Get Started for Free Contexxia identifies hard-to-find pieces of information in SEC filings. No more highlighters, no more redlining, no more poring over huge documents. SIONIX CORP (764667) 10-Q published on Aug 27, 2013 at 12:28 pm
Reporting Period: Jun 29, 2013
In February 2012, the Company entered into a Water Treatment Agreement with McFall Incorporated, a construction and logistics firm operating in the Williston Basin. Under the agreement, we agreed to deploy one of our Mobile Water Treatment Systems to locations in the Williston Basin to decontaminate water emitted from drilling operations. The agreement had an initial term of 5 years. Following our execution of the Water Treatment Agreement, we formed Williston Basin I, LLC, a Nevada limited liability company ("WBI"), and in March 2012 we sold 4,000 membership units to 19 accredited investors, raising a total of $1,350,000. As the holder of 60% of the membership of WBI, we were entitled to 60% of its net profit and distributable assets. WBI intended use the proceeds from the offering principally for the acquisition of the assets required for the performance of the Water Treatment Agreement.
Upon further review and consideration, we determined that our efforts to treat drilling mud did not allow us to take full advantage of our proprietary DAF system. Accordingly, we have proposed to McFall Incorporated that we amend our existing agreement related to the treatment of drilling mud, and instead direct our efforts in the treatment of fracking water prior to disposal into underground wells. We have entered into an agreement with an operator of several disposal wells in the Williston Basin, have delivered treatment equipment to their site in anticipation of treating frack production water that is currently being delivered to their site, but is too contaminated for disposal into their wells without treatment. As well, we are developing certain testing and treatment protocols so that our testing activities are properly and accurately aligned with those required and customary in the oil and gas industry. It is our intention that this project will demonstrate our capabilities in the Williston Basin region.
A basic earnings (loss) per share is calculated by dividing the earnings (loss) by the weighted average number of common shares outstanding during the period. A diluted earnings (loss) per share is calculated by dividing the earnings (loss) by the weighted average number of common shares and potentially dilutive securities outstanding during the period. Potentially dilutive common shares consist of incremental common shares issuable upon exercise of stock options, warrants and shares issuable upon the conversion of convertible notes. The dilutive effect of the convertible notes and warrants is calculated under the if-converted method. The dilutive effect of outstanding shares is reflected in diluted earnings per share by application of the treasury stock method. This method includes consideration of the amounts to be paid by the employees, the amount of excess tax benefits that would be recognized in equity if the instruments were exercised and the amount of unrecognized stock-based compensation related to future services. Warrants and convertible notes with exercise prices that exceed the average market price of the Company’s common stock during the periods will be excluded because the inclusion of these securities would be anti-dilutive to the diluted earnings per share. No potential dilutive common shares are included in the computation of any diluted per share amount when a loss is reported. Accordingly, we did not include 206,021,985 of potentially dilutive warrants and convertible debt instruments at June 30, 2012.
During quarter ended June 30, 2013, management of the Company identified and corrected certain errors in recording of debt discount, unregistered shares shortfall and additional paid-in capital in its previously filed financial statements for the year ended September 30, 2012 and in recording debt discount, derivative liability, unregistered shares shortfall, interest expense, and gain (loss) on change in fair value of derivative liability in its previous financial statements for the quarters ended December 31, 2012 and March 31, 2013. Specifically, debt discount should have been recorded when detachable warrants issued with convertible notes and accreted into interest expense over the term of the note. Additionally, the total potential shares upon exercise of warrants outstanding exceeded the total common stock authorized and unissued during the year ended September 30, 2012, hence the Company would need to reclassify the fair value of these equity instruments to liability and the change of the fair value of these liability would need to be reported as earnings (loss) subsequently. Moreover, the conversion feature of certain convertible notes was incorrectly included in calculation of derivative liabilities of the derivative conversion feature. The Company assessed the impact of the corrections of the errors on previously reported numbers and concluded that such correction is material to the previous financial statements. Moreover, in reaching this conclusion, management of the Company considered both the quantitative and qualitative characteristics of the adjustment.
We follow the provisions of ASC 820, Fair Value Measurements and Disclosures, with respect to our financial instruments. As required by ASC 820, assets and liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to their fair value measurement. Our derivative financial instruments which are required to be measured at fair value on a recurring basis under of ASC 815 are all measured at fair value using Level 3 inputs. Level 3 inputs are unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.