equity insights - sionex (sinx) research report may 2012

Equity I n s i g h t s

Sionix designs, develops, markets, and sells water management and treatment solutions intended for use in the oil and gas, agriculture, disaster relief, and municipal (both potable and wastewater) markets. The Company’s Mobile Water Treatment System (“MWTS”) is configured dependent upon customer requirements and integrates components and technologies based on those requirements. Within these systems, the company utilizes a Dissolved Air Floatation (“DAF”) system with patented technology that management estimates removes more than 99.95 percent of the organic, and most inorganic, particles in water. This includes the removal of hydrocarbons, insoluble metals, infectious bacteria, algae, and color. Historically, DAF systems similar to the DAF used in Sionix MWTS created bubbles that were 50 microns or greater, which were unable to remove all contaminants due to their size. The Sionix technology utilizes and refines DAF technology to provide a pre-treatment process using ambient oxygen and minimal chemical flocculent aids that can be more efficient and cost-effective. The company’s patented technology makes micro-bubbles that allow a much greater percentage of contaminants to be captured, floated to the surface, and skimmed off with minimal use of chemicals. The Company’s MWTS is mobile and modular such that it can be transported easily to address a wide range of water treatment markets and can meet customers’ needs for new systems or to replace or integrate with existing filtration technologies. Sionix was initially incorporated in Utah in 1996 and reincorporated in Nevada in 2003. The company’s website is www.sionix.com.

Sionix Corp. (OTCBB: SINX)

BerylStone Equity Research offers independent research services to public and private companies. Our reports provide factual and high quality information that has an emphasis on accuracy and objectivity. Our approach to equity research allows for a broad audience of investors to make informed, timely decisions about the companies we cover. We adhere to the Best Practice Guidelines Governing Analyst Corporate Issuer Relations. The CFA Centre for Financial Market Integrity developed these standards in collaboration with the National Investor Relations Institute.

May 2012

914 Westwood Blvd., Box 801Los Angeles, California 90024

Lead Investment Analysts:

Scott Bryant, CFARandy Burd, Ph.D.

www.berylstone.com

Independent Research

Price Per Share $0.11

Share Price Range (52w) $0.04-$0.11

Average Daily Volume (3m) 1,072,880

Shares Outstanding 334.16M

Float 312.43M

% Held by Insiders 1.45%

% Held by Institutions 0.10%

Market Cap $36.76M

Fiscal Year End Sept 30

Full-time Employees 8

Book Value < $0.01

Diluted EPS - $0.02

Operating Cash Flow (ttm) -2.56M

* Source: Capital IQ, Thomson Reuters 05/15/2012

B E RY L S TO N E E Q U I T Y R E S E A R C HS I O N I X C O R P. ( O T C B B : S I N X )

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Executive Summary Page 3

Recent Events Page 4

Executive Management Page 5

Industry Overview Page 6

Business Strategy Page 8

Marketing and Sales Plan Page 10

Sionix DAF Technology Page 11

Research and Development Page 12

Intellectual Property Page 12

Strategic Partners Page 13

Competitors Page 14

Other Water Treatment Methods Page 15

Business & Strategic Risks Page 16

Legal Proceedings Page 18

Regulatory Issues Page 18

Financial Statements Page 19

Glossary 2

References and Disclosures Page 23


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• The mobile water treatment industry is experiencing near-term growth from both industrial and municipal markets as the demand for clean water accelerates.

• Recyclingoftoxicflowbackwaterfromhydraulicfrackingoperationsrepresentsasignificantopportunityfor Sionix.

• Sionix proprietary DAF technology createsdenseandefficientmicrobubbles that can help lower thecostofwatertreatmentrelativeto other methods.

• The Company currently operates with limited revenue and short-term funding sources. Asset controlling partnerships have been introduced to help address limited liquidity.

______________________________ExecutiveSummary

Sionix Corporation competes in the global mobile water treatment systems market, which is estimated to have a compound annual growth rate of 11.2 percent and reach total revenues of $895 million by 2016. The growth in the mobile water treatment market comes from both mature and emerging economies due to the demand for purified water in industrial applications, emergency situations, and from areas with inadequate clean water supplies. Currently, North and South America constitute over 75 percent of all market revenues.

Sionix integrates its proprietary Dissolved Air Flotation (“DAF”) technology to treat contaminated water. DAF purifies water by the removal of suspended contaminates. Air is dissolved into the water forming tiny bubbles which adhere to the suspended particles causing the particles to float to the surface where they can then be skimmed. Although there are numerous variations of DAF technology offered in the mobile water treatment market that use the same basic principal, specific DAF methods can vary with respect to efficiency and cost. Sionix differentiates itself in this space by focusing on specialized, system-based DAF solutions that can remove contaminants efficiently with minimal or no need for chemicals. Sionix achieves these efficiencies through the extremely small size of the microbubbles created by their DAF technology. Smaller bubbles create greater surface tension. This allows the microbubbles to hold together longer and elevate more organic contaminants to the surface for removal. The microbubble size is a focal point of the Sionix Mobile Water Treatment System (“MWTS”) because it can make post-DAF filtration less costly. It can also reduce energy usage and provide for a smaller footprint. The Sionix MWTS is well suited to the water purification needs of the oil & gas industry - and specifically the recycling of toxic flowback water from hydraulic fracking operations. This is due to the system’s mobility, high level of organic contaminant removal, low usage of energy, and quick dispatch and commission. The Sionix DAF approach can efficiently remove organics (one micron or greater), and lighter particles (such as dust and clays), which can resist sedimentation out of treated source water and can cause maintenance problems in water treatment components within the treatment train (such as fouling of filtration membranes) or reduce filter system longevity and efficiency.

The combination of Sionix’s MWTS approach and the growth of oil fracking operations make the the Williston Basin, and specifically the Bakken Shale Formation, one of the Company’s best opportunities for revenue growth. The Williston Basin stretches across North Dakota, Montana, South Dakota, Manitoba, and Saskatchewan and covers roughly 300,000 square miles. Due to the remote nature of the drilling operations in the region, there are limited treatment alternatives to hydrocarbon-contaminated wastes other than disposal wells where toxic wastes are injected thousands of feet below the surface. Sionix MWTS offers a viable alternative with the recycling of the toxic flowback water, allowing for the treated water to be returned to the drillers for reuse.

The Company’s immediate challenge will be to transition from an early stage company to an operating company that can successfully deploy its technology. The Company’s success will depend on obtaining adequate cash to finance its overhead, research and development activities, and acquisition of production equipment. The Company’s ability to meet its cash requirements for the next twelve months is critical and will possibly involve additional debt service requirements and equity dilution.


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________________________________Recent Events

• Formation of Asset Controlling Partnership Program (“ACP”) - Sionix announced its first ACP through the formation of Williston Basin I, LLC (“Williston”), a Nevada limited liability company, of which the Company owns a 60 percent interest. Williston was formed with an initial capital contribution of $1.35 million representing 40 percent of the membership interests in the subsidiary. Of that 40 percent interest, 22 percent is held by RevH2O, LLC, an existing Sionix shareholder, and the remaining 18 percent by subscribers in prior equity offerings. Sionix contributed a MWTS to the Williston venture, which is specifically designated for operation in the Williston Basin of North Dakota for treatment of water contaminated by harvesting of energy resources in this region. Sionix personnel will be responsible for the operation and maintenance of the MWTS and their performance under the contract with McFall Incorporated, a Washington based construction and logistics firm operating as a Master Service Contractor to a major E & P company in the Williston Basin. The formation and operation of Williston signifies the migration of Sionix from a supplier of water treatment equipment to a provider of water treatment services. The Company expects to use their ACP Program for further deployments in the Williston Basin, as well as other energy bearing shale formations in the continental United States.

• Water Treatment Agreement (“WTA”) with McFall Incorporated / Introduction of Recurring Revenue Model – Under the agreement with McFall, Sionix will deploy a fully equipped MWTS consisting of de-watering, DAF, filtration, and desalination components for operation alongside a specific drilling rig. Sionix Corporation will be the owner/operator of this MWTS and will be compensated on a per gallon basis. The WTA defines a scale of treatment revenues dependent upon contaminant loading of influent water. Sionix expects to treat from 4,800 - 9,600 barrels of contaminated water per day during the approximately 25 day drilling cycles (11 drilling cycles per year). The deployment confirms the ability of Sionix to provide recycling capabilities in the Williston Basin.

• Abuja, Nigeria Housing Project Delay - In August 2011, Sionix signed a Letter of Intent (LOI) with ANA Global for the purchase of two MWTS to be installed in a cooperative housing project in Abuja, Nigeria. In discussions with ANA management, Sionix learned that infrastructure engineering has been delayed and that the current LOI is not expected to convert to a definitive purchase until later in 2012.

• Senior Secured Private Placement - On November 8, 2011, Sionix completed a private placement in which it sold and issued a senior secured redeemable debenture of $300,000 to TCA Global Credit Master Fund, LP for aggregate gross proceeds of $300,000. Until maturity of the Debenture, Sionix may request that investors purchase additional debentures in two tranches, each in an amount of up to $350,000 so long as there has been no default event. At this closing, Sionix issued to the investor 2,358,491 shares of common stock as an incentive for the private placement. Sionix can repurchase these shares if it chooses to pay the incentive fee of $125,000 in cash for a period of 9 months after this closing. As well, Sionix and the investor will revalue the shares at the 9 month anniversary from this closing and if the underlying shares are worth more than $125,000 based the then current market valuation, then Sionix will receive shares back from the investor. Conversely, if the market price is less than the incentive fee of $125,000 then Sionix will be required to issue additional shares.

• The Company expects to use their asset controlling partnerships for further deployments in the Williston Basin, as well as other energy bearingshaleformationsinthecontinentalUnitedStates.

• UnderanagreementwithMcFallIncorporated, Sionix will deploy a fully-equippedMWTSconsistingofde-watering,DAF,filtration,andde-salinationcomponentsforoperationalongsideaspecificdrillingrig.

• On November 8, 2011, Sionix completed a private placement in which it sold and issued a senior secured redeemable debenture of $300,000 to TCA Global Credit MasterFund,LPforaggregategrossproceeds of $300,000.


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_____________________________________________ExecutiveManagement

James R. Currier, Chairman and Chief Executive Officer - Mr. Currier has thirty five years progressive executive experience in public and private, domestic and international high technology companies, including Tellus Maskin AB, Conco-Tellus, Inc., NDC Automation, Inc., Statec Technologies S.A., Les Greening & Associates Pty Ltd, Apogee Robotics, Inc., The Prima Group International, Inc./Prima Industrie S.p.A., Fireaway LLC, and Green Bit, Inc. Mr. Currier’s experience includes:

• Resident assignments in Northern Ireland, Sweden, France, Italy, Israel, Australia, and South Africa involving factory automation, automated transport, storage and retrieval, flexible manufacturing, assembly and production, and roll handling systems; Radio Frequency Identification (“RFID”) Systems; metal fabricating systems, particularly laser cutting and welding equipment for automotive R&D applications; Biometrics, particularly digital fingerprint scanning; and fire suppression/extinguishing products and systems utilizing a licensed Russian technology.

• Principal author in various international technology licensing and partnership arrangements involving technology transfers from international sources to U.S. destinations.

• Currently involved with bio-mass conversion involving a mechanical disaggregation of certain bio-wastes into energy and thermal feedstocks, edible fiber, pure hydrogen, C5 sugars, and other recoverable elements contained in bio-wastes of high cellulosic and starch content (principally sugar cane bagasse).

• Managing Partner, CGS International LLC, and profit sharing participant in the bio-mass conversion project.

• Participated in both the private placement and public offering of Apogee Robotics and supervised the public offerings of NDC Automation, Inc. on NASDAQ and Prima Industrie S.p.A. on an Italian exchange, raising between $3 and $30 million from 1982 to 1996.

• Served as a consultant to various European corporations seeking access to American commercial and financial markets.

David R. Wells, President and Chief Financial Officer - Mr. Wells is responsible for strategy and operations for the Company. Prior to joining Sionix, he was the Chief Financial Officer of Voyant International Corporation. In that position he was responsible for strategy and financial operations of the publicly traded technology company. Before joining Voyant, he served as VP Finance for PowerHouse Technologies Group, Inc. (now Migo Software, Inc.), and prior to that was the Acting CFO of Insurance Services of America. Before that he was the VP, Finance and Administration for Broadstream, Inc. Mr. Wells was also the VP, Finance and Administration for the Hollywood Stock Exchange, where he was responsible for performing internal audits, establishing appropriate financial reporting, and extending corporate governance procedures. He has experience working with auditors and regulatory agencies to rapidly address non-conforming situations and assisting companies who desire to increase their internal controls.

• James Currier, Chairman and CEO, hasthirtyfiveyearsprogressiveexecutiveexperienceinpublicandprivate,domesticandinternationalhigh technology companies.

• David R. Wells, President and CFO, is responsible for strategy and operationsofSionix.PriortojoiningtheCompany,Mr.WellswastheChiefFinancialOfficerofVoyantInternationalCorporation.


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Mr. Wells possesses over 20 years experience in finance, operations, and administrative positions. While mainly focused on technology companies, he has also worked in water treatment, supply-chain management, manufacturing, and the professional services industry. He earned a BA in Finance and Entrepreneurship from the Seattle Pacific University, and holds an MBA from Pepperdine University.

Mark J. Hayes, Chief Science Officer - Mr. Hayes duties include overseeing all research activities including research and development of new company technologies. Other duties include drafting technical manuals and maintaining patent materials for all scientific endeavors of the Company. In 2008, Mr. Hayes started up a consulting firm called Minnesota Geotechnical Services. He provides services such as advanced septic design, water tests, wetland restoration and lake mapping. He spends the winters as a citizen lobbyist in St. Paul, Minnesota during the legislative session. In 2009, Mr. Hayes was a gubernatorial campaign manager for a GOP hopeful.

Before that, Mr. Hayes provided services in water quality consulting since 1985. Mr. Hayes attended St. Cloud University, receiving a B.S. of Geology with a Hydrology Emphasis. He is a Ph.D. candidate in Geology with an emphasis on surface waters and glacial geology. Mr. Hayes taught at St. Cloud State University as an Adjunct Professor for 2 years.

_____________________________________________Industry Overview

The water recycling and reuse industry is highly fragmented, consisting of many companies involved in various operational capacities, including companies that design fully integrated systems for processing millions of gallons of water for municipal, industrial, and commercial applications. Demand for water treatment and purification has continued to grow due to economic expansion, population growth, scarcity of usable water, concerns about water quality, and regulatory requirements. Specifically, mobile water treatment services, such as those provided by Sionix, are experiencing increasing demand from the urbanization of developing countries and from industries that require intensive water resources to operate, such as the oil and gas, agriculture, and food processing industries.

The industry exhibits significant growth in both mature and emerging economies due to demand for high-purity water in industrial applications and potable water in emergency situations and in areas with inadequate water supplies. In particular, the emerging markets of Asia Pacific and the Middle East represent opportunities for growth. Africa is a relatively unexplored region due to political instability in some countries, lack of water purification regulations, and difficult terrain.

New technological developments represent an important factor that will stimulate future growth. Since customized technology is required for specified treatments, there is also potential for growth in regional markets if treatment systems are suitable for local requirements. Furthermore, there is an increasing demand for alternative technologies due to environmental concerns associated with presently established water treatment methods.

• The water recycling and reuse industry is highly fragmented, consistingofmanycompaniesinvolvedinvariousoperationalcapacities.

• Customized technology is required forspecifiedtreatments,thereisapotentialforgrowthinregionalmarkets if treatment systems are suitable for local requirements.


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Although the overall outlook for the market is positive, there are several factors that restrict growth. The economic downturn has discouraged capital investments, which are crucial to expansion since each mobile water treatment unit costs $250,000 to $300,000. This ultimately limits the market size. Additionally, large corporations are active in the industry, creating competition and high barriers to entry.

• Oil and Gas Industry - The treatment of ‘produced water’ is a major component of the cost of producing oil and gas. In the United States, produced water is defined by the Environmental Protection Agency (“EPA”) to mean the water (brine) brought up from the hydrocarbon bearing formation strata during the extraction of oil and gas, and can include formation water, injection water, and any chemicals added downhole or during the oil/water separation process. Wells may start out producing little water but sooner or later all oil wells produce a much larger volume of water than oil. The ability to efficiently and economically dispose of this water is critical to the success in the oil production business. Annually, the U.S. produces 20 billion barrels (882 billion gallons) of produced water, onshore and 700 million (29.4 billion gallons) off-shore. Produced water handling and treatment represents billions in cost to U.S. oil & gas industry. Recent regulatory action requiring more responsible water usage management in oil and gas fracking in states such as Pennsylvania is a trend that might drive similar action in other states, such as North Dakota. North Dakota’s oil and gas industry has no readily available, affordable source of water recycling and treatment. The current practice in North Dakota for wastewater created during fracking is to inject produced water back into the ground, a practice that has unknown effects on the environment and has come under heavy regulatory scrutiny in other states. Each new horizontal well requires millions of gallons of fresh water over its life. Any regulatory actions affecting the legality of fresh water usage in fracking or injection of produced water back into the ground could negatively affect the oil and gas industry in North Dakota and increase industry demand for mobile water treatment and recycling services. The produced water management industry has potential for growth. Overall oil production in the U.S. has peaked and as a result of aging wells, the water to oil ratio is increasing, leading to higher demand for water treatment services. Oil field service companies may look to outsource the operational and regulatory risks associated with treating produced water as the need for on-site reuse using relatively complex technologies evolves. Water services for shale gas is a viable area for growth since the water treatment needed is temporary and portable water treatment is preferred.

• Agricultural Industry - The U.S. has more than 300 million acres of agricultural land. Activities from working farms and ranches can affect water quality. According to the EPA, nonpoint source pollution is the leading contributor to contamination of surveyed rivers and lakes, and also affects wetlands, surveyed estuaries, and ground water. Current farming and ranching practices result in a number of pollutants, including sediment, nutrients, pathogens, pesticides, metals, and salts. Due to an increase in state and federal regulations, as well as programs funded by the U.S. Department of Agriculture, there is an increase in the adoption of technologies and practices that eliminate or reduce water pollution caused by agricultural activities. Sionix’s DAF technology and MWTS configuration meets most agricultural water treatment needs.

• 363,459 oil-producing wells in the U.S.,eachbarrelofcrudeoilcreatesapproximately 10 barrels of produced water.

• 461,388 gas-producing wells in the U.S.,hydraulicfracturinginjectsover80,000 lbs of chemicals into the earth’s crust for each well that is drilled.

• Approximately 98 percent of onshore produced water is disposed of onsite.

• In the shale gas industry, around 13,000m3 of water is used to break rock and allow gas to rise to the surface.


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• Public Rural Water Districts - There are over 200,000 public rural water districts in the U.S. The majority of these are considered very small, small, and medium-sized public water systems, which support populations of fewer than 10,000 people. Many of these are in violation of the U.S. Safe Drinking Water Act (“SDWA”) at any given time. The number of districts out of compliance is expected to worsen as more stringent EPA rules are implemented for small public water systems. Substantial expenditures will be needed for years for repair, rehabilitation, operation, and maintenance of the water and wastewater treatment infrastructure. Many water districts using conventional treatment methods will be unable to comply with the SDWA without installations of on-site chemical filter aids and disinfection equipment.

• International Markets - The quality of drinking water outside the U.S. and other industrialized countries is generally much worse, with high levels of contaminants and often only rudimentary purification systems. A recent report from the United Nations estimates that approximately 1.1 billion people worldwide do not have access to fresh drinking water and approximately 2.6 billion do not have adequate sanitation systems. Approximately 3.5 million people die each year from water-related diseases, a majority of them in countries lacking adequate access to safe drinking water and sanitation systems. A lack of infrastructure in many of these areas creates a significant need for an affordable, mobile, customizable mobile water treatment system with adequate capacity. Equally important to the treatment of contaminated water in foreign markets is the development of desalination as a method of producing potable water. The Caribbean and Middle-Eastern markets already depend on desalination for a large portion of their drinking water. Industry expectations are that this sector of the water treatment industry will experience significant growth during the forthcoming decades as ordinary sources of fresh water (such as lakes, rivers, streams, well water, and treated water) continue to be stressed by unregulated industrial, commercial, and agricultural uses. The Sionix MWTS can be used in conjunction with existing desalination equipment to prolong the equipment life, creating cost savings and improving functionality.

____________________________________________Business Strategy

The Company’s objective is to be a leading provider of patented water treatment technologies that can be used for water management and treatment solutions in multiple end markets. Their solutions are designed to make it more cost-effective to quickly deploy water treatment technologies. They are focusing their efforts on the oil and gas markets where their solutions can offer an immediate return on investment. While there are many end market applications for their technology, the treatment of flowback water from oil and gas production offers the most compelling near term opportunity. The reservoir rocks in any oil and gas formation usually contain water along with hydrocarbons in varying concentrations. When hydrocarbons are extracted from the formation, water is also recovered along with hydrocarbons and is generally defined as ‘produced water’. On average, the ratio of produced water to actual hydrocarbons extracted from the wells of varying maturity is approximately 3:1, but can be as high as 10:1. The volume of water produced presents the greatest waste management challenge for oil field operators in the oil and gas sector. In addition, most wells utilizing hydrofracturing technology use enormous amounts of fresh water, up to 8 million gallons of water for a single well. After the hydrofracturing procedure completes, the fluid returns to the surface as flowback water, contaminated by fracturing chemicals and subsurface contaminants including toxic organic compounds, heavy metals, and naturally occurring radioactive materials.

• Equally important to the treatment of contaminated water in foreign markets is the development ofdesalinationasamethodofproducing potable water.

• Manydomesticwaterdistrictsusingconventionaltreatmentmethodswill be unable to comply with the Safe Drinking Water Act without installationsofon-sitechemicalfilteraidsanddisinfectionequipment.


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• The Williston Basin - The Bakken Shale Formation can be found in the Williston Basin, which stretches across North Dakota, Montana, South Dakota, Manitoba and Saskatchewan. The basin will become a large oil producing area as a direct result of hydraulic fracking, horizontal drilling, and artificial permeability practices. These technologies, using an average of 5 million gallons of water per well, have created opportunities for water treatment and recycling that would ordinarily be disposed of in deep injection wells. The Bakken Shale Formation is the largest known reserve of light sweet crude oil in North America. According to a recent U.S. Geological Survey (“USGS”) assessment, there is an estimated 3.8 billion barrels of undiscovered oil, 3.7 trillion cubic feet of associated/dissolved natural gas, and 200 million barrels of undiscovered natural gas liquids in the Williston Basin. The majority of undiscovered oil and gas is in the Bakken Formation, at about 3.65 billion barrels of oil. Two recently discovered areas, the Elm Coulee field in Richland County, Montana and the Parshall field in Montrail County, North Dakota, have increased interest in the Bakken Formation. The fractures throughout the formation and the development of new horizontal technology have led to estimated ultimate recoveries of up to 2 million barrels of oil from these reservoir zones. There are currently over 6,000 active oil wells in the Bakken Shale Formation and this number is expected to rise as oil production increases. Most wells are located in North Dakota and Montana. Daily production is estimated at 500,000 barrels and anticipated to increase to 1 million as more oil is extracted. These figures suggest that the original estimate of recoverable oil provided by the USGS may have been too low, and it is reported that the agency may revise their original estimate. In addition to the oil and gas applications, the proliferation of oil and gas related man camps in the Williston region to domicile workers, sub-contractors, and oil field service personnel represents a significant strain on source or non-existent waste treatment resources. Coupled with antiquated municipal treatment facilities, treatment of man camp and municipal wastes represents a meaningful resource of treated water for hydrofracturing activities without continued drawdowns on existing fresh water sources OtherU.S.ShaleFormationOpportunities

• The Marcellus Shale Opportunity – Sionix is currently engaged in permitting activities in Pennsylvania to provide a demonstration MWTS for purposes of testing and documentation. To the extent this MWTS achieves acceptable testing results that have been developed in cooperation with regulatory, scientific, and engineering consultants, sale or lease opportunities could be realized.

• Potential New Shale Formations – New drilling technologies have the potential to liberate energy resources in 30 or more shale formations across the United States and make the country substantially more energy efficient. Remediation of the large amounts of water necessary to support the energy harvesting activities is mission critical to the industry’s sustainability, future expansion, and success. In a 2006 study sponsored by the USGS, shale formations in the continental United States contain potential energy resources in amounts of eight times the resources in the rest of the world. As hydrofracturing, horizontal drilling, and artificial permeability technologies are required to harvest these vast domestic resources, water will either represent a significant

• There are currently over 6,000 activeoilwellsintheBakkenShaleFormationandthisnumberisexpectedtoriseasoilproductionincreases.MostwellsarelocatedinNorthDakotaandMontana.

• Inadditiontotheoilandgasapplications,theproliferationofoiland gas related man camps in the Williston region to domicile workers, sub-contractors,andoilfieldservicepersonnelrepresentsasignificantstrain on source or non-existent waste treatment resources.


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inhibitor to the development of the resources, or if properly implemented water conservation measures are mandated, including recycling toxic hydrofracturing flowback water and harvesting local waste treatment products, water will facilitate the continued development of these resources. OtherIndustryOpportunities

• Wastewater and Sewage Treatment Facilities - Municipal sewage treatment is the process of removing contaminants from wastewater originating from household, industrial, health care, and commercial sewage. It includes physical, chemical, and biological processes to remove physical, chemical, and biological contaminants to produce a waste stream (treated effluent) and a solid waste or sludge suitable for discharge or reuse back into the environment. This material is often inadvertently contaminated with many toxic organic and inorganic compounds.

• Disaster Relief Organizations - During natural disasters such as earthquakes, tsunamis, floods, hurricanes, and tornadoes, it is the role of the National Guard and the Federal Emergency Management Agency to assist local authorities with emergency services. Damage to local utilities can disrupt the fresh water supply and cause the failure of wastewater (sewage) treatment plants. The Sionix MWTS can help address both of these problems. The system is completely self-contained, can be easily transported from place to place, is highly efficient, and can be equipped with its own power package.

• Agribusiness - Treatment of agricultural wastewater is segregated into three categories: (i) food processing, (ii) animal waste (feed lots) and (iii) crop runoff pollution. Within the food processing industry there are several subsets, including (i) produce, (ii) meat processing, (iii) egg production, and (iv) dairy operations. Crop runoff pollution is the result of planting, cultivating, fertilizing, weed and pest control, and harvesting on the farm. (Runoff is caused by rain and irrigation.) Food processing involves treatment of animal waste pre-slaughter in the case of feeder cattle, hogs, and poultry. It also involves post harvest treatment of produce either for fresh delivery or for preservation by canning and/or freezing operations.

• Developing Countries - In addition to the U.S. market, fast spreading urbanization in developing countries has created a growing demand for public water systems. Most of the fatal waterborne illnesses occur in developing countries. Industrial and agricultural contamination of water supplies is epidemic because environmental controls are often neither adequate nor well enforced.

_______________________________MarketingandSalesPlan

In the United States, the Company plans to target the established base of small to medium water systems, as well as industrial users (such as the oil and gas industry, agriculture and food producers, and pharmaceuticals) and disaster relief agencies with a need for a clean and consistent water supply. In the immediate future, the primary domestic marketing focus will be on opportunities in the oil and gas industry.

Outside the United States, the Company plans to market principally to local water systems and international relief organizations. This includes a broad array of commercial, industrial, agricultural, municipal, and disaster relief applications. Sionix plans to market and sell MWTS through participation in a number of vertical market oriented industry groups, including

• IntheUnitedStates,thecompanyplans to target the established base of small to medium water systems, as well as industrial users

• OutsidetheUnitedStates,thecompany plans to market principally to local water systems and internationalrelieforganizations.


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selected advertising in specialized publications, trade shows, and direct mail. Initially the Company intends to utilize in-house marketing in conjunction with outsourced marketing consultants and national and international distributorships and agency relationships, both exclusive and non-exclusive in nature. Sionix marketing focus includes:

• Expandable and Upgradable Systems - Marketing efforts emphasize that the Company’s MWTS is easily expandable and upgradable; for example, adding ozone and microfiltration equipment to a DAF component is similar to adding a new hard drive to a personal computer. Each piece of equipment comes with state-of-the-art telemetry and wet-chemistry monitoring that expands as the MWTS does. Sionix plans to provide lease financing for all MWTS, not only making it easy for a customer to acquire the equipment, but also guaranteeing that the customer will always have access to any refinements and improvements made to the MWTS.

• Flexible Business Model - The Company offers the flexibility to sell, lease, or operate its MWTS and water treatment solutions to meet the needs of end customers. Sionix may in some instances lease or operate its MWTS as a fast-to-market strategy, using the customers operational budget to circumvent the capital budget cycle or adapt to environments that need quick implementation such as disaster relief or equipment failure.

________________________________Sionix DAF Technology

The main advantage of Sionix DAF technology is the small bubble size that allows for most (management estimates approximately 99.95 percent) contaminants to be removed from water. DAF is a method of coagulation-flocculation used as pretreatment for contaminated source water. It is particularly well suited for organic contaminants, the removal of algae, unwanted coloring, and lighter particles (such as dust and clays) that resist settling out of treated source water. The use of DAF prior to Reverse Osmosis (“RO”) reduces clogging of filtration membranes (fouling) and lessens maintenance.

In the process of DAF treatment, a chemical coagulant or flocculent such as iron salts, aluminum salts, or polymers can be added to the source water to facilitate bonding among particulates. Coagulants work by creating a chemical reaction, eliminating negative charges that cause particles to repel each other. Mixing the coagulant and source water is a process known as flocculation. The churning of water induces particles to collide and clump together into larger and more easily removable clots or flocs. The flocculated water is pumped into the DAF tank where the water is subjected to a large infusion of tiny, pressurized air bubbles. The action of these bubbles floats clots of particles to the surface of the DAF tank where they are skimmed off to a waste tank for disposal.

DAF is more effective than other water treatment systems, such as sedimentation, in removing algae and is a notable advantage because the presence of algae can lead to clogging of granular media filters and affect the filter run time. Different forms of algae can clog filters, including diatoms, green algae, flagellates, and blue–green algae, and DAF can remove a wide variety of algae from the water. However, the effectiveness is proportionate to algae concentration. Therefore, when algae levels are high there is greater removal compared to when levels are low.

Bubble size is an important factor in DAF because it affects the size of contaminants that can be removed from the water. Smaller bubble sizes have greater surface tension, making them hold together longer. Thus, smaller bubbles are more likely to reach the surface than larger

• Sionix DAF technology produces a denseconcentrationofmicrobubblesthat can reduce the need for chemical treatments and increase the lifespan of post-DAF equipment such as reverse osmosis membranes.

• SionixMWTScanbeeasilytransported and can be controlled via satellite or wireless communications.


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bubbles and allow for more organic contaminants to be removed from the water. Standard DAF treatment systems are able to remove contaminants of 50 microns or larger, although some are able to treat as small as 10-15 microns. However, Sionix technology is capable of removing particles measuring one micron (one millionth of a meter) in size.

The ability to treat smaller contaminants is essential to the removal of Giardia cysts and Cryptosporidium oocysts, protozoan parasites associated with contaminated drinking water that can cause intestinal infections. These protozoa range from 4-10 microns and are resistant to disinfection by chemical treatment, such as iodine or chlorine. Cryptosporidium oocysts are particularly resistant to traditional water treatment techniques. The Surface Water Treatment Rule mandates a removal of 99.9 percent of Giardia and between 99 and 99.995 percent of Cryptosporidium depending on the level of the pathogen initially detected in the water.

Bubble size is also significant because it affects the collision and attachment effectiveness of particles to bubbles. Bubbles are formed from cavitation and form nuclei, and grow larger through coalescence (merging of bubbles). Within the DAF contact zone, bubble growth can occur by many factors, including air uptake from the water, a decreased hydrostatic pressure, and coalescence. For DAF systems, coalescence is a major factor in bubble growth and most bubble sizes in the contact zone range from about 10 to 150 mm. Sionix technology sorts and manages the smallest bubbles, which creates a dense bubble organization and makes the system more efficient.

________________________________Research and Development

Research and development expenses were primarily costs associated with the improvements made to MWTS design and operation. Costs consist of additional modifications to MWTS based on varying water conditions experienced by current customers or prospective customers. Costs are also incurred through adjustments to unit functionality based on testing results. Current expenses were $562,179 during the fiscal year ended September 30, 2011, an increase of $201,197 or 56 percent, as compared to $360,982 for the fiscal year ended September 30, 2010. Sionix has also indicated it has future plans for additional products and revisions to its current products. These efforts would be supported by the hiring of additional personnel with industry experience and training.

________________________________Intellectual Property Patents held by Sionix are in the field of DAF. The systems and methods described in the patent provide for efficient, modular, transportable dissolved air flotation systems. The system includes a waste transport system that permits continuous operation, entails minimal loss or diversion of influent water for float removal, and provides for easy disposal of waste materials in the float. Patents Related to the field of DAF as described above:

1. 6,921,478 - DAF for Purification of Water Inventors: Lambert; David P. (Irvine, CA), Houtz; James J. (Irvine, CA) Assignee: Sionix Corporation (Irvine, CA) Appl. No.: 10/376,574 Filed: February 27, 2003

2. 7,767,080 - DAF for Purification of Influent WaterInventors: Lambert; David P. (Irvine, CA), Houtz; James J. (Irvine, CA) Assignee: Sionix Corporation (Santa Monica, CA) Appl. No.: 11/411,223 Filed: April 24, 2006

• For DAF systems, coalescence is a majorfactorinbubblegrowthandmost bubble sizes in the contact zone range from about 10 to 150 mm. Sionix technology sorts and manages the smallest bubbles, which creates adensebubbleorganizationandmakesthesystemmoreefficient.

• Research and development costs consistofadditionalmodificationstoMWTSbasedonvaryingwaterconditionsexperiencedbycurrentcustomersorprospectivecustomers.

• Sionix systems and methods described in the patents provide for efficient,modular,transportabledissolvedairflotationsystems.


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3. 7,033,495 - DAF for Purification of Water Inventors: Lambert; David P. (Irvine, CA), Houtz; James J. (Irvine, CA) Assignee: Sionix Corporation (Irvine, CA) Appl. No.: 10/376,573 Filed: February 27, 2003

4. 7,981,287 – Continuation PatentInventors: Lambert; David P. (Irvine, CA), Houtz; James J. (Irvine, CA) Assignee: Sionix Corporation (Santa Monica, CA) Appl. No.: 12/848,739 Filed: August 2, 2010

5. Provisional Patents Granted - Evaporator Patent Applications, Method of Use/Bubble Separation System, White Water Injection System, DAF Nozzle

________________________________Strategic Partners

Sionix retains most design, system configuration, and technical engineering resources in-house. Some design and specific research and development activities that exceed in-house capabilities or resources are sub-contracted to strategic partners, including PACE and PERC (see company descriptions below). PACE also provides overview of MWTS application configurations as part of a long-term services contract. System controls for the Sionix MWTS products are designed and implemented by PACE’s sister company, PERC Water, Inc. under a long-term supply contract. Only fabrication of the DAF component of the MWTS is sub-contracted, and then only for the construction of the stainless steel DAF tank. With the exception of plumbing and electrical sub-contractors, all other fabrication and assembly activities are supervised and managed by in-house resources, which reduces costs.

• Pacific Advanced Civil Engineering, Inc. (PACE) - In 2010 Sionix announced a strategic alliance agreement with Pacific Advanced Civil Engineering, Inc., an advanced water-engineering firm headquartered in Fountain Valley, California. PACE has over 35 years of experience in all phases of water remediation, large and small, including storm water management, river engineering, floodplain mapping, watershed analysis and planning, GIS water resource applications, water quality assessment, water and wastewater treatment, potable water storage and distribution, and lake systems. Under this agreement, PACE has provided continuous engineering oversight of the MWTS and the units included in them.

• PERC Water Corporation (PERC) - The Company also has an exclusive services agreement with PERC Water Corporation, a water recycling and water asset management company headquartered in Costa Mesa, California. Under the agreement, PERC has the exclusive right to supply logic controls, including the software, hardware, firmware, panels and networks, including Ethernet, Wi-Fi and/or satellite based telemetry. Pursuant to the Company’s arrangement with PACE, PACE is to receive a fee of 3 percent of the revenue earned from the sale of a MWTS for services provided on a per customer basis. Johan Perslow, the founder of both PACE and PERC, serves on the Board of Directors of Sionix.

• ResearchcostsconsistofadditionalmodificationstoMWTSbasedonvaryingwaterconditionsexperienced by current customers or prospectivecustomers.

• PACE also provides overview of MWTSapplicationconfigurationsas part of a long-term services contract. System controls for the SionixMWTSproductsaredesignedand implemented by PACE’s sister company, PERC Water, Inc. under a long-term supply contract.


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________________________________Competitors

Sionix must compete with water treatment equipment produced by companies that are more established and that have significantly greater resources. The Company also competes with large engineering firms that design and build water treatment plants and wastewater facilities, and with producers of new technologies for water filtration. Competitive factors include system effectiveness, operational cost and practicality of application, pilot study requirements, and potential adverse environmental effects. Competition in the industry is not based solely on price – water purification, filtration, and recycling solutions tend to be highly customized and designed to the customer’s specifications, and thus a wide range of considerations determine the competitiveness of the products and solutions of participants. Sionix does not currently represent a significant presence in the water treatment industry. Select competitors include:

• Heckmann Corporation (NYSE: HEK) - The company states, “Heckmann Corporation operates as a services-based company focused on total water and wastewater solutions for shale or unconventional oil and gas exploration and production. The company offers water delivery and disposal, trucking, fluids handling, treatment, temporary and permanent pipeline facilities, and water infrastructure services for oil and gas exploration and production companies. It operates multi-modal water disposal, treatment, trucking, and pipeline transportation operations in select shale areas in the United States, including the Eagle Ford, Haynesville, Marcellus, Utica, Barnett, and Tuscaloosa Marine Shale areas.”

• GE Power & Water (NYSE: GE) - According to the company, “GE provides all aspects of treatment, from system analysis and design through installation, maintenance, upgrades, and emergency response. Each MobileFlow® System contains six rubber-lined ASME code steel tanks of uniform size, with a patented piping system to allow operation in series or parallel. The system can be operated by an GE Field Service Representative, your plant personnel, or remotely monitored. Automatic shutdown features protect from power failure, excess pressure and off-specification water. Units are capable of producing up to 600 GPM of produced water.”

• Siemens Water Technology (FRA: SIE)- The company states, “Siemens’ temporary and mobile water treatment systems provide supplemental water to handle short-term water shortages or meet peak demand. The company provides temporary water while customers await new water systems to be delivered and installed; while an existing system is shutdown for scheduled maintenance or due to specific regulatory issues. These systems offer a range of treatment options, including clarification, media filtration, demineralization, reverse osmosis, membrane separation and/or induced air/gas flotation. Systems are skid-mounted and may be installed on-site or trailer-mounted in climatized assets. Trailers contain instrumentation and equipment for a fully automatic and monitored operation, and are backed by an inventory of critical components. Installation is minimized with quick hose and simple utility connections, all of which are performed by installation and service technicians.”

• Ecosphere Technologies, Inc. (OTCBB:ESPH)- According to the company, “Ecosphere Technologies, Inc. is a diversified water engineering, technology licensing and environmental services company that designs, develops, and manufactures wastewater treatment technologies for a variety of industrial markets. The company provides environmental services and technology solutions for large-scale, sustainable applications

• Sionix must compete with water treatment equipment produced by companies that are more established andthathavesignificantlygreaterresources.

• Competitionintheindustryisnot based solely on price – water purification,filtration,andrecyclingsolutionstendtobehighlycustomized and designed to the customer’sspecifications,andthusawiderangeofconsiderationsdeterminethecompetitivenessoftheproductsandsolutionsofparticipants.


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across industries, nations and ecosystems … Ecosphere Technologies’ most recent ‘eco-technology’ breakthrough is Ecosphere Ozonix®, a water recovery and recycling process with the potential to help energy companies recycle precious water resources.”

• Altela, Inc. (Private)- The company states that, “Altela, Inc. is a high-technology company that has developed a new energy-reuse water desalination product that operates unattended at remote locations, such as oil and gas wells. Altela’s first product was introduced in the field in 2007-2008 with revenue-generating systems in operation at natural gas wells in the San Juan and Piceance Basins. Through the use of its proprietary patented AltelaRain® technology, Altela desalinates and decontaminates highly challenged water using an evaporation/condensation process.”

• WaterTectonics (Private)- According to the company, “WaterTectonics designs, manufactures, deploys, and services innovative water treatment systems and provides complex whole project support services. Our core technologies include electrocoagulation treatment systems, chemical treatment systems, and automated pH adjustment systems. Through our partners, we also provide passive stormwater filtration systems, oil water separators, oil spill control valves, and waste-to-energy systems.”

________________________________OtherWaterTreatmentMethods

• Slow Sand Filtration - Slow sand filtration is used to enhance the clarity and aesthetics of delivered waters. In a typical treatment facility, the first step adds to the raw incoming water a substance which causes tiny, sticky particles (called “floc”) to form. Floc attracts dirt and other particles suspended in the water. This process of coagulation causes heavy particles of dirt and floc to clump together and fall to the bottom. These heavier particles form sediment that is siphoned off, leaving the clearer water, which passes on to filtration. The most common filtration method is known as slow sand or sand-anthracite, in which the water flows into large shallow beds and passes down through layers of sand, gravel and charcoal. The final process is disinfection, often using chemicals such as chlorine or ozone. While slow sand filtration is by far the most common treatment method used in the United States, it has drawbacks. The filtration beds are large, shallow in-ground concrete structures, often hundreds of feet long to accommodate large volumes of water. The water being filtered must remain in these beds for a comparatively long-time (known as “residence time ”) in order for low-density materials to settle out. The sand and charcoal filtering medium rapidly becomes plugged and clogged. The bed must then be taken off-line and back-flushed, which uses large amounts of water - water that becomes contaminated and is therefore wasted. Additional settling ponds are necessary to “de-water” this waste by evaporation so that the dried solids may be disposed of in an environmentally safe (but costly) method. Conventional slow sand water filtration beds are used in most of the nation’s public water districts.

• Organic Filtration - Organic filtration is the process of removing organic matter from water. Popular conventional filtration systems, such as slow sand, cannot effectively filter out smaller organic matter. The presence of high levels of organic matter makes disinfection more difficult and will clog expensive filter media used in these processes, causing long back-flush cycles, increasing the volume of back-flush waste-water. Reverse osmosis and activated coal are two of the most common organic filtration methods. Reverse osmosis is a filtration method that removes many types of large molecules and ions from solutions by applying pressure to the solution when it is on one side of a

• Whileslowsandfiltrationisbyfar the most common treatment methodusedintheUnitedStates,ithasdrawbacks.Thefiltrationbedsare large, shallow in-ground concrete structures,oftenhundredsoffeetlong to accommodate large volumes of water.

• Organicfiltrationistheprocessofremovingorganicmatterfromwater.Popularconventionalfiltrationsystems, such as “slow sand”, cannot effectivelyfilteroutsmallerorganicmatter.

• Reverseosmosisandactivatedcoalare two of the most common organic filtrationmethods.


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selective membrane. The result is that the solute is retained on the pressurized side of the membrane and the pure solvent (water) is allowed to pass to the other side. Reverse osmosis systems are often used in conjunction with other forms of water treatment such as slow sand or dissolved air flotation. Coal based activated carbon originates from coal that has undergone steam activation process to create its activated carbon form. During activation, it creates millions of pores at the surface of the carbon thus increasing the total surface area. Activated carbon pores can be divided into three general sizes, Micro-pores (diameter in the range of less than 2 nm), Meso-pores (diameter in the range of 2 – 25 nm), and Macro-pores (diameter in the range of above 25 nm). Due to its unique distribution of pores diameter, coal based activated carbon is very popular in the gas phase purification industries, potable water purification industries, wastewater purification industries and aquarium/pond water purification industries. In the case of desalination, organic matter is the primary cause of system failures resulting from fouling of the delicate filtration membranes that are used to filter out organic matter. These costly filtration membranes require frequent replacement and maintenance. The membranes are clogged quickly by organic particles in the water, due to the fact that most initial filtration systems (such as slow sand and standard DAF) are not technologically advanced enough to remove an optimal amount of smaller particles. This adds excess strain on filter membranes, causing the need for frequent replacement.

• Other methods - Other notable methods of wastewater treatment include ozone disinfection and chemical precipitation. For more detailed information see http://water.epa.gov/scitech/wastetech/mtbfact.cfm. (BerylStonedoesnotverifyinformationprovided by third-party websites.)

____________________________________Business & Strategic Risks

• Liquidity and Capital Funding - Capital requirements have been and will continue to be required for Sionix to fund operating losses. The Company will most likely not achieve profitability in the near future and existing stockholders are not under any obligation to continue purchasing equity securities or to provide loans. In order to fund operations and capital investment, Sionix must raise additional capital to continue operations. If Sionix raises additional funds by issuing equity securities, stockholders may experience dilution. Debt financing, if available, may involve restrictive covenants or additional security interests that may also be diluted. If funds are raised through additional collaboration and licensing arrangements with third parties, it may be necessary to relinquish some rights to technologies or products, or grant licenses on terms that are not favorable. If Sionix is unsuccessful in finding financing, the Company may be required to severely curtail, or even to cease, operations. Given significant liquidity concerns, there is no assurance that Sionix will be able to implement their business plan or continue operations.

• Significant Competition - Many of the Company’s competitors are large, diversified manufacturing companies with significant expertise in the water quality business and contacts with water utilities and industrial water consumers. These competitors have significantly greater name recognition and financial and other resources. Sionix may not be able to compete successfully against them and is not a significant presence in the water treatment industry. The water treatment system and the technology on which MWTS it is based may not achieve widespread market acceptance. The success of the firm will depend on its ability to market system and services to businesses and water providers on acceptable terms and conditions and maintain successful relationships

• Capital requirements have been andwillcontinuetoberequiredforSionixtofundoperatinglosses.The Company will most likely not achieveprofitabilityinthenearfutureandexistingstockholdersarenotunderanyobligationtocontinuepurchasingequitysecuritiesortoprovide loans.

• Givensignificantliquidityconcerns,there is no assurance that Sionix will be able to implement their business planorcontinueoperations.

• Manyofthecompany’scompetitorsarelarge,diversifiedmanufacturingcompanieswithsignificantexpertisein the water quality business and contactswithwaterutilitiesandindustrial water consumers.


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with various water providers and state regulatory agencies. If Sionix fails to achieve or maintain market acceptance or if new technologies are introduced by others that are more favorably received, Sionix may not be able to sell MWTS.

• Regulatory Risk – The water treatment industry is subject to government regulation, which may increase costs of doing business. Such regulations could have a material adverse impact on the results of operations. Treatment of domestic drinking water and wastewater is regulated by a number of federal, state and local agencies, including the EPA. The changing regulatory environment, including changes in water quality standards, could adversely affect Sionix business by requiring re-engineering of products or investments in new technologies.

• Supply Agreements – Sionix depends on a limited number of manufacturers and suppliers to produce and assemble various critical components for its MWTS, including an exclusive supply agreement with PERC Water Corporation. The loss of any of the Company’s manufacturing or supply relationships could delay production and sales of products. The Company relies entirely on third parties to produce and assemble units that form a part of the MWTS. In addition, PERC has an exclusive right to supply logic controls, including software, hardware, firmware, panels, and networks for the MWTS. If any of the Company’s existing manufacturers or suppliers were unable or unwilling to meet its demand for products, if the products they produce and assemble do not meet quality and other specifications, or if Sionix switches manufacturers or suppliers for any reason, production and sales of the Company’s product could be delayed.

• Intellectual Property Risk - The water management and treatment industry is characterized by the existence of a large number of patents and other intellectual property rights. Competitors might assert that Sionix is infringing their intellectual property rights and might be subject to intellectual property infringement litigation given the complex technical issues and inherent uncertainties in such litigation. Defending such claims, regardless of their merit, could be time-consuming and distracting to management, result in costly litigation or settlement, cause development delays, or require the Company to enter into royalty or licensing agreements. If the Company’s products violate any third-party proprietary rights, they could be required to withdraw those products from the market, re-develop those products, or seek to obtain licenses from third parties, which might not be available on reasonable terms or at all.

• Cyclical Demand - Demand for water treatment systems could be adversely affected by a downturn in government spending related to water treatment, delayed regulatory actions for oil and gas fracking operations, or in the cyclical residential or non-residential building markets. Sionix business will be dependent upon spending on water treatment systems by oil producers, utilities, municipalities, and other organizations that supply or use water which, in turn, is often dependent upon construction, population growth, continued contamination of water sources and regulatory responses to this contamination. As a result, demand for the Company’s water treatment systems could be impacted adversely by cyclical economic conditions.

• Sionix depends on a limited number of manufacturers and suppliers, including an exclusive supply agreement with PERC Water Corporation.Thelossofanyofthecompany’s manufacturing or supply relationshipscoulddelayproductionand sales of products.

• The water management and treatment industry is characterized by the existence of a large number of patents and other intellectual propertyrights.Competitorsmightassert that Sionix is infringing their intellectual property rights.

• Demand for water treatment systemscouldbeadverselyaffectedbydelayedregulatoryactionsforoilandgasfrackingoperations.


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________________________________Legal Proceedings

• On January 14, 2011 Sionix settled all claims with an attorney, Robert J. Zepfel of Haddan & Zepfel. Mr. Zepfel filed a Complaint in the Superior Court of California, County of Orange (assigned Case No. 30-2010-00333941) alleging claims for breach of contract and seeking money damages. Mr. Zepfel’s Complaint focused upon a fee agreement entered into July 2003. Mr. Zepfel claimed that as of the filing date $96,896 was due in fees, interest, and penalties for non-payment. The Company and Mr. Zepfel settled the claim for $80,000 to be paid out over a period of approximately 10 months from the date of settlement. This obligation is now paid in full and the Company has no legal proceedings outstanding.

________________________________Regulatory Issues

• In connection with the restatement of the Company’s consolidated financial statements for the years ended September 30, 2007 and 2008 and each subsequent quarter through the quarter ended June 30, 2009, weaknesses were identified in internal controls over financial reporting that were material weaknesses as defined by standards established by the Public Company Accounting Oversight Board. The deficiencies related to the lack of a sufficient number of internal personnel possessing the appropriate knowledge, experience and training in applying U.S. generally accepted accounting principles, in reporting financial information in accordance with the requirements of the SEC, the lack of an audit committee to oversee accounting and financial reporting processes, the lack of written documentation of internal control policies and procedures, lack of sufficient segregation of duties within accounting functions, and lack of review and supervision procedures for financial reporting functions. Sionix is in the process of improving internal controls over financial reporting to address these issues.

• On one occasion over the past two years Sionix was unable to file annual or quarterly reports on a timely basis. If the Company fails to file periodic reports on a timely basis, the common stock may cease to be quoted on the OTCBB. Section 6530(e)(1) of the FINRA Manual states, “Notwithstanding the foregoing paragraphs, a member shall not be permitted to quote a security if: (A) while quoted on the OTCBB, the issuer of the security has failed to file a complete required annual or quarterly report by the due date for such report (including, if applicable, any extensions permitted by SEC Rule 12b-25) three times in the prior two-year period . . . .” If Sionix fails to file an annual or quarterly report on a timely basis, the OTCBB will no longer allow the common stock to be quoted.

• The Company has no legal proceedings outstanding.

• On one occasion over the past twoyearsSionixwasunabletofileannual or quarterly reports on a timelybasis.IftheCompanyfailstofileperiodicreportsonatimelybasis, the common stock may cease to be quoted on the OTCBB.


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__________________________________________________________Financial Statements

Quarterly (Thousands) Mar31,2012 Dec 31, 2011 Sept 30, 2011 Jun 30, 2011

Total Revenue - - - -

Cost of Revenue - - - -

GrossProfit - - - -

Operating Expenses

Research & Development 172 143 92 296

SG & A 650 871 1,073 872

Non Recurring - - - -

Other 4 4 4 3

OperatingIncomeorLoss (826) (1,018) (1,169) (1,171)

Other Income / Expense Net (241) 42 (421) (1,315)

Earnings Before Interest & Taxes (1,066) (976) (1,589) (2,486)

Interest Expense (244) 219 178 126

Income Before Taxes (1,309) (1,195) (1,767) (2,612)

Income Tax Expense - - 1 -

Minority Interest 2 - - -

Net Income (1,307) (1,195) (1,768) (2,612)

PreferredStock&OtherAdjustments 2 - - -

Net Income Applicable to Common (1,309) (1,195) (1,768) (2,612)

ResultsofOperations

Revenues for the three months ended March 31, 2012 and 2011 were $0.

The Company’s total operating expenses were $825,572 during the three months ended March 31, 2012, a decrease of $218,258 or 21%, as compared to $1,043,830 for the three months ended March 31, 2011. General and administrative expenses were $587,167 during the three months ended March 31, 2012, a decrease of $240,417 or 29%, as compared to $827,584 for the three months ended March 31, 2011. Sales and marketing expenses were $62,882 for the three months ended 2012, a decrease of $57,355 or 48%, as compared to $120,237 for the three months ended March 31, 2011. The decrease in sales and marketing expense was related to a loss of personnel and vendors for sales support, as well as decreased travel and related expenses. Research and development expenses were $171,581 during the three months ended March 31, 2012, an increase of $79,002 or 85%, as compared to $92,579 for the three months ended March 31, 2011. The increase is due to the number of employees and resources dedicated to the WBI’s operations. The Company also incurred interest costs related to various notes in the amount of $243,731, an increase of $153,310 from the prior period when the Company reported interest costs of $90,421. Normal operations were limited by the lack of available cash.


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Cash Flow

During the six months ended March 31, 2012, the Company used $1,063,231 of cash in operating activities, primarily to fund its net loss. Non-cash adjustments included $7,448 for depreciation, $222,569 for the amortization of debt discounts, $139,420 for share-based payments to consultants and employees, and for a gain on settlement of debt. Cash provided by operating activities included $50,696 in accounts payable and $415,052 in accrued expenses. Cash used in operating activities included $48,279 in inventory, and $212,255 in other current assets.

During the six months ended March 31, 2011, the Company used $692,200 of cash in operating activities. Non-cash adjustments included $5,234 for depreciation, $103,081 for the amortization of beneficial conversion feature and debt discounts, $1,044,655 for share-based payments to consultants and employees, and $74,271 for a loss on settlement of debt. Cash provided by operating activities included $354,909 in accounts payable and $29,068 in accrued expenses. Cash used in operating activities included $59,705 in inventory, $45,999 in other current assets, and $300,000 in deferred revenue. Financing activities provided $2,342,700 to the Company during the six months ended March 31, 2012 including $1,350,000 from the sale of member units of the Asset Controlling Partnership for WBI and $592,500 from borrowings. During the six months ended March 31, 2012, cash of $400,200 was provided by the net proceeds from common stock sales and borrowings. Financing activities provided $676,000 to the Company during the six months ended March 31, 2011 including $561,000 from net proceeds from the sale of common stock and $115,000 from borrowings.


Net Income (1,351) (1,153) (1,768) (2,612)

OperatingActivities

Depreciation 125 104 19 43

Adjustments To Net Income 764 301 1,329 2,080

Changes In Accounts Receivables - - - -

Changes in Liabilities 45 450 284 (210)

Changes in Inventories (31) (17) (114) (553)

Changes in Other Operating Activities 6 (265) 11 (3)

TotalCashFlowFromOperatingActivities (442) (621) (240) (1,256)

InvestingActivities - - - -

FinancingActivities

Sale / Purchase of Stock 251 150 164 1,172

Net Borrowings 100 492 77 80

Minority Interest Issuance 1,350 - - -

Total Cash From Financing 1,701 642 241 1,252

Change in Cash and Cash Equivalents 1,259 21 1 (4)


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Assets

Current Assets

Cash and Equivalents 1,239 22 1 -

Short Term Investments - - - -

Net Receivables 29 18 12 8

Inventory 1,354 1,323 1,306 1,192

Other Current Assets 82 158 27 49

Total Current Assets 2,704 1,521 1,346 1,249

Property, Plant & Equipment 63 26 30 33

Total Assets 2,768 1,547 1,375 1,282

Liabilities

CurrentLiabilities

Accounts Payable 1,627 1,936 1,552 1,365

Current Long-term Debt 1,971 1,575 1,255 1,209

Other Current Liabilities - 150 - -

TotalLiabilities 3,598 3,661 2,807 2,575

Stockholder’s Equity

Common Stock 332 308 299 286

Retained Earnings (34,401) (33,094) (31,899) (30,131)

Capital Surplus 31,892 30,672 30,168 28,553

Total Stockholder’s Equity (Sionix Corp.) (830) (2,114) (1,432) (1,293)

Equity Noncontrolling Interest 1,347 - - -

Total Stockholders’ Equity (830) (2,114) (1,432) (1,293)

Balance Sheet


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_________________________________________________________Glossary

Cryptosporidium A single-celled parasite that causes cryptosporidiosis, a gastro-intestinal illness.

Desalination The process of removing salt from water.

Diatoms Forms of algae.

Dissolved Air Flotation “DAF” A method of water treatment that injects air bubbles into the water. These air bubbles cling to particulates of waste and float them to the surface, allowing pollutants to be removed.

Flocculent Chemical added to the influent that aids in the floatation of contaminants.

Fracking The procedure of creating fractures in rocks and rock formations by injecting fluid into cracks to force them further open. The larger fissures allow more oil and gas to flow out of the formation and into the wellbore, from where it can be extracted.

Flowback The liquid, containing brine and fracking fluids, that returns up and out of the well following a fracking.

Giardia A protozoan parasite that causes infection of the small intestine.

Hydrocarbon A compound of hydrogen and carbon, such as any of those that are the chief components of petroleum and natural gas.

Influent water Water that may or may not be polluted depending on the situation.

MWTS Mobile Water Treatment System.

Nonpoint Source Pollution Pollution that comes from many difference sources, not a point source such as industrial and sewage treatment plants. Polluted runoff is caused by rainfall or snowmelt moving over and through the ground.

Produced Water The water (brine) brought up from the hydrocarbon bearing formation strata during the extraction of oil and gas, and can include formation water, injection water, and any chemicals added downhole or during the oil/water separation process.

Reverse Osmosis “RO” A post processor used primarily to extract mineral salts from water.

Sedimentation A water treatment process that uses gravity to settle out suspended solids.

Trihalomethanes A group of four chemicals that are formed along with other disinfection byproducts when chlorine or other disinfectants used to control microbial contaminants in drinking water react with naturally occurring organic and inorganic matter in water. Thetrihalomethanes are chloroform, bromodichloromethane, dibromochloromethane, and bromoform.


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__________________________________________________________References

Acquisition and valuation trends in US water. Global Water Intelligence, 5 (6). (2004). Retrieved from http://www.globalwaterintel.com/archive/5/6/general/acquisition-and-valuation-trends-in-us-water.html

Bakken Oil: the North Dakota Bakken Oil Shale Formation. (2012). Retrieved from Bakkenoil.org.

Betancourt, Walter Q. and Joan B. Rose. (2004). Drinking water treatment processes for removal of Cryptosporidium and Giardia. Veterinary Parasitology, 126, 219-234.

Demand spike for emergency process water set to double Mobile Water Treatment Market revenues. (2011). Retrieved from http://www.pollutionsolutions-online.com/news/water- wastewater/17/frost_sullivan/demand_spike_for_emergency_process_water_set_to_double_mobile_water_treatment_market_revenues/16195/

Edzwald, James K. Dissolved air flotation and me. (2010). Water Research, 44, 2077-2106.

Environmental Protection Agency. Protecting water quality from agricultural runoff. (2005). Retrieved from epa.gov/nps

Environmental Protection Agency. Technology Fact Sheets. (2012). Retrieved from http://water.epa.gov/scitech/wastetech/mtbfact.cfm

Gunjan, Pritil. Mobile water systems: a compelling solution to emergency needs. (2011). Retrieved from http://www.waterworld.com/index/display/article-display/1392723532/articles/water-wastewater-international/vol-26/issue-2/regulars/creative-finance/mobile-water-systems-a-compelling-solution-to.html

Sionix SEC Filings Form 10K, Form 10Q; Financial Data from Bloomberg and Reuters

U.S. Geological Survey Williston Basin Province Assessment Team. (2010). “Assessment of Undiscovered Oil and Gas Resources of the Williston Basin Province of North Dakota, Montana, and South Dakota, 2010.” U.S. Department of the Interior U.S. Geological Survey. Retrieved from http://pubs.usgs.gov/dds/dds-069/dds-069-w/

Water’s growing role in oil and gas. Global Water Intelligence, 12 (3). (2011). Retrieved from http://www.globalwaterintel.com/archive/12/3/market-profile/waters-growing-role-oil-and-gas.html

__________________________________________________________Disclosures

This report by BerylStone Investments’ Equity Research Division and the Analyst(s), (together referred to as “BerylStone”) on Sionix Corporation (the “Company”) is intended for informational purposes only and should not be construed as investment advice or as an offer to buy or sell any securities. The report was prepared based on the standards and principles contained in the Analyst / Corporate Issuer Guidelines jointly promulgated by the CFA Institute and the National Investor Relations Institute, described at: http://www.cfainstitute.org and http://www.niri.org. This report is based on information provided by the Company and sources that are assumed to be reliable and accurate, but BerylStone does not guarantee (or make any representation or warranty as to) the accuracy or completeness of the information provided. BerylStone made no attempt to independently verify through audits, on-site inspections, or any other method the information provided by the Company and no representations whatsoever are being made by BerylStone. BerylStone is not providing an investment recommendation regarding the Company’s stock and accepts no liability whatsoever for any direct or consequential loss or damage arising from any use of this report or its content to make an investment in the Company. Any opinions expressed in this report are subject to change without notice. Past performance of the Company should not be taken as an indication or guarantee of future performance, and no representation or warranty, expressed or implied, is made by BerylStone regarding future performance. Any security discussed in this report may be deemed speculative and therefore not appropriate or suitable for all investors. Certain statements contained in this report may be “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on estimates and projections made by the Company and/or by BerylStone. These estimates and projections are derived in part on assumptions, and are not guarantees of future performance. BerylStone does not guarantee investment returns nor does it represent, warrant, or imply that services or methods of analysis can or will predict future results or insulate investors from loss due to a decline of investment value. Because future performance is quite difficult to predict, actual outcomes and results may differ materially from what is expressed or forecasted in forward-looking statements due to numerous factors. Such factors include, but are not limited to, the Company’s ability to effectively execute its business plan or acquisition strategy, failure by the Company to retain key personnel, changes in the markets in which the Company operates, the development of new products or services that compete with those offered by the Company, competitive pressures, economic and political conditions, changes in consumer behavior, and other risks not contemplated by the Company or by BerylStone. BerylStone was paid an aggregate of $0 by the Company in advance of the publication of this report dated April 9th, 2012. No part of the compensation to BerylStone is tied to any of the contents or views expressed in this report. BerylStone owns no shares in the Company and does not provide the Company investment banking services. BerylStone assumes no responsibility to update information concerning the Company.

equity insights - sionex (sinx) research report may 2012

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