. In the quarter ended June 30, 2010, 92% of revenues were from sales of our NightHunter products to the military (U.S. Army, U.S. Marines and military distributors). In the quarter ended June 30, 2009, 90% of revenues were to the military market.

Cost of Goods and Gross Profit: Cost of goods consist of the cost of manufacturing our NightHunter One and SuperVision products and the price that we pay to PerkinElmer for NightHunter 3 products that PerkinElmer manufactures for us under a manufacturing agreement.

The gross profit percentages were 51% and 46% for the quarters ended June 30, 2010 and 2009, respectively.

Selling, General and Administrative: Selling, general and administrative expenses decreased by $340,000 to $709,000 for the quarter ended June 30, 2010 as compared to $1,049,000 for the quarter ended June 30, 2009. The decrease is primarily attributed to the Company’s cost reduction program that included decreases in salaries and benefits of $179,000, consulting services of $105,000 and trade show, marketing and travel expenses of $103,000.

Research & Development: Research and development expenses were $171,000 for the quarter ended June 30, 2010 compared to $158,000 for the quarter ended June 30, 2009. The increase is primarily attributed to costs incurred for the further development of the Company’s product lines during a period of lower sales.

Other Income (Expense): For the quarter ended June 30, 2010 interest expense was $38,000. There was no interest expense for the quarter ended June 30, 2009.

In connection with the repurchase of the Company’s minority interest in December 2008, the Company issued 275,000 shares of common stock with a guaranteed market value of at least $375,000 as of December 10, 2009. The Company recorded a derivative of $161,000 at the time of the transaction. The repurchase was completed in January 2010 for $161,000. At June 30, 2009, the fair value of the common stock decreased in value and the Company recorded the mark to market adjustment of $33,000 as a loss on derivative revaluation.

Net Loss: Lower revenues in the current quarter were offset by significant reductions in operating expenses to account for a net loss of $188,000 compared to a net loss of $240,000 for the quarter ended June 30, 2009.

Nine months ended June 30, 2010 compared to the nine months ended June 30, 2009

Revenues: Revenues for the nine months ended June 30, 2010 were $2,786,000 compared to revenues of $5,288,000 for the nine months ended June 30, 2009. For the nine months ended June 30, 2010, 86% of revenues were from sales of our NightHunter products to the military (U.S. Army, U.S. Marines and military distributors). This compares to 79% of revenues to the military market in the same nine month period of the prior year.

Cost of Goods and Gross Profit: Cost of goods consist of the cost of manufacturing our NightHunter One and SuperVision products and the price that we pay to PerkinElmer for NightHunter 3 products that PerkinElmer manufactures for us under a manufacturing agreement.

The gross profit percentages were 49% and 45% for the nine months ended June 30, 2010 and 2009, respectively.

Selling, General and Administrative: Selling, general and administrative expenses decreased by $1,431,000 to $2,198,000 for the nine months ended June 30, 2010 as compared to $3,629,000 for the nine months ended June 30, 2009. Decreases in non-cash compensation expenses for stock options of $216,000 were offset by an increase for warrants of $138,000. Other decreases, which were part of the Company’s cost reduction program, included salaries and benefits of $516,000, advertising, trade show, travel and samples expenses of $520,000, legal expenses of $76,000, consulting expenses of $88,000, investor relations of $39,000 and rent and relocation expenses of $39,000.

Research & Development: Research and development expenses were $625,000 for the nine months ended June 30, 2010 compared to $501,000 for the nine months ended June 30, 2009. The Company continues to spend for the development of new products, including our new NightHunter 3 ultra high intensity illumination system.

Net Loss: Lower revenues in the current nine month period offset by significant reductions in operating expenses accounted for a net loss of $1,544,000 compared to a net loss of $1,797,000 for the prior year nine month period.

Liquidity and Capital Resources

As of June 30, 2010, the Company had working capital of $3,265,000 and a current ratio of 5.3 to 1 as compared to working capital of $2,436,000 and a current ratio of 2.6 to 1 as of September 30, 2009.

Our net loss of $1,544,000 for the nine months ended June 30, 2010 negatively impacted cash. In the first nine months of this year, cash flows from financing activities included the net proceeds from the sales of common stock of $1,929,000 and an exercise of stock options of $6,000. Significant sources of cash from operating activities during the first nine months of the current year included a decrease in accounts receivable of $437,000 offset by a decrease in accounts payable of $453,000. Cash used in operating activities totaled $1,559,000 for the nine months ended June 30, 2010.

During April 2010 the Company sold a total of 4,000,000 shares of common stock at $0.50 per share and issued 4,000,000 warrants to purchase additional shares of common stock at $0.65 per share for a period of five years. Net proceeds of the common stock sales were $1,780,000.

Based on the amount of working capital that we had on hand on June 30, 2010, the proceeds from the April sales of common stock and the amount of unfilled and potential orders we have pending, we are optimistic about our ability to obtain sales orders and/or additional equity or debt financing to continue to support planned operations and satisfy obligations. 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 and although management believes it can obtain additional financing, there is no certainty that it can.

ITEM 3. Quantitative and Qualitative Disclosures about Market Risk

Not applicable

ITEM 4. Controls and Procedures

The Company’s management conducted an evaluation, with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness as of the end of the period covered by this quarterly report of the Company’s disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”). Disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission (the “SEC”) and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of June 30, 2010, which is the end of the period covered by this quarterly report.

Based upon our evaluation, we also concluded that there was 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.

PART II. OTHER INFORMATION

Item 1A. Risk Factors.

The risk factors in the Company’s Annual Report on Form 10-K for the year ended September 30, 2009 are updated as follows:

Risks Related to Our Business

We have a recent history of losses and cannot assure you that we will ever become or remain profitable.

During each of the five fiscal years in the period ended September 30, 2009, we incurred a net loss ranging from $1,391,000 to $5,310,000, and we had revenue ranging from $4,434,000 to $10,168,000. For the fiscal year ended September 30, 2004, we had net income of $1,476,000 on revenue of $11,927,000.

Since our revenue is primarily dependent upon the receipt of large orders from the military and other governmental organizations, which orders are sporadic and unpredictable, our revenue fluctuates significantly from year to year. We cannot provide any assurance that we will generate revenue at any specific levels or that any revenue generated will be sufficient for us to become profitable or thereafter maintain profitability. If our revenue does not increase significantly, we will need to raise substantial additional amounts of capital in order to be able to continue our operations.

The loss of contracts with U.S. government agencies would adversely affect our revenue.

To date, substantially all of our sales have been derived from sales to military and security organizations, such as the U.S. military, and various other governmental law enforcement agencies. There are certain considerations and limitations inherent in sales to governmental or municipal entities such as budgetary constraints, timing of procurement, political considerations and listing requirements that are beyond our control and that could affect our future sales. There is no assurance that we will be able to achieve our targeted sales objectives to these governmental and municipal entities or that we will continue to generate any material sales to these entities in the future.

Potential customers may prefer our competitors’ technology and products.

The ultra-high intensity lighting industry, in which we operate, is characterized by mature products and established industry participants. We compete with other providers of specialized lights in the United States and abroad who have created or are developing technologies and products that are similar to the products we are selling to many of the same purchasers in our targeted markets. Although we believe that our competitors do not offer products as advanced as ours, competition from these companies is intense. Because we are currently a small company with a limited marketing budget, our ability to compete effectively will depend on the benefits of our technology and on our patents. There is no assurance that potential customers will select our technology over that of a competitor, or that a competitor will not market a competing technology with operating characteristics similar to those owned by us.

Our products could be rendered obsolete or uneconomical by the introduction and market acceptance of competing products, technological advances by current or potential competitors, or other approaches. If that development were to occur, we might be required to reduce our prices in order to remain competitive and these lower prices could affect our profitability. We compete on the basis of a number of factors in areas in which we have limited experience, including marketing to the military and governmental agencies, and customer service and support. There is no assurance that we will be able to compete successfully against current or future competitors.

Because we have a new marketing and sales team, we may be unable to compete successfully against other companies that have a history and track record in the high-intensity lighting and night vision marketplaces.

We have a new marketing and sales team. On July 27, 2009, we entered into a domestic distribution agreement with Aardvark Tactical, Inc. for all of our high-intensity illumination systems, SuperVision high-definition night-vision devices and future products developed by us. The customer base covered by the agreement includes all United States military, all United States federal law enforcement agencies, all state and local first responders and all United States based defense contractors. Although Aardvark is one of the largest suppliers of non-lethal weapons, riot control, force protection and tactical equipment in the United States to military, law enforcement, federal government and homeland security, there is no assurance that Aardvark will be successful in its effort to market our products.

Although our officers have experience in the operations and management of various businesses and have experience in the high-intensity lighting field, they have limited experience in the management of a company engaged in the high volume sale of high-intensity lighting and night vision. In addition, while we have had success in marketing to certain branches of the U.S. military and to certain other U.S. governmental agencies, we are new to marketing our products to a wider market. There is no assurance that our current marketing and sales capabilities will enable us to compete successfully against competitors that have a history and track record in the high-intensity lighting and night vision marketplaces. If we do not maintain an effective marketing and sales organization, our business will be adversely affected.

The loss of any of our key personnel could adversely affect our business.

Our future success depends on the efforts of our senior management, particularly Alan P. Magerman, our Chairman of the Board and Chief Executive Officer, and Jeffrey P. Kennedy, our Chief Operating Officer and President. The loss of the services of one or more members of our senior management could have a material adverse effect on our business and prospects.

We are subject to government regulations that may require us to obtain additional licenses and could limit our ability to sell our products outside the United States.

The sale of certain of our products outside the United States is subject to compliance with the United States Export Administration Regulations and, potentially, the International Traffic in Arms Regulations. Compliance with government regulations may subject us to additional fees and costs. The absence of comparable restrictions on competitors in other countries may adversely affect our competitive position. The need to obtain licenses could limit or impede our ability to ship to certain foreign markets. Although we currently hold the requisite export licenses required under current requirements, future laws and regulations could impact our ability to generate revenue from the sale of our products outside the United States, which could have a material adverse effect on our business, financial condition and results of operations.

We may experience production delays if suppliers fail to deliver materials to us, which could reduce our revenue.

The manufacturing process for our products consists primarily of the assembly of purchased components. Although we can obtain materials and purchase components from different suppliers, we rely on certain suppliers for our components. If a supplier should cease to deliver such components, this could result in added cost and manufacturing delays and have a material adverse effect on our business.

Our operations involve evolving products and technological change, which could make our products obsolete.

Ultra-high-intensity portable illumination products are continuously evolving and are subject to technological change. Our ability to maintain a competitive advantage and build our business requires us to consistently invest in research and development. Many of the companies that currently compete in the portable illumination market, or that may in the future compete with us in our market, may have greater capital resources, research and development staffs, facilities and field trial experience than we do. Our products could be rendered obsolete by the introduction and market acceptance of competing products, technological advances by current or potential competitors, or other approaches.

We may not have adequate protection of our intellectual property, which could result in a reduction in our revenue if our competitors are able to use our intellectual property.

We own the rights to 18 patents, including 5 design patents and 13 utility patents relating to the design and configuration of our xenon illumination technology and digital lowlight viewing. There is no assurance, however, that our patents will provide competitive advantages for our products or that our patents will not be successfully challenged or circumvented by our competitors. There is no assurance that our pending patent applications will ultimately be issued or provide patent protection for improvements to our base technology. While we believe that our patent rights are valid, we cannot be sure that our products or technologies do not infringe on other patents or intellectual property or proprietary rights of third parties. In the event that any relevant claims of third-party patents are upheld as valid and enforceable, we could be prevented from selling our products or could be required to obtain licenses from the owners of such patents or to redesign our products to avoid infringement. In addition, many of the processes of our products that we deem significant are not protected by patents or pending patent applications.

We regard portions of the designs and technologies incorporated into our products as proprietary, and we attempt to protect them with a combination of patent, trademark and trade secret laws, employee and third-party nondisclosure agreements and similar means. Despite these precautions, it may be possible for unauthorized third parties to copy certain portions of our products or to otherwise obtain and use to our detriment information that we regard as proprietary. There is no assurance that the agreements we have entered into with employees or third parties to maintain the confidentiality of our confidential or proprietary information will effectively prevent disclosure of our confidential information or provide meaningful protection for our proprietary information or that our confidential or proprietary information will not be independently used by our competitors.

Because we currently have only a single line of products, any delay in our ability to market, sell or ship these existing products would adversely affect our revenue.

To date, all of our revenue has been generated from the sales of our three NightHunter illumination system products (the NightHunter One, NightHunter II and NightHunter ext), related accessories and our SuperVision product. In addition to these NightHunter models and SuperVision, we are now marketing the NightHunter 3. Our profitability and viability are dependent upon our continued ability to sell, manufacture and ship our NightHunter and SuperVision products, and any delay or interruption in our ability to market, sell or ship our NightHunter illumination systems or SuperVision and related accessories will have a material adverse affect on our business and financial condition.

In addition, our future growth and profitability will depend on our ability to successfully expand our NightHunter and SuperVision products and to develop other products. While our goal is to develop and commercialize a line of ultra-high-intensity illumination systems, and digital low-light viewing devices, new products will require substantial expenditures of money for development and advertising. There is no guarantee that the market will accept these new products.

Because we depend on a single manufacturer to make our NightHunter products, any failure by the manufacturer to honor its obligations to us will impair our ability to deliver our products to customers.

Under our agreement with PerkinElmer, a global provider of products and services to, among others, the optoelectronics industries, PerkinElmer is the sole and exclusive manufacturer of our NightHunter products, and we are not permitted to engage any other manufacturer. In addition, PerkinElmer is responsible for testing, packaging and maintaining product inventories. Accordingly, we are dependent upon PerkinElmer for the manufacture and delivery of our new NightHunter products. To date, as a small company with limited resources, our arrangement with PerkinElmer has provided us with the manufacturing, packaging and shipping expertise normally only available to larger firms. However, should PerkinElmer for any reason in the future be unable or unwilling to fully honor its obligations under our manufacturing agreement, we would lose the ability to manufacture and deliver our principal product until PerkinElmer recommences manufacturing or until we obtain an alternate manufacturer. While we believe that we could replace PerkinElmer in such an event, any such event would adversely affect our operations and financial results during the period in which we transitioned to another manufacturer.

The current global economic downturn may materially and adversely affect our business, financial condition and results of operations.

Unfavorable economic conditions, including the impact of recessions in the United States and throughout the world, may negatively affect our business and financial results. These economic conditions may negatively impact (1) demand for our products, (2) our ability to collect accounts receivable on a timely basis, (3) the ability of suppliers to provide the products required in our operations, and (4) our ability to obtain financing or to otherwise access capital markets.

Risks Related to Our Common Stock

The market price of our common stock may be volatile.

The market price of our common stock could fluctuate substantially in the future in response to a number of factors, many of which are beyond our control, including:

	•		actual or anticipated fluctuations in our operating results;
	•		changes in stock market analyst recommendations regarding our common stock, the common stock of our competitors or our industry generally;
	•		operating and stock price performance of other companies that investors deem comparable to us;
	•		changes in government regulations;
	•		litigation or threats of litigation;
	•		reports or speculation in the press, industry publications or internet communities;
	•		short selling of our common stock or our issuance of common stock for less than the then-current market price of our common stock;
	•		new accounting standards;
	•		general economic, political and market conditions; and
	•		the occurrence of any of the other risks described in our filings with the Securities and Exchange Commission.

Low trading volume of our common stock may adversely affect the market price of our common stock.

There is no assurance as to the depth or liquidity of the market for our common stock or the prices at which stockholders may be able to sell their shares. As a consequence, there may be periods of several days or more when trading activity in our shares is minimal or non-existent, as compared to a seasoned issuer which has a large and steady volume of trading activity that will generally support continuous sales without an adverse effect on share price. Due to these conditions, there is no assurance that stockholders will be able to sell their shares at or near ask prices or at all.

If securities or industry analysts do not publish research reports about our business or if they downgrade our common stock, the price of our common stock could decline.

Small, relatively unknown companies can achieve visibility in the trading market through research and reports that industry or securities analysts publish. The lack of published reports by independent securities analysts could limit the interest in our common stock and negatively affect our stock price. We do not have any control over the research and reports these analysts publish or whether they will be published at all. If any analyst who does cover us downgrades our common stock, our stock price would likely decline. If any analyst ceases coverage of our company or fails to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause our stock price to decline.

We do not plan to pay any cash dividends on our common stock.

We do not plan to pay any cash dividends on our common stock in the foreseeable future. Any decision to pay dividends is within the discretion of the board of directors and will depend upon our profitability at the time, cash available and other factors. As a result, there is no assurance that there will ever be any cash dividends or other distributions on our common stock.

The exercise of outstanding stock options and warrants would dilute the ownership interests of our stockholders, and sales of the common stock acquired upon the exercise of these stock options and warrants could cause our stock price to decline.

There are currently outstanding stock options and warrants entitling the holders to purchase 8.8 million shares of our common stock. Substantial option and warrant exercises would significantly dilute the ownership interests of our stockholders. Substantial sales in the public market of the common stock acquired upon the exercise of these options and warrants could cause the market price of our common stock to decline. The perception among investors that these sales may occur could produce the same adverse effect on our stock price.

Our ability to raise capital in the future may be limited, and the interests of our stockholders may be adversely affected if we incur indebtedness or issue additional equity securities to finance our business operations.

There is no assurance that our future revenue will be sufficient to fund our business operations. If our revenue is insufficient, there is no assurance that we will be able to obtain sufficient funds from debt financing or additional issuances of equity securities to finance our business operations.

Debt financing may not be available to us in sufficient amounts, on favorable terms or at all. The terms of any debt financing that we incur may impose restrictions on our operations, which may include limiting our ability to incur additional indebtedness or to engage in certain business activities such as acquisitions of other businesses. In addition, we may be subject to covenants requiring us to satisfy certain financial tests and ratios, and our ability to satisfy such covenants may be affected by events outside of our control. The holders of our indebtedness will have rights, preferences and privileges that are senior to those of our stockholders in the event of a liquidation.

The sale of additional equity securities would result in dilution to our common stockholders by reducing their proportionate ownership interest in our company. Our board of directors has the authority to issue up to 5,000,000 shares of our preferred stock and to determine the rights, preferences and privileges of the preferred stock without the approval of our common stockholders. The issuance of preferred stock could adversely affect the voting power of holders of our common stock, restrict their rights to receive payment upon liquidation, and have the effect of delaying, deferring or preventing a change in control which may be beneficial to our common stockholders.

In addition, the market price of our common stock could decline as a result of sales of our common stock offered by in future securities offerings if we issue common stock at a price that is less than the then-current market price of our common stock.

Our common stock may be delisted from the NYSE Amex, which could result in a decline in the market price of our common stock.

On July 30, 2010, we received a written notice from the NYSE Amex stating that we are not in compliance with the NYSE Amex’s continued listing standards and that, accordingly, our common stock is subject to a delisting proceeding. Specifically, the NYSE Amex advised us that we are not in compliance with Section 1003(a)(iii) of the NYSE Amex’s Company Guide because our stockholders’ equity is less than $6,000,000.

In accordance with Sections 1009(d) and 1203 of the NYSE Amex’s Company Guide, we have the right to appeal the determination of the NYSE Amex’s staff by requesting a hearing before a Listing Qualifications Panel. We have exercised this right and expect the hearing to occur in mid-September 2010. Pending the hearing, our common stock will continue to be listed on the NYSE Amex.

There is no assurance that our appeal will be successful, and our common stock may be delisted from the NYSE Amex. The market price of our common stock may be adversely affected if our common stock is delisted from the NYSE Amex because of our failure to comply with the exchange’s continued listing standards.

If our common stock is delisted from the NYSE Amex, we anticipate that the common stock will be quoted on the OTC Bulletin Board. Quotation of our common stock on the OTC Bulletin Board may limit the liquidity and price of our common stock more than if the common stock were listed on a national securities exchange. Some investors might perceive our common stock to be less attractive if it ceases to be listed on the NYSE Amex. In addition, a company whose stock is quoted on the OTC Bulletin Board might not attract the same amount of analyst coverage that accompanies companies listed on national securities exchanges. In addition, institutional and other investors may have investment guidelines that restrict or prohibit investing in securities that are quoted on the OTC Bulleting Board. All of these factors might adversely affect the market price and trading volume of our common stock.

You may have difficulty selling our common stock if it is deemed a “penny stock.”

If our common stock is delisted from the NYSE Amex and is not thereafter listed on any national securities exchange, the open market trading of our common stock will be subject to the SEC’s “penny stock” rules as long as the market price of the stock is below $5.00 per share. The “penny stock” rules impose additional sales practice requirements on certain broker-dealers who sell securities to persons other than established customers and accredited investors (generally an individual with assets in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 together with his or her spouse). These rules require the delivery, prior to any transaction involving a penny stock, of a disclosure schedule explaining the penny stock market and the associated risks. Under these rules, certain brokers-dealers who recommend such penny stock to persons other than established customers or certain accredited investors must make a special written suitability determination regarding such a purchaser and receive the purchaser’s written agreement to a transaction prior to sale. These rules might have the effect of limiting the trading activity of our common stock, reducing the liquidity of an investment in our common stock and increasing the transaction costs for sales and purchases of our common stock as compared to other securities. The additional burdens imposed upon broker-dealers by the penny stock rules could discourage broker-dealers from effecting transactions in our common stock, which could severely limit the market liquidity of the common stock and the ability of holders of the common stock to sell their shares.

ITEM 6. Exhibits

Exhibit
Number				Description
	31.1			Certification of the Chairman of the Board and Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act
	31.2			Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act
	32.1			Certification pursuant to Section 906 of the Sarbanes-Oxley Act
	32.2			Certification pursuant to Section 906 of the Sarbanes-Oxley Act

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Xenonics (AMEX:XNN)
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Xenonics (AMEX:XNN)
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