Equity Insights - Sionex (SINX) Research Report May 2012

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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 pretreatment
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.

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Equity Insights - Sionex (SINX) Research Report May 2012

  1. 1. Equity I n s i g h t s Independent ResearchMay 2012 Price Per Share $0.11Sionix Corp. (OTCBB: SINX) Share Price Range (52w) $0.04-$0.11914 Westwood Blvd., Box 801 Average Daily Volume (3m) 1,072,880Los Angeles, California 90024 Shares Outstanding 334.16M Sionix designs, develops, markets, and sells water management and treatment solutions intended for use in the oil and gas, agriculture, disaster relief, and Float 312.43M municipal (both potable and wastewater) markets. The Company’s Mobile Water Treatment System (“MWTS”) is configured dependent upon customer % Held by Insiders 1.45% requirements and integrates components and technologies based on those requirements. Within these systems, the company utilizes a Dissolved Air % Held by Institutions 0.10% 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, Market Cap $36.76M insoluble metals, infectious bacteria, algae, and color. Historically, DAF systems similar to the DAF used in Sionix MWTS created bubbles that were 50 microns Fiscal Year End Sept 30 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- Full-time Employees 8 treatment process using ambient oxygen and minimal chemical flocculent aids that can be more efficient and cost-effective. The company’s patented Book Value < $0.01 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 Diluted EPS - $0.02 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 Operating Cash Flow (ttm) -2.56M integrate with existing filtration technologies. Sionix was initially incorporated in Utah in 1996 and reincorporated in Nevada in 2003. The company’s website * Source: Capital IQ, Thomson Reuters 05/15/2012 is www.sionix.com. BerylStone Equity Research offers independent research services Lead Investment Analysts: 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 Scott Bryant, CFA broad audience of investors to make informed, timely decisions Randy Burd, Ph.D. 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 www.berylstone.com collaboration with the National Investor Relations Institute.
  2. 2. B E RY L S TO N E E Q U I T Y R E S E A R C H S I O N I X C O R P. ( O T C B B : S I N X )Executive Summary Page 3Recent Events Page 4Executive Management Page 5Industry Overview Page 6Business Strategy Page 8Marketing and Sales Plan Page 10Sionix DAF Technology Page 11Research and Development Page 12Intellectual Property Page 12Strategic Partners Page 13Competitors Page 14Other Water Treatment Methods Page 15Business & Strategic Risks Page 16Legal Proceedings Page 18Regulatory Issues Page 18Financial Statements Page 19Glossary Page 22References and Disclosures Page 23 2
  3. 3. B E RY L S TO N E E Q U I T Y R E S E A R C H S I O N I X C O R P. ( O T C B B : S I N X ) ______________________________• The mobile water treatment industry Executive Summary is experiencing near-term growth from both industrial and municipal Sionix Corporation competes in the global mobile water treatment systems market, which is markets as the demand for clean estimated to have a compound annual growth rate of 11.2 percent and reach total revenues water accelerates. 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• Recycling of toxic flowback water applications, emergency situations, and from areas with inadequate clean water supplies. from hydraulic fracking operations Currently, North and South America constitute over 75 percent of all market revenues. represents a significant opportunity for Sionix. Sionix integrates its proprietary Dissolved Air Flotation (“DAF”) technology to treat contaminated water. DAF purifies water by the removal of suspended contaminates. Air• Sionix proprietary DAF technology is dissolved into the water forming tiny bubbles which adhere to the suspended particles creates dense and efficient causing the particles to float to the surface where they can then be skimmed. Although microbubbles that can help lower there are numerous variations of DAF technology offered in the mobile water treatment the cost of water treatment relative market that use the same basic principal, specific DAF methods can vary with respect to to other methods. 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• The Company currently operates chemicals. with limited revenue and short-term funding sources. Asset controlling Sionix achieves these efficiencies through the extremely small size of the microbubbles partnerships have been introduced created by their DAF technology. Smaller bubbles create greater surface tension. This to help address limited liquidity. 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. 3
  4. 4. B E RY L S TO N E E Q U I T Y R E S E A R C H S I O N I X C O R P. ( O T C B B : S I N X ) ________________________________• The Company expects to use their Recent Events asset controlling partnerships for further deployments in the Williston • Formation of Asset Controlling Partnership Program (“ACP”) - Sionix announced its first Basin, as well as other energy ACP through the formation of Williston Basin I, LLC (“Williston”), a Nevada limited liability bearing shale formations in the company, of which the Company owns a 60 percent interest. Williston was formed with continental United States. 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,• Under an agreement with McFall LLC, an existing Sionix shareholder, and the remaining 18 percent by subscribers in prior Incorporated, Sionix will deploy a equity offerings. Sionix contributed a MWTS to the Williston venture, which is specifically fully-equipped MWTS consisting of designated for operation in the Williston Basin of North Dakota for treatment of water de-watering, DAF, filtration, and de- contaminated by harvesting of energy resources in this region. Sionix personnel will be salination components for operation responsible for the operation and maintenance of the MWTS and their performance alongside a specific drilling rig. 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• On November 8, 2011, Sionix Williston Basin. The formation and operation of Williston signifies the migration of Sionix completed a private placement in from a supplier of water treatment equipment to a provider of water treatment services. which it sold and issued a senior The Company expects to use their ACP Program for further deployments in the Williston secured redeemable debenture Basin, as well as other energy bearing shale formations in the continental United States. of $300,000 to TCA Global Credit Master Fund, LP for aggregate gross • Water Treatment Agreement (“WTA”) with McFall Incorporated / Introduction of proceeds of $300,000. 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. 4
  5. 5. B E RY L S TO N E E Q U I T Y R E S E A R C H S I O N I X C O R P. ( O T C B B : S I N X ) _____________________________________________• James Currier, Chairman and CEO, Executive Management has thirty five years progressive executive experience in public and James R. Currier, Chairman and Chief Executive Officer - Mr. Currier has thirty five years private, domestic and international progressive executive experience in public and private, domestic and international high high technology companies. 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• David R. Wells, President and CFO, Group International, Inc./Prima Industrie S.p.A., Fireaway LLC, and Green Bit, Inc. Mr. Currier’s is responsible for strategy and experience includes: operations of Sionix. Prior to joining the Company, Mr. Wells was the • Resident assignments in Northern Ireland, Sweden, France, Italy, Israel, Australia, and Chief Financial Officer of Voyant South Africa involving factory automation, automated transport, storage and retrieval, International Corporation. 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. 5
  6. 6. B E RY L S TO N E E Q U I T Y R E S E A R C H S I O N I X C O R P. ( O T C B B : S I N X ) 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• The water recycling and reuse treatment, supply-chain management, manufacturing, and the professional services industry. industry is highly fragmented, He earned a BA in Finance and Entrepreneurship from the Seattle Pacific University, and holds consisting of many companies an MBA from Pepperdine University. involved in various operational capacities. Mark J. Hayes, Chief Science Officer - Mr. Hayes duties include overseeing all research activities including research and development of new company technologies. Other duties• Customized technology is required include drafting technical manuals and maintaining patent materials for all scientific for specified treatments, there is endeavors of the Company. a potential for growth in regional markets if treatment systems are In 2008, Mr. Hayes started up a consulting firm called Minnesota Geotechnical Services. suitable for local requirements. 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. 6
  7. 7. B E RY L S TO N E E Q U I T Y R E S E A R C H S I O N I X C O R P. ( O T C B B : S I N X ) Although the overall outlook for the market is positive, there are several factors that restrict• 363,459 oil-producing wells in the growth. The economic downturn has discouraged capital investments, which are crucial U.S., each barrel of crude oil creates to expansion since each mobile water treatment unit costs $250,000 to $300,000. This approximately 10 barrels of produced ultimately limits the market size. Additionally, large corporations are active in the industry, water. creating competition and high barriers to entry.• 461,388 gas-producing wells in the • Oil and Gas Industry - The treatment of ‘produced water’ is a major component of the U.S., hydraulic fracturing injects over cost of producing oil and gas. In the United States, produced water is defined by the 80,000 lbs of chemicals into the earth’s Environmental Protection Agency (“EPA”) to mean the water (brine) brought up from crust for each well that is drilled. 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• Approximately 98 percent of onshore the oil/water separation process. Wells may start out producing little water but sooner or produced water is disposed of onsite. 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• In the shale gas industry, around business. Annually, the U.S. produces 20 billion barrels (882 billion gallons) of produced 13,000m3 of water is used to break water, onshore and 700 million (29.4 billion gallons) off-shore. Produced water handling rock and allow gas to rise to the and treatment represents billions in cost to U.S. oil & gas industry. surface. 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. 7
  8. 8. B E RY L S TO N E E Q U I T Y R E S E A R C H S I O N I X C O R P. ( O T C B B : S I N X ) • 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• Equally important to the treatment water systems, which support populations of fewer than 10,000 people. Many of these of contaminated water in foreign are in violation of the U.S. Safe Drinking Water Act (“SDWA”) at any given time. The markets is the development number of districts out of compliance is expected to worsen as more stringent EPA of desalination as a method of rules are implemented for small public water systems. Substantial expenditures will be producing potable water. needed for years for repair, rehabilitation, operation, and maintenance of the water and wastewater treatment infrastructure. Many water districts using conventional treatment• Many domestic water districts using methods will be unable to comply with the SDWA without installations of on-site conventional treatment methods chemical filter aids and disinfection equipment. will be unable to comply with the Safe Drinking Water Act without • International Markets - The quality of drinking water outside the U.S. and other installations of on-site chemical filter industrialized countries is generally much worse, with high levels of contaminants and aids and disinfection equipment. 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. 8
  9. 9. B E RY L S TO N E E Q U I T Y R E S E A R C H S I O N I X C O R P. ( O T C B B : S I N X ) • The Williston Basin - The Bakken Shale Formation can be found in the Williston• There are currently over 6,000 Basin, which stretches across North Dakota, Montana, South Dakota, Manitoba and active oil wells in the Bakken Shale Saskatchewan. The basin will become a large oil producing area as a direct result Formation and this number is of hydraulic fracking, horizontal drilling, and artificial permeability practices. These expected to rise as oil production technologies, using an average of 5 million gallons of water per well, have created increases. Most wells are located in opportunities for water treatment and recycling that would ordinarily be disposed of in North Dakota and Montana. deep injection wells.• In addition to the oil and gas The Bakken Shale Formation is the largest known reserve of light sweet crude oil in North applications, the proliferation of oil America. According to a recent U.S. Geological Survey (“USGS”) assessment, there is and gas related man camps in the an estimated 3.8 billion barrels of undiscovered oil, 3.7 trillion cubic feet of associated/ Williston region to domicile workers, dissolved natural gas, and 200 million barrels of undiscovered natural gas liquids in the sub-contractors, and oil field service Williston Basin. The majority of undiscovered oil and gas is in the Bakken Formation, at personnel represents a significant about 3.65 billion barrels of oil. Two recently discovered areas, the Elm Coulee field in strain on source or non-existent Richland County, Montana and the Parshall field in Montrail County, North Dakota, have waste treatment resources. 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 Other U.S. Shale Formation Opportunities • 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 9
  10. 10. B E RY L S TO N E E Q U I T Y R E S E A R C H S I O N I X C O R P. ( O T C B B : S I N X ) inhibitor to the development of the resources, or if properly implemented water conservation measures are mandated, including recycling toxic hydrofracturing flowback• In the United States, the company water and harvesting local waste treatment products, water will facilitate the continued plans to target the established base development of these resources. of small to medium water systems, as well as industrial users Other Industry Opportunities• Outside the United States, the • Wastewater and Sewage Treatment Facilities - Municipal sewage treatment is the company plans to market principally process of removing contaminants from wastewater originating from household, to local water systems and industrial, health care, and commercial sewage. It includes physical, chemical, and international relief organizations. 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. _______________________________ Marketing and Sales Plan 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 10
  11. 11. B E RY L S TO N E E Q U I T Y R E S E A R C H S I O N I X C O R P. ( O T C B B : S I N X ) selected advertising in specialized publications, trade shows, and direct mail. Initially the Company intends to utilize in-house marketing in conjunction with outsourced marketing• Sionix DAF technology produces a consultants and national and international distributorships and agency relationships, both dense concentration of microbubbles exclusive and non-exclusive in nature. Sionix marketing focus includes: that can reduce the need for chemical treatments and increase • Expandable and Upgradable Systems - Marketing efforts emphasize that the the lifespan of post-DAF equipment Company’s MWTS is easily expandable and upgradable; for example, adding ozone and such as reverse osmosis membranes. 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• Sionix MWTS can be easily wet-chemistry monitoring that expands as the MWTS does. Sionix plans to provide lease transported and can be financing for all MWTS, not only making it easy for a customer to acquire the equipment, controlled via satellite or wireless but also guaranteeing that the customer will always have access to any refinements and communications. 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 11
  12. 12. B E RY L S TO N E E Q U I T Y R E S E A R C H S I O N I X C O R P. ( O T C B B : S I N X ) 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• For DAF systems, coalescence is a some are able to treat as small as 10-15 microns. However, Sionix technology is capable of major factor in bubble growth and removing particles measuring one micron (one millionth of a meter) in size. most bubble sizes in the contact zone range from about 10 to 150 mm. The ability to treat smaller contaminants is essential to the removal of Giardia cysts and Sionix technology sorts and manages Cryptosporidium oocysts, protozoan parasites associated with contaminated drinking water the smallest bubbles, which creates that can cause intestinal infections. These protozoa range from 4-10 microns and are resistant a dense bubble organization and to disinfection by chemical treatment, such as iodine or chlorine. Cryptosporidium oocysts are makes the system more efficient. 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• Research and development costs Cryptosporidium depending on the level of the pathogen initially detected in the water. consist of additional modifications to MWTS based on varying 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 conditions experienced by current through coalescence (merging of bubbles). Within the DAF contact zone, bubble growth can customers or prospective customers. 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• Sionix systems and methods bubble sizes in the contact zone range from about 10 to 150 mm. Sionix technology sorts described in the patents provide for and manages the smallest bubbles, which creates a dense bubble organization and makes the efficient, modular, transportable system more efficient. dissolved air flotation systems. ________________________________ 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 Water Inventors: 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 12
  13. 13. B E RY L S TO N E E Q U I T Y R E S E A R C H S I O N I X C O R P. ( O T C B B : S I N X ) 3. 7,033,495 - DAF for Purification of Water• Research costs consist of additional Inventors: Lambert; David P. (Irvine, CA), Houtz; James J. (Irvine, CA) modifications to MWTS based Assignee: Sionix Corporation (Irvine, CA) on varying water conditions Appl. No.: 10/376,573 experienced by current customers or Filed: February 27, 2003 prospective customers. 4. 7,981,287 – Continuation Patent• PACE also provides overview of Inventors: Lambert; David P. (Irvine, CA), Houtz; James J. (Irvine, CA) MWTS application configurations Assignee: Sionix Corporation (Santa Monica, CA) as part of a long-term services Appl. No.: 12/848,739 contract. System controls for the Filed: August 2, 2010 Sionix MWTS products are designed and implemented by PACE’s sister 5. Provisional Patents Granted - Evaporator Patent Applications, Method of Use/Bubble company, PERC Water, Inc. under a Separation System, White Water Injection System, DAF Nozzle long-term supply contract. ________________________________ 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. 13
  14. 14. B E RY L S TO N E E Q U I T Y R E S E A R C H S I O N I X C O R P. ( O T C B B : S I N X ) ________________________________• Sionix must compete with water Competitors treatment equipment produced by companies that are more established Sionix must compete with water treatment equipment produced by companies that are and that have significantly greater more established and that have significantly greater resources. The Company also competes resources. 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• Competition in the industry is include system effectiveness, operational cost and practicality of application, pilot study not based solely on price – water requirements, and potential adverse environmental effects. Competition in the industry is purification, filtration, and recycling not based solely on price – water purification, filtration, and recycling solutions tend to be solutions tend to be highly highly customized and designed to the customer’s specifications, and thus a wide range of customized and designed to the considerations determine the competitiveness of the products and solutions of participants. customer’s specifications, and thus Sionix does not currently represent a significant presence in the water treatment industry. a wide range of considerations Select competitors include: determine the competitiveness of the products and solutions of • Heckmann Corporation (NYSE: HEK) - The company states, “Heckmann Corporation participants. 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 14
  15. 15. B E RY L S TO N E E Q U I T Y R E S E A R C H S I O N I X C O R P. ( O T C B B : S I N X ) across industries, nations and ecosystems … Ecosphere Technologies’ most recent ‘eco- technology’ breakthrough is Ecosphere Ozonix®, a water recovery and recycling process• While slow sand filtration is by with the potential to help energy companies recycle precious water resources.” far the most common treatment method used in the United States, it • Altela, Inc. (Private)- The company states that, “Altela, Inc. is a high-technology company has drawbacks. The filtration beds that has developed a new energy-reuse water desalination product that operates are large, shallow in-ground concrete unattended at remote locations, such as oil and gas wells. Altela’s first product was structures, often hundreds of feet introduced in the field in 2007-2008 with revenue-generating systems in operation at long to accommodate large volumes natural gas wells in the San Juan and Piceance Basins. Through the use of its proprietary of water. patented AltelaRain® technology, Altela desalinates and decontaminates highly challenged water using an evaporation/condensation process.”• Organic filtration is the process of removing organic matter from water. • WaterTectonics (Private)- According to the company, “WaterTectonics designs, Popular conventional filtration manufactures, deploys, and services innovative water treatment systems and systems, such as “slow sand”, cannot provides complex whole project support services. Our core technologies include effectively filter out smaller organic electrocoagulation treatment systems, chemical treatment systems, and automated pH matter. adjustment systems. Through our partners, we also provide passive stormwater filtration systems, oil water separators, oil spill control valves, and waste-to-energy systems.”• Reverse osmosis and activated coal are two of the most common organic filtration methods. ________________________________ Other Water Treatment Methods • 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 15
  16. 16. B E RY L S TO N E E Q U I T Y R E S E A R C H S I O N I X C O R P. ( O T C B B : S I N X ) 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• Capital requirements have been osmosis systems are often used in conjunction with other forms of water treatment and will continue to be required such as slow sand or dissolved air flotation. Coal based activated carbon originates from for Sionix to fund operating losses. coal that has undergone steam activation process to create its activated carbon form. The Company will most likely not During activation, it creates millions of pores at the surface of the carbon thus increasing achieve profitability in the near the total surface area. Activated carbon pores can be divided into three general sizes, future and existing stockholders are Micro-pores (diameter in the range of less than 2 nm), Meso-pores (diameter in the not under any obligation to continue range of 2 – 25 nm), and Macro-pores (diameter in the range of above 25 nm). Due to purchasing equity securities or to its unique distribution of pores diameter, coal based activated carbon is very popular in provide loans. the gas phase purification industries, potable water purification industries, wastewater purification industries and aquarium/pond water purification industries. In the case• Given significant liquidity concerns, of desalination, organic matter is the primary cause of system failures resulting from there is no assurance that Sionix will fouling of the delicate filtration membranes that are used to filter out organic matter. be able to implement their business These costly filtration membranes require frequent replacement and maintenance. plan or continue operations. 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• Many of the company’s competitors technologically advanced enough to remove an optimal amount of smaller particles. This are large, diversified manufacturing adds excess strain on filter membranes, causing the need for frequent replacement. companies with significant expertise in the water quality business and • Other methods - Other notable methods of wastewater treatment include ozone contacts with water utilities and disinfection and chemical precipitation. For more detailed information see http:// industrial water consumers. water.epa.gov/scitech/wastetech/mtbfact.cfm. (BerylStone does not verify information provided 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 16

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