Item 1. DESCRIPTION OF BUSINESS |
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Xenonics Holdings, Inc - Recent Material Event2
Table of Contents
Introductory Comment
Throughout this annual report on Form 10-KSB, the terms “we,” “us,” “our,” and “our company”
refer to Xenonics Holdings, Inc., a Nevada corporation formerly known as Digital Home Theater
Systems, Inc., and, unless the context indicates otherwise, also includes our subsidiary, Xenonics,
Inc., a Delaware corporation.
Forward-Looking Statements
This annual report contains forward-looking statements, which reflect the views of our
management with respect to future events and financial performance. These forward-looking
statements are subject to a number of uncertainties and other factors that could cause actual
results to differ materially from such statements. Forward-looking statements are identified by
words such as “anticipates,” “believes,” “estimates,” “expects,” “plans,” “projects,” “targets” and
similar expressions. Readers are cautioned not to place undue reliance on these forward-looking
statements, which are based on the information available to management at this time and which speak
only as of this date. Our actual results may differ materially from results anticipated in these
forward-looking statements. We undertake no obligation to update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise. For a discussion of
some of the factors that may cause actual results to differ materially from those suggested by the
forward-looking statements, please read carefully the information under “Risk Factors.”
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
Overview
We design, manufacture and market high-end, high-intensity portable illumination products and
low light viewing systems (night vision). Our core product line consists of lightweight,
long-range, ultra-high intensity illumination products used in a wide variety of applications by
the military, law enforcement, security, search and rescue and, to a lesser extent, in commercial
markets. The Night Vision system is used across the entire spectrum from commercial to the
military. We hold several patents for our technology platform, which applies high efficiency
dimmable electronic ballast circuitry and precision optics to xenon light to produce an
illumination device that delivers improved performance over current technologies, and additional
patents to the integration of the night vision system.
We are largely dependent upon government orders for our revenues. While the night vision
products will expand our sales into the commercial market, the government market, particularly law
enforcement, will continue to be a large part of the night vision sales. Existing customers include
all branches of the United States Armed Forces and federal law enforcement. Starting late in FY
2007 sales expanded into the commercial and international markets
We market our illumination products under the NightHunter brand name and Night Vision under
the SuperVision brand. The NightHunter series of products is produced in a variety of
configurations to suit specific customer needs. These include compact hand-held systems for
foot-borne personnel and stabilized systems for airborne, vehicular and shipboard use. These
NightHunter illumination systems are used for reconnaissance, surveillance, search and rescue,
physical security, target identification and navigation. The systems allow the user to illuminate
an area, an object or a target with visible or non-visible light, and to improve visibility through
many types of obscurants such as smoke, haze and most types of fog.
The SuperVision product was launched in June 2007 and brings a new category to night vision
using a high resolution HDTV display with an ultra-sensitive infrared (IR)/visible sensor and a
proprietary Digital Signal Processor (DSP). This all digital format brings capabilities comparable
to high end military analog systems at less than half the price. In addition the digital format
allows for zoom capability. The price and capability opens the market to law enforcement and the
general consumer, whether in the maritime environment, hunting, camping, security, or any other
activity done in a low light situation.
History
We conduct all of our operations through our subsidiary, Xenonics, Inc. On July 23, 2003,
Digital Home Theater Systems, Inc. acquired in a reorganization all of the issued and outstanding
shares of Xenonics, Inc.’s common stock and we changed our name from Digital Home Theater Systems,
Inc. to Xenonics Holdings, Inc. The transaction was accounted for as a reorganization of Xenonics,
Inc. with the issuance of stock for cash. For accounting purposes, Xenonics, Inc. was treated as
the acquirer and, as such, its historical financial statements will continue and are incorporated
by reference into this prospectus.
In addition, we exchanged all of the then-outstanding options to purchase stock in Xenonics,
Inc. for options to purchase our stock (at the same price then in effect, but with different
terms), and exchanged 94% of the warrants to purchase stock in Xenonics, Inc. (one warrant to
purchase 135,000 shares of Xenonics, Inc. common stock remained outstanding), for warrants to
purchase our stock (with modified terms and a higher exercise price). On December 14, 2004, the
holder of the remaining warrant to purchase shares of Xenonics, Inc. partially exercised his
warrant and purchased 125,000 shares of Xenonics, Inc. As a result, we currently own approximately
98.6% of the issued and outstanding capital stock of Xenonics, Inc.
Our Products
The NightHunter series of products currently consists of four versatile compact illumination
systems — NightHunter One, NightHunter II, NightHunter ext, and NightHunter 3. Our products are
lightweight, ruggedized for operation in harsh environments, and allow users to illuminate objects
with visible or infrared (IR) light at distances of more than one mile. With our infrared filter
accessory in place, the NightHunter products emit non-detectable infrared light. When used with
night vision devices or low-light cameras, our NightHunter products can illuminate a target without
the target knowing that it is being illuminated. We have also developed an ultraviolet filter which
enables our product to fluoresce materials from great distances for applications including
forensics and special lighting effects. Each NightHunter product incorporates a mechanical focusing
design that enables the user to
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vary the flood spread of the beam. For example, the systems can be focused at a 0.5° spread
that results in only a 60-90 foot footprint at one mile, or at a 10° spread that results in a 900
foot footprint at one mile. Unlike other high intensity lighting systems (and traditional
flashlights), the NightHunter products do not have a “black hole” at the center of the light beam
that obstructs the field of view (that is, there is no “blind spot” in the beam), allowing the user
to keep the illumination centered on the target area. Our NightHunter One, NightHunter II
NightHunter 3 products all have an internal rechargeable battery and built-in charger. In addition,
the NightHunter One, NightHunter ext and NightHunter 3 can be operated from external power sources.
Depending on the functionality and accessories of the product, the prices for our products range
from $2,000 to $4,000 per unit.
The SuperVision high resolution HDTV display with an ultra-sensitive IR/visible sensor, zoom
capability, and a proprietary Digital Signal Processor (DSP) brings capability to a wide variety of
customers. Operating in both the visible and IR spectrum SuperVision allows you to operate from
dusk to dark. SuperVision can operate with or without an illuminator and with its expended IR
spectrum in excess of 1000 nanometers it can operate well past the range of conventional analog
tube system. With a retail price of just $1,399 it is affordable at the local law enforcement level
as well as with commercial customers.
Our currently available products and their respective features are listed below.
NightHunter One The NightHunter One system is a lightweight (9.7 lbs.) illumination system
that can be readily adapted to a variety of uses and platforms, from handheld to fixed mounted use
on vehicles, boats, and helicopters. The NightHunter can be powered from its internal rechargeable
battery or from any 12-32 VDC power source.
NightHunter II The NightHunter II is a self-contained, durable, waterproof and lightweight
(4.4 lbs) unit. The unit has an extended battery life (1.5 hrs on a single charge) and can recharge
in 1.5 hours. The NightHunter II is manufactured for us by PerkinElmer Electronics, Inc.
NightHunter ext The NightHunter ext is a durable and lightweight (5.5 lbs) illumination system
that is designed for fixed mounted applications and for use on stationary platforms or vehicles,
boats, or helicopters. The NightHunter ext has the same range as the NightHunter One, but with an
increased field-of-view. The NightHunter ext can be equipped with an optional pistol grip and
utilized as a powerful spotlight.
NightHunter 3 The NightHunter 3 was designed to give better than NightHunter II capabilities
in a light weight weapons mountable system. Utilizing Xenonics proprietary technology and lessons
learned NightHunter 3 is a 2.5 pound illuminator that exceeds the range of the NightHunter II while
at the same time incorporating an integrated filter assembly, new battery technology, and off board
control. We began testing NightHunter 3 in our fiscal year ended September 30, 2007 and we expect
it to be in production in our fiscal year ending September 30, 2008. This product will open up a
new market for the NightHunter technology.
SuperVision SuperVision will allow the user to see in the dark with greater clarity than
conventional night vision, and with a zoom capability. The product is a small hand held device and
weighs only 20 ounces. SuperVision retails for significantly less than the high-end night vision
products.
The Markets
The actual and potential markets for our products consist of the following.
Military Forces, of the United States and Foreign Allies
Military forces in the United States currently represent the primary target market for our
NightHunter products. Through September 30, 2007, we have sold more than $20,000,000 of NightHunter
brand illumination systems into this market for testing or deployment. Our customers include the
U.S. Army, the U.S. Air Force, the U.S. Navy and the U.S. Marine Corps. In 2007, the Defense
Appropriations Bill includes $2.0 million for the purchase of NightHunter products for the U.S.
Army.
According to the International Institute for Strategic Studies and the U.S. Department of
Defense, there are nearly 5,000,000 active troops, over 8,000,000 reserve troops, approximately
600 warships, and 900 amphibious, major mine, and support ships, 26,000 heavy tanks, and 63,000
armored infantry vehicles in the armed forces of the United States and its key allies. Given the
large number of applications for NightHunter products, we believe that this represents a
substantial market opportunity for the NightHunter product line.
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SuperVision has application to the US Military though it was not optimized for military
operations. It is listed on the GSA schedule and is also sold through the military exchange
network. With the high performance and quality of SuperVision and no export restrictions, we see a
good market in the international militaries.
U.S. Department of Homeland Security
The agencies of the U.S. Department of Homeland Security represent another key market for
NightHunter and SuperVision products. These agencies include the U.S. Customs and Border
Protection, Federal Emergency Management Agency, the Transportation Security Administration, the
U.S. Secret Service and the U.S. Coast Guard. Our NightHunter products have been tested and
deployed in key strategic locations for port, waterway, coastline, airport and border security. We
believe that the increased concern about homeland security and the higher amounts budgeted for new
security products may make homeland security a potentially significant market for both of our
product lines. Our goal is for agencies within the United States Department of Homeland Security to
use discretionary funding to purchase our products, and we believe that in the future we may
achieve specific line items in the budget similar to our experience with the defense budget.
U.S. Law Enforcement and Fire, Search & Rescue
We are in the early stage of pursuing additional opportunities for sales of NightHunter
illumination systems and SuperVision to law enforcement and fire, search & rescue organizations.
Thus far sales to this market group have been limited. However, law enforcement and fire, search &
rescue represent a large market opportunity. Approximately 700,000 law enforcement personnel are
estimated to be employed in the United States and there are approximately 30,000 fire, search &
rescue departments in the United States. The introduction of SuperVision should have a significant
impact in this segment. In addition the international market opportunity is large, primarily with
the SuperVision product line.
Commercial Markets
SuperVision was designed to be a high performance but affordable night vision system. Because
of this, we have an excellent opportunity in several commercial markets. Initially we focused on
the hunting market, but have expanded to the overall outdoor market and will be expanding efforts
into the maritime market in 2008. There has also been interest from several industrial customers
which we will continue to pursue in 2008.
Sales & Marketing
We generate most of our revenue from the direct sale of our products to customers. To date,
most of our sales have been to the United States military. In the past we have depended upon top
down funding through Congress matched with communication directly to end users to drive the demand.
We have attended customer specific tradeshows to also communicate the capabilities of the
NightHunter product line and SuperVision.
Starting late in our fiscal year ended September 30, 2007 we significantly increased our sales
and marketing program. We hired a VP of Sales and Marketing with experience across all the
SuperVision and NightHunter markets. He has been adding to his team to have a professional inside
and outside sales team to work these markets. We have reevaluated our independent representative
group structure and have used senior management’s relationships with key customers. In May we hired
a professional advertising agency with a primary focus on SuperVision. They will also be working on
the NightHunter 3 program. We have also increased our presence at key tradeshows and have opened up
the international market place and we have maintained our Congressional contact either through our
lobbyist or directly by our officers and directors.
SuperVision specifically was introduced to three key market segments in our fiscal year ended
September 30, 2007 and will expand in our next fiscal year. Initial markets are law enforcement,
hunting, and international. Advertising, tradeshow, independent representative groups, and
dedicated sales personnel are focused on these markets.
We currently have seven persons engaged on a full-time basis in sales and marketing. In
addition, our senior executives actively assist in our marketing efforts by initiating and
maintaining customer relationships and interacting with external consultants who assist us with our
marketing activities.
In the future, we may consider partnering with others to generate additional sales though
distributorships and/or licenses and may utilize such models to expand our sales capabilities in
certain domestic and international markets.
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Manufacturing
We conduct manufacturing and final assembly operations on the NightHunter One, NightHunter
ext, and SuperVision at our headquarters in Carlsbad, California, and own all of the equipment
required to manufacture and assemble these finished products. In addition, we also own all molds,
schematics, and prototypes utilized by our vendors in the production of the components and
sub-assemblies used in our products. We can expand our production capabilities by adding additional
personnel with negligible new investment in tooling and equipment.
We currently purchase both commodity off-the-shelf components and custom-designed fabricated
parts and sub-assemblies for use in our products from a number of qualified local, national and
international suppliers. Although we currently obtain these components from single source
suppliers, we believe we could obtain components from alternative suppliers without incurring
significant production delays. We acquire all of our components on a purchase order basis and do
not have long-term contracts with suppliers.
In January 2003, we entered into a three-year agreement with PerkinElmer Electronics, Inc. for
the manufacturing of our NightHunter II product. This agreement renews automatically for an
additional 12 month term unless otherwise terminated by either party. PerkinElmer, a publicly
traded company (NYSE: PKI), is a leader in the life sciences, fluid sciences and optoelectronics
industries. Under the terms of this agreement, PerkinElmer will manufacture all NightHunter II
products exclusively for Xenonics, on a fixed price basis. In return, we have agreed not to
purchase any NightHunter II products from any other manufacturer or to manufacture any NightHunter
II products ourselves. In addition, PerkinElmer agreed not to produce, market, or sell NightHunter
II products to any entity except Xenonics. PerkinElmer further agreed that all intellectual
property relating to the NightHunter II products is solely owned by Xenonics.
PerkinElmer is responsible for the purchasing, shipping and receiving, production, and quality
assurance of the NightHunter II product. PerkinElmer provides the working capital required for
inventory and manages the labor pool required to meet our delivery requirements without any cash
investment by Xenonics. PerkinElmer has demonstrated the ability to increase production to meet
growing demand. Despite this sole source relationship, Xenonics retains all documentation and
know-how to build the NightHunter II and owns all tooling required to produce NightHunter II
products and related components. We believe we could transition to a second source if required
without significant disruption.
Competition
Other companies that offer high intensity, portable lighting products include Reva
International and Peak Beam Systems, Inc. We believe that neither of these companies currently
offers a product with the features or range of applications of our NightHunter series. It is our
understanding that Reva International is no longer doing business and might be in a restructuring
phase. To our knowledge, only one company, Peak Beam Systems, supplies a short-arc xenon-based
product. Peak Beam’s product also has the capability of utilizing infrared and ultraviolet filters,
and provides a long-range light beam. However, unlike our products, we believe that Peak Beam’s
products project a “black hole” and hence an obstructed field-of-view.
In addition to these suppliers of hand-held high intensity lighting products, we believe that
other companies that use first generation xenon technology, such as Spectrolab (helicopter
searchlights), Phoebus (entertainment spotlights), and Strong (entertainment spotlights) could
enter our market in the future. Our strategy is to remain the recognized market and technology
leader for hand held size systems thus not leaving an opening for the searchlight companies.
In the night vision market we have chosen an open spot in the market. We deliver in a digital
format, the capabilities of current analog Gen 3 systems, at about half to one third the price.
While our system retails at $1,399, analog Gen 3 systems are typically priced over $3,500. There
are also significant lower performing products, usually analog Gen 1 or 2 systems, in the sub $600
retail range. Since our performance well exceeds these systems, our real competition is with the
higher end product. We have patented our digital system, though we would expect others to try and
move into this space as sales grow for SuperVision.
Regulation
We applied to the United States Department of Commerce, Bureau of Export Administration for an
export license for both SuperVision and NightHunter products. In response to our inquiry, the
department assigned an EAR classification of 99. We can export all our products without a license
to all countries that are not on the restricted list IAW part 746 of the EAR.
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Intellectual Property
NightHunter has eleven design and utility patents issued, allowed or pending, including
patents for our technology platform, which applies high efficiency dimmable electronic ballast
circuitry and precision optics to xenon light. We continue to make advancements, and have recently
filed for an additional patent covering certain technologies that complement our NightHunter
product technologies. In addition to the foregoing patents, we also rely on certain know-how and
trade secrets related to the design and manufacture of our products. We believe that the patents
(both granted and pending) and our know-how and trade secrets provide protection to certain of our
core technologies, and allow us to develop future products that can be scaled up or down (or to
develop alternative packages for the existing products). We are not aware of any infringement of
our patents or that we are infringing any patents owned by others.
SuperVision has one patent with 33 separate claims included in the patent. It includes the
integration of the entire systems as well as weapons mounting and future recording capability. We
think that there are systems in the market that might be infringing on our patents and we are
currently reviewing options with our attorneys on how we wish to proceed. We are not aware of any
patent infringement on our part.
Our “NightHunter”, “Xenonics” and “SuperVision” trademarks have been registered with the
United States Patent and Trademark Office.
Research and Development
We maintain an engineering, research and development program for the development and
introduction of new products and accessories and for the development of enhancements and
improvements to our existing products. In addition, we collaborate closely with certain of our
largest customers in the design and improvement of our products to suit their respective needs. As
such, we consider our research and development program to be an important element of our business,
operations and future success.
Our research and development efforts currently are focused on (i) improving our current
product line, (ii) designing and developing product line extensions that employ our proprietary
illumination and electronics platforms, and (iii) designing and developing new products
complementary to our existing products. We maintain an active research and development program at
our facilities in Carlsbad, California, and as needed we retain outside consultants who can provide
any necessary additional engineering or technological expertise. We also regularly work with our
outside vendors and manufacturers to improve product performance and manufacturability, and to
reduce manufacturing costs.
During the fiscal years ended September 30, 2007 and 2006, we spent $713,000 and $576,000,
respectively, on engineering, research and development.
Employees
As of September 30, 2007, we employed 23 persons. There are four members in our executive
management team, seven persons are employed in operations (in addition to four temporary help
personnel), one person in engineering, seven persons in sales and four persons in administrative
support. We are not a party to any collective bargaining agreements.
ITEM 2. DESCRIPTION OF PROPERTY
Our principal operations and executive offices are located at 2236 Rutherford Road, Suite 123,
Carlsbad, California 92008 and our telephone number is (760) 448-9700. The facility consists of
approximately 9,200 square feet of leased office, warehouse and manufacturing space in Carlsbad,
California. The lease on this facility expires in the year 2008.
ITEM 3. LEGAL PROCEEDINGS
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, alleges 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. Plaintiff
alleges that had he been a Xenonics shareholder prior to the effective date, his shares would have
been exchanged as a result of the transaction for shares of DHTS and therefore he could have sold
the resulting shares for a profit he alleges to be more than $1,000,000. Plaintiff further asserts
that after the transaction was effective, Xenonics wrongfully refused to permit him to purchase the
Company’s shares at the exercise price in his warrants for Xenonics shares.
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The Company denies the allegations of the complaint and intends to vigorously defend the
action. Discovery is now substantially complete. The Court has determined that there are issues
of fact that preclude dismissing the action on summary judgment and the case is expected to go to
trial within the next year, but no trial date has been fixed.
We are occasionally subject to legal proceedings and claims that arise in the ordinary course
of our business. It is impossible for us to predict with any certainty the outcome of pending
disputes, and we cannot predict whether any liability arising from pending claims and litigation
will be material in relation to our consolidated financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. Market for Common Equity and Related Shareholder Matters and Small Business Issuer
Purchases of Equity Securities
Our common stock is currently traded under the symbol “XNN” on the American Stock Exchange.
The following table sets forth, for the periods indicated, the high and low sales prices per share
of our common stock as reported on the American Stock Exchange.
As of September 30, 2007, there were 19,838,839 common shares outstanding and approximately 56
shareholders of record, not including holders who hold their stock in “street name”.
Dividends
The Company has never paid any cash dividends on its common stock. The Company currently
anticipates that it will retain all future earnings for use in its business. Consequently, it does
not anticipate paying any cash dividends in the foreseeable future. The payment of dividends in the
future will depend upon our results of operations, as well as our short-term and long-term cash
availability, working capital, working capital needs and other factors, as determined by our Board
of Directors. Currently, except as may be provided by applicable laws, there are no contractual or
other restrictions on our ability to pay dividends if we were to decide to declare and pay them.
Repurchase of Securities
We did not repurchase any shares of our common stock during the year ended September 30, 2007.
Recent Sales of Unregistered Securities
Not applicable
Equity Compensation Plan Information
The following table summarizes as of September 30, 2007, the number of securities to be issued
upon the exercise of outstanding derivative securities (options, warrants and rights); the
weighted-average exercise price of the outstanding derivative securities; and the number of
securities remaining available for future issuance under our equity compensation plans.
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The equity compensation plans approved by the security holders are the 2003 Stock Option Plan
of Xenonics Holdings, Inc and the 2004 Stock Incentive Plan of Xenonics Holdings, Inc. Except as
described in the following paragraph, the Company has not adopted without the approval of security
holders any equity compensation plan under which securities of the issuer are authorized for
issuance.
On September 5, 2006, the Company and a consultant entered into an agreement pursuant to which
the consultant will provide consulting services relating to financial public relations enhancing
the Company’s visibility in the financial community and introducing the Company and its products to
possible merger candidates, financial institutions and other members of the investment community;
and assisting Company personnel in preparing presentation materials in connection with meetings and
conferences involving the investment community. As part of this agreement the Company issued to the
consultant a five year Warrant, vested upon issuance to purchase 500,000 shares of the Company’s
common stock at $1.60 per share (which exceeded the fair market value of the common stock as of
August 31, 2006, the day before an oral agreement was made).
ITEM 6. Management’s Discussion and Analysis or Plan of Operation
Forward-Looking Statements
The following Management’s Discussion and Analysis or Plan of Operation, 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 those described under “Risk Factors” below.
Overview
We design, manufacture and market high-end, high-intensity portable illumination products and
low light viewing systems (night vision). Our core product line consists of lightweight,
long-range, ultra-high intensity illumination products used in a wide variety of applications by
the military, law enforcement, security, search and rescue and, to a lesser extent, in commercial
markets. The Night Vision system is used across the entire spectrum from commercial to the
military. We hold several patents for our technology platform, which applies high efficiency
dimmable electronic ballast circuitry and precision optics to xenon light to produce an
illumination device that delivers improved performance over current technologies, and additional
patents to the integration of the night vision system.
We are largely dependent upon government orders for our revenues. While the night vision
products will expand our sales into the commercial market, the government market, particularly law
enforcement, will continue to be a large part of the night vision sales. Existing customers include
all branches of the United States Armed Forces and federal law enforcement. Starting late in FY
2007 sales expanded into the commercial and international markets
We market our illumination products under the NightHunter brand name and Night Vision under
the SuperVision brand. The NightHunter series of products is produced in a variety of
configurations to suit specific customer needs. These include compact hand-held systems for
foot-borne personnel and stabilized systems for airborne, vehicular and shipboard use. These
NightHunter illumination systems are used for reconnaissance, surveillance, search and rescue,
physical security, target identification and navigation. The systems allow the user to illuminate
an area, an object or a target with visible or non-visible light, and to improve visibility through
many types of obscurants such as smoke, haze and most types of fog.
The SuperVision product was launched in June 2007 and brings a new category to night vision
using a high resolution HDTV display with an ultra-sensitive IR/visible sensor and a proprietary
Digital Signal Processor. This all digital format brings capabilities comparable to high end
military analog systems at less than half the price. In addition the digital format allows for zoom
capability. The price and capability opens the market to law enforcement and the general consumer,
whether in the maritime environment, hunting, camping, security, or any other activity done in a
low light situation.
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We conduct all of our operations through our subsidiary, Xenonics, Inc. On July 23, 2003,
Digital Home Theater Systems, Inc. acquired in a reorganization all of the issued and outstanding
shares of Xenonics, Inc.’s common stock in exchange for 8,750,000 shares of our common stock, and
we changed our name from Digital Home Theater Systems, Inc. to Xenonics Holdings, Inc. The
transaction was accounted for as a reorganization of Xenonics, Inc. with the issuance of stock for
cash. For accounting purposes, Xenonics, Inc. was treated as the acquirer and, as such, its
historical financial statements will continue and are incorporated by reference into this annual
report.
In addition, we exchanged all of the then-outstanding options to purchase stock in Xenonics,
Inc. for options to purchase our stock (at the same price then in effect, but with different
terms), and exchanged 94% of the warrants to purchase stock in Xenonics, Inc. (one warrant to
purchase 135,000 shares of Xenonics, Inc. common stock remained outstanding), for warrants to
purchase our stock (with modified terms and a higher exercise price). On December 14, 2004, the
holder of the remaining warrant to purchase shares of Xenonics, Inc. partially exercised his
warrant and purchased 125,000 shares of Xenonics, Inc. As a result, we currently own approximately
98.6% of the issued and outstanding capital stock of Xenonics, Inc.
How We Generate Revenue
We generate most of our revenue from the direct sale of our products to customers. To date,
most of our sales have been to the United States military. In the past we have depended upon top
down funding through Congress matched with communication directly to end users to drive the demand.
Starting late in our fiscal year ended September 30, 2007 we significantly increased our sales
and marketing program. We hired a new Vice President of Sales and Marketing, who has experience
across all of the SuperVision and NightHunter markets. He has been making additions to his staff to
have a professional inside and outside sales team. He has also reevaluated our independent
representative group.
We have also increased our presence at key tradeshows, began focusing on the international
market place and maintained our Congressional contacts either through our lobbyist or directly by
our officers and directors. In addition, we hired a professional advertising agency with a primary
focus on SuperVision. They will also work on the NightHunter 3 program.
SuperVision was specifically introduced to three key market segments during our fiscal year
ended September 30, 2007. Our initial targeted markets are law enforcement, hunting and
international. Advertising, tradeshow, independent representative groups, and dedicated sales
personnel are focused on these markets. The number of markets will be expanded next year.
We currently have seven persons engaged on a full-time basis in sales and marketing. In
addition, our senior executives actively assist in our marketing efforts by initiating and
maintaining customer relationships and interacting with external consultants who assist us with
our marketing activities.
In the future, we may consider partnering with others to generate additional sales though
distributorships and/or licenses and may utilize such models to expand our sales capabilities in
certain domestic and international markets.
Trends in Our Business
The Company had revenue levels sufficient to generate net income in only one of the last four
years. In the last three years revenue levels did not maintain traction. In order to improve our
revenue levels, we are focusing on improving our current products, introducing new products,
expanding our customer base and restructuring the sales and marketing approach and team. We have
just launched SuperVision and are in the early stages of launching NightHunter 3. We have expanded
our distribution channels that will best help us to reach a goal of an expanded customer base. In
addition to an ongoing effort to improve revenue levels, we continually look to lower costs
wherever possible to improve our operating margin.
Our current challenge is to supplement government sales with commercial sales of both our
current products and new products. Risks include new competitors entering the market, decreases in
government budgets (particularly the defense budget) and our previous inability to penetrate other
markets.
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Critical Accounting Policies and Estimates
The preparation of financial statements and related disclosures in conformity with accounting
principles generally accepted in the United States requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the financial statements and revenues and expenses
during the period reported. The following accounting policies involve a “critical accounting
estimate” because they are particularly dependent on estimates and assumptions made by management
about matters that are highly uncertain at the time the accounting estimates are made. In addition,
while we have used our best estimates based on facts and circumstances available to us at the time,
different estimates reasonably could have been used in the current period, and changes in the
accounting estimates we used are reasonably likely to occur from period to period which may have a
material impact on the presentation of our financial condition and results of operations. We review
these estimates and assumptions periodically and reflect the effects of revisions in the period
that they are determined to be necessary and reviewed by the audit committee.
Revenue Recognition - The Company recognizes revenue net of discounts upon shipment and
transfer of title and when it has evidence that arrangements exist and the price to the buyer is
fixed through signed contracts or purchase orders. Collectibility is reasonably assured through one
or more of the following: government purchase, historical payment practices or review of new
customer credit. Customers do not have the right to return product unless it is damaged or
defective.
Accounts Receivable - The Company recognizes revenue net of discounts upon shipment and
transfer of title and when it has evidence that arrangements exist and the price to the buyer is
fixed through signed contracts or purchase orders. Collectibility is reasonably assured through one
or more of the following: government purchase, historical payment practices or review of new
customer credit. Customers do not have the right to return product unless it is damaged or
defective.
Tax Valuation Allowance - A tax valuation allowance is established, as needed, to reduce net
deferred tax assets to the amount for which recovery is probable. We have established a full
valuation allowance against our U.S. net deferred tax assets because of our history of losses. In
the event it becomes more likely than not that some or all of the deferred tax assets will be
realized, we will adjust our valuation allowance. Depending on the amount and timing of taxable
income we ultimately generate in the future, as well as other factors, we could recognize no
benefit from our deferred tax assets, in accordance with our current estimate, or we could
recognize a portion of or their full value.
Inventory Valuation - Inventories are stated at the lower of cost or market. Cost is computed
using standard cost, which approximates actual cost, on a first-in, first-out basis. The Company
may also provide inventory allowances based on excess and obsolete inventories determined primarily
by future demand forecasts.
A physical inventory is completed on a monthly basis, and adjustments are made based on such
inventories. If it is determined that our estimates of the valuation of inventories are incorrect,
we may need to establish reserves, which would negatively affect any future earnings.
Results of Operations
Year ended September 30, 2007 compared to September 30, 2006 Revenues: We operate in the security lighting systems and night vision industries. Until we
began shipping our new SuperVision products in the year ended September 30, 2007, the majority of
our revenues were derived from sales of our illumination products to various customers, primarily
the military.
Revenues for the year ended September 30, 2007 were $4,984,000 compared to revenues of
$4,833,000 for the year ended September 30, 2006. In the year ended September 30, 2007, we sold
$3,991,000 or 79% of our products to the US Government, which includes both direct sales to the
military (U.S. Army and U.S. Marines) as well as military resellers. This compares to $4,619,000 or
96% of revenue to the military market (U.S. Army, U.S. Marines and military resellers) in 2006.
Initial shipments to commercial customers of our new SuperVision product began in the third quarter
and accounted for 15% of revenues for the current year. International sales for the current year
represented approximately 3% of revenues.
Cost of Goods and Gross Profit: Cost of goods consist of our cost of manufacturing our
NightHunter and SuperVision products and the price that we pay to PerkinElmer for NightHunter II
products that PerkinElmer manufactures for us under our manufacturing agreement.
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The gross profit percentage on revenue was 53% and 58% for the years ended September 30, 2007
and 2006, respectively. The gross profit percentage for both periods was positively impacted by
sales of the NightHunter II product from inventory that was identified as excess inventory during
the fiscal year ended September 30, 2005. The 2007 reduction of the excess inventory reserve
related to the sale of the NightHunter II product was $1,156,000, which positively impacted the
gross profit percentage for the current year by 23%. As of June 30, 2007, all of the excess
inventory of the NightHunter II products had been shipped to customers.
Selling, General and Administrative: Selling, general and administrative expenses increased by
$2,293,000 to $6,007,000 for the year ended September 30, 2007. The increase in expenses consisted
of compensation and benefit costs of $634,000, primarily related to increased headcount for the
SuperVision product, $823,000 in SuperVision advertising, trade show and other selling expenses,
and $247,000 for legal expenses, with the remainder of the change attributable to increased
corporate compliance costs.
Engineering, Research & Development: Engineering, research and development expenses increased
by $138,000 for the year ended September 30, 2007 compared to the prior year. The increase was
primarily related to higher legal expenses for patents of $101,000 and higher compensation and
consulting expenses. Engineering, research and development spending levels are expected to continue
to increase in the future as we develop new products and make improvements to our existing
products.
Other Income / Expense: For the year ended September 30, 2007, interest income was $71,000
compared to $26,000 in the prior year. In the 2006 year, interest income was offset by $7,000 of
interest expense.
Provision for Income Taxes: : For the years ended September 30, 2007 and 2006, the provision
for income tax was $2,000, which represent the minimum annual payments for state taxes.
Net Loss: We incurred a net loss of $4,034,000 for the year ended September 30, 2007 compared
to a net loss of $1,488,000 for the year ended September 30, 2006. The current year was impacted
by the initial roll-out costs of our new SuperVision product, including advertising and other
promotional selling expenses needed to introduce the product and $1,128,000 of non-cash charges
related to stock options and warrants.
Year ended September 30, 2006 compared to September 30, 2005
Revenues: Revenues for the fiscal year ended September 30, 2006 were $4,833,000 compared to
revenues of $4,434,000 for the fiscal year ended September 30, 2005.
In the fiscal year ended September 30, 2006, sales to the military market which includes both
direct sales (U.S. Army and U.S. Marines) as well as sales to military resellers were $4,619,000 or
96% of revenue.
The Company sold $113,000 or 2% of revenue to various international customers in the fiscal
year ended September 30, 2006.
Cost of Goods and Gross Profit: Cost of goods consist of our cost of manufacturing our
NightHunter products and the price that we pay to PerkinElmer for NightHunter II products that
PerkinElmer manufactures for us under our manufacturing agreement. The gross profit percentage on
revenue was 58% for the year ended September 30, 2006 compared to 0% for the prior year. For the
year ended September 30, 2005, the company determined that based on the decrease in revenues of a
specific product in the fiscal year ended September 30, 2005, $1,953,000 of finished goods
inventory should be identified as excess inventory. The gross profit percentage was positively
impacted in 2006 due to the sales of product from inventory that was identified as excess inventory
in the prior year. The sales of this excess inventory during the year ended September 30, 2006 were
$797,000. The gross profit percentage for the 2006 year was positively impacted by 16%.
Selling, General and Administrative: Selling, general and administrative expenses decreased by
$1,170,000 to $3,714,000 in the year ended September 30, 2006. The decrease in expenses reflected a
reduction in legal expense of $791,000, marketing expenses of $135,000, corporate governance
matters of $116,000 and accounting services of $112,000.
Engineering, Research & Development: Engineering, research and development expenses increased
by $72,000 during the year ended September 30, 2006 compared to the prior year. The increase in
expenses were for continued improvement in our product lines and for new products, such as our new
night vision product called SuperVision.
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Other Income / Expense: For the year ended September 30, 2006, interest income was $26,000
compared to $22,000 in the prior year. In the current year, interest income was offset by $7,000
of interest expense.
Provision for Income Taxes: For the year ended September 30, 2006, the provision for income
tax was $2,000, which represents the minimum annual payment for state taxes.
Liquidity and Capital Resources
The accompanying financial statements have been prepared assuming that we will continue as a
going concern. As reflected in the accompanying financial statements, we have incurred losses for
the years ended September 30, 2007 and 2006 and have an accumulated deficit. Our continued
existence is dependent on our ability to obtain orders for our products and/or additional equity
and/or debt financing to support planned operations and satisfy obligations. There is no assurance
that we will be able to obtain enough orders for our products or additional financing to support
our current operations. The financial statements do not include any adjustments relating to the
recoverability or classification of recorded asset amounts or the amount and classification of
liabilities that might be necessary as a result of this going-concern uncertainty.
As of September 30, 2007, we had working capital of $4,527,000 and a current ratio of 4.88 to
1.
Historically, we invested substantial resources in the development of our products and in the
establishment of our business, which negatively impacted our cost structure and created an
accumulated deficit of $18,313,000 as of September 30, 2007. Historically, we have relied on the
sale of equity to fund our working capital needs. Financing activities for the year ended
September 30, 2007 included two private placements for a total of 2,025,000 shares of common stock
at $2.00 per share or $4,010,000 (net of $40,000 of expenses), the proceeds from a common stock
subscription receivable of $650,000 and the proceeds of $587,000 from the exercises of stock
options and warrants to purchase 759,000 shares of common stock. Cash on hand at the end of the
year increased by $2,289,000 from the amount of cash on hand as of September 30, 2006,
During the year ended September 30, 2007, we increased our SG&A spending in anticipation of
sales of our new SuperVision product. However, we sustained a loss due to lower than anticipated
sales. Our net loss of $4,034,000 for the year ended September 30, 2007 negatively impacted our
cash balance. During the year we used $2,750,000 of cash for operations. A decrease in accounts
receivable of $1,889,000 was offset by an increase in inventory of $2,031,000 in anticipation of a
large military order, non-cash stock option compensation of $1,074,000 and non-cash compensation
of $55,000 for the granting of warrants for services.
During the current year we invested $208,000 in equipment, furniture and fixtures. We did not
have any material commitments for capital expenditures as of September 30, 2007 and currently we do
not anticipate any material expenditures during the fiscal year ending September 30, 2008.
The following is a summary of our contractual cash obligations at September 30, 2007 for the
following fiscal years:
We do not believe that inflation has had a material impact on our business or operations.
We are not a party to any off-balance sheet arrangements and do not engage in trading
activities involving non-exchange traded contracts. In addition, we have no financial guarantees,
debt or lease agreements or other arrangements that could trigger a requirement for an early
payment or that could change the value of our assets.
Based on the amount of working capital that we had on hand on September 30, 2007 and the
amount of unfilled orders we have pending, we are dependent on our ability to obtain sales orders
and/or additional equity or debt financing to continue to support planned operations and satisfy
obligations. Our marketing activity has been intensified and management remains optimistic about
our growth opportunity. However, due to the nature of our business, there is no assurance that we
will receive new orders during the quarters that we expect them and although management believes it
can obtain additional financing, there is no certainty that it can.
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RISK FACTORS
An investment in our common stock is subject to a high degree of risk. The risks described
below should be carefully considered, as well as the other information contained in this annual
report and in the documents incorporated herein by reference. If any of the following risks
actually occurs, our business, financial condition, results of operations and business prospects
could be materially and adversely affected. In such event, the trading price of our common stock
would likely decline.
Risks Related to Our Business
We have a limited operating history, which makes it difficult for investors to evaluate our
business prospects.
We have been engaged in selling high intensity illumination products only since March 2003. We
only started selling night vision products in the third quarter of the fiscal year ended September
30, 2007. As a result, we have a very limited operating history for investors to consider in
evaluating an investment in our common stock.
Fluctuations in our quarterly and annual operating results make it difficult to assure future
positive cash flows from operations.
For the most recent fiscal year ended September 30, 2007, we posted a net loss of $4,034,000
on revenue of $4,984,000, compared to a net loss of $1,488,000 on revenues of $4,833,000 for the
year ended September 30, 2006. For the year ended September 30, 2005, had a net loss of
$5,310,000 on revenues of $4,434,000. For the year ended September 30, 2004, we recorded net income
of $1,476,000 on revenues of $11,927,000. Since our revenues are primarily dependent upon the
receipt of large orders from the military and other governmental organizations, which orders are
sporadic and unpredictable, our revenues fluctuate significantly from quarter to quarter and from
year to year. No assurance can be given that we will generate sales at any specific levels or that
any additional sales that may be generated will result in the profitability or viability of this
company.
The loss of any one of our major customers would have an adverse effect on our revenue.
We have been dependent on a few large customers. For the fiscal years ended September 30, 2007
and 2006, sales to the U.S. Marine Corps represented 31% and 56% of our total revenues,
respectively. Accordingly, the loss of the U.S. Marine Corps as a customer could have a material
adverse impact on the results of our operations and on our financial condition. We expect that with
sales of our new SuperVision product, we will become less dependent on a few large customers. On
November 13, 2007 we announced that we had received new purchase orders totaling approximately
$4,000,000 for our NightHunter high-intensity illumination devices. The purchase orders included
approximately $3,200,000 from the U.S. Army for our NightHunter II systems and purchase orders for
approximately $800,000 from Aardvark Tactical, Inc. (ATI) for NightHunter One devices to be
included in ATI’s force protection integration projects for the U.S. military. This order is in
addition to a $1,500,000 NightHunter One order from Aardvark we announced in September 2007. We
also stated that we expect significant additional orders as part of this ‘program of record’ with
Aardvark. We expect to begin making deliveries for these purchase orders beginning in the first
quarter of our fiscal year ending September 30, 2008. However, no assurance can be given that we
will continue to receive these kinds of purchase orders for our products or that we will receive
similar orders from other customers.
Most of our NightHunter illumination products that we have recently sold and shipped have been
shipped to U.S. military forces operating in, or related to, the currently on-going military
operations in Afghanistan and Iraq. These shipments have contributed to the recent significant
increase in our revenues. While we believe that we would have received orders from the U.S.
military even without the current military activity in Afghanistan and Iraq, the events in those
countries have affected the amount of our recent sales and the timing of the delivery of the
products ordered by the military. The withdrawal of U.S. forces from these regions, or any other
reduction in the military’s need for our illumination products, may in the future reduce the demand
for our products by such military forces.
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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.
While we believe that we will continue to be successful in marketing our products to these
entities, 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 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 such a 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 small and 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 small and new marketing and sales team. We currently have seven persons engaged on
a full-time basis in marketing and sales. Although our other 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 have not
been successful in generally marketing our products to a wider market. There can be 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.
We depend on the efforts of our senior management, particularly Alan P. Magerman, our Chairman
of the Board, Charles W. Hunter, our Chief Executive Officer, and Jeffery P. Kennedy, our Chief
Operating Officer and President. The loss of the services of one or more of these individuals could
delay or prevent us from achieving our objectives.
The interests of our current shareholders will be diluted if we seek additional equity financing in
the future, and any debt financing that we seek in the future will expose us to the risk of default
and insolvency.
We are dependent on our ability to obtain sales orders and/or additional equity or debt
financing to continue to support planned operations and satisfy obligations. The Company’s
marketing activity has been intensified and management remains optimistic about our growth
opportunity. However, due to the nature of our business, there is no assurance that we will receive
new orders during the quarters that we expect them. Although management believes it can obtain
additional financing, there is no certainty that it can. Any equity financing may involve dilution
of the interests of our current shareholders, and any debt financing would subject us to the risks
associated with leverage, including the possible risk of default and insolvency.
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We are subject to government regulation which 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. Compliance with government regulations may
also 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 cannot
be anticipated that could impact our ability to generate revenues 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 an 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 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 or if we lose our
rights to the NightHunter II or SuperVision patent application.
We own the rights to seven patents (or allowed patent applications) and four patent pending
applications relating to the design and configuration of our xenon illumination technology and
digital lowlight viewing and one patent for our night vision product. 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. No assurance can be given
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 only have 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 revenues have been generated from the sales of our three NightHunter
illumination system products (the NightHunter One, NightHunter II and NightHunter ext), related
accessories and SuperVision. In addition to the three NightHunter models and SuperVision, we have
started marketing the new NightHunter 3 and have done early stage marketing on tactical
illumination. The profitability and viability of our company is dependent upon our continued
ability to sell, manufacture and ship our three illumination models and SuperVision, then bringing
NightHunter 3 into production, 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.
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Further, our future growth and profitability will depend on our ability to both successfully
expand NightHunter and to develop and commercially release SuperVision and 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.
If we are unable to develop and release other products, the future of this company will depend on
the commercial success of our existing three NightHunter products and SuperVision.
Because we depend on a single manufacturer to make our NightHunter II products, any failure by the
manufacturer to honor its obligations to us will impair our ability to deliver our products to
customers.
In January 2003, we entered into a three-year manufacturing agreement with PerkinElmer, a
global provider of products and services to, among others, the optoelectronics industries, for the
manufacture of NightHunter II products. In the absence of termination notification by either party,
the agreement will automatically renew for a twelve-month term.
Under this agreement, PerkinElmer is the sole and exclusive manufacturer of the NightHunter II
products, and we are not permitted to engage any other manufacturer. In addition PerkinElmer is
responsible for testing, packaging, maintaining product inventories, and shipping the NightHunter
II products directly to our customers. Accordingly, we are dependent upon PerkinElmer for the
manufacture and delivery of our principal product, the NightHunter II. 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 live up to 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.
Risks Related to Our Common Stock
You may be unable to sell your shares at an adequate price or at all.
There is no assurance as to the depth or liquidity of any market for the common stock or the
prices at which holders may be able to sell the 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 you will be able to sell your 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 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. However, to our knowledge, no
analysts either cover our company or the segment of the industry in which we operate. 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 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.
Anti-takeover provisions in our articles of incorporation could adversely affect the value of our
common stock.
Our articles of incorporation contain certain provisions that could impede a non-negotiated
change in control. In particular, without shareholder approval we can issue up to 5,000,000 shares
of preferred stock with rights and preferences determined by the board of directors. These
provisions could make a hostile takeover or other non-negotiated change in control difficult, which
takeover or change of control could be at a premium to the then-current stock price.
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The future issuance of additional common and preferred stock could dilute existing shareholders.
We are currently authorized to issue up to 50,000,000 shares of common stock. To the extent
that common shares are available for issuance, our board of directors has the ability, without
seeking shareholder approval, to issue additional shares of common stock in the future for such
consideration as the board of directors may consider sufficient. The issuance of additional common
stock in the future will reduce the proportionate ownership and voting power of the common stock
held by our existing shareholders.
We are also authorized to issue up to 5,000,000 shares of preferred stock, the rights and
preferences of which may be designated in series by the board of directors. Such designation of new
series of preferred stock may be made without shareholder approval and could create additional
securities which would have dividend and liquidation preferences over our common stock. Preferred
shareholders could adversely affect the rights of holders of common stock by:
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
existing shareholders.
There are currently outstanding stock options and warrants entitling the holders to purchase
5,679,000 shares of our common stock, including a number of options granted to directors, officers,
employees and consultants that are subject to vesting conditions. These options and warrants have
exercise prices ranging from $0.25 per share to $8.00 per share. It is likely that many of the
holders of these options and warrants will exercise and sell shares of our common stock when the
stock price exceeds their exercise price. Substantial option and warrant exercises and subsequent
stock sales by our option and warrantholders would significantly dilute the ownership interests of
our existing shareholders.
Future sales of common stock by our existing shareholders and option and warrantholders could cause
our stock price to decline.
The release into the public market of a large number of freely tradable shares and restricted
securities that are now eligible or subsequently become eligible for public resale under Rule 144
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 market price.
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ITEM 7. FINANCIAL STATEMENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
XENONICS HOLDINGS, INC.
F-1
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REPORT OF CURRENT INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Xenonics Holdings, Inc. We have audited the accompanying consolidated balance sheet of Xenonics Holdings, Inc. and
subsidiary (the “Company”) as of September 30, 2007, and the related consolidated statements of
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