Attached files

file filename
EX-32.2 - Cavitation Technologies, Inc.v222436_ex32-2.htm
EX-31.1 - Cavitation Technologies, Inc.v222436_ex31-1.htm
EX-10.10 - Cavitation Technologies, Inc.v222436_ex10-10.htm
EX-32.1 - Cavitation Technologies, Inc.v222436_ex32-1.htm
EX-31.2 - Cavitation Technologies, Inc.v222436_ex31-2.htm
EX-10.11 - Cavitation Technologies, Inc.v222436_ex10-11.htm
 


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 

(Mark One)
   
x
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
     
For the quarterly period ended March 31, 2011

or
     
  o  
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     .
 
Commission File Number: 0-29901
 
Cavitation Technologies, Inc.
(Exact name of Registrant as Specified in its Charter)
 
Nevada
 
20-4907818
(State or Other Jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer
Identification No.)
 
10019 CANOGA AVENUE, CHATSWORTH, CALIFORNIA 91311
(Address, including Zip Code, of Principal Executive Offices)
 
(818) 718-0905
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x     No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, every Interactive Data File, required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Sec.232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.                                                                                                                Yes o     No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filer o                                                                                                             Accelerated Filer o  
Non-Accelerated Filer o   (Do not check if a smaller reporting company)              Smaller Reporting Company  x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
                                                                                                                      Yes o     No x
 
As of May 13, 2011, the issuer had 145,129,354 shares of common stock outstanding.
 
 
 

 
 
TABLE OF CONTENTS
 
   
Page
Part I.
FINANCIAL INFORMATION
     
Item 1.
Consolidated Financial Statements
     
 
Consolidated Balance Sheets at March 31, 2011 (unaudited) and June 30, 2010
     
 
Consolidated Statements of Operations - Three and Nine Months Ended March 31, 2011 (unaudited) and March 31, 2010 (unaudited)
     
 
Consolidated Statement of Stockholders' Deficit - Nine Months Ended March 31, 2011 (unaudited)
5
     
 
Consolidated Statements of Cash Flows – Nine Months Ended March 31, 2011 (unaudited) and March 31, 2010 (unaudited)
6
     
 
Notes to Consolidated Financial Statements (unaudited)
7
     
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
17
     
Item 3.  
Quantitative and Qualitative Disclosures About Market Risk
24
     
Item 4.
Controls and Procedures
24
     
Part II.
OTHER INFORMATION
25
     
Item 1.  
Legal Proceedings
25
     
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
25
     
Item 3.  
Defaults Upon Senior Securities
28
     
Item 4.  
(Removed and Reserved)
28
     
Item 5.  
Other Information
28
     
Item 6.
Exhibits
29
     
Signatures
  29

 
1

 
 
PART I – FINANCIALINFORMATION
 
ITEM 1 - Consolidated Financial Statements

CAVITATION TECHNOLOGIES, INC.
(A Development Stage Company)
Consolidated Balance Sheets
 
   
March 31,
   
June 30,
 
   
2011
   
2010
 
   
(Unaudited)
       
ASSETS
           
             
Current assets:
           
Cash and cash equivalents
  $ 95     $ 270  
Accounts receivable
    309,964       -  
Prepaid expenses and other current assets
    3,324       3,158  
      Total current assets
    313,383       3,428  
                 
Property and equipment, net
    55,982       69,605  
Deferred costs
    205,211       71,683  
Patents, net
    90,121       92,284  
Other assets
    9,500       9,500  
      Total assets
  $ 674,197     $ 246,500  
                 
LIABILITIES AND STOCKHOLDERS' DEFICIT
               
 
               
Current liabilities:
               
   Bank overdraft
  $ 638     $ 2,747  
   Accounts payable
    207,620       160,179  
   Accrued expenses
    761,607       75,656  
   Accrued payroll
    169,066       83,051  
   Advances
    36,533       17,262  
   Deferred revenue
    16,950       33,499  
   Convertible notes payable, net of discount
    35,662       -  
   Derivative liability
    74,960       -  
   Short-term loans
    75,000       109,000  
   Bank loan
    490,479       524,750  
      Total current liabilities
    1,868,515       1,006,144  
                 
                 
Commitments and contingencies
               
                 
Stockholders' deficit:
               
Preferred stock, $0.001 par value, 10,000,000 shares authorized, 111,111 shares issued and outstanding as of March 31, 2011 and June 30, 2010
    111       111  
Common stock, $0.001 par value, 1,000,000,000 shares authorized, 144,192,248 (unaudited) and 130,581,562 shares are issued and outstanding as of March 31, 2011 and June 30, 2010, respectively
    144,194       130,582  
Additional paid-in capital
    15,118,634       12,656,723  
Deficit accumulated during the development stage
    (16,457,257 )     (13,547,060 )
      Total stockholders' deficit
    (1,194,318 )     (759,644 )
      Total liabilities and stockholders' deficit
  $ 674,197     $ 246,500  
 
See accompanying notes, which are an integral part of these financial statements
 
 
2

 
 
CAVITATION TECHNOLOGIES, INC.
(A Development Stage Company)
Consolidated Statements of Operations (Unaudited)

                           
January 29, 2007,
 
                           
Inception,
 
   
For the Three Months Ended
   
For the Nine Months Ended
   
Through
 
   
March 31,
         
March 31,
         
March 31,
 
   
2011
   
2010
   
2011
   
2010
   
2011
 
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
 
                               
Revenue
  $ 341,326     $ -     $ 589,926     $ -     $ 589,926  
Cost of revenue
    54,444       -       91,144       -       91,144  
Gross profit
    286,882       -       498,782       -       498,782  
General and administrative expenses
    885,358       2,116,779       2,709,805       6,444,167       10,972,175  
Research and development expenses
    282,134       47,373       628,204       202,306       5,251,604  
Total operating expenses
    1,167,492       2,164,152       3,338,009       6,646,473       16,223,779  
Loss from operations
    (880,610 )     (2,164,152 )     (2,839,227 )     (6,646,473 )     (15,724,997 )
Change in value of derivatives
    (13,588 )     -       (13,588 )     -       (13,588 )
Interest expense
    (30,645 )     (9,614 )     (52,882 )     (103,362 )     (541,347 )
Loss before income taxes
    (924,843 )     (2,173,766 )     (2,905,697 )     (6,749,835 )     (16,279,932 )
Income tax expense
    -       -       -       -       -  
Net loss
  $ (924,843 )   $ (2,173,766 )   $ (2,905,697 )   $ (6,749,835 )   $ (16,279,932 )
 Deemed dividends to preferred stockholders
    (1,500 )     (1,500 )     (4,500 )     (4,500 )     (177,325 )
Net loss available to common stockholders
  $ (926,343 )   $ (2,175,266 )   $ (2,910,197 )   $ (6,754,335 )   $ (16,457,257 )
                                         
Net loss available to common shareholders per share:
                                       
Basic and Diluted
  $ (0.01 )   $ (0.02 )     (0.02 )   $ (0.06 )        
                                         
Weighted average shares outstanding:
                                       
Basic and Diluted
    140,793,632       118,653,402       136,643,591       111,013,943          
 
See accompanying notes, which are an integral part of these financial statements
 
 
3

 
 
CAVITATION TECHNOLOGIES, INC.
(A Development Stage Company)
Statements of Changes In Stockholders' Deficit (Unaudited)

                                 
Deficit
       
                                 
Accumulated
       
                            Additional    
During the
       
   
Series A Preferred
   
Common Stock
   
Paid-in
   
Development
       
   
Shares
   
Amount
   
Shares
   
Amount
   
Capital
   
Stage
   
Total
 
                                           
 Balance at inception, January 29, 2007
    -     $ -       -     $ -     $ -     $ -     $ -  
  
                                                       
 Issuance of common stock for services on January 29, 2007
                    42,993,630       42,994       (21,994 )             21,000  
 Common stock issued as payment for services on March 31, 2008
                    6,428,904       6,429       1,123,971               1,130,400  
 Common stock issued as payment for services on April 16, 2008
                    51,180       51       8,949               9,000  
 Common stock issued as payment for services on April 22, 2008
                    102,360       102       17,898               18,000  
 Common stock issued as payment for services on June 18, 2008
                    3,787,320       3,788       662,212               666,000  
 Common stock sold for cash on June 30, 2008
                    2,047,200       2,047       497,953               500,000  
 Amortization of discount on convertible preferred stock
                                    47,879       (47,879 )     -  
 Net loss
                                            (2,681,782 )     (2,681,782 )
                                                         
 Balance at June 30, 2008
    -     $ -       55,410,594     $ 55,411     $ 2,336,868     $ (2,729,661 )   $ (337,382 )
                                                         
 Common stock sold in connection with reverse merger for cash on October 3, 2008
                    2,149,560       2,150       122,850               125,000  
 Preferred stock sold for cash on March 17, 2009
    111,111       111                       99,889               100,000  
 Preferred stock - beneficial conversion feature
                                    11,111       (11,111 )     -  
 Common stock sold for cash on April 22, 2009
                    499,998       500       99,500               100,000  
 Common stock sold for cash on June 4, 2009
                    499,998       500       99,500               100,000  
 Common stock sold for cash on June 22, 2009
                    300,000       300       49,700               50,000  
 Common stock sold for cash on June 30, 2009
                    300,000       300       49,700               50,000  
 Bio common stock outstanding before reverse merger on October 3, 2008
                    27,840,534       27,840       (27,840 )             -  
 Common stock issued as payment for services on September 22, 2008
                    150,000       150       17,850               18,000  
 Common stock issued as payment for services on December 3, 2008
                    450,000       450       187,150               187,600  
 Common stock issued as payment for services on December 17, 2008
                    300,000       300       131,800               132,100  
 Common stock issued as payment for services on February 27, 2009
                    590,565       591       156,893               157,484  
 Common stock issued as payment for services on March 11, 2009
                    86,550       86       26,853               26,939  
 Common stock issued as payment for services on March 22, 2009
                    150,000       150       50,350               50,500  
 Common stock issued as payment for services on April 23, 2009
                    29,415       29       9,285               9,314  
 Common stock issued as payment for services on May 28, 2009
                    152,379       152       38,959               39,111  
 Common stock issued as payment for services on June 4, 2009
                    37,500       38       9,837               9,875  
 Common stock issued as payment for services on June 30, 2009
                    37,500       38       8,712               8,750  
Warrants issued with convertible debt in December 2008, January 2009 and February 2009
                              49,245               49,245  
 Amortization of discount on convertible preferred stock
                                    107,835       (107,835 )     -  
 Warrants issued as payment for services on May 27, 2009
                                    56,146               56,146  
 Warrants issued as payment for services on June 3, 2009
                                    84,219               84,219  
 Warrants issued as payment for services on June 30, 2009
                                    5,678               5,678  
 Issuance of stock options as payment for services on August 8, 2008
                                    229,493               229,493  
 Issuance of stock options as payment for services on October 1, 2008
                                    4,598               4,598  
 Issuance of stock options as payment for services on October 7, 2008
                                    22,770               22,770  
 Issuance of stock options as payment for services on October 21, 2008
                                    47               47  
 Issuance of stock options as payment for services on October 28, 2008
                                    33               33  
 Issuance of stock options as payment for services on January 19, 2009
                                    50,571               50,571  
 Net loss
                                            (2,495,991 )     (2,495,991 )
                                                         
 Balance at June 30, 2009
    111,111     $ 111       88,984,593     $ 88,985     $ 4,089,602     $ (5,344,598 )   $ (1,165,900 )
 
 
4

 

CAVITATION TECHNOLOGIES, INC.
(A Development Stage Company)
Statements of Changes In Stockholders' Deficit (Unaudited) (Continued)
 
                                 
Deficit
     
                                 
Accumulated
     
                            Additional    
During the
     
   
Series A Preferred
   
Common Stock
   
Paid-in
   
Development
     
   
Shares
   
Amount
   
Shares
   
Amount
   
Capital
   
Stage
   
Total
                                         
 Balance at June 30, 2009
 
     111,111
 
 $
       111
   
        88,984,593
 
 $
              88,985
 
 $
                4,089,602
 
 $
    (5,344,598)
 
 $
    (1,165,900)
                                         
 Common stock issued as payment for services on July 27, 2009
             
        17,358,000
   
              17,358
   
                3,886,279
         
      3,903,637
 Common stock issued as payment for services on August 5, 2009
             
             165,000
   
                   165
   
                     44,935
         
           45,100
 Common stock issued as payment for services on September 16, 2009
             
             190,011
   
                   190
   
                     42,209
         
           42,399
 Common stock issued as payment for services on October 7, 2009
             
             130,500
   
                   131
   
                     42,500
         
           42,631
 Common stock issued as payment for services on October 16, 2009
             
             100,911
   
                   101
   
                     34,209
         
           34,310
 Common stock issued as payment for services on October 23, 2009
             
               30,000
   
                     30
   
                       9,270
         
             9,300
 Common stock issued as payment for services on October 29, 2009
             
               37,500
   
                     38
   
                     13,463
         
           13,501
 Common stock issued as payment for services on November 3, 2009
             
               37,500
   
                     37
   
                     13,464
         
           13,501
 Common stock issued as payment for services on November 10, 2009
             
               35,102
   
                     35
   
                     12,251
         
           12,286
 Common stock issued as payment for services on November 16, 2009
             
          1,505,000
   
                1,505
   
                   405,944
         
         407,449
 Common stock issued as payment for services on November 30, 2009
             
               60,000
   
                     60
   
                     17,340
         
           17,400
 Common stock issued as payment for services on December 4, 2009
             
               49,157
   
                     49
   
                     12,240
         
           12,289
 Common stock issued as payment for services on January 11, 2010
             
             121,286
   
                   121
   
                     30,200
         
           30,321
 Common stock issued as payment for services on February 1, 2010
             
          5,125,102
   
                5,125
   
                1,071,146
         
      1,076,271
 Common stock issued as payment for services on February 11, 2010
             
             500,000
   
                   500
   
                   109,500
         
         110,000
 Common stock issued as payment for services on February 15, 2010
             
             127,500
   
                   128
   
                     26,648
         
           26,776
 Common stock issued as payment for services on February 23, 2010
             
             135,000
   
                   135
   
                     26,865
         
           27,000
 Common stock issued as payment for services on March 5, 2010
             
             346,098
   
                   346
   
                     82,897
         
           83,243
 Common stock issued as payment for services on March 12, 2010
             
               70,000
   
                     70
   
                     13,455
         
           13,525
 Common stock issued as payment for services on March 22, 2010
             
               50,000
   
                     50
   
                       8,450
         
             8,500
 Common stock issued as payment for services on April 12, 2010
             
             127,282
   
                   127
   
                     16,420
         
           16,547
 Common stock issued as payment for services on April 19, 2010
             
             100,000
   
                   100
   
                     16,900
         
           17,000
 Common stock issued as payment for services on April 29, 2010
             
          1,700,000
   
                1,700
   
                   253,300
         
         255,000
 Common stock issued as payment for services on May 10, 2010
             
             773,750
   
                   774
   
                   115,288
         
         116,062
 Common stock issued as payment for services on May 24, 2010
             
             219,092
   
                   219
   
                     43,599
         
           43,818
 Common stock issued as payment for services on June 1, 2010
             
             163,794
   
                   164
   
                     29,319
         
           29,483
 Common stock issued as payment for services on June 9, 2010
             
             333,333
   
                   333
   
                     59,667
         
           60,000
 Common stock issued as payment for services on June 14, 2010
             
               46,544
   
                     47
   
                       8,331
         
             8,378
 Common stock issued for debt and accrued interest conversion on August 7, 2009
             
          1,122,375
   
                1,122
   
                   189,681
         
         190,803
 Conversion feature on convertible notes payable
                         
                     63,601
         
           63,601
 Common stock sold for cash on October 13, 2009
             
             208,104
   
                   208
   
                     34,156
         
           34,364
 Common stock sold for cash on October 16, 2009
             
          2,980,734
   
                2,981
   
                   493,808
         
         496,789
 Common stock sold for cash on November 4, 2009
             
             217,117
   
                   217
   
                     36,183
         
           36,400
 Common stock sold for cash on November 17, 2009
             
             421,529
   
                   422
   
                     71,748
         
           72,170
 Common stock sold for cash on December 4, 2009
             
             352,451
   
                   352
   
                     59,565
         
           59,917
 Common stock sold for cash on January 6, 2010
             
               58,058
   
                     58
   
                       9,812
         
             9,870
 Common stock sold for cash on February 4, 2010
             
             888,235
   
                   888
   
                   150,112
         
         151,000
 Common stock sold for cash on March 2, 2010
             
             743,746
   
                   744
   
                   125,693
         
         126,437
 Common stock sold for cash on March 12, 2010
             
             352,941
   
                   353
   
                     59,647
         
           60,000
 Common stock sold for cash on April 19, 2010
             
             125,000
   
                   125
   
                     14,875
         
           15,000
 Common stock sold for cash on June 1, 2010
             
             700,000
   
                   700
   
                     69,300
         
           70,000
 Common stock issued for conversion of note payable on June 1, 2010
             
          2,789,217
   
                2,789
   
                   276,133
         
         278,922
 Common stock sold for cash on June 24, 2010
             
          1,000,000
   
                1,000
   
                     99,000
         
         100,000
 Warrants issued as payment for services on July 15, 2009
                         
                     13,205
         
           13,205
 Warrants issued as payment for services on February 11, 2010
                         
                   131,376
         
         131,376
 Conversion feature of note payable on June 1, 2010
                         
                   223,137
         
         223,137
 Dividends on preferred stock
                               
           (6,000)
   
           (6,000)
 Net loss
                               
    (8,196,462)
   
    (8,196,462)
                                         
 Balance at June 30, 2010
 
     111,111
 
 $
       111
   
      130,581,562
 
 $
            130,582
 
 $
              12,656,723
 
 $
  (13,547,060)
 
 $
       (759,644)
                                         
 Common stock issued as payment for services on July 8, 2010
             
             349,571
   
                   350
   
                     52,086
         
           52,436
 Common stock issued as payment for services on August 3, 2010
             
          1,854,009
   
                1,854
   
                   350,406
         
         352,260
 Common stock issued as payment for services on August 30, 2010
             
               75,000
   
                     75
   
                     11,175
         
           11,250
 Common stock issued as payment for services on September 8, 2010
             
             237,192
   
                   237
   
                     35,342
         
           35,579
 Common stock issued as payment for services on October 1, 2010
             
             473,517
   
                   474
   
                     70,554
         
           71,028
 Common stock issued as payment for services on November 1, 2010
             
          1,020,482
   
                1,020
   
                   131,643
         
         132,663
 Common stock issued as payment for services on November 22, 2010
             
             100,000
   
                   100
   
                     11,900
         
           12,000
 Common stock issued as payment for services on December 7, 2010
             
             459,056
   
                   459
   
                     50,037
         
           50,496
 Common stock issued as payment for services on January 10, 2011
             
             116,916
   
                   117
   
                     13,913
         
           14,030
 Common stock issued as payment for services on February 14, 2011
             
          1,264,883
   
                1,265
   
                   137,872
         
         139,137
 Common stock issued as payment for services on March 10, 2011
             
             219,767
   
                   220
   
                     21,757
         
           21,977
 Common stock issued as payment for services on March 22, 2011
             
             510,000
   
                   510
   
                     50,490
         
           51,000
 Common stock sold for cash on August 3, 2010
             
             593,211
   
                   593
   
                     58,728
         
           59,321
 Common stock sold for cash on October 1, 2010
             
             661,000
   
                   661
   
                     78,659
         
           79,320
 Common stock sold for cash on November 1, 2010
             
          1,400,000
   
                1,400
   
                   142,600
         
         144,000
 Common stock sold for cash on November 22, 2010
             
             350,000
   
                   350
   
                     41,650
         
           42,000
 Common stock sold for cash on January 10, 2011
             
             110,000
   
                   110
   
                     11,990
         
           12,100
 Common stock sold for cash on February 14, 2011
             
          1,920,000
   
                1,920
   
                   190,080
         
         192,000
 Common stock sold for cash on March 2, 2011
             
             290,000
   
                   290
   
                     28,710
         
           29,000
 Common stock sold for cash on March 10, 2011
             
             176,923
   
                   177
   
                     14,823
         
           15,000
 Common stock issued as payment of short-term loan into stock on February 14, 2011
           
          1,000,000
   
                1,000
   
                     99,000
         
         100,000
 Warrants issued as payment for services on November 22, 2010
                         
                     46,735
         
           46,735
 Common stock issued for conversion of note payable on February 8, 2011
             
               30,769
   
                     31
   
                       1,967
         
             1,998
 Common stock issued for conversion of note payable on February 11, 2011
             
               15,385
   
                     15
   
                          985
         
             1,000
 Common stock issued for conversion of note payable on February 16, 2011
             
               26,154
   
                     26
   
                       1,674
         
             1,700
 Common stock issued for conversion of note payable on February 17, 2011
             
               15,385
   
                     15
   
                          985
         
             1,000
 Common stock issued for conversion of note payable on February 22, 2011
             
               21,927
   
                     22
   
                       1,475
         
             1,497
 Common stock issued for conversion of note payable on February 28, 2011
             
               55,749
   
                     56
   
                       3,568
         
             3,624
 Common stock issued for conversion of note payable on March 7, 2011
             
               24,796
   
                     25
   
                       1,506
         
             1,531
 Common stock issued for conversion of note payable on March 8, 2011
             
               18,100
   
                     18
   
                          982
         
             1,000
 Common stock issued for conversion of note payable on March 14, 2011
             
             109,783
   
                   110
   
                       5,956
         
             6,066
 Common stock issued for conversion of note payable on March 28, 2011
             
               51,282
   
                     52
   
                       2,948
         
             3,000
 Common stock issued for conversion of note payable on March 30, 2011
             
               59,829
   
                     60
   
                       3,440
         
             3,500
 Amortization of restricted stock issued for services
                         
                   786,275
         
         786,275
 Dividends on preferred stock
                               
           (4,500)
   
           (4,500)
 Net loss
                               
    (2,905,697)
   
    (2,905,697)
                                         
 Balance at March 31, 2011 (unaudited)
 
     111,111
 
 $
       111
   
      144,192,248
 
 $
            144,194
 
 $
              15,118,634
 
 $
  (16,457,257)
 
 $
    (1,194,318)

See accompanying notes, which are an integral part of these financial statements
 
 
5

 
 
CAVITATION TECHNOLOGIES, INC.
(A Development Stage Company)
Statements of Cash Flows (Unaudited)
 
 
               
January 29, 2007,
 
   
For the Nine Months Ended
   
Inception,
 
   
March 31,
   
Through
 
   
2011
   
2010
   
March 31, 2011
 
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
 
Operating activities:
                 
Net loss
  $ (2,905,697 )   $ (6,749,835 )   $ (16,279,932 )
Adjustments to reconcile net loss to net cash
                       
   used in operating activities:
                       
   Depreciation and amortization
    15,786       12,343       45,373  
   Warrants issued in connection with convertible notes payable
    -       -       49,245  
   Beneficial conversion feature on convertible notes payable
    -       63,601       286,738  
   Common stock issued for services
    1,730,131       5,534,155       10,690,275  
   Stock option compensation
    -       -       307,512  
   Warrants issued for services
    46,735       61,991       337,359  
   Amortization of discounts on convertible notes payable
    19,207       -       19,207  
   Change in value of derivatives
    13,588       -       13,588  
Effect of changes in:
                       
   Accounts receivable
    (309,964 )     -       (309,964 )
   Prepaid expenses and other current assets
    (166 )     (8,341 )     (3,324 )
   Deposits
    -       -       (9,500 )
   Bank overdraft
    (2,109 )     9,555       638  
   Accounts payable and accrued expenses
    728,923       131,937       969,217  
   Accrued payroll
    86,015       -       447,988  
   Advances
    19,271       -       36,533  
   Deferred revenue
    (16,549 )     24,741       16,950  
      Net cash used in operating activities
    (574,829 )     (919,853 )     (3,382,097 )
 
                       
Investing activities:
                       
   Purchase of property and equipment
    -       (21,121 )     (99,192 )
   Payments for systems
    (133,528 )     -       (205,211 )
   Payments for patents
    -       -       (92,284 )
      Net cash used in investing activities
    (133,528 )     (21,121 )     (396,687 )
                         
Financing activities:
                       
   Proceeds from (payments on) bank loan borrowings
    (34,271 )     (99,412 )     490,479  
   Proceeds from sales of preferred stock
    -       -       725,000  
   Proceeds from convertible notes payable
    103,712       -       338,712  
   Payments on convertible notes payable
    -       (20,000 )     (55,000 )
   Proceeds from sale of common stock
    572,741       1,033,447       2,104,688  
   Proceeds from short-term loans
    75,000       27,500       184,000  
   Payments of short-term loans
    (9,000 )     (5,000 )     (9,000 )
      Net cash provided by financing activities
    708,182       936,535       3,778,879  
Net increase in cash
    (175 )     (4,439 )     95  
Cash, beginning of period
    270       5,038       -  
Cash, end of period
  $ 95     $ 599     $ 95  
                         
Supplemental disclosures of cash flow information:
                       
   Cash paid for interest
  $ 32,588     $ 39,761     $ 183,570  
   Cash paid for income taxes
  $ 1,600     $ -     $ 6,728  
Supplemental disclosure of non-cash investing and financing activities:
                       
   Warrants issued in connection with preferred stock
  $ -     $ -     $ 155,714  
   Beneficial conversion feature on preferred stock
  $ -     $ -     $ 11,111  
   Conversion of preferred to common shares in reverse merger
  $ -     $ -     $ 625,000  
   Proceeds from sales of preferred shares used to purchase shares of Bio
  $ -     $ -     $ 400,000  
   Conversion of note payable to common stock
  $ -     $ -     $ 278,922  
   Conversion of short-term loan to common stock
  $ 100,000     $ -     $ -  
   Accrued dividends issued to preferred stockholders
  $ 4,500     $ -     $ 10,500  
   Conversion of convertible notes payable and accrued interest to common stock
  $ 25,916     $ 190,803     $ 216,719  
 
See accompanying notes, which are an integral part of these financial statements
   
 
 
6

 
 
CAVITATION TECHNOLOGIES, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
March 31, 2011
 
Note 1 - Nature of Operations
 
Cavitation Technologies, Inc. (the “Company”) is a Nevada Corporation originally incorporated under the name Bio Energy, Inc. The Company designs and engineers environmentally friendly NANO technology based systems that have potential commercial applications in industries such as vegetable oil refining, renewable fuels, water-oil emulsions, alcoholic beverage enhancement, algae oil extraction, and crude oil yield enhancement.

We are focused on merchandising our NANO Neutralization System – a vegetable oil refining system that employs our proprietary continuous flow-through, hydrodynamic NANO Technology in the form of our multi-stage NANO Series of reactors.  The target market for our systems includes vegetable oil refiners who process soybean oil.  The finished product is used for human consumption as well as animal feed.  During the nine months ended March 31, 2011, we recorded revenue of $589,926. Our cumulative loss since inception on January 29, 2007 is $16,279,932, including $10,690,275 in common stock issued for services.  Cumulative net cash used in operating activities of $3,382,097 was funded largely with $3,168,400 in equity issuances, including proceeds of $725,000 from the sale of preferred stock and $338,712 from convertible debt, and $490,479 in a bank loan.  Our investment in research and development since inception on January 29, 2007 through March 31, 2011 is $5,251,604, including $2,232,808 paid in restricted stock primarily to service providers.  We have four full-time employees and no part-time employees.

Note 2 – Basis of Presentation and Going Concern

Management’s Plan Regarding Going Concern

The accompanying financial statements have been prepared in conformity with generally accepted accounting principles which contemplate continuation of the Company as a going concern.  The Company has no significant operating history and, from January 29, 2007, (inception), through March 31, 2011, generated a net loss of $16,279,932.  The Company also has negative cash flow from operations and negative net equity.  These factors, among others, raise substantial doubt about the Company’s ability to continue as a going concern.

Management’s plan is to generate income from operations by successfully finalizing licensing or other arrangements with prospective customers.  We will also attempt to raise additional debt and/or equity financing to fund operations and to provide additional working capital. However, there is no assurance that such financing will be consummated or obtained in sufficient amounts necessary to meet the Company’s needs, or that the Company will be able to meet its future contractual obligations. Should management fail to obtain such financing, the Company may curtail its operations.

The accompanying consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from an inability of the Company to continue as a going concern.

Basis of Presentation
 
We have prepared the accompanying consolidated unaudited financial statements of the Company in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial statements and with instructions to Form 10-Q pursuant to the rules and regulations of Securities and Exchange Act of 1934, as amended (the "Exchange Act") and Article 8-03 of Regulation S-X under the Exchange Act. In the opinion of our management, we have included all adjustments considered necessary (consisting of normal recurring adjustments) for a fair presentation. Operating results for the three and nine months ended March 31, 2011 are not indicative of the results that may be expected for the fiscal year ending June 30, 2011.  You should read these unaudited consolidated financial statements in conjunction with the audited financial statements and the notes thereto included in the Company's annual report on Form 10-K for the year ended June 30, 2010.
 
Note 3 – Summary of Significant Accounting Policies
 
 
7

 
 
Principles of Consolidation
 
The consolidated financial statements include the accounts of Cavitation Technologies, Inc. and its wholly owned subsidiary Hydrodynamic Technology, Inc. All significant inter-company transactions and balances have been eliminated in consolidation.
 
Fair Value Measurement
 
FASB Accounting Standards Codification (“ASC”) 820-10 requires entities to disclose the fair value of financial instruments, both assets and liabilities recognized and not recognized on the balance sheet for which it is practicable to estimate fair value. ASC 820-10 defines the fair value of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties. As of March 31, 2011, the carrying value of certain accounts such as deferred costs, accounts payable, accrued expenses, accrued payroll and short-term loans approximates fair value due to the short-term nature of such instruments.    
 
Use of Estimates
 
The preparation of financial statements in conformity with GAAP in the United States of America (“U.S.”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the financial statement date, and reported amounts of revenue and expenses during the reporting period. Significant estimates are used in valuing our common stock issued for services, among other items. Actual results could differ from these estimates.
 
Revenue Recognition
 
The Company recognizes revenue when an arrangement exists, delivery has occurred, including transfer of title and risk of loss for product sales, or services have been rendered for service revenues; the price to the buyer is fixed or determinable; and collectability is reasonably assured.

Deferred Revenue

As of March 31, 2011, the Company had received total deposits of $16,950 relating to the fabrication of the Company’s NANO Neutralization System.  Because this transaction has not yet been fully completed, this amount has been reflected in deferred revenue on the accompanying consolidated balance sheet as of March 31, 2011.
 
Cash and Cash Equivalents
 
The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. Cash equivalents are carried at cost which approximates market value.
 
Property and Equipment
 
Property and equipment is presented at cost less accumulated depreciation and amortization. Depreciation and amortization are provided using the straight-line method over the estimated useful lives of the assets. Betterments, renewals, and extraordinary repairs that extend the life of the assets are capitalized; other repairs and maintenance charges are expensed as incurred. The cost and related accumulated depreciation and amortization applicable to retired assets are removed from the Company's accounts, and the gain or loss on dispositions, if any, is recognized in the consolidated statements of operations.

Property and equipment are recorded at cost and depreciated using the straight-line method over the following estimated useful lives.

Leasehold improvements
 
Shorter of life of asset or lease
Furniture
 
5-7 Years
Office equipment
 
5-7 Years
Equipment
 
5-7 Years
 
 
8

 
 
Stock-Based Compensation
 
The Company accounts for its share-based compensation in accordance ASC 718-20, Share-Based Payment.  Stock-based compensation cost is measured at the grant date, based on the estimated fair value of the award, and is recognized as expense over the requisite vesting period.  There were no stock options granted during the nine months ended March 31, 2011 or 2010.  Warrants granted during the nine months ended March 31, 2011 and 2010 were valued using the following assumptions.

   
Nine
   
Nine
 
   
Months Ended
   
Months Ended
 
   
March 31,
   
March 31,
 
   
2011
   
2010
 
             
Expected life in years
    3.0       3.0  
Stock price volatility
    132.1 %     64.0 %
Risk free interest rate
    0.72 %     1.60 %
Expected dividends
 
None
   
None
 
Forfeiture rate
    0 %     0 %
 
Income Taxes
 
The Company accounts for income taxes in accordance with ASC 740-10, Income Taxes.  The Company recognizes deferred tax assets and liabilities to reflect the estimated future tax effects, calculated at currently effective tax rates, of future deductible or taxable amounts attributable to events that have been recognized on a cumulative basis in the financial statements. A valuation allowance related to a deferred tax asset is recorded when it is more likely than not that some portion of the deferred tax asset will not be realized. Deferred tax assets and liabilities are adjusted for the effects of the changes in tax laws and rates of the date of enactment.
 
 
ASC 740-10 prescribes a recognition threshold that a tax position is required to meet before being recognized in the financial statements and provides guidance on recognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition issues. The Company classifies interest and penalties as a component of interest and other expenses. To date, there have been no interest or penalties assessed or paid.
 
The Company measures and records uncertain tax positions by establishing a threshold for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.  Only tax positions meeting the more-likely-than-not recognition threshold at the effective date may be recognized or continue to be recognized.
 
Advertising and Promotion Costs
 
Advertising costs (including marketing expenses) incurred in the normal course of operations are expensed as incurred.  Advertising expenses amounted to $94,117, $27,077 and $233,421 for the nine months ended March 31, 2011 and 2010, and the period from January 29, 2007 (date of inception) through March 31, 2011, respectively.  Advertising expenses amounted to $81,836 and $15,786 for the three months ended March 31, 2011 and 2010, respectively.


Research and Development Costs

Research and development expenses relate primarily to the development, design, and testing of preproduction prototypes and models and are expensed as incurred.
 
 
9

 
 
Patents

Capitalized patent costs represent legal fees associated with procuring and filing patent applications.  The Company accounts for patents in accordance with ASC 350-30, General Intangibles Other Than Goodwill.  As of March 31, 2011, the Company had incurred $92,284 in gross patent costs which are capitalized in the accompanying consolidated balance sheet.  The Company had one patent issued during the nine months ended March 31, 2011 which is being amortized over an estimated useful life of 4 years.  The patent has a duration through February 27, 2029.  For the three and nine months ended March 31, 2011, amortization amounted to $788 and $2,163, respectively.

Intangible and Long-Lived Assets
 
In accordance with ASC 350-30, the Company evaluates long-lived assets for impairment whenever events or changes in circumstances indicate that their net book value may not be recoverable. When such factors and circumstances exist, the Company compares the projected undiscounted future cash flows associated with the related asset or group of assets over their estimated useful lives against their respective carrying amount. Impairment, if any, is based on the excess of the carrying amount over the fair value, based on market value when available, or discounted expected cash flows, of those assets and is recorded in the period in which the determination is made. The Company’s management believes there is no impairment of its long-lived assets. There can be no assurance, however, that market conditions will not change or demand for the Company’s products under development will continue. Either of these could result in future impairment of long-lived assets.
 
Deferred costs

Deferred costs represent costs associated with customizing specific units of the Company’s NANO Neutralization System and Reactor Skid products that it plans on licensing.  The direct costs incurred by the Company associated with manufacturing the products have been capitalized and reflected as Deferred Costs.  When licensing or sales of the specific products are made, the amounts recorded as deferred costs will be expensed as cost of sales.

Note 4 -Net Loss Per Share – Basic and Diluted
 
The Company computes the loss per common share using ASC 260, Earnings Per Share.  The net loss per common share, both basic and diluted, is computed based on the weighted average number of shares outstanding for the period.  The diluted loss per common share is computed by dividing the net loss attributable to common stockholders by the weighted average shares outstanding assuming all potential dilutive common shares were issued.

On March 31, 2011, the Company had 1,810,957 stock options and 13,145,618 warrants outstanding to purchase common stock that were not included in the diluted net loss per common share because their effect would be anti-dilutive.  In addition, the Company had 111,111 shares of Series A Preferred Stock outstanding which are convertible into approximately 333,333 shares of common stock.  The Company also had $77,827 of outstanding convertible notes payable, before any discounts, which are convertible into 1,388,971 shares of common stock as of March 31, 2011.  These items were also not included in the calculation of diluted net loss per common share because their effect would be anti-dilutive.

Note 5 - Property and Equipment

Property and equipment consisted of the following as of March 31, 2011 (unaudited) and June 30, 2010.
 
 
10

 

   
March 31,
   
June 30,
 
   
2011
   
2010
 
   
(Unaudited)
       
             
Leasehold  improvement
  $ 2,475     $ 2,475  
Furniture
    26,837       26,837  
Office equipment
    1,500       1,500  
Equipment
    68,380       68,380  
                 
      99,192       99,192  
                 
                 
Less: accumulated depreciation and amortization
    (43,210 )     (29,587 )
                 
    $ 55,982     $ 69,605  
 
Depreciation expense amounted to $13,623, $12,343 and $43,210 for the nine months ended March 31, 2011 and 2010, and the period from January 29, 2007 (date of inception) through March 31, 2011, respectively.  Depreciation expense amounted to $4,541 and $4,403 for the three months ended March 31, 2011 and 2010, respectively.

Note 6 -Bank Loan
 
On August 1, 2010 the Company renewed its loan with National Bank of California until November 1, 2010.  The amount outstanding at the time of renewal was $520,516.  The terms and conditions remain the same with monthly payments of $7,396 and an interest rate of prime plus 2.75%.  On November 1, 2010, the loan was extended until November 1, 2011 with 11 regular monthly payment of $6,000 and a final payment of $474,171.  The interest rate floor was increased from 7.0% to 7.5%. As of March 31, 2011, the outstanding balance on the loan was $490,479.

Note 7 – Convertible Notes Payable

On February 1, 2011, the Company issued convertible promissory notes to the Tripod Group, LLC, (the “Tripod Notes”) for an aggregate total amount of $61,212.  The Tripod Notes bear interest at a rate of 6% per annum and have a maturity date of February 1, 2012.  The holder of the notes may elect to convert the outstanding principal and accrued interest into shares of the Company’s common stock at a conversion price equal to 65% of the lowest closing bid price of any of the four trading days prior to the conversion.  The issuance of the Tripod Notes amounted in a beneficial conversion feature of $32,960 on the issue date, which has been recorded as a discount to the carrying value of the notes.  As of March 31, 2011, the remaining discount balance amounted to $19,022.  During the quarter ended March 31, 2011, $25,885 of the Tripod Notes principal was converted into 429,159 shares of common stock.  As a result, the carrying value of the Tripod Notes as of March 31, 2011 amounted to $16,305 consisting of outstanding principal of $35,327 less the discount of $19,022.

On February 8, 2011, the Company issued a convertible promissory note payable to Asher Enterprises, Inc., (the “Asher Note”), in the amount of $42,500.  The Asher Note bears interest at a rate of 8% per annum and matures on November 10, 2011.  The holder of the note may elect to convert principal and accrued interest into shares of common stock at a conversion price equal to 58% of the average lowest closing bid prices of the Company’s common stock for 3 of any 10 trading days prior to conversion.  The issuance of the Asher Note amounted in a beneficial conversion feature of $28,412 on the issue date, which has been recorded as a discount to the carrying value of the note.  As of March 31, 2011, the remaining discount balance amounted to $23,143.  As a result, the carrying value of the Asher Note as of March 31, 2011 amounted to $19,357 consisting of outstanding principal of $42,500 less the discount of $23,143.

By virtue of the variable conversion ratios of the Tripod Notes and the Asher Note, the conversion feature of the above notes is a derivative under ASC 815-40, Derivatives and Hedging.  Accordingly, the value of the conversion feature has been classified as a derivative liability on the accompanying balance sheet.  As of March 31, 2011, the aggregate value of the conversion features associated with the above notes amounted to $74,960.
 
 
11

 

Note 8 – Short-Term Loans

On October 26, 2010, the Company entered into a loan agreement with Desmet Ballestra North America, Inc. under which the Company borrowed $75,000.  Under the original terms of the agreement, the loan was interest-free and was repayable at $25,000 per month beginning January 25, 2011.  On March 28, 2011, the terms of the loan agreement were revised to provide for monthly payments of $15,000 starting in April 2011.  The loan bears no interest, unless the Company is late with a payment, at which point interest is accrued on the late amount at a rate of 10% compounded annually.
 
Note 9 – Stockholders’ Deficit
 
Common Stock
 
On July 8, 2010, the Company issued an aggregate total of 349,571 shares of restricted common stock with an aggregate fair value of $52,436 for the payment of services rendered.

On August 3, 2010, the Company issued an aggregate total of 1,854,009 shares of restricted common stock with an aggregate fair value of $352,260 for the payment of services rendered.

On August 3, 2010, the Company sold an aggregate total of 593,211 shares of restricted common stock for proceeds of $59,321.

On August 30, 2010, the Company issued an aggregate total of 75,000 shares of restricted common stock with an aggregate fair value of $11,250 for the payment of services rendered.

On September 8, 2010, the Company issued an aggregate total of 237,192 shares of restricted common stock with an aggregate fair value of $35,579 for the payment of services rendered.

On October 1, 2010, the Company issued an aggregate total of 473,517 shares of restricted common stock with an aggregate fair value of $71,028 for the payment of services rendered.

On October 1, 2010, the Company sold an aggregate total of 661,000 shares of restricted common stock for proceeds of $79,320.

On November 1, 2010, the Company issued an aggregate total of 1,020,482 shares of restricted common stock with an aggregate fair value of $132,663 for payment of services rendered.

On November 1, 2010, the Company sold an aggregate total of 1,400,000 shares of restricted common stock for proceeds of $144,000.

On November 22, 2010, the Company issued an aggregate total of 100,000 shares of restricted common stock with an aggregate fair value of $12,000 for payment of services rendered.

On November 22, 2010, the Company sold an aggregate total of 350,000 shares of restricted common stock for proceeds of $42,000.

On December 7, 2010, the Company issued an aggregate total of 459,056 shares of restricted common stock with an aggregate fair value of $50,496 for payment of services rendered.

On January 10, 2011, the Company issued an aggregate total of 116,916 shares of restricted common stock with an aggregate fair value of $14,030 for payment of services rendered.
 
 
12

 

On January 10, 2011, the Company sold an aggregate total of 110,000 shares of restricted common stock for proceeds of $12,100.

On February 14, 2011, the Company issued an aggregate total of 1,264,883 shares of restricted common stock with an aggregate fair value of $139,137 for payment of services rendered.

On February 14, 2011, the Company issued an aggregate total of 1,920,000 shares of restricted common stock for proceeds of $192,000.
 
 
On February 14, 2011, the Company issued 1,000,000 shares of restricted common stock as payment for a short-term loan of $100,000.

In February 2011, the Company issued an aggregate total of 165,369 shares of common stock for the conversion of $10,820 of convertible notes payable for the Tripod Notes (see Note 7).

On March 2, 2011, the Company sold an aggregate total of 290,000 shares of restricted common stock for proceeds of $29,000.

On March 10, 2011, the Company sold an aggregate total of 176,923 shares of restricted common stock for proceeds of $15,000.

On March 10, 2011, the Company issued an aggregate total of 219,767 shares of restricted common stock with an aggregate fair value of $21,977 for payment of services rendered.

On March 22, 2011, the Company issued an aggregate total of 510,000 shares of restricted common stock with an aggregate fair value of $51,000 for payment of services rendered.

In March 2011, the Company issued an aggregate total of 263,790 shares of common stock for the conversion of $15,097 of convertible notes payable for the Tripod Notes (see Note 7).
 
 
Preferred Stock
 
The Company has 5,000,000 shares of Series A Preferred Stock authorized and 111,111 shares outstanding.  Series A Preferred Stock is convertible into common stock at a rate of 3 shares of common stock per share of each Series A Preferred Stock held at any time at the option of the preferred shareholders.  In the event of any liquidation, dissolution or winding up of the Company, the holders of Series A Preferred will have liquidation preferences prior to distributions made to any other class of stockholder.  The Series A Preferred Stock is not redeemable.  On the third anniversary date of the issuance of the preferred shares, any Series A Preferred shares outstanding are automatically converted into common stock, at a conversion rate of 3 shares for common to 1 share of Series A Preferred Stock.
 
The holders of the Series A Preferred Stock are entitled to receive out of any funds legally available dividends at the rate of 6% per annum payable on September 30 and March 30. Dividends shall accrue and be cumulative whether or not they have been declared. Dividends may be paid in cash or through the issuance of additional shares of Series A Preferred Stock at the Company’s option.  As of March 31, 2011, cumulative dividends amounted to $10,500.  As of March 31, 2011, none of the cumulative dividends were paid and are recorded in accrued expenses on the accompanying consolidated balance sheet.
 
The Company has authorized 5,000,000 shares of Preferred Stock as Series B Preferred Stock.  The Board of Directors can establish the rights, preferences and privileges of the Series B Preferred Stock.  There are no shares of Series B Preferred Stock outstanding.

Stock Options
A summary of the stock option activity for the nine months ended March 31, 2011 is presented below.
 
 
13

 

               
Weighted-
 
               
Average
 
         
Weighted-
   
Remaining
 
         
Average
   
Contractual
 
         
Exercise
   
Life
 
   
Options
   
Price
   
(Years)
 
                   
Outstanding at June 30, 2010
    1,987,612     $ 0.56       6.16  
Granted
    -       -          
Forfeited
    (176,655 )     0.67          
Outstanding at March 31, 2011 (unaudited)
    1,810,957       0.55       5.98  
                         
Vested and expected to vest
                       
  at March 31, 2011 (unaudited)
    1,810,957       0.55       5.98  
                         
Exercisable at March 31, 2011 (unaudited)
    1,810,957       0.55       5.98  
 
The following table summarizes information about outstanding stock options as of March 31, 2011.

                                 
     
Options Outstanding
         
Options Exercisable
       
           
Weighted
   
Weighted
         
Weighted
 
           
Average
   
Average
         
Average
 
Exercise
   
Number
   
Remaining
   
Exercise
   
Number
   
Exercise
 
Price
   
of Shares
   
Life (Years)
   
Price
   
of Shares
   
Price
 
                                 
$ 0.33       637,297       5.56     $ 0.33       637,297     $ 0.33  
  0.67       1,173,660       6.21       0.67       1,173,660       0.67  
          1,810,957                       1,810,957          
 
Warrants

A summary of the warrant activity for the six months ended March 31, 2011 is presented below.
 
 
14

 

               
Weighted-
 
               
Average
 
         
Weighted-
   
Remaining
 
         
Average
   
Contractual
 
         
Exercise
   
Life
 
   
Warrants
   
Price
   
(Years)
 
                   
Outstanding at June 30, 2010
    12,545,618     $ 0.42       2.66  
Granted
    600,000       0.25          
Exercised
    -       -          
Outstanding at March 31, 2011 (unaudited)
    13,145,618       0.41       1.94  
                         
Vested and expected to vest
                       
  at March 31, 2011 (unaudited)
    13,145,618       0.41       1.94  
                         
Exercisable at March 31, 2011 (unaudited)
    13,145,618       0.41       1.94  
 
The following table summarizes information about outstanding warrants as of March 31, 2011.

     
Warrants Outstanding
         
Warrants Exercisable
       
           
Weighted
   
Weighted
         
Weighted
 
           
Average
   
Average
         
Average
 
Exercise
   
Number
   
Remaining
   
Exercise
   
Number
   
Exercise
 
Price
   
of Shares
   
Life (Years)
   
Price
   
of Shares
   
Price
 
                                 
$ 0.20 - 0.37       2,939,374       2.02     $ 0.29       2,939,374     $ 0.29  
  0.42 - 0.58       10,206,244       1.92       0.45       10,206,244       0.45  
          13,145,618                       13,145,618          

Note 10 - Income Taxes

The Company accounts for income taxes in accordance with ASC 740, Income Taxes. Under ASC 270, Interim Financial Reporting, the Company is required to adjust its effective tax rate each quarter to be consistent with the estimated annual effective tax rate. The Company is also required to record the tax impact of certain discrete items, unusual or infrequently occurring, including changes in judgment about valuation allowances and effects of changes in tax laws or rates, in the interim period in which they occur. In addition, jurisdictions with a projected loss for the year or a year-to-date loss where no tax benefit can be recognized are excluded from the estimated annual effective tax rate. The impact of such an exclusion could result in a higher or lower effective tax rate during a particular quarter based upon the mix and timing of actual earnings versus annual projections. The Company has estimated its annual effective tax rate to be zero. This is based on an expectation that the Company will generate net operating losses in the year ending June 30, 2011, and it is not more likely than not that those losses will be recovered using future taxable income. Therefore, no provision for income tax or tax liability has been recorded as of and for the period ended March 31, 2011.

ASC 740-10, Accounting for Uncertainty in Income Taxes, indicates criteria that an individual tax position must satisfy for some or all of the benefits of that position to be recognized in the financial statements. ASC 740-10 includes a higher standard that tax benefits must meet before they can be recognized in a company’s financial statements. As the Company has no uncertain tax positions as defined in ASC 740, there are no corresponding unrecognized tax benefits. Any future changes in the unrecognized tax benefit will have no impact on the Company’s effective tax rate due to the existence of the valuation allowance. The Company estimates that the unrecognized tax benefit will not change significantly within the next twelve months. It is the Company’s policy to classify income tax penalties and interest, if any, as part of general and administrative expense in its Statements of Operations. The Company has not incurred any interest or penalties since inception.
 
 
15

 

Note 11 - Commitments and Contingencies

Lease Agreements

The Company leases approximately 5,000 square feet of office and warehouse space at 10019 Canoga Ave under a lease agreement which extends through February 1, 2012.  Monthly rent under the extended lease agreement is $4,250 per month.  The Company has a security deposit of $9,500 associated with this lease. 

Total rent expense was $38,633, $42,985, and $239,315 for the nine months ended March 31, 2011 and 2010, and for the period from January 29, 2007 (date of inception) through March 31, 2011, respectively.  Total rent expense was $13,133 and $12,750 for the three months ended March 31, 2011 and 2010, respectively.

Future minimum lease payments under non-cancelable operating leases are as follows.

 Year Ended
     
 June 30,
     
       
 2011 (remainder of)
    12,750  
 2012
    29,750  
 Total
  $ 42,500  

Royalty Agreements

On July 1, 2008, our wholly owned subsidiary entered into Patent Assignment Agreements with our President and CEO where certain devices and methods involved in the hydrodynamic cavitation processes invented by the President and CEO have been assigned to the Company.  In exchange, the Company agreed to pay a royalty of 5% of gross revenues to each of the CEO and President for licensing, leasing, or rental revenue generated from products using the assigned technologies. These were subsequently assigned to Cavitation Technologies on May 13, 2010.  The Company’s CEO and President both waived their rights to receive royalty payments that have accrued, or that may accrue, on any gross revenue generated through June 30, 2011.
 
On April 30, 2008, our wholly owned subsidiary entered into an employment agreement with Varvara Grichko who became a member of the Board of Directors in September 2010.  For any technologies invented by Ms. Grichko, the Company shall pay a royalty of 5% of revenues received relating to patents in which she is a named inventor in the first year and 3% in subsequent years from licensing, leasing, or rental revenues associated with patents assigned from the employee.

Licensing Agreement

On November 1, 2010 we signed a Technology License, Marketing &Collaboration Agreement with N.V. Desmet Ballestra Group S.A. (“Desmet”).  The agreement gives Desmet the exclusive worldwide license to market the CTI Nano Reactor System (“CTI System”) in the field of vegetable oil processing (the “Licensed Field”). Under this Agreement, Desmet is responsible for marketing the CTI System to end users in the Licensed Field, as well as the construction, installation and maintenance of the system.  In consideration for services rendered, we agreed to pay Desmet a fee.  We intend to generate revenues from the licensing of systems.  This agreement supersedes a previous agreement between the parties signed January 15, 2010.

The Company received advances from Desmet to assist with funding the production of specific CTI Systems.  The Company has agreed to pay these amounts at the time the systems are sold or licensed.  These amounts are reflected as Advances on the accompanying consolidated balance sheets as of March 31, 2011 and June 30, 2010.  As of March 31, 2011, the Company had $36,533 in Advances outstanding.
 
 
16

 
 
ITEM 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
The following discussion and analysis should be read in conjunction with our financial statements and the related notes. This discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties, such as its plans, objectives, expectations and intentions. Its actual results and the timing of certain events could differ materially from those anticipated in these forward-looking statements.
 
Overview
 
We design and engineer NANO technology based systems that are designed to serve large, growing, global markets such as vegetable oil refining, renewable fuels, alcoholic beverage enhancement, algae oil extraction, water-oil emulsions and crude oil yield enhancement.  During the nine months ended March 31, 2011, we recorded revenue of $589,926. Our cumulative loss since inception on January 29, 2007 is $16,279,932, including $10,690,275 in common stock issued for services.  Cumulative net cash used in operating activities of $3,382,097 was funded largely with $3,168,400 in equity issuances, including proceeds of $725,000 from the sale of preferred stock and $338,712 from convertible debt, and $490,479 in a bank loan.  Our investment in research and development since inception on January 29, 2007 through March 31, 2011 is $5,251,604, including $2,232,808 paid in restricted stock primarily to service providers.  We have four full-time employees and no part-time employees.

The company is focused on merchandising our NANO Neutralization System – a vegetable oil refining  system that employs our proprietary continuous flow-through, hydrodynamic NANO Technology in the form of our multi-stage NANO Series of reactors. The target market for our systems includes refiners who process vegetable oils including soybean oil. The finished product is used for human consumption as well as animal feed.

Management’s Plan

We are a development stage entity engaged in merchandising our NANO Neutralization System which is designed to help refine vegetable oils such as soybean, canola, and rapeseed.  Our near term goal is to successfully merchandise our systems. We have no significant operating history and, from January 29, 2007, (inception), through March 31, 2011, generated a net loss of $16,279,932.  We also have negative cash flow from operations and negative net equity. The accompanying financial statements have been prepared in conformity with generally accepted accounting principles which contemplate continuation of the Company as a going concern.
 
Management’s plan is to generate income from operations by successfully finalizing arrangements with prospective clients. We will also attempt to raise additional debt and/or equity financing to fund future operations and to provide additional working capital. However, there is no assurance that such financing will be consummated or obtained in sufficient amounts necessary to meet the Company’s needs, or that the Company will be able to meet its future contractual obligations. Should management fail to obtain such financing, the Company may curtail its operations.

Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amount of revenues and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgments, including those related to stock options, warrants, and common stock issued for services, among others. Management bases its estimates and judgments on historical experience and various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.
 
 
17

 

Revenue Recognition
 
We recognize revenue when an arrangement exists; delivery has occurred, including transfer of title and risk of loss for product sales, or services have been rendered for service revenues; the price to the buyer is fixed or determinable; and collectability is reasonably assured.

Deferred Revenue

We received total deposits of $16,950 as of March 31, 2011 relating to fabrication of our NANO Neutralization Systems.  Because these transactions have not yet been fully completed, these amounts have been reflected in deferred revenue on the accompanying consolidated balance sheet as of March 31, 2011.

Patents

Capitalized patent costs represent legal fees associated with procuring and filing patent applications.  We account for patents in accordance with ASC 350-30, General Intangibles Other Than Goodwill.  As of March 31, 2011, we had incurred $92,284 in gross patent costs which are capitalized in the accompanying consolidated balance sheet.  We had one patent issued during the nine months ended March 31, 2011 which is being amortized over an estimated useful life of 4 years.  The patent has a duration through February 27, 2029.  In addition to one approved patent, we have 9 pending United States patents and 9 pending international patent applications filed under the Patent Corporation Treaty.  We also received the “CE Marking” certification which allows us to market our systems in the European Union. We plan to continue to file for new and improved patents on a regular basis.

Intangible and Long-Lived Assets
 
In accordance with ASC 350-30, we evaluate long-lived assets for impairment whenever events or changes in circumstances indicate that their net book value may not be recoverable. When such factors and circumstances exist, we compare the projected undiscounted future cash flows associated with the related asset or group of assets over their estimated useful lives against their respective carrying amount. Impairment, if any, is based on the excess of the carrying amount over the fair value based on market value when available or discounted expected cash flows of those assets and is recorded in the period in which the determination is made. Management believes there is no impairment of its long-lived assets. There can be no assurance, however, that market conditions will not change or demand for our products under development will continue. Either of these could result in future impairment of long-lived assets.
 
Stock-Based Compensation

We account for our share-based compensation in accordance ASC 718-20. Stock-based compensation cost is measured at the grant date based on the estimated fair value of the award and is recognized as an expense over the requisite vesting period. 

Income Taxes
 
We account for income taxes in accordance with ASC 740-10. We recognize deferred tax assets and liabilities to reflect the estimated future tax effects, calculated at currently effective tax rates, of future deductible or taxable amounts attributable to events that have been recognized on a cumulative basis in the financial statements. A valuation allowance related to a deferred tax asset is recorded when it is more likely than not that some portion of the deferred tax asset will not be realized. Deferred tax assets and liabilities are adjusted for the effects of the changes in tax laws and rates on the date of enactment.
 
 
18

 
 
ASC 740-10 prescribes a recognition threshold that a tax position is required to meet before being recognized in the financial statements and provides guidance on recognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition issues. We classify interest and penalties as a component of interest and other expenses. To date, there have been no interest or penalties assessed or paid. We measure and record uncertain tax positions by establishing a threshold for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.  Only tax positions meeting the more-likely-than-not recognition threshold at the effective date may be recognized or continue to be recognized.
 
Deferred costs

Deferred costs represent costs associated with customizing specific units of our NANO Neutralization System that we plan to lease or rent.  The direct costs incurred by the Company associated with manufacturing the products have been capitalized and reflected as deferred costs on the balance sheet.  When licensing or sales of the specific products are made, the amounts recorded as deferred costs will be expensed as cost of sales.
 
Results of Operations for the Three Months Ended March 31, 2011 Compared to the Three Months Ended March 31, 2010
 
The following is a comparison of our results of operations for the three months ended March 31, 2011 and 2010.
 
   
For the Three Months Ended
             
   
March 31,
             
   
2011
   
2010
   
$ Change
   
% Change
 
   
(Unaudited)
   
(Unaudited)
             
                         
Revenue
  $ 341,326     $ -     $ 341,326       100.0 %
Cost of revenue
    54,444       -       54,444       100.0 %
Gross profit
    286,882       -       286,882       100.0 %
General and administrative expenses
    885,358       2,116,779       (1,231,421 )     -58.2 %
Research and development expenses
    282,134       47,373       234,761       495.6 %
Total operating expenses
    1,167,492       2,164,152       (996,660 )     -46.1 %
Loss from operations
    (880,610 )     (2,164,152 )     1,283,542       -59.3 %
Change in value of derivatives
    (13,588 )     -       (13,588 )     100.0 %
Interest expense
    (30,645 )     (9,614 )     (21,031 )     218.8 %
Loss before income taxes
    (924,843 )     (2,173,766 )     1,248,923       -57.5 %
Income tax expense
    -       -       -       0.0 %
Net loss
  $ (924,843 )   $ (2,173,766 )     1,248,923       -57.5 %

Revenue

During the three months ended March 31, 2011, our revenue consisted of a license fee related to a transaction that we completed in March 2011 with a customer located in Maryland for a NANO Neutralization System for $341,326.

We had no revenue during the three months ended March 31, 2010.

Cost of Revenue

During the three months ended March 31, 2011, our cost of revenue amounted to $54,444, which was the result of the revenue transaction described above.  We had no cost of revenue during the three months ended March 31, 2010, as we had no revenue during that period.

Operating Expenses
 
Our operating expenses for the three months ended March 31, 2011 amounted to $1,167,492, compared with $2,164,152 in same period during 2010, a decrease of $996,660, or 46.1%.  The decrease consisted of a decrease in general and administrative expenses in 2011 of $1,231,421, or 58.2%, offset by an increase in research and development expenses of $234,761, or 495.6%.  These components of our operating expenses decreased primarily due to the following.
 
 
19

 

Our general and administrative expenses decreased by $1,231,421 for the three months ended March 31, 2011 as compared to 2010.  This decrease is primarily due to a decrease in our expenses related to the issuance of share-based compensation as payment for services.  During the three months ended March 31, 2010, we issued 6,474,986 shares of common stock valued at $1,375,636, including $1,359,511 for general and administrative expenses and $16,125 for research and development expenses.  These shares were issued to consultants, service providers and other key personnel who contributed to the success of the Company, the largest of which were 5,000,000 shares issued to a company for consulting services on February 1, 2010, which resulted in $1,050,000 of general and administrative expenses which did not reoccur in 2011.  In 2010, we also recorded an additional $395,285 of expenses associated with the amortization of restricted stock issued for services in July 2009.  During the three months ended March 31, 2011, we issued 2,111,566 shares of common stock valued at $226,144, including $225,144 in general and administrative expenses and $1,000 in research and development expenses.  As a result, our general and administrative expenses in 2011 decreased by $1,529,652 relating to the share-based compensation.  The remaining expenses for the three months ending March 31, 2011 consisted mostly of compensation expense of $107,203 and professional fees for legal, audit, and accounting services of $52,507 which remained fairly consistent with 2010.  We also incurred $373,406 in consulting expenses during 2011, which are reflected as a component of accrued expenses as of March 31, 2011.
 
 
Our research and development expenses increased by $234,761 for the three months ended March 31, 2011 as compared to 2010 attributable largely to an increase in consulting services.
 
Change in Value of Derivatives

In February 2011, we issued convertible notes payable amounting to a gross face value of $103,712.  By virtue of the variable conversion ratios contained in the provisions of the agreements, the conversion features of the notes are a derivative under ASC 815-40, Derivatives and Hedging.  Accordingly, the value of the conversion feature has been classified as a derivative liability on the accompanying balance sheet.  As of March 31, 2011, the aggregate value of the conversion features associated with the above notes amounted to $74,960.  The initial aggregate value upon the issuance dates in February 2011 amounted to $61,372.  The increase of $13,588 is recorded as a change in value of derivatives for the three months ended March 31, 2011.  There was no such charge in 2010.

Interest Expense
 
Our interest expense increased by $21,031, or 218.8%, for the three months ended March 31, 2011 as compared to 2010.  This increase was due primarily to amortization of discounts of $19,207 on convertible notes payable that were issued during the three months ended March 31, 2011, as well as $1,087 in additional interest expense associated with these notes.  These charges did not exist in 2010, as these notes were all issued during the three months ended March 31, 2011.

Results of Operations for the Nine Months Ended March 31, 2011 Compared to the Nine Months Ended March 31, 2010

The following is a comparison of our results of operations for the nine months ended March 31, 2011 and 2010.
 
 
20

 

   
For the Nine Months Ended
             
   
March 31,
             
   
2011
   
2010
   
$ Change
   
% Change
 
   
(Unaudited)
   
(Unaudited)
             
                         
Revenue
  $ 589,926     $ -     $ 589,926       100.0 %
Cost of revenue
    91,144       -       91,144       100.0 %
Gross profit
    498,782       -       498,782       100.0 %
General and administrative expenses
    2,709,805       6,444,167       (3,734,362 )     -57.9 %
Research and development expenses
    628,204       202,306       425,898       210.5 %
Total operating expenses
    3,338,009       6,646,473       (3,308,464 )     -49.8 %
Loss from operations
    (2,839,227 )     (6,646,473 )     3,807,246       -57.3 %
Change in value of derivatives
    (13,588 )             (13,588 )     100.0 %
Interest expense
    (52,882 )     (103,362 )     50,480       -48.8 %
Loss before income taxes
    (2,905,697 )     (6,749,835 )     3,844,138       -57.0 %
Income tax expense
    -       -       -       0.0 %
Net loss
  $ (2,905,697 )   $ (6,749,835 )     3,844,138       -57.0 %
  
Revenue

During the nine months ended March 31, 2011, our revenue consisted primarily of a transaction completed in March 2011 with a customer located in Maryland for a NANO Neutralization System for $341,326, as well as a licensing agreement that we completed in December 2010 with a customer located in North Carolina for a 10 gallons/minute NANO Neutralization System for $187,600.  In addition, we recognized revenue of  $35,000 associated with the rental of a NANO Neutralization System and $26,000 related to  the sale of a Bioforce 9000 Reactor Skid System.  We had no revenue during the nine months ended March 31, 2010.

Cost of Revenue

During the nine months ended March 31, 2011, our cost of revenue amounted to $91,144 which was the result of the revenue transactions described above.  We had no cost of revenue during the nine months ended March 31, 2010, as we had no revenue during that period.  One of the units sold during the nine months ended March 31, 2011 was a prototype, and as a result much of the associated cost was expensed in a prior year.

Operating Expenses
 
Our operating expenses for the nine months ended March 31, 2011 amounted to $3,338,009 compared with $6,646,473 in 2010, a decrease of $3,308,464 or 49.8%.  The decrease consisted of a decrease in general and administrative expenses in 2011 of $3,734,362, or 57.9%, offset by an increase in research and development expenses of $425,898, or 210.5%.  These components of our operating expenses increased primarily due to the following.

Our general and administrative expenses decreased by $3,734,362 for the nine months ended March 31, 2011 as compared to 2010.  This decrease is primarily due to a decrease in share-based compensation during the nine months ended March 31, 2011 relating to shares issued for services.  During the nine months ended March 31, 2010, we issued a total of 26,173,667 shares of common stock as payment for services valued at $5,534,155, including $5,483,950 for general and administrative expenses and $50,205 for research and development expenses.  The increased number of shares issued for services were due primarily to bonuses in July 2009 to key employees and consultants, as well as 5,000,000 shares issued for consulting services in February 2010, which did not reoccur in 2011.  During the nine months ended March 31, 2011, we issued 6,680,393 shares of common stock as payment for services valued at $943,856, including $658,256 in general and administrative expenses and$285,600 in research and development expenses.  During the nine months ended March 31, 2011, we also recognized amortization of $786,275 in restricted stock issued for services.  As a result, total share-based general and administrative expenses for the nine months ended March 31, 2011 amounted to $1,444,531.  Share based compensation relating to shares issued for general and administrative services, therefore, declined by $4,039,418 during the nine months ended March 31, 2011.  The remaining expenses for the nine months ending March 31, 2011 consisted largely of salaries of $329,822 and professional fees for legal, audit, and accounting services of $167,310, and remained fairly consistent between the periods.  We also incurred $373,406 in consulting expenses during 2011, which are reflected as a component of accrued expenses as of March 31, 2011.
 
 
21

 

Our research and development expenses increased by $425,898 for the nine months ended March 31, 2011 as compared to 2010 attributable largely to an increase in consulting services.
 
Change in Value of Derivatives

In February 2011, we issued convertible notes payable amounting to a gross face value of $103,712.  By virtue of the variable conversion ratios contained in the provisions of the agreements, the conversion features of the notes are a derivative under ASC 815-40, Derivatives and Hedging.  Accordingly, the value of the conversion feature has been classified as a derivative liability on the accompanying balance sheet.  As of March 31, 2011, the aggregate value of the conversion features associated with the above notes amounted to $74,960.  The initial aggregate value upon the issuance dates in February 2011 amounted to $61,372.  The increase of $13,588 is recorded as a change in value of derivatives for the nine months ended March 31, 2011.  There was no such charge in 2010.

Interest Expense
 
Interest expense decreased by $50,480, or 48.8%, for the nine months ended March 31, 2011 as compared to 2010.  This decrease was primarily due to $63,601 attributable to the beneficial conversion feature on convertible debt during 2010. This amount arose as we converted debt into restricted common shares at a 25% discount to the market price.  This decrease was offset by additional charges in 2011 of $19,207 for the amortization of discounts on the issuance of convertible notes payable in February 2011, as well as an additional $1,087 in interest expense associated with these notes.  The remaining decrease was due primarily to a decrease in the outstanding loan balance in 2011.

Liquidity and Capital Resources

Bank Loan

On August 1, 2010 we renewed our loan from the National Bank of California through November 1, 2010 for $520,516.  The terms and conditions remain the same with monthly payments of $7,396 and an interest rate of prime plus 2.75%.  On August 1, 2010, we renewed the loan until November 1, 2010.  The amount outstanding at the time of renewal was $520,516.  The terms and conditions remain the same with monthly payments of $7,396 and an interest rate of prime plus 2.75%. On November 1, 2010, the loan was extended until November 1, 2011 with 11 regular monthly payments of $6,000 and a final payment of $474,171.  The interest rate floor was increased from 7.0% to 7.5%. As of March 31, 2011, the outstanding balance on the loan was $490,479.

Short-Term Loans

On October 26, 2010, we entered into a loan agreement with Desmet Ballestra North America, Inc. under which the Company borrowed $75,000.  Under the original terms of the agreement, the loan was interest-free and was repayable at $25,000 per month beginning January 25, 2011.  On March 28, 2011, the terms of the loan agreement were revised to provide for monthly payments of $15,000 starting in April 2011.  The loan bears no interest, unless the Company is late with a payment at which point interest is accrued on the late amount at a rate of 10% compounded annually.

Convertible Notes Payable

On February 1, 2011, we issued convertible promissory notes to the Tripod Group, LLC, (the “Tripod Notes”) for an aggregate total amount of $61,212.  The Tripod Notes bear interest at a rate of 6% per annum and have a maturity date of February 1, 2012.  The holder of the notes may elect to convert the outstanding principal and accrued interest into shares of the Company’s common stock at any time at a conversion price equal to 65% of the lowest closing bid price of any of the four trading days prior to the conversion.  The issuance of the Tripod Notes amounted in a beneficial conversion feature of $32,960 on the issue date, which has been recorded as a discount to the carrying value of the notes.  As of March 31, 2011, the remaining discount balance amounted to $19,022.  During the quarter ended March 31, 2011, $25,885 of the Tripod Notes principal was converted into 429,159 shares of common stock.  As a result, the carrying value of the Tripod Notes as of March 31, 2011 amounted to $16,305 consisting of outstanding principal of $35,327 less the discount of $19,022.
 
 
22

 

On February 8, 2011, we issued a convertible promissory note payable to Asher Enterprises, Inc., (the “Asher Note”), in the amount of $42,500.  The Asher Note bears interest at a rate of 8% per annum and matures on November 10, 2011.  The holder of the note may elect to convert principal and accrued interest into shares of common stock at any time at a conversion price equal to 58% of the average lowest closing bid prices of the Company’s common stock for 3 of any 10 trading days prior to conversion.  The issuance of the Asher Note amounted in a beneficial conversion feature of $28,412 on the issue date, which has been recorded as a discount to the carrying value of the note.  As of March 31, 2011, the remaining discount balance amounted to $23,143.  As a result, the carrying value of the Asher Note as of March 31, 2011 amounted to $19,357 consisting of outstanding principal of $42,500 less the discount of $23,143.

Common Stock

During the nine months ended March 31, 2011, we issued an aggregate total of 5,501,134 shares of common stock for $572,741 in cash.

Share-based Compensation

We pay a significant portion of our operating expenses through issuance of share-based compensation.  During the nine months ended March 31, 2011, we issued 6,680,393 shares of common stock valued at $943,856 as payments to service providers.  In addition, we incurred $786,275 of expenses relating to the amortization of restricted stock issued during the year ended June 30, 2010.  We also issued warrants as payment for services during the nine months ending March 31, 2011, resulting in $46,735 in expenses.
 
Cash Flow

Net cash used in operating activities during the nine months ended March 31, 2011 amounted to $574,829 compared to $919,853 for the same period in 2010.  During the nine months ended March 31, 2011, our net loss amounted to $2,905,697 including non-cash operating expenses of $1,825,447 arising primarily from common stock issued for services provided.  During the nine months ended March 31, 2011, we also generated a gross profit of $498,782, compared with $0 in same period in 2010.  The remaining net cash operating expenditures in 2011 of $1,579,032 was used largely to pay salary and related expenses, research and development, interest expense and professional fees such as attorneys and accountants.  During the nine months ended March 31, 2010, our net loss amounted to $6,749,835, including non-cash operating expenses of $5,672,090 arising primarily from common stock issued for services provided.  The remaining net cash operating expenses of $1,077,745 was used largely to pay similar salary and professional expenses as in 2011.

Net cash used in investing activities during the nine months ended March 31, 2011 amounted to $133,528 which was the result of payment for customization of systems.  During the nine months ended March 31, 2010, our net cash used in investing activities amounted to $21,121 which resulted from amounts spent for the purchase of property and equipment.

Net cash provided by financing activities during the nine months ended March 31, 2011 amounted to $708,182, which resulted from proceeds from the sale of common stock amounting to $572,741, proceeds from convertible notes payable issued of $103,712 and proceeds from short-term loans of $75,000, offset by the payment of short-term loans of $9,000 and payments for the bank loan of $34,271.  During the nine months ended March 31, 2010, our net cash provided from financing activities amounted to $936,535 which resulted from proceeds from the sale of common stock of $1,033,447 and proceeds from short-term loans of $27,500, offset by payments for convertible notes payable of $20,000, payments of short-term loans of $5,000 and payments for the bank loan of $99,412.
 
 
23

 
 
Commitments

Lease Agreements

The Company leases approximately 5,000 square feet of office and warehouse space at 10019 Canoga Ave under a lease agreement which extends through February 1, 2012.  Monthly rent under the extended lease agreement is $4,250 per month.  The Company has a security deposit of $9,500 associated with this lease. 

Future minimum lease payments under non-cancelable operating leases are as follows.
 
 Year Ended
     
 June 30,
     
       
 2011 (remainder of)
    12,750  
 2012
    29,750  
 Total
  $ 42,500  

Royalty Agreements

On July 1, 2008, our wholly owned subsidiary entered into Patent Assignment Agreements with our President and CEO where certain devices and methods involved in the hydrodynamic cavitation processes invented by the President and CEO have been assigned to the Company.  In exchange, the Company agreed to pay a royalty of 5% of gross revenues to each of the CEO and President for licensing, leasing, or rental revenue generated from products using the assigned technologies. These were subsequently assigned to Cavitation Technologies on May 13, 2010.
 
Our CEO and President both waived their rights to receive royalty payments that have accrued, or that may accrue, on any gross revenue generated through June 30, 2011.
 
On April 30, 2008, our wholly owned subsidiary entered into an employment agreement with Varvara Grichko, a member of the Board of Directors.  For any technologies invented by Ms. Grichko, the Company shall pay a royalty of 5% of revenues received relating to patents in which she is a named inventor in the first year and 3% in subsequent years from licensing, leasing, or rental revenues associated with patents assigned from the employee.

Licensing Agreement

On November 1, 2010 we signed a Technology License, Marketing &Collaboration Agreement with N.V. Desmet Ballestra Group S.A. (“Desmet”).  The agreement gives Desmet the exclusive worldwide license to market the CTI Nano Reactor System (“CTI System”) in the field of vegetable oil processing (the “Licensed Field”). Under this Agreement, Desmet is responsible for marketing the CTI System to end users in the Licensed Field, as well as the construction, installation and maintenance of the system.  In consideration for services rendered, we agreed to pay Desmet a fee.  We intend to generate revenues from the licensing of systems.  This agreement supersedes a previous agreement between the parties signed January 15, 2010.

ITEM 3.  Quantitative and Qualitative Disclosures about Market Risk.
 
Not applicable for smaller reporting companies.
 
ITEM 4.  Controls and Disclosures

Evaluation of  Disclosure Controls and Procedures

 
24

 
 
Our Chief Executive Officer and Chief Financial Officer have evaluated the Company’s disclosure controls and procedures as defined in Rules 13a-15(b)(e) and 15d-15(b)(e) of the Securities Exchange Act of 1934 as of the end of the period covered by this report, and they have concluded that these controls and procedures are effective.

 Changes in Internal Control Over Financial Reporting

There were no changes in financial control over financial reporting during the third quarter of fiscal 2011 that have materially affected or are reasonably likely to materially affect the company’s internal control over financial reporting.

PART II – OTHER INFORMATION
 
Item 1 - Legal Proceedings

We know of no material, existing or pending legal proceeding against our Company, nor are we involved as a plaintiff in any material proceeding or pending litigation.  There are no proceedings in which any of our directors, officers or affiliates, or any registered or beneficial shareholder, is an adverse party or has a material interest adverse to our interest.

Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds
 
Since our previous disclosure in our Quarterly Report on Form 10-Q for the quarter ended December 31, 2010, the following is a listing of unregistered security activity during the quarter ended March 31, 2011.
 
Sales of Restricted Common Stock

On January 10, 2011, we issued 110,000 shares of common stock to Anita McCormick for a total purchase price of $12,100. These shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended.  These shares were not offered via general solicitation to the public but solely to the aforementioned purchaser.  The Company issued restricted shares in connection with these issuances.  No sales commissions or other remuneration was paid in connection with these issuances.

On February 14, 2011, we issued 70,000 shares of common stock to Suzahnna Tepper for a total purchase price of $7,000.  These shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended.  These shares were not offered via general solicitation to the public but solely to the aforementioned purchaser.  The Company issued restricted shares in connection with these issuances.  No sales commissions or other remuneration was paid in connection with these issuances.

On February 14, 2011, we issued 100,000 shares of common stock to Constance Troncale for a total purchase price of $10,000.  These shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended.  These shares were not offered via general solicitation to the public but solely to the aforementioned purchaser.  The Company issued restricted shares in connection with these issuances.  No sales commissions or other remuneration was paid in connection with these issuances.

On February 14, 2011, we issued 150,000 shares of common stock to Kathleen Eliot for a total purchase price of $15,000.  These shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended.  These shares were not offered via general solicitation to the public but solely to the aforementioned purchaser.  The Company issued restricted shares in connection with these issuances.  No sales commissions or other remuneration was paid in connection with these issuances.

On February 14, 2011, we issued 250,000 shares of common stock to Janice Tamoto for a total purchase price of $25,000.  These shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended.  These shares were not offered via general solicitation to the public but solely to the aforementioned purchaser.  The Company issued restricted shares in connection with these issuances.  No sales commissions or other remuneration was paid in connection with these issuances.
 
 
25

 

On February 14, 2011, we issued 350,000 shares of common stock to AM PM Appliance Co. for a total purchase price of $35,000.  These shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended.  These shares were not offered via general solicitation to the public but solely to the aforementioned purchaser.  The Company issued restricted shares in connection with these issuances.  No sales commissions or other remuneration was paid in connection with these issuances.

On February 14, 2011, we issued 2,000,000 shares of common stock to Star Funding, LLC for a total purchase price of $200,000.  These shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended.  These shares were not offered via general solicitation to the public but solely to the aforementioned purchaser.  The Company issued restricted shares in connection with these issuances.  No sales commissions or other remuneration was paid in connection with these issuances.

On March 2, 2011, we issued 100,000 shares of common stock to Gerald Healy for a total purchase price of $10,000.  These shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended.  These shares were not offered via general solicitation to the public but solely to the aforementioned purchaser.  The Company issued restricted shares in connection with these issuances.  No sales commissions or other remuneration was paid in connection with these issuances.

On March 2, 2011, we issued 100,000 shares of common stock to Charles Collier for a total purchase price of $10,000.  These shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended.  These shares were not offered via general solicitation to the public but solely to the aforementioned purchaser.  The Company issued restricted shares in connection with these issuances.  No sales commissions or other remuneration was paid in connection with these issuances.

On March 2, 2011, we issued 90,000 shares of common stock to Marlyce Nessan for a total purchase price of $9,000.  These shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended.  These shares were not offered via general solicitation to the public but solely to the aforementioned purchaser.  The Company issued restricted shares in connection with these issuances.  No sales commissions or other remuneration was paid in connection with these issuances.

On March 10, 2011, we issued 100,000 shares of common stock to Jacquelyn A. Skelly for a total purchase price of $10,000.  These shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended.  These shares were not offered via general solicitation to the public but solely to the aforementioned purchaser.  The Company issued restricted shares in connection with these issuances.  No sales commissions or other remuneration was paid in connection with these issuances.

On March 10, 2011, we issued 76,923 shares of common stock to Siobhan M. Cyr for a total purchase price of $5,000.  These shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended.  These shares were not offered via general solicitation to the public but solely to the aforementioned purchaser.  The Company issued restricted shares in connection with these issuances.  No sales commissions or other remuneration was paid in connection with these issuances.

Issuance of Restricted Common Stock for Services

On January 10, 2011, we issued 31,836 shares of common stock to Michael Psomas for accounting services. These shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended.  These shares were not offered via general solicitation to the public but solely to the aforementioned service provider.  The Company issued restricted shares in connection with these issuances.  No sales commissions or other remuneration was paid in connection with these issuances.

On January 10, 2011, we issued 76,080 shares of common stock to Tomer Tal for legal services. These shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended.  These shares were not offered via general solicitation to the public but solely to the aforementioned service provider.  The Company issued restricted shares in connection with these issuances.  No sales commissions or other remuneration was paid in connection with these issuances.
 
 
26

 

On January 10, 2011, we issued 9,000 shares of common stock to Shannon Stokes for office services. These shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended.  These shares were not offered via general solicitation to the public but solely to the aforementioned service provider.  The Company issued restricted shares in connection with these issuances.  No sales commissions or other remuneration was paid in connection with these issuances.

On February 14, 2011, we issued 111,806 shares of common stock to Tomer Tal for legal services. These shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended.  These shares were not offered via general solicitation to the public but solely to the aforementioned service provider.  The Company issued restricted shares in connection with these issuances.  No sales commissions or other remuneration was paid in connection with these issuances.

On February 14, 2011, we issued 97,933 shares of common stock to Michael Psomas for accounting services. These shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended.  These shares were not offered via general solicitation to the public but solely to the aforementioned service provider.  The Company issued restricted shares in connection with these issuances.  No sales commissions or other remuneration was paid in connection with these issuances.

On February 14, 2011, we issued 17,644 shares of common stock to Silvio Nardoni for legal services. These shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended.  These shares were not offered via general solicitation to the public but solely to the aforementioned service provider.  The Company issued restricted shares in connection with these issuances.  No sales commissions or other remuneration was paid in connection with these issuances.

On February 14, 2011, we issued 50,000 shares of common stock to Kirk Wiggins for marketing and sales services.  These shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended.  These shares were not offered via general solicitation to the public but solely to the aforementioned service provider.  The Company issued restricted shares in connection with these issuances.  No sales commissions or other remuneration was paid in connection with these issuances.

On February 14, 2011, we issued 37,500 shares of common stock to James Fuller for board of director services. These shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended.  These shares were not offered via general solicitation to the public but solely to the aforementioned service provider.  The Company issued restricted shares in connection with these issuances.  No sales commissions or other remuneration was paid in connection with these issuances.

On February 14, 2011, we issued 200,000 shares of common stock to Pinnacle Financial Group and Services, Inc. for investor relation services. These shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended.  These shares were not offered via general solicitation to the public but solely to the aforementioned service provider.  The Company issued restricted shares in connection with these issuances.  No sales commissions or other remuneration was paid in connection with these issuances.

On February 14, 2011, we issued 750,000 shares of common stock to Strategic IR, LTD for investor relation services. These shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended.  These shares were not offered via general solicitation to the public but solely to the aforementioned service provider.  The Company issued restricted shares in connection with these issuances.  No sales commissions or other remuneration was paid in connection with these issuances.

On March 10, 2011, we issued 124,650 shares of common stock to Tomer Tal for legal services. These shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended.  These shares were not offered via general solicitation to the public but solely to the aforementioned service provider.  The Company issued restricted shares in connection with these issuances.  No sales commissions or other remuneration was paid in connection with these issuances.
 
 
27

 

On March 10, 2011, we issued 80,455 shares of common stock to Michael Psomas for accounting services. These shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended.  These shares were not offered via general solicitation to the public but solely to the aforementioned service provider.  The Company issued restricted shares in connection with these issuances.  No sales commissions or other remuneration was paid in connection with these issuances.

On March 10, 2011, we issued 14,662 shares of common stock to Silvio Nardoni for legal services. These shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended.  These shares were not offered via general solicitation to the public but solely to the aforementioned service provider.  The Company issued restricted shares in connection with these issuances.  No sales commissions or other remuneration was paid in connection with these issuances.

On March 22, 2011, we issued 10,000 shares of common stock to Varvara Grichko for service as a board member. These shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended.  These shares were not offered via general solicitation to the public but solely to the aforementioned service provider.  The Company issued restricted shares in connection with these issuances.  No sales commissions or other remuneration was paid in connection with these issuances.

On March 22, 2011, we issued 500,000 shares of common stock to Undiscovered Equities, Inc. for investor relation services. These shares were issued in reliance on Section 4(2) of the Securities Act of 1933, as amended.  These shares were not offered via general solicitation to the public but solely to the aforementioned service provider.  The Company issued restricted shares in connection with these issuances.  No sales commissions or other remuneration was paid in connection with these issuances.

With the exception of Varvara Grichko, and James Fuller who are affiliates of the company, none of the aforementioned service providers are affiliates of the Company.

Issuance of Convertible Notes Payable

On February 1, 2011, we issued convertible promissory notes to the Tripod Group, LLC, (the “Tripod Notes”) for an aggregate total amount of $61,212.  The Tripod Notes bear interest at a rate of 6% per annum and have a maturity date of February 1, 2012.  The holder of the notes may elect to convert the outstanding principal and accrued interest into shares of the Company’s common stock at any time at a conversion price equal to 65% of the lowest closing bid price of any of the four trading days prior to the conversion.  During the quarter ended March 31, 2011, $25,917 of the outstanding principal balance of the Tripod Notes was converted into 263,790 shares of common stock.

On February 8, 2011, the Company issued a convertible promissory note payable to Asher Enterprises, Inc., (the “Asher Note”), in the amount of $42,500.  The Asher Note bears interest at a rate of 8% per annum and matures on November 10, 2011.  The holder of the note may elect to convert principal and accrued interest into shares of common stock at any time at a conversion price equal to 58% of the average lowest closing bid prices of the Company’s common stock for 3 of any 10 trading days prior to conversion.

We have granted the above securities in reliance on Section 4(2) of the Securities Act of 1933, as amended. These warrants were not offered via general solicitation to the public but solely to the aforementioned service provider.  No sales commissions or other remuneration was paid in connection with these issuances.

Item 3 – Defaults Upon Senior Securities

None

Item 4 – (Reserved and Removed)


Item 5 – Other Information

None
 
 
28

 
 
Item 6 – EXHIBITS, FINANCIAL STATEMENT SCHEDULES

The following documents are filed as part of this report or incorporated by reference.   
 
       
Incorporated by Reference
 
   
Filed
       
Exhibit
Exhibit Description
Herewith
Form
Pd. Ending
Exhibit
Filing Date
             
3(i)(a)
Articles of Incorporation - original name of Bioenergy, Inc.
 
SB-2
N/A
3.1
October 19, 2006
3(i)(b)
Articles of Incorporation - Amended and Restated
 
10-Q
December 31, 2009
3-1
February 17, 2009
3(i)( c )
Articles of Incorporation - Amended and Restated
 
10-Q
June 30, 2009
3-1
May 14, 2009
3(i)(d)
Articles of Incorporation - Amended; increase in authorized shares
 
8K
N/A
N/A
October 29, 2009
3(i)(e)
Articles of Incorporation - Certificate of Amendment; forward split
 
10Q
September 30, 2009
3-1
November 16, 2009
             
3(ii)(a)
By-laws - originally Bioenergy, Inc.
 
SB-2
N/A
3.2
October 19, 2006
             
10.1
Site User License
 
8-K
N/A
99.1
April 19, 2011
10.2
Licensing  agreement
 
10-Q
December 31, 2010
10.1
February 11, 2011
10.3
CFO agreement
 
10-Q
December 31, 2010
10.2
February 11, 2011
10.4
Employment Agreement
 
10-Q
December 31, 2010
10.3
February 11, 2011
10.5
Employment Agreement
 
10-Q
December 31, 2010
10.4
February 11, 2011
10.6
Assignment of Patent Assignment Agreement
 
8K
N/A
10.3
May 18, 2010
10.7
Assignment of Patent Assignment Agreement
 
8K
N/A
10.4
May 18, 2010
10.8
Patent Assignment Agreement
 
8K
N/A
10.1
May 18, 2010
10.9
Patent Assignment Agreement
 
8K
N/A
10.2
May 18, 2010
10.10
Royalty Waiver Letter
X
       
10.11
Royalty Waiver Letter
X
       
             
31.1
Certificat of Principal Executive Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002
X
       
31.2
Certificat of Principal Financial Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002
X
       
32.1
Certification of Principal Executive Officer pursuant to 18 U.S.C Section 1350, as adopted
X
       
 
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
         
32.2
Certification of Principal Financial Officer pursuant to 18 U.S.C Section 1350, as adopted
X
       
 
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
         

 
SIGNATURES

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.

SIGNATURE
 
TITLE
 
DATE
         
/s/ Roman Gordon
 
Chief Executive Officer and Director
 
May 13, 2011
Roman Gordon
 
(Principal Executive Officer)
Chairman of the Board
   
         
/s/  Igor Gorodnitsky
 
President
 
May 13, 2011
Igor Gorodnitsky
       
         
/s/  R.L. Hartshorn
 
Chief Financial Officer
 
May 13, 2011
R.L. Hartshorn
 
(Principal Financial Officer and Accounting Officer)
   

 
29