Equity Insights - Sionex (SINX) Research Report May 2012

Equity I n s i g h t s
Independent Research

May 2012

Price Per Share $0.11

Sionix Corp. (OTCBB: SINX) Share Price Range (52w) $0.04-$0.11
914 Westwood Blvd., Box 801
Average Daily Volume (3m) 1,072,880
Los 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.

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to public and private companies. Our reports provide factual
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broad audience of investors to make informed, timely decisions Randy Burd, Ph.D.
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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 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 Page 22

References and Disclosures Page 23

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______________________________
• 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.

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________________________________
• 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.

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_____________________________________________
• 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.

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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
• 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.

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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.

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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
• 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


• 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


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


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


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
Assignee: Sionix Corporation (Santa Monica, CA)
Appl. No.: 11/411,223
Filed: April 24, 2006
12


3. 7,033,495 - DAF for Purification of Water
• Research costs consist of additional
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
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


________________________________
• 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


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


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

Equity Insights - Sionex (SINX) Research Report May 2012

Equity Insights - Sionex (SINX) Research Report May 2012

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Equity Insights - Sionex (SINX) Research Report May 2012